MS-03 Economic and Social Environment

Subsidy

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Subsidy

A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Examples are subsidies to encourage the sale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production.

Subsidies can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort markets, and can impose large economic costs. Financial assistance in the form of a subsidy may come from one's government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions.

Primary functions of money

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Primary functions of money

* Medium of exchange:
The most important functions of money is to serve as a medium of exchange. It facilitates buying and selling to take place. It solves all the problems of barter system. People can exchange goods and services through money. By using money anything anything can be purchased in the market. For example, a seller sells a commodity by accepting money and by using this money, he can buy some other commodity which he wants.

* Measure of value:
Money is a common measure of value. The value of all the commodities can be expressed in terms of money. It is a measuring rod and it can be expressed in the price ratio of different commodities. In India, rupee is the standard of measure, and therefore prices of goods and services are expressed in terms of rupees.

Growth and Efficiency of industry

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Growth and Efficiency of industry

The industrial sector is one of the main sectors that contribute in india. The country ranks fourteenth in the factory output in the world. The industrial sector is made up of manufacturing, mining and quarrying, and electricity, water supply, and gas sectors. The industrial sector accounts for around 27.6% of the India and it employs over 17% of the total workforce in the country. The Growth Rate of the Industrial Sector in India came to around 5.2% in 2002- 2003. In this year, within the India , the mining and quarrying sector contributed 4.4%, the electricity, water supply, and gas sector contributed 2.8%, and the manufacturing sector contributed around 5.7%.

The Growth Rate of the Industry Sector in India came to around 6.6% in 2003- 2004 and in this year, the electricity, water supply, and gas sector contributed 4.8%, the mining and quarrying sector contributed 5.3%, and the manufacturing sector contributed 7.1% in India . Industry Growth Rate in India came to 7.4% in 2004- 2005, with the manufacturing sector contributing 8.1%, the mining and quarrying sector contributing 5.8%, and the water supply, electricity, and gas sector contributing 4.3% in India .

Industry Growth Rate in India came to 7.6% in 2005- 2006. In this year, the mining and quarrying sector contributed 0.9%, the manufacturing sector contributed 9.0%, and the water supply, gas, and electricity sector contributed 4.3%. The Growth Rate of the Industrial Sector finally came to 9.8% in 2006- 2007. This shows that Industry Growth Rate in India has been on the rise over the last few years.
The reasons for the rise of Industry Growth Rate in India
The reasons for the increase of Industry Growth Rate in India are that huge amounts of investments are being made in this sector and this has helped the industries to grow. Further the reasons for the rise of the Growth Rate of the Industrial Sector in India are that the consumption of the industrial goods has increased a great deal in the country, which in its turn has boosted the industrial sector. Also the reasons for the increase of Industry Growth Rate in India are that the industrial goods are being exported in huge quantities from the country.
The Indian government must boost the Industrial Sector
Industry Growth Rate in India thus has been registering steady growth over the past few years. This has given a major boost to the Indian economy. The government of India thus must continue to make efforts to boost the industrial sector in the country. For this will in turn help to grow the country's economy.

Discuss the approaches to tax equity with special reference to ‘ability to pay principle.

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Discuss the approaches to tax equity with special reference to ‘ability to pay principle.’

User pays, or beneficiary pays, is a pricing approach based on the idea that the most efficient allocation of resources occurs when consumers pay the full cost of the goods that they consume. In public finance it stands with another principle of "ability to pay," which states that those who have the means should share more of the burden of public services. The ability to pay principle is one the reasons for the general acceptance of the progressive income tax system.

The principle of user pay supports the idea of horizontal equity, which states that those in similar wealth and income positions should be treated equally by the tax system. The basic idea is that those who do not use a service should not be obligated to pay for it. As long as the beneficiary aligns exactly with the user, the user pay principle works. Those who do not go to a movie are not obligated to pay for someone else to attend.

In public goods, beneficiaries and users often do not align. The divergence of user and beneficiary occurs when production and consumption have external effects. The driver, who purchases gasoline, may believe he or she is paying for the full cost (user pay) of using gasoline, except that greenhouse gases are produced. These impose costs on the environment and are believed to contribute to climate change. The "beneficiaries" must bear costs not paid in the purchase of gasoline. In this case the user pay principle results in the driver not paying the full or social cost of using fossil fuels, which creates a strong argument for regulation and other forms of public intervention. Increasing taxes on gasoline is one possible response that preserves the user pay principle by increasing the costs to user.

“The Foreign Trade Regime has undergone changes overtime.” Briefly examine the phases of change.

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“The Foreign Trade Regime has undergone changes overtime.” Briefly examine the phases of change.

The administrative control regime, which applies to all merchandise has several changes overtime which are as follow…..

Under Law 7/1991, the government is entitled to regulate the import regime through decrees. Decrees must be approved by the Committee of Tariffs, Customs and Foreign Trade, whose main members are the vice-ministers of economy.(1) Decrees must be approved with the recommendation of the Superior Council of Foreign Trade, which is composed of the ministers of economy and the president of India.(2)

Under Decree 3803/2006, the Committee of Imports of the Ministry of Trade, Industry and Tourism will be the competent administrative authority to grant licences for the import of goods. The administrative authorization of prior licenses for the import of goods is mandatory now in the following cases:

* Goods included in the list established by the government;

* Goods that do not require payment under the exchange regime, including:

* goods imported as foreign investment or contributions in kind;

* donations;

* previously-paid imports originating from the free trade zone;

* personal belongings and luggage;

* legalization of merchandise; and

* goods identified by the government within the import policy framework;

* Requests for import of goods with tariff and tax exemptions;

* Requests for import of used, faulty, reconstructed, refurbished or remanufactured goods or inventory leftovers;

* imports originating from official and governmental organizations, except for gasoline and other fuels; and

* waste and scrap iron in cases determined by the government .

Any additional imports into India fall under the free import regime; some imports must be registered, while in other cases registration is not required. Both types of import are regulated by the Direction of Foreign Trade of the Ministry of Commerce, Industry and Tourism. Under the regime of free import with registration set forth in Article 2 of Decree 3803/2006, importers must submit certain information and request authorization in advance from the relevant administrative authorities and the Ministry of Foreign Trade with regard to the following goods:

* fishing resources;

* monitoring and security equipment;

* Radioactive isotopes and substances;

* Goods reserved for the armed forces;

* Hydrocarbons, fuels and gasoline;

* goods subject to sanitary control to preserve human, vegetal and animal safety and health;
goods subject to technical requirements and regulations;

* goods subject to quantitative restrictions;

* goods subject to control to guarantee environmental protection; and

* automotive vehicles.

The sanitary, environmental, energy, technical and radiation control authorities must receive requests in advance and issue their opinions accordingly. Requests are received and processed through the Unique Window of Foreign Trade, a service that operates on the Internet. It is managed by the Assistant Direction of Design and Administration of Operations of the Ministry of Commerce, Industry and Tourism.

The authorizations given within the framework of the foreign trade regime for the import of goods (either through licences or registrations) have a term of 12 months for capital goods (which may be extended by a further 12 months) and six months for other goods (which may be extended by three months).

The free import regime without registration applies to goods that do not require licences or authorizations within the free import regime with registration. In these cases importers may request customs clearance declarations from the relevant authorities without having to provide additional documents.

Authorizations (where applicable) must be presented as supporting documents for customs clearance and import declarations. Authorizations and registrations must be provided to the customs authorities to obtain customs clearance.

Importers must keep these documents for a minimum of five years; they must be available for review and control by the customs authorities of the National Direction of Taxes and Customs whenever required.

To benefit from all the legal advantages and comply with the legal requirements of the regime for the import of goods into India, importers and suppliers may seek legal advice from a trade lawyer before developing any projects for international sales of goods or import contracts.

Briefly explain the Tenth Five Plan (2002-2007), highlighting its weaknesses and strengths. Refer to the Planning Commission report on website.

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Briefly explain the Tenth Five Plan (2002-2007), highlighting its weaknesses and strengths. Refer to the Planning Commission report on website.

First Five-Year Plan, 1951–1956
The first Indian Prime Minister, Jawaharlal Nehru presented the first five-year plan to the Parliament of India on 8 December 1951. The plan addressed, mainly, the agrarian sector, including investments in dams and irrigation. The agricultural sector was hit hardest by the partition of India and needed urgent attention. The total planned budget of 206.8 billion (US$23.6 billion in the 1950 exchange rate) was allocated to seven broad areas: irrigation and energy (27.2 percent), agriculture and community development (17.4 percent), transport and communications (24 percent), industry (8.4 percent), social services (16.64 percent), land rehabilitation (4.1 percent), and for other sectors and services (2.5 percent). The target growth rate was 2.1% annual gross domestic product (GDP) growth; the achieved growth rate was 3.6%. The net domestic product went up by 15%. The monsoon was good and there were relatively high crop yields, boosting exchange reserves and the per capita income, which increased by 8%. National income increased more than the per capita income due to rapid population growth. Many irrigation projects were initiated during this period, including the Bhakra Dam and Hirakud Dam. The World Health Organization, with the Indian government, addressed children's health and reduced infant mortality, indirectly contributing to population growth.
At the end of the plan period in 1956, five Indian Institutes of Technology (IITs) were started as major technical institutions. The University Grant Commission was set up to take care of funding and take measures to strengthen the higher education in the country.[ Contracts were signed to start five steel plants, which came into existence in the middle of the second five-year plan.
Second Five-Year Plan, 1956–1961
This plan functioned on the basis of a nude model. The Mahalanobis model was propounded by Prasanta Chandra Mahalanobis in the year 1953. The second five-year plan focused on industry, especially heavy industry. Unlike the First plan, which focused mainly on agriculture, domestic production of industrial products was encouraged in the Second plan, particularly in the development of the public sector. The plan followed the Mahalanobis model, an economic development model developed by the Indian statistician Prasanta Chandra Mahalanobis in 1953. Hydroelectric power projects and five steel mills at Bhilai, Durgapur, and Rourkela were established. Coal production was increased. More railway lines were added in the north east.
The Atomic Energy Commission was formed in 1958 with Homi J. Bhabha as the first chairman. The Tata Institute of Fundamental Research was established as a research institute. In 1957 a talent search and scholarship program was begun to find talented young students to train for work in nuclear power.
The total amount allocated under the second five year plan in India was Rs. 4,800 crore. This amount was allocated among various sectors:
• Mining and industry
• Community and agriculture development
• Power and irrigation
• Social services
• Communications and transport
• Miscellaneous
Third Five-Year Plan, 1961–1966
The third plan stressed on agriculture and improving production of rice, but the brief Sino-Indian War of 1962 exposed weaknesses in the economy and shifted the focus towards the Defence industry. In 1965-1966, India fought a war with Pakistan. The war led to inflation and the priority was shifted to price stabilisation. The construction of dams continued. Many cement and fertilizer plants were also built. Punjab began producing an abundance of wheat.
Many primary schools were started in rural areas. In an effort to bring democracy to the grassroot level, Panchayat elections were started and the states were given more development responsibilities.
State electricity boards and state secondary education boards were formed. States were made responsible for secondary and higher education.
Fourth Five-Year Plan, 1969–1974
At this time Indira Gandhi was the Prime Minister. The Indira Gandhi government nationalised 14 major Indian banks and the Green Revolution in India advanced agriculture. In addition, the situation in East Pakistan (now Bangladesh) was becoming dire as the Indo-Pakistani War of 1971 and Bangladesh Liberation War took place.
Funds earmarked for the industrial development had to be diverted for the war effort. India also performed the Smiling Buddha underground nuclear test in 1974, partially in response to the United States deployment of the Seventh Fleet in the Bay of Bengal. The fleet had been deployed to warn India against attacking West Pakistan and extending the war.
Fifth Five-Year Plan, 1974–1979
Stress was laid on employment, poverty alleviation, and justice. The plan also focused on self-reliance in agricultural production and defense. In 1978 the newly elected Morarji Desai government rejected the plan. Electricity Supply Act was enacted in 1975, which enabled the Central Government to enter into power generation and transmission leaders.
The Indian national highway system was introduced for the first time and many roads were widened to accommodate the increasing traffic. Tourism also expanded.
Sixth Five-Year Plan, 1980–1985
The sixth plan also marked the beginning of economic liberalization. Price controls were eliminated and ration shops were closed. This led to an increase in food prices and an increase in the cost of living. This was the end of Nehruvian Plan and Rajiv Gandhi was prime minister during this period.
Family planning was also expanded in order to prevent overpopulation. In contrast to China's strict and binding one-child policy, Indian policy did not rely on the threat of force. More prosperous areas of India adopted family planning more rapidly than less prosperous areas, which continued to have a high birth rate.
Seventh Five-Year Plan, 1985–1990
The Seventh Plan marked the comeback of the Congress Party to power. The plan laid stress on improving the productivity level of industries by upgrading of technology.
The main objectives of the 7th five year plans were to establish growth in areas of increasing economic productivity, production of food grains, and generating employment opportunities.
The thrust areas of the 7th Five year plan have been enlisted below:
• Social Justice
• Removal of oppression of the weak
• Using modern technology
• Agricultural development
• Anti-poverty programs
• Full supply of food, clothing, and shelter
• Increasing productivity of small and large scale farmers
• Making India an Independent Economy
Eighth Five-Year Plan, 1992–1997
Modernization of industries was a major highlight of the Eighth Plan. Under this plan, the gradual opening of the Indian economy was undertaken to correct the burgeoning deficit and foreign debt. Meanwhile India became a member of the World Trade Organization on 1 January 1995.This plan can be termed as Rao and Manmohan model of Economic development. The major objectives included, controlling population growth, poverty reduction, employment generation, strengthening the infrastructure, Institutional building, tourism management, Human Resource development, Involvement of Panchayat raj, Nagarapalikas, N.G.O'S and Decentralization and people's participation. Energy was given priority with 26.6% of the outlay. An average annual growth rate of 6.7% against the target 5.6% was achieved.
Ninth Five-Year Plan, 1997–2002
Ninth Five Year Plan India runs through the period from 1997 to 2002 with the main aim of attaining objectives like speedy industrialization, human development, full-scale employment, poverty reduction, and self-reliance on domestic resources.
The main objectives of the Ninth Five Year Plan of India are:
• to prioritize agricultural sector and emphasize on the rural development
• to generate adequate employment opportunities and promote poverty reduction
• to stabilize the prices in order to accelerate the growth rate of the economy
• to ensure food and nutritional security
• to provide for the basic infrastructural facilities like education for all, safe drinking water, primary health care, transport, energy
• to check the growing population increase
• to encourage social issues like women empowerment, conservation of certain benefits for the Special Groups of the society
• to create a liberal market for increase in private investments
During the Ninth Plan period, the growth rate was 5.35 per cent, a percentage point lower than the target GDP growth of 6.5 per cent.
Tenth Five-Year Plan, 2002–2007
• Attain 8% GDP growth per year.
• Reduction of poverty ratio by 5 percentage points by 2007.
• Providing gainful and high-quality employment at least to the addition to the labour force;*All children in India in school by 2003; all children to complete 5 years of schooling by 2007.
• Reduction in gender gaps in literacy and wage rates by at least 50% by 2007;*Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2%;*Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002 to 2007).

“The structural changes which are quite fundamental in character are inherent in the process of economic growth.” Discuss this statement.

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“The structural changes which are quite fundamental in character are inherent in the process of economic growth.” Discuss this statement.

The Statement is totally agreeable that structural changes which are quite fundamental in character are inherent in the process of economic growth. Structural-change theory deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a "more modern, more urbanized, and more industrially diverse manufacturing and service economy." There are two major forms of structural-change theory; W. Lewis' two-sector surplus model, which views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur the development of an urbanized industrial sector, and Hollis Chenery's patterns of development approach, which holds that different countries become wealthy via different trajectories. The pattern that a particular country will follow, in this framework, depends on its size and resources, and potentially other factors including its current income level and comparative advantages relative to other nations. Empirical analysis in this framework studies the "sequential process through which the economic, industrial and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth."

Structural-change approaches to development economics have faced criticism for their emphasis on urban development at the expense of rural development which can lead to a substantial rise in inequality between internal regions of a country. The two-sector surplus model, which was developed in the 1950s, has been further criticized for its underlying assumption that predominantly agrarian societies suffer from a surplus of labor. Actual empirical studies have shown that such labor surpluses are only seasonal and drawing such labor to urban areas can result in a collapse of the agricultural sector. The patterns of development approach have been criticized for lacking a theoretical framework.

Identify the critical elements of the sociological environment of business and analyze the social problems and prospects with the help of examples.

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Identify the critical elements of the sociological environment of business and analyze the social problems and prospects with the help of examples.

The business environment includes the marketplace, yourself and your business partners, and any external factor that may positively or negatively affect the level of your business success. Today we are going to look at three aspects of the environment; transformation, opportunities and obstacles, and two groups of environment handling strategies; consolidation strategies, and exit strategies.

1. The Amount Of Transformation Required To Reach Your Goal

Achieving any goal requires change. It is important when setting business goals to determine the amount of change required. If the change is great it may be better to break the goal down to sub-goals in order to make success more accessible.

Start with the question; why hasn’t the business already attained that goal? This will help determine exactly what needs to be changed as well as the amount of change needed.

It is important to determine how those changes can be accomplished in the current environment by looking at the opportunities and threats in the environment and the strengths and weakness within the business.
Opportunities, Strengths And Advantages

Every environment provides opportunities to those who develop the skill of seeing them. Every business has its own strengths and its own advantages over other businesses. The wise business manager can determine the best combination of these opportunities, strengths and advantages and then implement strategies to maximize profit at this point in the environment.

Even in the toughest times, when most businesses are in trouble, there are always some businesses that are prospering. If you develop the skills for assessing opportunities, strengths and advantages and the habit of acting on that assessment by taking appropriate goal directed action, then your business will always be one of those that are prospering.

3. Obstacles, Threats and Limitations

The environment always contains opportunities and it also always contains obstacles. Your business always has some limitations at any particular point in time and there are always threats to your success and profitability.

Since we know that these “problems” will always exist the wise business manager develops the skill of recognizing them early and develops and implements risk management strategies to guide the business through the difficulties while at the same time the business is focusing its efforts on profiting from the opportunities.

4. Consolidation Strategies

A business requires change in order to grow but constant change can be destabilizing. The wise business manager determines when it is appropriate to consolidate the gains made so that those gains become a strong foundation on which to build the next campaign of positive change.

A thorough understanding of the business environment can help determine the best point at which to consolidate and the best strategy to implement that consolidation.

5. Exit Strategies

No matter how skilled the manager is, or how well the environment is analyzed for opportunities, and threats, or how good the consolidation strategy may be, there is always the possibility that things don’t go to plan.

For this reason there is a golden rule that needs to be followed in every campaign; never enter any business campaign without a predetermined exit strategy.

The best time to determine strategies for how to exit a campaign with the minimum of difficulty or loss is before the campaign starts. This is when you are calm and clear thinking. If you wait until things are going wrong and the pressure is at a peak you are far less likely to find the best solution.

That was a brief introduction to capitalizing on the business environment. Now it’s up to you to put aside some time to use these five points to help you look at the current environment for your business and determine how you can capitalize on that environment to increase your business success.

Industrial Location

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Industrial Location

Choosing the Location of the Industry

Every entrepreneur is faced with the problem of deciding the location for his/her factory or plant. Location of the business is the most important factor influencing its success or failure. It is a long-term decision which should take into consideration not only the present requirements of the organisation but also its future expansion plans. Errors in location may be very difficult and expensive to rectify. Location of a plant has a bearing on the layout of machinery and equipment as well as on the process of production. The objective of a location plan is to find out the optimum or best location for the particular plant. Such a location not only results in lowest cost per unit but also facilitates orderly growth of the firm. Hence, the most advantageous location is that at which the cost of gathering material and fabricating it plus the cost of distributing the finished product to the customers will be at a minimum. It is not necessarily the most favourable location but rather the site at which all the considerations are optimised. There is no ideal location for all firms or even for one firm at all times. The choice of location depends on several important factors. It is influenced by the kind of products being manufactured, costs of production and distribution. The location of the plant should also be able to meet the environmental guidelines and other regulations set by the Government specific to a particular industry. The choice of an optimum location requires judicious balancing of all these factors.

Current Account Convertibility

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Current Account Convertibility:

Convertibility of a currency implies that a currency can be transferred into another currency without any limitations or any control. A currency is said to be fully convertible, if it can be converted into some other currency at the market price of that currency. If currency has to be convertible, it shall not be subjected to these restrictions.
Current account convertibility refers to currency convertibility required in the case of transactions relating to exchange of goods and services, money transfers and all those transactions that are classified in the current account. On the other hand, capital account convertibility refers to convertibility required in the transactions of capital flows that are classified under the capital account of the balance of payments.
At present, the Indian rupee is partly convertible on current account. In 1997, the Tarapore Committee on Capital Account Convertibility (CAC), constituted by the Reserve Bank, had indicated the preconditions for Capital Account Convertibility. The three crucial preconditions were fiscal consolidation, a mandated inflation target and, strengthening of the financial system.

Restructuring

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Restructuring
Restructuring is of two types: financial restructuring and basic restructuring.
(1) Financial restructuring implies the writing off of accumulated losses and rationalization of capital composition in respect of debt-equity ratio. The main purpose of this restructuring is to improve the financial health of the enterprise.
(2) Basic restructuring is said to occur when the public enterprise decides to shed some of its activities to be taken up by ancillaries or small-scale units.
Operational measures:
The efficiency of public sector enterprises depends upon the organisational structure. Unless this structure grants a sufficient degree of autonomy to the operators of the enterprise or develop a system of incentives, it cannot raise its efficiency and productivity. These measures include: (a) grant of autonomy to public enterprises in decision making, (b) provision of incentives for workers and executives consistent with increase in efficiency and productivity, (c) freedom to acquire certain inputs from the markets with a view to reducing costs, (d) development of proper criteria for the investment planning, and (e) permission to public enterprise to raise resources from the capital market to execute plan of diversification/expansion. The basic purpose of operational measures is to infuse the spirit of private enterprise.

What are the functions of Development Banks? Describe its Quantitative and Qualitative roles.

2011-05-18T08:05:00.000-07:00

What are the functions of Development Banks? Describe its Quantitative and Qualitative roles.

Solution:

Development banks provide financial assistance to industry in the following forms:
i) Term loans and advances
ii) Subscription to shares and debentures
iii) Underwriting of new issues
iv) Guarantees for term loans and deferred payments

The first two forms place funds directly in the hands of companies as subscription to shares and debentures. The last two forms facilitate the raising of funds from other sources.

Aggregative Role of Development Financing Institutions
Development Financing Institutions consist of Development Banks like the IDBI, SIDBI, NABARD and the State Finance Corporations. Three of the development financing institutions has exited from the market after the RBI announced its policy of harmonization of the development and banking functions. They are: ICICI with a reverse merger with its off-spring ICICI Bank Ltd., impending merger of IFCI with the Punjab National Bank, and the winding up of the IRBI due to its unsustainable nature. The IDBI is also slated for conversion to a Bank and the Parliament already gave its approval. The process is yet to commence. The role played by development banks is of two broad types.

1. Quantitative Role
This is the part played by development banks as a constituent of the industrial financing system in India and refers to the magnitude of funds provided by them jointly to industrial enterprises. The magnitude of industrial financing by these development banks has been considerable.
These banks have emerged as the single most important source of institutional finance to industry and have come to occupy a pre-eminent position in the institutional structure of the financial system. The annual average of sanctioned assistance by all the development banks during the three year period 1978-79 to 1980-81 touched an all time high of Rs.1808 crores. At present, as much as one-third of the gross fixed capital formation in private industry is being contributed by development banks
In India, their operations have the effect of improving the allocative efficiency of the financial system. The development banks perform the function of being a substitute for the capital market. When industrial enterprises are unable to raise funds from the normal channels, development banks fill the gap as well as restore or resuscitate the capital market.
As integral part of their lending operations, they thoroughly appraise projects as regards the priority aspect, financial viability and economic soundness and so on. The rigorous and exacting scrutiny by development banks tones up the quality of industrial projects and enables a more efficient use of available project resources.
Appraisal by the development banks is impersonal and objective. This results in financial assistance to diverse enterprises for a wide variety of purposes which would not otherwise have been possible. Included in this category are; new enterprises, small or medium–sized firms, enterprises in backward regions, and non-traditional industries

2. Qualitative Role
Development banking in India has an overwhelmingly qualitative dimension too in terms of the recent orientation towards promotional or innovative functions in their operations. With the evolution of a meaningful strategy of industrial development, a more positive role has been assigned to, and it being played by, development banks in India since 1969-70. The essential elements of these are:
(i) Development of backward regions
(ii) Encouragement to a new class of small entrepreneurs and enterprises
(iii) Rehabilitation of sick mills

Briefly explain the latest trade policy measures for 2008-09 and 2009-10. Refer to the recent Economic Survey.

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Briefly explain the latest trade policy measures for 2008-09 and 2009-10. Refer to the recent Economic Survey.

Solution:
Trade policy measures in 2008-09 - Measures taken by the Government
• Interest subvention of 2 per cent from 1.12.2008 to 30.9.2009 to the labour-intensive sectors of exports such as textiles (including handloom), handicrafts, carpets, leather, gems and jewellery, marine products and small and medium enterprises.
• An additional allocation for export incentive schemes of Rs. 350 crore.
• Inclusion of handicrafts items in Vishesh Krishi and Gram Udyog Yojana (VKGUY)
• Support under VKGUY scheme for some additional commodities.
• Extension of market-linked focus product scheme for bicycle parts, motor cars and motor cycles, apparels and clothing accessories, auto components, etc.
• Provision of additional Rs. 1,100 crore to ensure full refund of claims of CST/terminal excise duty/duty drawback on deemed exports.
• Continuation of duty entitlement passbook (DEPB) scheme up to December 31, 2009.
• Restoration of DEPB rates for all items where they were reduced in November 2008 and increase in duty drawback rates on certain items effective from September 1, 2008
• Backup guarantee made available to ECGC to the extent of Rs. 350 crore to enable it to provide guarantees for exports to difficult markets/products. Funding for ECGC also provided from the National Export Insurance Account for providing higher risk cover to MSME exporters and select export sectors.
• Provision of additional funds of Rs. 1,400 crore for textile sector to clear the backlog claims of Technology Upgradation Fund (TUF).
• Export duty on iron ore fines eliminated, and for lumps, reduced to 5 per cent.
• Some pending issues relating to service tax refund on exports resolved.
• For fast track resolution of a number of procedural issues to reduce delays for the exporters, a committee constituted under the chairmanship of the Finance Secretary including Secretaries of the Department of Revenue and the Commerce.
• Excise duty reduced across the board by 4 per cent for all products except petroleum products and those products where current rate was less than 4 per cent.
• The guarantee cover under credit guarantee scheme for micro and small enterprises on loans doubled to Rs. 1 crore with a guarantee cover of 50 per cent. The guarantee cover extended by credit guarantee fund trust increased to 85 per cent for credit facility up to Rs. 5 lakh. The lock-in period for such collateral free loans reduced.
• CVD on TMT bars and structurals and on cement removed.
• Exemption from basic customs duty on zinc and ferro alloys withdrawn.
• Duty credit scrips under DEPB scheme and Freely Transferable Scrips under chapter 3 of FTP shall now be issued without waiting for realization of export proceeds.

• Rs. 325 crore outlay earmarked under the promotional schemes for leather, textile etc. for exports made with effect from 1.4.09.
• Benefit of 5 per cent under FPS has been notified for export of handmade carpets, in lieu of 3.5 per cent benefit allowed earlier under VKGUY scheme.
• Technical textiles and stapling machine have been added under the focus product scheme. An additional benefit of 2.5 per cent is notified for export of dried vegetables under VKGUY.
• STCL Limited, Diamond India Limited, MSTC Limited, Gem & Jewellery Export Promotion Council and Star Trading Houses (for gem and jewellery sector) have been added under the list of nominated agencies for the purpose of import of precious metals. The procedure and monitoring provisions for implementation of these additional agencies have been announced.
• Authorized person of gem & jewellery units in EOU allowed personal carriage of gold in primary form up to 10 kilograms in a financial year subject to RBI and customs guidelines.
• Export obligation period against advance authorizations extended up to 36 months without payment of composition fee in view of the present global economic slowdown.
• Supply of an Intermediate product by the domestic supplier directly from their factory to the port against advance intermediate authorization for export by ultimate exporter has been allowed.
• Elimination of import duties for naphtha for use in power sector.
• Simplification of export licensing requirements for blood samples
• Elimination of import duty on rough cubic zirconia and reduction in import duty on polished cubic zirconia and rough corals.

Measures taken by the RBI
• Increase in liquidity to the banks for improving credit flow
• Reducing CRR, SLR, repo rate and reverse repo rates
• Putting in place a special refinance facility for banks for the purpose of extending finance to exports, micro and small enterprises, mutual funds and NBFCs. Provisioning requirements have been lowered. Export credit refinance facility for commercial banks increased from 15 per cent to 50 per cent of the outstanding rupee export credit.
• Refinance facility to the EXIM Bank for an amount of Rs. 5,000 crore for providing pre-shipment and post shipment credit in rupees or dollars.
Increase in Forex liquidity:
• RBI's assurance for continued selling of foreign exchange (US$) through banks, to augment supply in the domestic foreign exchange market.
• Ceiling rates on export credit in foreign currency raised from LIBOR+100 basis points to LIBOR+350 basis points subject to the condition that the banks will not levy any other charges, i.e., service charge, management charge, except for recovery towards out of pocket expenses incurred.
• The ceiling on interest rates for non-residents deposits raised.
• Banks' overseas borrowing limits increased and ECB borrowing norms eased; "all in cost" ceiling of such borrowings to be removed under the approval route of RBI.
• RBI to provide forex liquidity to Indian public and private sector banks up to June 30, 2009, through forex swaps of tenure up to 3 months.
Easing of credit terms:
• Enhancing the period of pre-shipment and post-shipment Rupee Export Credit by 90 days each;
• Increasing the time period of export realization for non-status holder exporters to 12 months;
• Authorized dealers category-I banks permitted to consider applications for premature buy-back of FCCBs from their customers.
Other announcements made by the PSU banks consequent to measures announced by RBI:
i) Reduced interest rate for micro enterprises and SMEs;
ii) PSU banks will grant need-based ad hoc working capital loan of up to 20 per cent of their overall credit facility if it is less than Rs. 10 crore.
iii) For export units, margin money on guarantees will be reduced

Briefly discuss why the Industrial Policy of 1956 is referred to as the ‘Economic Constitution’ of the country?

2011-05-18T07:51:00.000-07:00

Briefly discuss why the Industrial Policy of 1956 is referred to as the ‘Economic Constitution’ of the country?

Solution:

The Industrial Policy of 1956 is referred to as the `Economic Constitution’ of the country. Private sector is a junior partner. Public sector to play a leading role as a senior partner to develop heavy and basic industries to play a leading role as a senior partner to develop heavy and basic industries as well as infrastructure. Private sector worked under the misconception that the Damocles’ swear was hung on its head. This was an incorrect perception of IPR 1956. Rather a permanent place was provided for the private sector. By developing heavy industry and infrastructure, the State created a congenial environment for the development of the private sector. Later development by the Industrial Licensing Policy Inquiry Committee (1969) indicated that under one pretext or another, several areas reserves for the public sector were opened to the private sector. Private sector investment zoomed forward, along with public sector expansion. Industrial Policy Statement, 1977 - Policy drafted by the Ghanaians in the Janata Party. The main aim of the policy was to correct the distortions in the implementation of the Industrial Policy (1956). Major distortions:
(a) Unemployment has incre4ased
(b) rural-urban disparities have widened
(c) rate of real investment has stagnated.
Chief features:
Major thrust on the development of small industries.
• Reservation list increased from 180 to 807 items.
• District Industries Centres to be set up so that the services and support required
• Khadi and village Industries Commission to be strengthened.
• Appropriate technology to be developed for small and village industries.
Areas for Large Scale Sector:
Large sector should be related to minimum basic needs programme via dispersal of small and village industries. Large industries should strengthen the agricultural sector. Approach towards Large Business Houses – Large houses to rely on internally generated resources fro financing new projects or expanding existing projects. They should not depend on public financial institutions and banks. Larger role for the Public Sector – Besides producing important and strategic goods, public sector be expanded to act as a stabilizing force for maintaining supplies of essential consumer goods.
Foreign Collaborations:
In areas where technological know-how is not needed, existing foreign collaborations will not be renewed. As a rule, majority interest in ownership and control to remain in Indian hands, though the governmental make exceptions in highly export-oriented and/or sophisticated technology areas. Sick Units – Sick units to be helped in the interest of protecting employment, but no blanket assurance was given to take-over every sick unit. Units which are non-viable and continue to make losses year after year, may not be helped.

Analyze the Growth and Structure of the Private Sector in India with special reference to the informal sector.

2011-05-18T07:26:00.001-07:00

Analyze the Growth and Structure of the Private Sector in India with special reference to the informal sector.

Solution:

At the time of independence, almost the entire production and trade was in the domain of private sector. The public sector was insignificant, being confined to irrigation, power, railways, ports, posts and telegraphs and ordinance establishments. After 1951, the public sector was expanded fast both by Central and State Governments. It has become significant in many fields in terms of investments, total turnover, capital stock, contribution to foreign exchange earnings and so on as we noted in the previous unit. Now we turn to the growth of private sector. The importance of the private sector in the Indian economy can be assessed in terms of its contribution to national income and employment. According to the latest available statistics for the year 1999-2000 the public sector, including Government administration, contributed 25 per cent domestic product while the private sector contributed 75 per cent, private sector is dominant in agriculture, forestry, fishing, small-scale industry, retail trade, construction, transport other than railways, etc. major segment of the organised private sector is the corporate sector. Let us now look at the private corporate sector. As the organised private sector is generally equated with the private sector in a narrow sense, it is convenient and useful to study the growth of private corporate sector and compare it with the growth of public sector. The public sector companies in the early 1990's occupied a major position in terms of the amount of paid up capital, even though the number of government companies was small. In terms of number of companies the rate of growth of public sector companies has been faster than those of the private sector companies. Between 1967 to 2000, the number of government companies had increased from 74 to l,257. On the other hand, during the same period, the number of non-government companies had increased from 29,283 to 541,051. The paid-up capital of government companies increased from Rs. 70 crores in 1957 to Rs. 95,842 crores by March 2000. During the same period, the paid-up capital of private sector companies increased from Rs. 1,050 crores to 172,056 crores. The share of Government companies in total paid-up capital of all companies rose from 6.8% in 1957 to 35.8% in 2000. This indicates the growing importance of government companies.
In the organised sector public sector accounted for more than 70 per cent of total employment. The share of the private sector in the organised sector employment registered a slight increase from 28.7 per cent in 1989 to 31.3 per cent in 2001. As per the growth rate of employment in private sector during the recent period, it was higher than the growth rate in public sector. Structure of Private Sector Agriculture and allied activities which accounted for nearly 40 per cent of the domestic GNP and nearly 65% of employment in early 1990s are completely in the private sector. Small scale and cottage industries, trading, consumer goods industries, construction etc. are some of the other areas in which the private sector has been playing a major part. As noted in the previous unit the public sector in contrast to the private sector predominates in basic, heavy and infrastructure industries one important structural dimension of the private sector is the predominance of the informal or unorganised sector within the private sector. Informal or Unorganised Sector The private sector in India has three components : 1. Corporate sector, 2. enterprises other than corporate sector enterprises belonging to the .organised sector, 3. Informal or unorganised sector enterprises. Within the .organised private sector, the corporate sector predominates. We have already explained the structure and growth of private corporate sector, Now we briefly deal with the unorganised sector which is a large component of the private sector. T.S, Papola ("Informal Sector: Concept and Policy," The Giri Institute of Development Studies, Lucknow, December 1979 (mimeo) listed some prominent characteristics of the informal sector units after explaining how difficult it is to precisely define informal sector. Small size of operations, informal structure and family ownership, use of non-modern technology, lack of access to Government favours (subsidies etc.), competitive and unprotected product and labour markets are the prominent characteristics of the informal sector indentified and elaborated by Papola. A study of the informal sector in India has come up with the following conclusions:
Informal sector both in terms of employment and income has been a predominant sector of the Indian economy. In 1981 the sector accounted for 91.l% of total national employment and 65.66 per cent of income generated in the economy. During the period 1960-61 to 1981-82, while the organised sector grew at an average annual rate of 12.57 per cent (income growth rate), the unorganised sector recorded a growth rate of 9.37 percent. The economy as a whole recorded a higher growth rate of 11.36 percent indicating slight declining trend of the unorganised sector. While in the aggregate the above trend is clear, the urban informal sector has been growing during the period. The share of the urban informa1 sector in the total income of the unorganised sector increased from 29.35 per cent to 43.56 per cent during the period 1960-61 to 198 1-82.The average earnings per employee in the rural informal sector and urban informal sector were both less than those of the organised sector employee. The organised sector earnings per capita were several times higher than unorganised sector earnings per capita. While the share of wage/salary income in the case of organised sector was more than two-thirds, in the case of the unorganised sector it was less than a quarter. From the above, it is clear that within the private sector the unorganised sector was predominant both by income and employment criteria. In 1994-95 the share was around 63 per cent. By 2000-01 it has declined to 59 per cent. With steps for economic liberalisation initiated in 1991, it is expected that the organised private sector' will further expand resulting in the reduction of the sizeof the unorganised sector.

The economic environment of business exercises a strong influence on the non-economic environment.

2011-05-18T07:25:00.000-07:00

“The economic environment of business exercises a strong influence on the non-economic environment.” Discuss this statement with the help of examples.
ENVIRONMENT OF BUSINESS

Solution:

The term “environment” refers to the totality of all the factors which are external to and beyond the control of individual business enterprises and their managements. Environment furnishes the macro-context, the business firm is the micro-unit. The environmental factors are essentially the “givens” within which firms and their managements must operate. For example, the value system of society, the rules and regulations laid down by the Government, the monetary policies of the central bank, the institutional set up of the country, the ideological beliefs of the leaders, the attitude towards foreign capital and enterprise, etc., all constitute the environment system within which a business firm operates. These environmental factors are many in numbers and various in form. Some of these factors are totally static, some are relatively static and some are very dynamic – they are changing every now and then. Some of these factors can be conceptualized and quantified, while other can be only referred to in qualitative terms. Thus, the environment of business is an extremely complex phenomenon.
ECONOMIC ENVIRONMENT
The present day economic environment of business is a complex phenomenon. The business sector has economic relations with the Government, the capital market, the household sector and the foreign sector. These different sectors, together, influence the trends and structure of the economy. The form and functioning of the economy varies from country to country. The design and structure of an economic system is conditioned by socio-political arrangements. Such arrangements are relevant from the standpoint of macro-economic decision-making.
For example, in a democratic set up, people exercise an influence, direct or indirect, through the system of casting votes, on the nature of the decisions taken by the Government. In a parliamentary system, most decisions are processed by Cabinet ministers, whereas under a presidential form of Government the President acts as the real manager of the state: It is he who takes or makes decisions. Similarly, macro-real manager of the State: it is he who takes or makes decisions. Similarly, Marco-decision-making is more decentralized in a federal form of Government than in unitary form of Government.
All modern economics, whether capitalist, socialized, communist or missed, have certain fundamental economic problems to deal with. In each and every economy, including the so-called “affluent society”, some or many resources are scarce. Consequently, choices concerning the resource use have to be made together by individuals, by business corporations, and by society. It is the social choice and community preferences which give substance to the question of macro-economic decisions. From the standpoint of resources, the basic economic problem of every economy is that of just allocation of resources and subsequent optimum production. These may be the aspects to this problem: What to produce? How to produce? For whom to produce? When to produce?
Every economy has to decide on the quality and quantity of the goods and services to be produced. It has to decide on the nature of the technology and technique of production in view of factor endowment. It has to decide on the course and pattern of distribution of goods and services produced. It has to decide on the timing of production. The process of decision-making differs depending on how these problems are solved in different economies. This is what constitutes the functioning of the economy, or the nature of the economic environment. At the risk of over-implication, certain points can be made about the organisation and functioning of modern economics:
i) In most economies, both “free market mechanism” and “Centralised planning” exist in different degrees even today. By “free market mechanism” or “price mechanism”, we mean a free play of the market forces of demand and supply to determine an equilibrium solution of the allocation problem. Market mechanism determines commodity prices, factor prices, and income distribution. By “planning”, we mean a programme of action based upon consistency and feasibility of attaining a set of targets in view of a set of objectives through a set of instruments. In the present day world around us, planning is combined with free pricing to arrive at macro-economic decisions yielding “the maximum good to the maximum number”. Thus, the economy in which a business firm operates today is not an exclusively free economy making an indiscriminate use of prices and the markets. Rather, it is directed by a system of planning, control, regulation and coordination.
ii) In most economies, positive intervention by the Government in day-to-day economic affairs has existed over several decades in the past. Planning is a form of Government intervention. Besides this, the Government can also intervene through a system of controls and regulations. The “welfare state”principle induces the Government to enforce minimum wages, commodity controls, fair trade practices, etc, through legislation. The basic objectives of such economic legislations and policies are : growth, efficiency and equity. It is the intervene role fonder government that has made most business firms socially responsible. However, intervention by the Government is now on the decrees. Many economics have relaxed regulations and controls through economic reforms, and are allowing a free play of market forces.
iii) Modern economies age not “closed” and “open”; they are actively engaged in international trade and cooperation. So, the international transmission effect today is stronger than ever before. Though three are disparities in the levels of income and standards of living over space and time, there is a conscious effort to develop the port nations. The maintenance of steady growth and enveloped countries dependent on the acceleration of growth in underdeveloped countries. This idea has given new dimensions to issues like the role of multinational corporations, the ecological balance, the recycling of petrodollars, and the transfer of technology. The technological revolution is making strident moves. In order to keep their dynamism, the economics are determined to develop science and technology, and to balance environment and economy, and this is going to act as a unifying force for the world economic order. These facts define the environment and set the constraints within which modern business firms must operate. The managements cannot overlook the environment, whether market or non-market. No management can ignore the functioning of markets, the objectives of national planning, the polices of the Government or their social responsibilities, or the rate, pattern and structure of economic changes, or the forms of international cooperation. Progressive managements must keep themselves continuously informed about the magnitude and direction of changes in the national as well as international economic environment. Of course, both economic and non-economic environment have an important bearing on managerial decisions.

Administered Prices

2011-05-18T07:23:00.001-07:00

Administered Prices

An administered price is a price fixed by policy makers in order to determine, directly or indirectly, domestic market or producer prices. In the United States, all administered price schemes set a minimum guaranteed support price or target price for a commodity, which is maintained by associated policy measures such as quantitative restrictions on production and imports; taxes and tariffs on imports; export subsidies; and public stockholding. According to the definitions used, administered prices cover all goods and services whose prices are included in the HICP and are fully (“directly”) set or mainly (“to a significant extent”) influenced by the government (central, regional, or local government including national regulators). Fully administered prices cover the prices of goods and services that are directly set by the government. For example, the government may choose to increase local public transport charges at regular intervals. Other examples may include school and university fees, the prices of public theatre tickets, waste collection and childcare, and fees for administrative documents. Mainly administered prices cover the prices of goods and services on which the government or another national regulator has a very significant influence. These may include, for example, prices that cannot be changed without the prior approval of a national regulatory authority. The influence of such decisions may have a direct bearing on retail prices or it may be indirect via wholesale prices. However, the regulator must have a very significant impact on the consumer price. Owing to the many borderline cases that the concept of administered prices inevitably involves, a number of conventions have been used to guide the implementation of the general definition. Prices that are only influenced by the government via indirect taxation.) are not considered to be administered. Eurostat intends to publish a separate index that excludes the impact of changes in indirect tax rates on the HICP.
For example, administered prices under the 2002 farm bill (P.L. 107-171) include loan rates and/or target prices, and price support levels for sugar, and dairy products.

Incremental Capital-Output Ratio

2011-05-18T07:21:00.001-07:00

Incremental Capital-Output Ratio (ICOR)

The incremental capital output ratio (ICOR) is defined as the ratio between investment in some previous period(s) and the growth in output in the subsequent period. Needless to say, ICOR calculation is based on constant price data.

There are several critical points to be mentioned about this ratio: (i) Growth in output can be due to several other factors than investment in new capital, e.g., growth in productivity, production capacity utilization rate, and (ii) The 'investment - increase in output' lag will vary. Thus, to obtain a reliable relationship the measurement of ICOR should be estimated for a longer period, perhaps three or four decades.
The period used to compute ICOR should be as “normal” as possible, however, it might be difficult to recognize a 'normal' period. A pragmatic solution to this problem is to derive ICOR on the basis of several periods.

The above method smooths out periods with extremely high or low investments, however, if the periods 0 and/or t have extremely low or high use of capacity this method will give a ‘wrong’ picture of the average capital output ratio.
ICOR has been used since the 1950's, and is still used by the Bank and other international organizations for instance to measure required investment to reach the targeted GDP growth.
Example;
If a country has an investment rate of four percent of GDP and an ICOR of four, growth in GDP will be one percent per year. If the population is growing faster than one percent per year, GDP per capita will fall. Alternatively, lets say that the targeted GDP growth is five percent next year, then required investment this year is 20 percent of GDP.

Externalities

2011-05-18T07:19:00.000-07:00

Externalities

Externalities are common in virtually every area of economic activity. They are defined as third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid. Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years - not least because of concerns about the link between the economy and the environment.

PRIVATE AND SOCIAL COSTS
Externalities create a divergence between the private and social costs of production. Social cost includes all the costs of production of the output of a particular good or service. We include the third party (external) costs arising, for example, from pollution of the atmosphere.
SOCIAL COST = PRIVATE COST + EXTERNALITY
For example: - a chemical factory emits wastage as a by-product into nearby rivers and into the atmosphere. This creates negative externalities which impose higher social costs on other firms and consumers. e.g. clean up costs and health costs.
Another example of higher social costs comes from the problems caused by traffic congestion in towns, cities and on major roads and motor ways. It is important to note though that the manufacture, purchase and use of private cars can also generate external benefits to society. This why cost-benefit analysis can be useful in measuring and putting some monetary value on both the social costs and benefits of production.
MARKET FAILURE AND EXTERNALITIES
When negative production externalities exist, marginal social cost > private marginal cost. This is shown in the diagram below where the marginal social cost of production exceeds the private costs faced only by the producer/supplier of the product. In our example a supplier of fertiliser to the agricultural industry creates some external costs to the environment arising from their production process.

Externalities lead to market failure?
If we assume that the producer is interested in maximising profits - then they will only take into account the private costs and private benefits arising from their supply of the product. We can see from the diagram below that the profit-maximising level of output is at Q1. However the socially efficient level of production would consider the external costs too. The social optimum output level is lower at Q2.

This leads to the private optimum output being greater than the social optimum level of production. The producer creating the externality does not take the effects of externalities into their own calculations. We assume that producers are only concerned with their own self interest. In the diagram above, the private optimum output is when where private marginal benefit = private marginal cost, giving an output of Q1. For society as a whole though the social optimum is where social marginal benefit = social marginal cost at output Q2.The failure to take into account the negative externality effects is an example of market failure.
NEGATIVE CONSUMPTION EXTERNALITIES
Consumers can create externalities when they purchase and consume goods and services.
• Pollution from cars and motorbikes
• Litter on streets and in public places
• Noise pollution from using car stereos or ghetto-blasters
• Negative externalities created by smoking and alcohol abuse
• Externalities created through the mis-treatment of animals
• Vandalism of public property
• Negative externalities arising from crime
In these situations the marginal social benefit of consumption will be less than the marginal private benefit of consumption. This leads to the good or service being over-consumed relative to the social optimum. Without government intervention the good or service will be under-priced and the negative externalities will not be taken into account. Again there will be a deadweight loss of economic welfare.

In the example shown in the chart above we illustrate the potentially negative effects of people consuming cigarettes on other consumers. The disutility (dis-satisfaction) created leads to a reduction in the overall social benefit of consumption. If the cigarette consumer only considers their own private costs and benefits, then there will be over-consumption of the product. Ideally, the socially efficient level of cigarette consumption will be lower (Q2). The issue is really which policies/strategies are most appropriate in reducing the total level of cigarette consumption!

What is privatization? Briefly discuss the three forms adopted for privatizing Public Sector Enterprises.

2011-05-18T07:14:00.001-07:00

What is privatization? Briefly discuss the three forms adopted for privatizing Public Sector Enterprises.

How important is privatization in India? The first order issue is that of competition policy. When the government hinders competition by blocking entry or FDI, this is deeply damaging. Once competitive conditions are ensured, there are, indeed, benefits from shifting labour and capital to more efficient hands through privatisation, but this is a second order issue. The difficulties of governments that run businesses are well-known. PSUs face little "market discipline". There is neither a fear of bankruptcy, nor are there incentives for efficiency and growth. The government is unable to obtain efficiency in utilising labour and capital; hence the GDP of the country is lowered to the extent that PSUs control labour and capital. When an industry has large PSUs, which are able to sell at low prices because capital is free or because losses are reimbursed by periodic bailouts, investment in that entire industry is contaminated. This was the experience of Japan where the "zombie firms" - loss-making firms that were artificially rescued by the government - contaminated investment in their industries by charging low prices and forcing down the profit rate of the entire industry.
Further, in many areas, the government faces conflicts of interest between a regulatory function and an ownership function. As an example, the Ministry of Petroleum crafts policies which cater for the needs of government as owner, which often diverge from what is best for India. There is a fundamental loss of credibility when a government regulator faces PSUs in its sector: there is mistrust in the minds of private investors, who demand very high rates of return on equity in return for bearing regulatory risk. These arguments have led many economists to advocate large-scale privatisation, so as to clear the slate, and get on with the task of building a mature market economy. The role model in this regard is India. After the collapse of communism and the unification of East and West Germany, an auction was held for selling off all East German PSUs. Negative bids were permitted; i.e. the government was willing to even pay a private manager to take over a loss-making business if no higher bid was to be found. Through this, Germany was able to erase the heritage of socialism, and get on with the task of running an efficient market economy.
While such a game plan is entirely feasible in India, the present Parliament desires no privatisation. Does this mean that in the immediate future, progress in economic policy on privatisation must merely wait for the next elections? When we look at various industries in India, the gains from privatisation are quite heterogeneous. In some cases, there are hopelessly loss-making PSUs. These operate in industries where private and foreign firms have been able to come in, and the PSU has been left far behind the standards of quality and price set by the private sector. The PSUs should ideally have been sold off long ago, but today, these firms are irrelevant for the competitive dynamics of the industries that they operate in. The only issue is that of getting the land, the labour and some machinery out of public hands. When privatisation is achieved, India will benefit because the private buyer will produce more GDP using the same resources, and the flow of budgetary support to these firms will cease. The government should be happy to get these firms out of its hands with negative bids. The next and most interesting category comprises industries like telecom and airlines. In these areas, India has witnessed the dramatic benefits that come from the entry of private players.
Telecom and airline services in India are now dramatically improved, if not yet up to world-class, by changing rules in a way that permitted limited entry to domestic and foreign players. The privatization of VSNL was critically important because it was part of the opening up of the ILD sector to competition: the government would arguably have been more tardy in opening up if it had a vested interest through ownership of VSNL.
However, the key innovation, which broke with the stasis of socialism was opening up entry barriers - not privatisation. In both sectors, the full benefits from permitting foreign competitors, which are only present in very muted fashion, remain to be harnessed. While Spicejet is a good airline, there are bigger benefits waiting to be obtained by having domestic flights run by Lufthansa and Singapore Airlines. In both sectors, the defining issue in policy is the removal of entry barriers, not privatisation. Looking forward, there is a good chance that in some years, BSNL, MTNL [ Get Quote ] and the merged airline will end up like one of the many defunct PSUs of today. It makes sense for the government to sell today - while the going is good. But the privatisation of these three firms is no longer the most important issue - the further elimination of entry barriers faced by domestic and foreign firms is. What does this tell us about banking? The decline in market shares of PSU banks, while helped along by strikes of PSU bank unions, has proceeded only slowly. This is partly because there is a fundamentally non-level playing field where private and foreign banks have deposit insurance for only Rs 100,000 of deposits while PSU banks have unlimited deposit insurance. This gives one reason in favour of bank privatisation: it is inherently difficult to achieve competitive conditions without privatisation. But equally, there is no industry in India where the licence-permit raj hinders entry more than in the case of banking. At a time when the Indian economy is booming, and every kind of business is being created, the one industry where we see no new firms starting up is banking. This has surely got to do with government restrictions on entry. There is absolutely no industry in India where the opening of branch offices by foreign firms and private firms requires permission from the government. When Ford operates in India, it has to obey rules on FDI, but after that, it never has to go back to the government to take permission to open offices. What is worse, all foreign banks - put together - are given permission to open 12 branches per year in the full country. There is no worse instance where contemporary Indian policy-making is animated by ideas from the 1960s.

An important factor which influences the Balance of Payments of a country is the exchange rate of its currency vis-a- vis other major currencies.

2011-05-18T07:12:00.000-07:00

'An important factor which influences the Balance of Payments of a country is the exchange rate of its currency vis-a- vis other major currencies.’ Briefly explain this statement.

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 favorable balance of trade is known as a trade surplus and consists of exporting more than is imported; an unfavorable balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.
Primitive understanding of the functioning of balance of trade informed the economic policies of Early Modern Europe that are grouped under the heading mercantilism. An early statement appeared in Discourse of the Common Weal of this Realm of England, 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them." The balance of payments of a country is said to be in equilibrium when the demand for foreign exchange is exactly equivalent to the supply of it. The balance of payments is in disequilibrium when there is either a surplus or a deficit in the balance of payments. When there is a deficit in the balance of payments, the demand for foreign exchange exceeds the demand for it. A number of factors may cause disequilibrium in the balance of payments. These various causes may be broadly categorized into:
(i) Economic factors;
(ii) Political factors; and
(iii) Sociological factors.
Economic Factors:
A number of economic factors may cause disequilibrium in the balance of payments. These are:
Development Disequilibrium:Large-scale development expenditures usually increase the
purchasing power, aggregate demand and prices, resulting in substantially large imports. The development disequilibrium is common in developing countries, because the above factors, and large-scale capital goods imports needed for carrying out the various development programmes, give rise to a deficit in the balance of payments.
Capital Disequilibrium: Cyclical fluctuations in general business activity are one of the prominent reasons for the balance of payments disequilibrium. As Lawrance W. Towle points out, depression always brings about a drastic shrinkage in world trade, while prosperity stimulates it. A country enjoying a boom all by itselt ordinarily experiences more rapid growth in its imports than its exports, while the opposite is true of other countries. But production in the other countries will be activated as a result of the increased exports to the boom country.
Secular Disequilibrium: Sometimes, the balance of payments diequilibrium persists for a long time because of certain secular trends in the economy. For instance, in a developed country, the disposable income is generally very high and, therefore, the aggregate demand, too, is very high. At the same time, production costs are very high because of the higher wages. This naturally results in higher prices. These two factors - high aggregate demand and higher domestic prices may result in the imports being much higher than the exports. This could be one of the reasons for the persistent balance of payments deficits of the India.
Structural Disequilibrium: Structural changes in the economy may also cause balance of payments disequilibrium. Such structural changes include the development of alternative sources of supply, the development of better substitutes, the exhaustion of productive resources, the changes in transport routes and costs, etc.
Political Factors: Certain political factors may also produce a balance of payments disequilibrium. For instance, a country plagued with political instability may experience large capital outflows, inadequacy of domestic investment and production, etc. These factors may, sometimes, cause disequilibrium in the balance of payments. Further, factors like war, changes in world trade routes, etc., may also produce balance of payments difficulties.
Social Factors: Certain social factors influence the balance of payments. For instance, changes in tastes, preferences, fashions, etc. may affect imports and exports and thereby affect the balance of payments.

‘Rao - Manmohan Model of Growth is different from Gandhian Model of Growth.’ Critically evaluate this statement.

2011-05-18T07:09:00.000-07:00

‘Rao - Manmohan Model of Growth is different from Gandhian Model of Growth.’ Critically evaluate this statement.

In India efforts to remove poverty and inequality in rural areas have failed although growth in production and income has been achieved. The reason for this is that strategies for rural development were aimed primarily at raising production without any understanding of social and class structure and their relation to production and its distribution. A new approach to development policy is therefore required. Renewed attention has recently been paid to the Gandhian approach to rural development in the centre and in the northern states. This approach is examined, in the context of the present agricultural situation in India, in anticipation of its implementation. Aspects discussed include: characteristics of the model, ideals of development, concept of development, main aspects and sources of development, historical realities, and changing agrarian structure. It is concluded that the Gandhian model of rural development cannot succeed in providing social justice without the existence of the Gandhian type of rural economy. The prevailing agrarian situation indicates that this cannot be brought about in the context of India's present stage of development and of development in the world in general. In the present state of socio-politico-economic affairs, the model would benefit the dominant class of the rural population at the cost of the rural poor. Some aspects of the Gandhian model e.g. expansion of village and cottage industries, decentralization of production and wealth, and the institution of trusteeship by state confiscation of excess wealth, may be implemented under present conditions.
The economy of India is the twelfth largest economy in the world by nominal value and the fourth largest by purchasing power parity (PPP).In the 1990s, following economic reform from the socialist-inspired economy of post-independence India, the country began to experience rapid economic growth, as markets opened for international competition and investment. In the 21st century, India is an emerging economic power with vast human and natural resources, and a huge knowledge base. Economists predict that by 2020,India will be among the leading economies of the world. India was under social democratic-based policies from 1947 to 1991. The economy was characterised by extensive regulation, protectionism, and public ownership, leading to pervasive corruption and slow growth. Since 1991, continuing economic liberalisation has moved the economy towards a market-based system.A revival of economic reforms and better economic policy in 2000s accelerated India's economic growth rate. By 2008, India had established itself as the world's second-fastest growing major economy. However, the year 2009 saw a significant slowdown in India's official GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP which would be among the highest in the world.
India's large service industry accounts for 54% of the country's GDP while the industrial and agricultural sector contribute 29% and 17% respectively. Agriculture is the predominant occupation in India, accounting for about 60% of employment. The service sector makes up a further 28%, and industrial sector around 12%. The labor force totals half a billion workers. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish. Major industries include telecommunications, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology enabled services and software.
India's per capita income (nominal) is $1070, ranked 143th in the world, while its per capita (PPP) of US$2,780 is ranked 130th.Previously a closed economy, India's trade has grown fast. India currently accounts for 1.5% of World trade as of 2007 according to the WTO. According to the World Trade Statistics of the WTO in 2006, India's total merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and India's services trade inclusive of export and import was $143 billion. Thus, India's global economic engagement in 2006 covering both merchandise and services trade was of the order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India's trade has reached a still relatively moderate share 24% of GDP in 2006, up from 6% in 1985. Despite robust economic growth, India continues to face many major problems. The recent economic development has widened the economic inequality across the country. Despite sustained high economic growth rate, approximately 80% of its population lives on less than $2 a day (PPP). Even though the arrival of Green Revolution brought end to famines in India, 40% of children under the age of three are underweight and a third of all men and women suffer from chronic energy deficiency. The economic liberalization in India refers to ongoing reforms in India. After Independence in 1947, India adhered to socialist policies. In the 1980s, Prime Minister Rajiv Gandhi initiated some reforms. His government was blocked by politics. In 1991, after the International Monetary Fund (IMF) had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalization has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labor laws and reducing agricultural subsidies.
As of 2009, about 300 million people — equivalent to the entire population of the entire United States — has escaped extreme poverty.[2] The fruits of liberalization reached their peak in 2007, with India recording its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China. An Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace.
Indian government coalitions have been advised to continue liberalization. India grows at slower pace than China. McKinsey states that removing main obstacles "would free India’s economy to grow as fast as China’s, at 10 percent a year".
Period between 1989-91
1989-91 was a period of political instability in India and hence no five year plan was implemented. Between 1990 and 1992, there were only Annual Plans. In 1991, India faced a crisis in [[Foreign Exchange]] (Forex) reserves, left with reserves of only about $1 billion (US). Thus, under pressure, the country took the risk of reforming the socialist economy. [[P.V. Narasimha Rao]])(28 June 1921 – 23 December 2004) also called Father of Indian Economic Reforms was the twelfth Prime Minister of the Republic of India and head of [[Congress Party]], and led one of the most important administrations in India's modern history overseeing a major economic transformation and several incidents affecting national security. At that time Dr. [[Manmohan Singh]] (currently, Prime Minister of India) launched India's free market reforms that brought the nearly bankrupt nation back from the edge. It was the beginning of [[privatization]] and [[liberalization]] in India. Eighth plan (1992-1997) [[Modernization]] of industries was a major highlight of the Eighth Plan. Under this plan, the gradual opening of the Indian economy was undertaken to correct the burgeoning [[deficit]] and foreign debt. Meanwhile India became a member of the [[World Trade Organization]] on 1 January 1995.This plan can be termed as Rao and Manmohan model of Economic development. The major objectives included, containing population growth,poverty reduction,employment generation,strengthening the infrastructure,Institutional building, Human Resource development,Involvement of Panchayat raj,Nagarapalikas,N.G.OSand Decentralisation and peoples participation. Energy was given prority with 26.6% of the outlay. An average annual growth rate of 6.7%against the target 5.6% was achieved. The Government of India headed by Narasimha Rao decided to usher in several reforms that are collectively termed as liberalisation in the Indian media. Narasimha Rao appointed Manmohan Singh as a special economical advisor to implement liberalisation. The reforms progressed furthest in the areas of opening up to foreign investment, reforming capital markets, deregulating domestic business, and reforming the trade regime. Liberalization has done away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Rao's government's goals were reducing the fiscal deficit, privatization of the public sector, and increasing investment in infrastructure. Trade reforms and changes in the regulation of foreign direct investment were introduced to open India to foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an acclaimed economist, played a central role in implementing these reforms. New research suggests that the scope and pattern of these reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms.
• In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized.
• Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue.
• Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries.
• Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India's other stock exchanges. The NSE emerged as India's largest exchange by 1996.
• Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls. (The rupee was made convertible on trade account.)
• Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors.
• Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation.
• Opening up in 1992 of India's equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs).
• Marginal tax rates were reduced.
• Privatization of large, inefficient and loss-inducing government corporations was initiated.

Explain the factors responsible for industrial sickness and measures to tackle them in Small Scale Industries Sector (SSI)

2011-05-18T07:05:00.000-07:00

Explain the factors responsible for industrial sickness and measures to tackle them in Small Scale Industries Sector (SSI)

It is a real fact that more than 70% of Indian population resides in rural areas of our country. But the majority of that population is still backward due to less support of external environment. The quoted quote that "wheel is the symbol of development" is proven false in case of Rural India because there is lack of development which may be because of unfair political environment and government negligence. SIDBI is an apex financial institution which provides financial support to the sick / small scale industries. So, we can say that SIDBI is the institution which engaged in the business of rural industrialization in India.
The small Industries Development Bank of India is Principal Financial institution engaged in development initiative in rural sector and improving the SSI unit. The another very important role is keeping by this Bank is that it is also encouraging SSIS and generating employment in rural India. The Bank also performing the rehabilitation duty and improving the performance of small Industries.
INDUSTRIAL SICKNESS IN INDIA
Industrial sickness specially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like – cotton, Jute, Sugar, Textile small steel and engineering industries are being affected by this sickness problem. As per an estimate 300 units in the medium and large scale sector were either closed or were on the stage of closing in the year 1976. About 10% of 4 lakhs unit were also reported to be ailing. And this position also remain same in the next decades. At the end of year 1986, the member of sick units in the portfolio of scheduled commercial banks stood at 1.47,740 involving an out standing bank credit of Rs. 4874 crores.
• Where the total number of large Industries which are sick were 637 units at the end of year 1985 increased to 714 units in the end of next year 1986.
• Likewise on the other hand the number of sick small scale units were also increased 1.18 lacks at the end of 1985 to 1.46 lakhs at the end of 1986.
• The bank amount which was outstanding in case of large industries for the same period also increased from Rs.2,900 crores to Rs. 3287 crores at the end of year 1986
• Dues of Small Scale sector also increased from Rs.1071 crores to Rs.1306 at the end of the year 1986.
• Of the 147, 740 sick industrial units which contains large medium as well as small scale involving the total bank loan (credit) of Rs. 4874 at the end of the year 1986.
CAUSES OF SICKNESS OF SSI'S
Most of the Indian authors and researchers have classified the different types of industrial sickness under two important categories. They are:
1) Internal Cause for sickness: Pertaining to the factors which are within the control of management. This sickness arises due to internal disorder in the areas justified as following:
a) Lack of Finance: This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing & pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds.
b) Bad Production Policies : The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard research & development and so on.
c) Marketing and Sickness : This is another part which always affects the health of any sector as well as SSI. This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions.
d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labour relations, lack of behavioural approach causes dissatisfaction among the employees and workers.
e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control etc.
2) External causes for sickness:
a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area.
b) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession.
c) Production Constraints: This is another reason for the sickness which comes under external cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.
d) Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization.
LENDING (FINANCING SCHEMES OF SIDBI)
A) Direct Financial Assistances
For the development of Industrial infrastructure for SSIs
• Venture capital/development scheme
• Equipment Finance Scheme
• Integrated Infrastructural Development Scheme
• Project Finance Scheme
• Schemes related to Marketing of SSI's Product
• ISO 9000 Scheme
• Micro credit financing scheme
• Short term & long term loan schemes
• Direct Discounting of bill
• TDMF Schemes
• Factoring scheme
• Pre & Post shipment financial assistance scheme
• Export bill financing scheme & so on
B) Indirect Finance by SIDBI
I) Refinance Assistance
a) Composite loan scheme for cottage, Village & tiny Industries
b) Scheme for women entrepreneurs Mahila Udyam Nidhi
c) SEMFEX Scheme
d) Single window scheme
e) RTDM Scheme
f) RISO-9000 Scheme
g) NEF Scheme
h) RSR Scheme
i) Scheme for SRTOs
j) Scheme for ST/SC & Physically Challenged
k) Other General Schemes
II) Scheme for Rediscounting of bills
a) For equipments
b) For Inland supply bills
III) Other support through various institutions
a) SFC's, SIDC, SSIDC, Bank to Intermediacies
b) To leasing / hire purchase companies.
c) To factoring companies
d) To special corporate entities and institutions which are engaged in the business of development of SSIs

The politico-legal environment of business contains a number of critical elements.

2011-05-18T06:53:00.000-07:00

“The politico-legal environment of business contains a number of critical elements.” Examine this statement with the help of examples.

The impact a political-legal environment can have on business can cause so many craters so as to make that business look like the moon. It was a political-legal environment that gave birth to the corporate personhood doctrine and that gave rise to the corporate world we live in today. Political-legal environments can only hope to regulate markets, and market regulations will most certainly have profound impacts on business organizations. An example of the kind of bone headed impact a political-legal environment can have on a business one need look no further than American auto makers, the electric car and California. For whatever reasons, several of the auto manufacturers in the United States began developing electric cars which they leased to satisfied customers. Then, California decided it would be a good idea to mandate to American auto makers that if they expected to sell their cars in California they would have to invent some new technology reducing carbon dioxide. Presumably, California expected to see an increase of electric cars being sold by auto makers. What happened is quite the opposite and the auto makers took a hard look at their electric car program, uncertain how to market a "clean vehicle" without admitting the piston engine vehicles are dirty, realizing that much of the profit from a piston engine vehicle comes with the replacement of parts and not so with electric cars and finally, realizing that a State, not even the State of California can make them build technology they don't have, nor can any state even make them keep building the technology they do have, and so, the auto makers killed their own electric car program and this was the impact of a political-legal environment.
The Politico-Legal Environment Have An Impact On The Business Organization -In Anyone Or More Of These Areas
-Finance
-Marketing
-Human Resource
-Tax policies
what tax hinder the business and what taxes incentives are available] [ if the tax policies are liberal / incentivated, businesses will add expansion , which means the impact on HR
-International trade regulations and restrictions [ does the government encourage exports / with high tariffs on imports] [ if the exports policies are liberal / incentivated, businesses will add expansion , which means the impact on HR
Education : as the education level goes up and income distribution improves, demand for product/services will go up, businesses will addexpansion , which means the impact on HR
-Living conditions : as the income level goes up and living conditions improves, demand for product/services will go up, businesses will addexpansion , which means the impact on HR
Technological
New inventions and development : as more inventions are brought out, more jobs are created, demand for product/services will go up, businesses will add expansion , which means the impact on HR

Industrial Policy of 1956

2011-05-18T06:51:00.000-07:00

Industrial Policy of 1956

The Industrial Policy Resolution - 1956 was shaped by the Mahalanobis Model of growth, which suggested that emphasis on heavy industries would lead the economy towards a long term higher growth path. The Resolution widened the scope of the public sector. The objective was to accelerate economic growth and boost the process of industrialization as a means to achieving a socialistic pattern of society. Given the scarce capital and inadequate entrepreneurial base, the Resolution accorded a predominant role to the State to assume direct responsibility for industrial development. All industries of basic and strategic importance and those in the nature of public utility services besides those requiring large scale investment were reserved for the public sector.

The Industrial Policy Resolution - 1956 classified industries into three categories. The first category comprised 17 industries exclusively under the domain of the Government. These included inter alia, railways, air transport, arms and ammunition, iron and steel and atomic energy. The second category comprised 12 industries, which were envisaged to be progressively State owned but private sector was expected to supplement the efforts of the State. The third category contained all the remaining industries and it was expected that
private sector would initiate development of these industries but they would remain open for the State as well. It was envisaged that the State would facilitate and encourage development of these industries in the private sector, in accordance with the programmes formulated under the Five Year Plans, by appropriate fiscal measures and ensuring adequate infrastructure. Despite the demarcation of industries into separate categories, the Resolution was flexible enough to allow the required adjustments and modifications in the national interest.

Another objective spelt out in the Industrial Policy Resolution - 1956 was the removal of regional disparities through development of regions with low industrial base. Accordingly, adequate infrastructure for industrial development of such regions was duly emphasized. Given the potential to provide large- scale employment, the Resolution reiterated the Government’s determination to provide all sorts of assistance to small and cottage industries for wider dispersal of the industrial base and more equitable distribution of income. The Resolution, in fact, reflected the prevalent value system of India in the early
1950s, which was centered around self sufficiency in industrial production. The Industrial Policy Resolution – 1956 was a landmark policy statement and it formed the basis of subsequent policy announcements.

Public Accountability

2011-05-18T06:50:00.002-07:00

Public Accountability is the obligations of public enterprises and agencies (who are entrusted with public resources) to be answerable for fiscal and social responsibilities, to those who have assigned such responsibilities to them.

A difficult problem faced by public enterprises is to reconcile the demands of accountability and autonomy. Autonomy in managing and running the concern is needed to ensure a high degree of efficiency. Without such a freedom to the management in choosing it policies (e.g., wage policy and the like) decision making is delayed, flexibility in management is lost, and efficiency in its diverse aspects cannot be ensured. On the other hand, since public undertakings are (a) using public funds and (b) are meant to work for social good, it is necessary that the independence of the management must be subjected to the accountability constraint. It is necessary to strike a proper balance between autonomy and accountability.

Three major constituents of public enterprise accountability are :
™ Accountability to Parliament
™ Accountability through Audit
™ Accountability in Annual Reports.

Parliamentary control is very important aspect of the performance appraisal of public enterprises in India. Parliamentary control is exercised through a number of ways such as questions, short discussions, the work of Committees on Public Undertakings (CPU), approvals and reporting about investment and loans, public enquiry based on the recommendations of CPU etc.

Auditing (financial efficiency and propriety) is an important instrument of accountability. There are also systems of Supplementary Audit and Social Audit.

Each Audit has its own purpose and justification. However, sometimes too many audit objections may hinder managerial initiative and efficiency and they may come in conflict with the principle of autonomy.

Finally, there is accountability through the system of annual reports. The Bureau of Public Enterprises (BPE) has issued guidelines about the coverage in Annual Reports. Among other aspects, Annual Report must cover a summary of financial results, changes in accounting methods, changes in price policy, important events affecting production and productivity, staff welfare activities etc. In parliamentary democracy these several instruments of public accountability go some way in ensuring that public enterprises serve public need in a responsible manner

Economic Environment

2011-05-18T06:50:00.001-07:00

Economic Environment

Business fortunes and strategies are influenced by the economic characteristics and economic policy dimensions. The economic environment includes the structure and nature of the economy, the stage of the development of the economy, economic resources, the level of income, the distribution of income and assets, global economic linkages, economic policies, etc.

Nature of economy: The general level of development of the economy has lot of implications for business- it has significant bearing on the nature and size demand, government policies affecting business etc.
Structure of the economy: The structure of the economy- factors such as contribution of different sectors like primary, secondary and tertiary sectors, large, medium, small and tine sectors to the economy, and their linkages, integration with the world economy etc. – are important to business because these factors indicate the prospects for different types of business, certain factors which affect the business etc. For example, if an economy is highly integrated with global economy it will be quickly affected by developments in the global economy.
Economic Policies: There are several economic policies which can have a great impact on business. Important economic policies are industrial policy, trade policy, foreign exchange policy, monetary policy, fiscal policy and foreign investment and technology policy.
Economic Conditions: General economic conditions affect business. Economies pass through periods of boom and recession. A boom is characterized by high level of output, employment and rising demand and prices. A recession has the opposite of these characteristics.

What are the basic functions of money? Explain in detail the derivative functions of money.

2011-05-18T06:38:00.001-07:00

What are the basic functions of money? Explain in detail the derivative functions of money.

Answer. Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value, and occasionally, a standard of deferred payment.

Basic Functions

Money as medium of exchange

In the economy, all goods and services are purchased with money. This reflects the function of money as medium of exchange. There should be sufficient quantity of money supply circulating in the market for money to fully carry out this function.

In the liberal economy, money in circulation has cost. Money that has cost becomes limitation for production. It also leads to decrease in demand.

When through the system based on interest rate money is withdrawn from circulation (which is one of the key concepts in liberal economics), it hampers a normal exchange in the economy. Liberal economy creates obstacles to money return into the markets by means of additional money supply and opens the door for “money re-sellers”. This limits the ability of society to consumer and even meet the simplest human needs.

The population of Earth is growing. This growing population does not have satisfactory consumption not because the volume of production is not sufficient, but because people do not have money enough for consumption.

In the National Economic Model, money in circulation has no cost. Due to this money returns to the markets, it freely circulates and stimulates real economic activities. The National Economic Model promotes intensive exchange of goods and services and creates conditions for their fair exchange based on their true value.

In the National Economic Model, the supply and demand equilibrium is achieved through the money supply subject to mathematically calculated indicators of demand and supply. Such approach is a formula to secure sustainable economic growth, which is the main objective of economic policy.

Unit of account

A unit of account is a standard monetary unit of measurement of the market value/cost of goods, services, or assets. It is a well-known function of money. It lends meaning to profits, losses, liability, or assets.

A standard unit of account allows meaningful interpretation of prices, costs, and profits, so that an entity can monitor its own performance and its shareholders can make sense of its past performance and have an idea of its future profitability. In modern economies, money in the form of currency usually serves the role of the standard unit of account. The use of money, under conditions of price stability, vastly improves the efficiency of market economies.

Unit of account is the main way of calculating a carrier or Ship owners liability in relation to carriage of goods contracts in which the Hague-Visby Rules apply.

Historic examples of units of account include the livre tournois, used in France from 1302 to 1794 whether or not livre coins were minted. Another was the European Currency Unit, used in the European Union from 1979 to 1998; its replacement in 1999, the euro, was also just a unit of account until the introduction of notes and coins in 2002.

The use of a unit of account in financial accounting, according to the American business model, allows investors to invest capital into those companies that provide the highest rate of return. The use of a unit of account in managerial accounting enables firms to choose between activities that yield the highest profit.

In economics, a standard unit of account is used for statistical purposes to describe economic activity. Indexes such as GDP and the CPI are so broad in their scope that compiling them would be impossible without a standard unit of account. After being compiled, these figures are often used to guide governmental policy; especially monetary and fiscal policy.

Derivative functions of money

Standard of deferred payment

A "standard of deferred payment" is an accepted way to settle a debt – a unit in which debts are denominated, and the status of money as legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts. When debts are denominated in money, the real value of debts may change due to inflation and deflation, and for sovereign and international debts via debasement and devaluation. As of 2009, the US dollar and the euro are the most generally accepted standards for international settlements.

Examples

Deferred payment is based on enforceability of debts and rule of law, and is not used or rarely used when debts are unlikely to be collectable. For certain kinds of transactions (such as for illegal goods like drugs or weapons), gold or diamonds may be preferred as the medium of exchange — there being no recourse in case of counterfeit currency being used — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars.

Historically, there have been many times when creditors have had to hide from debtors to avoid being paid off in near worthless currency, typically following hyper-inflation.

Time-based currency such as Ithaca Hours establishes fixed amounts of human labour as the only standard of deferred payment.

Store of value

To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved.

When you work, you are paid a wage. The portion of that wage that you do not spend gets saved. By saving money, you are able to spend some now and some later. In this way, money serves as a store of value, allowing you to trade current consumption for future consumption. Imagine if you were paid in bananas. Any bananas that you did not eat or trade immediately would rot, rendering you unable to enjoy the fruits of your labor at a later time.

When currency is stable, money can serve all four functions. When it isn't, such as during times of hyperinflation or when complex and volatile forms of financial capital are involved, it becomes important to identify alternative stores of value, of which common ones are:
™ real estate - actual deeds in protectible land
™ gold - once the basis of the gold standard
™ silver - once the basis of the silver standard
™ precious stones, and precious metals
™ collectibles, e.g. original art by a famous artist or antiques
™ livestock

While these items may be inconvenient to trade daily or store, and may vary in value quite significantly, they rarely or never lose all value. This is the point of any store of value, to impose a natural risk management simply due to inherent stable demand for the underlying asset. It need not be a capital asset at all, merely have economic value that is not known to disappear even in the worst situation. In principle, this could be true of any industrial commodity, but gold and precious metals are generally favored because of their demand and rarity in nature, which reduces the risk of devaluation associated with increased production and supply.

‘Economic reforms have taken into account growth but ignored equity.’ Briefly explain this statement.

2011-05-18T06:36:00.001-07:00

‘Economic reforms have taken into account growth but ignored equity.’ Briefly explain this statement.

Answer. Economic reforms were introduced in 1991 by the congress government led by P.V Narasimha Rao. India is the second fastest growing economy in the world. Only China grew faster than India. Last few years have witnessed growth rate above 7%. During the last two decades India has transited from a low-income to a middle income country. It would also mean a transition in the lives of the common people. Fast, efficient and sustained growth over two decades would be accompanied by a rapid and sustained growth of productive employment that would eliminate disguised unemployment and underemployment in agriculture and informal services. Associated with this would be elimination of poverty among families headed by able-bodied healthy persons. The challenge would be translation of these into reality.

The reforms in the 1990s in the industrial, trade, and financial sectors, among others, were much wider and deeper. As a consequence, they have contributed more meaningfully in attaining higher rates of growth but the benefits of growth have not percolated to weaker sections.

Reforms in India have failed to focus on the end objectives of development, namely, reduction of poverty and improvement in the quality of life of bulk of the population. The reforms pursued so far have bypassed the poor and benefited mostly the rich and the middle-class segments.

The rate of increasing disparity between the ‘haves’ and the ‘have-nots’, is hard to miss in tech centers like Bangalore, Chennai and Delhi. It is quite obvious that India’s recent economic growth has not trickled down to the bottom. The majority of the population has been sitting by the sidelines watching the buildings grow taller and the roads get wider. What’s concerning is that there doesn’t seem to be any concerted government effort to rectify the situation. For the poor, a severe lack of basic health, education and training opportunities mean that not only are they in a miserable condition today, there isn’t much hope for the future either. It is only a matter of time when they barter their spades for knives, in a desperate attempt to liberate themselves from the throes of poverty.

There are concerns over the slowdown in agriculture and employment generation, post-reform, as also the growing regional disparities and the rural-urban divide. The impoverishment of rural India is largely attributed to the big decline in public investment in agriculture as also the flow of institutional credit to the sector. There is no doubt that the economic reforms so far pursued have helped the country to overcome the severe foreign exchange crisis it faced in 1991 and gain significant resilience against any external shocks.

Similarly, Indian industry has improved its productive efficiency and quality of products significantly and is today better prepared to face international competition. Quite a few Indian companies have joined the billion-dollar club in terms of sales and market capitalization and are all set to become multinational companies by setting up shop abroad. However, the fiscal situation has witnessed a deterioration after some initial success, and employment growth has decelerated. The state has failed to protect the interests of the socially disadvantaged and weaker sections of society by empowering them through active intervention in social sectors to improve the rate of literacy, public health and nutrition.

While market-oriented economic reforms are no doubt important to step up the rate of growth of the economy, as the Nobel Laureate Prof Amartya Sen has pointed out: "The markets can be used by all fruitfully, rather than by a few selectively, if general healthcare is good, if land reforms have occurred, if micro- credit is widely available, and if initiative is encouraged even from underdogs of society."
In this context, the recent Asian experience suggests that to ensure increased social welfare along with economic growth, the major thrust will have to be on the development of human capital. India's record in this regard continues to be dismal.

The hierarchy of priorities of contemporary Indian policy-makers, for instance, privatization has gained ascendancy over poverty reduction. Measures to encourage savings and investment and to promote employment have been relegated to the background. There is no denying that the steps towards liberalization and globalization were obviously designed to enhance the rate of growth of the economy. However, growth alone is not enough. There is need to ensure that the fruits of growth are equitably distributed. Attention must be paid constantly to the social dimensions of growth by expanding social services and building a strong social infrastructure.

The priority should be eradication of illiteracy and covering the country with primary health care centres and access to safe drinking water. Evidently, all this cannot be done by the private sector; it would require active state intervention and state funding.

Economic reforms were `indeed' critical at the first phase of transforming the economy. However, neglect of agriculture during the reform period has resulted in an erosion of the growth base of the economy. During this period, public investment in agriculture declined, net addition to irrigated area decelerated, and the flow of institutional credit to the sector suffered a setback. Not surprisingly, in the 1990s the annual average growth rate of agriculture decelerated sharply to 2.6 per cent from 5.2 per cent in the 1980s and the share of agriculture and allied activities in the country's GDP declined from 32.2 per cent in 1990-91 to 24 per cent now. However, since 70 per cent of the country's population continues to depend on this sector for livelihood, reforms have failed to make a dent in rural poverty. If at all, the rural-urban divide has only widened because of the failure to create job opportunities outside agriculture both in rural and urban areas.

In our priorities, we should aim at elimination of hunger first and poverty later and suggest utilization of surplus foodgrains with the Food Corporation of India for undertaking massive food-for-work programmes.

The most suitable programme for the purpose could be micro-watershed development, which could be undertaken on a massive scale throughout the country and the bulk of the wages could be paid in kind, namely, foodgrains.

On the question of privatization of public sector units, Dr Mujumdar (former Principal Advisor, Reserve Bank of India) advocates a systemic approach instead of being unduly obsessive about it. According to him, the question to be posed is: Would privatisation in a particular segment lead to greater efficiency in the use of resources and promote faster GDP growth?

Further, what you do with the proceeds of privatization is as important as why you need to privatize a particular unit or segment of the public sector. The real economic issues are obfuscated because of the emotional and political undertones the debate has acquired.

So far, the Government has been using the proceeds from privatization to reduce fiscal deficit. This is counter-productive. Fiscal profligacy per se needs to be condemned. But the suggestion that such profligacy be balanced by using the proceeds of privatization needs to be condemned severely.

In an effort to replicate an American-style financial system in India, there has been mindless pursuit of a soft interest rate regime that may eventually affect the savings rate.

I am particularly critical of the gross neglect of agriculture by the public sector banks, post-reform: 1990s was a lost decade for agriculture and rural development generally, with shrinkage of the flow of resources to the rural sector, a misconceived interest rate policy which discriminated against agriculture. The rural credit delivery system became a victim of the emergence of a new banking culture and rural development and rural employment suffered a setback.

The casualties of the new banking culture also included the small borrowers, small-scale and tiny industries, micro businesses and the whole range of institutions involved in rural credit. If the reforms in the economy in the post-1991 period have come to acquire an anti-poor image, the way the financial sector reforms were implemented are also to be blamed for it.

For the banks now prefer to lend to corporate elite and high worth individuals and park huge amounts in government securities rather than lend to farmers and small and tiny industries.

More important, the moral pollution in contemporary society, adversely affects economic development. I emphasize the need for incorporation of a `development conscience factor' in growth models aimed at improving the quality of life of the bulk of the population. I advocate the need to sensitize the youth to the abject poverty, the squalor, disease, ignorance and illiteracy that surround us.

The first phase of reforms, which started in 1991, essentially concentrated on reforms at the Central government level. Now these have to be taken to the level of the States and district local bodies. Almost 40 per cent of our revenue and fiscal deficit are because of poor State finances. A number of reforms are required to improve the delivery system, too, since all social services such as education, health, and so on are delivered at the State level. The State-level reforms are of particular importance to promote regional equity, which is a matter of fundamental significance for a federal polity like India.

A long term strategy is imperative to achieve a consistent high export growth, control POL imports and achieve a sound BOP position

2011-05-18T06:32:00.000-07:00

‘A long term strategy is imperative to achieve a consistent high export growth, control POL imports and achieve a sound BOP position.’ Critically evaluate this statement in the light of BOP crisis faced by India.

Answer. The balance of payments of a country is a systematic record of all economic transactions between the residents of a country and the rest of the world. A country which is faced with exiting or projected balance of payments deficits on combined current and capital accounts has a variety of policy options. It can seek to improve the balance on current account by promoting export expansion/or limiting imports. A second alternative, though often not exclusive of the first, is to improve the balance on their capital account by encouraging more private foreign investment and seeking more public foreign assistance. Finally, a country can also seek to modify the detrimental impact of chronic balance of payments deficits by expanding their stocks of official monetary reserves. Generally, under the workings of the international monetary system, countries with deficits in their balance of payments are required to pay for these deficits by drawing down on their official reserves comprising gold, U.S. Dollars and SDRs. Fiscal imbalances were the root cause of the 1991 balance of payments crisis in India. By the end of the 1980s, deteriorating government finances had resulted in a significant widening of the current account deficit, an accumulation of government and external debt, and rapidly rising debt service. As concerns about the external position mounted, and with a renewal of domestic political tensions, India’s credit rating was downgraded, access to external borrowing dried up, and nonresident deposits were withdrawn. By early 1991, foreign exchange reserves were almost depleted, and India was on the verge of default.

Two sources of external shocks contributed the most to India’s large current account deficit in 1990/91. The first shock came from events in the Middle East in
1990 and the consequent run-up in world oil prices, which helped precipitate the crisis in India. In 1990/91, the value of petroleum imports increased by $2 billion to
$5.7 billion as a result of both the spike in world prices associated with the Middle

East crisis and a surge in oil import volume, as domestic crude oil production was
impaired by supply difficulties. In comparison, non-oil imports rose by only 5 percent in value (1 percent in volume terms). The rise in oil imports led to a sharp deterioration in the trade account, worsened further by a partial loss of export markets (as the Middle East crisis disturbed conditions in the Soviet Union, one of India’s key trading partners). The Gulf crisis also resulted in a decline in workers’ remittances, as well as an additional burden on repatriating and rehabilitating nonresident Indians from the affected zones.

Second, the deterioration of the current account was also induced by slow growth in important trading partners. Export markets were weak in the period leading up to India’s crisis, as world growth declined steadily from 41/2 percent in 1988 to
21/4 percent in 1991. The decline was even greater for U.S. growth, India’s single largest export destination. U.S. growth fell from 3.9 percent in 1988 to 0.8 percent in 1990 and to –1 percent in 1991. Consequently, India’s export volume growth slowed to 4 percent in 1990/91.

In addition to adverse shocks from external factors, there had been rising political uncertainty, which peaked in 1990 and 1991. After a poor performance in the 1989 elections, the previous ruling party (Congress), chaired by Rajiv Gandhi (the son of former Prime Minister Indira Gandhi), refused to form a coalition government. Instead, the next largest party, Janata Dal, formed a coalition government, headed by V.P. Singh. However, the coalition became embroiled in caste and religious disputes and riots spread throughout the country. Singh’s government fell immediately after his forced resignation in December 1990. A caretaker government was set up until the new elections that were scheduled for May 1991. These events heightened political uncertainty, which came to a head when Rajiv Gandhi was assassinated on May 21, 1991, while campaigning for the elections. India’s balance of payments in 1990/91 also suffered from capital account problems due to a loss of investor confidence. The widening current account imbalances and reserve losses contributed to low investor confidence, which was further weakened by political uncertainties and finally by a downgrade of India’s credit rating by the credit rating agencies. Commercial bank financing became hard to obtain, and outflows began to take place on short-term external debt, as creditors became reluctant to roll over maturing loans. Moreover, the previously strong inflows on nonresident Indian deposits shifted to net outflows.

To make the balance of payments viable, the key lies in consistently stepping up exports. On the import front, POL will require special attention if the country has to be protected from external-price hike-shocks. Petro products being the dominant import item, measures be taken to augment domestic production. There is ample scope for locating new petro reserves as only 6 out of 26 basins that have potential for oil and gas in India have been explored and that too only partially. Significant and consistent export growth so as to cover the growing import bill will bring a turn-around by removing vulnerability of India’s balance of payments.

Does the structure and growth of public sector matches with its objectives?

2011-05-18T06:31:00.001-07:00

Does the structure and growth of public sector matches with its objectives? Explain with the help of an example.

Answer. Before independence, there was almost no 'Public Sector' in the Indian economy. The only instances worthy of mention were the Railways, the Posts and Telegraphs, the Port Trust, the Ordnance and the Aircraft factories and few Government managed undertakings like the Government salt factories, quinine factories etc. After independence and with the advent of planning, India opted for the dominance of the public sector, firmly believing that political independence without economic self-reliance was not good for the country. The passage of Industrial Policy Resolution of 1956 and adoption of the socialist pattern of the society led to a deliberate enlargement of our public sector. It was believed that a dominant public sector would reduce the inequality of income and wealth, and advance the general prosperity of the nation. The planners also seemed to believe that by placing the management and workers in public enterprises in a position of responsibility and trust, they would be so imbued with a sense of the public good that their actions and aspirations would naturally reflect what was best for the country. The main objectives for setting up the Public Sector Enterprises as stated in the Industrial Policy Resolution of 1956 were:
‰ To help in the rapid economic growth and industrialization of the country and create the necessary infrastructure for economic development;
‰ To earn return on investment and thus generate resources for development;
‰ To promote redistribution of income and wealth; • To create employment opportunities;
‰ To promote balanced regional development;
‰ To assist the development of small-scale and ancillary industries; and
‰ To promote import substitutions, save and earn foreign exchange for the economy.

In tune with the widespread belief at that time, the 2nd Five Year Plan stated very clearly that ' the adoption of socialist pattern of society as the national objective, as well as the need for planned and rapid development, require that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector. Other industries, which are essential and require investment on a scale, which only the state, in the present circumstances, could provide, have also to be in the public sector. The state has, therefore, to assume direct responsibility for the future development of industries over a wider area '.

The Second Plan further emphasized that ' the public sector has to expand rapidly. It has not only to initiate developments which the private sector is either unwilling or unable to undertake, it has to play the dominant role in shaping the entire pattern of investment in the economy, whether it makes the investments directly or whether these are made by the private sector. The private sector has to play its part within the framework of the comprehensive plan accepted by the community.'

Investment in Public Sector Enterprises

Particulars Total Investment Enterprises

At the commencement of the 1st 5-Year

(Crore)

(Numbers)

Plan (1.4.1951)

At the commencement of the 2nd 5-Year

Plan (1.4.1956)

At the commencement of the 3rd 5-Year

Plan (1.4.1961)

At the end of the 3rd 5-Year Plan

(31.3.1966)

At the commencement of the 4th 5-Year

Plan (1.4.1969)

At the commencement of the 5th 5-Year

Plan (1.4.1974)

29 5

81 21

948 47

2,410 73

3,897 84

6,237 122

At the end of 5th 5-Year Plan (31.3.1979) 15,534 169

At the commencement of the 6th 5-Year

Plan (1.4.1980)

18,150 179

At the commencement of the 7th 5-Year

Plan (1.4.1985)

42,673 215

At the end of 7th 5-Year Plan (31.3.1990) 99,329 244

At the commencement of the 8th 5-Year

Plan (1.4.1992)

1,35,445 246

At the end of 8th 5-Year Plan (31.3.1997) 2,13,610 242

As in 1998 2,31,024 240

As in 1999 2,39,167 240

As in 2000 2,52,554 240

At the end of 9th Five Year Plan As on

31.03.2002

324614 240

As on 31.3.2003 335647 240

As on 31.3.2004 349994 242

As on 31.3.2005 357849 237

Source: Department of public enterprises

At the beginning of the 1990’s, the public sector was dominant in many industries. The PSEs contributed the entire output in the vase of petroleum, lignite, copper and primary lead, about 98 percent of zinc, with over 90% of coal, more than half of steel and aluminum and about one-third of fertilizers.

However, a large number of PSEs, including several monopolies, have made huge losses. Despite the huge losses incurred by a number of enterprises, the PSEs as a whole could make profits mainly because of the enormous profits made by several public sector monopolies.

Several of the loss making PSEs have been either in non-priority sectors or in sectors where the private sector proved to be more efficient. A number of loss making units are sick units.

A variety of factors have been identified for the unsatisfactory performance of a large number of public enterprises. While the project formulation has improved over the years, huge cost and time over-runs continued to take place in project implementation. This was on account of problems of land acquisition, procurement of equipment, civil work and other imponderables.

A number of other problems including allocation of resources, delays in the filling up of top level posts, tight regulations and procedures for investment and restrictions on functional autonomy of the enterprises (e.g., in respect of labour and wage policy), etc. have for long been noticed as serious constrains on PSE operational efficiency.

The public sector is generally criticized for inadequate generation of internal resources. The department of public enterprises points out that generation of internal resources by public enterprises is constrained by the following factors.
‰ PSEs were set up not only for commercial consideration but also for factors such as generation of employment, promoting balanced regional development, etc.
‰ Low return on investment on account of price constraints imposed on certain infrastructural goods and services of public enterprises.
‰ A number of sick units in the private sector facing closure had to be taken over by the government and these units form sizeable part of central public sector.
‰ Number of industries promoted in the public sector with long gestation period.
‰ The impact of escalation in the prizes of various inputs and periodical wage revision.

Business decision-making is an economic process.

2011-05-18T06:30:00.000-07:00

“Business decision-making is an economic process.” Analyze this statement with the help of examples.

Answer. Decision-making is a crucial part of good business. Decision-making increasingly happens at all levels of a business. The Board of Directors may make the grand strategic decisions about investment and direction of future growth, and managers may make the more tactical decisions about how their own department may contribute most effectively to the overall business objectives. But quite ordinary employees are increasingly expected to make decisions about the conduct of their own tasks, responses to customers and improvements to business practice. This needs careful recruitment and selection, good training, and enlightened management.

Business can be expressed in three terms.

1) Business is an economic activity

2) Business firm is an economic unit

3) Business decision making is an economic process

Business decision making is an economic process. Making any decision involves undertaking a choice among a set of alternative course of action.

Business is a micro-economic unit and it functions in the macroeconomic context. The macroeconomic environment is external to the firm. The internal business decisions should adjust itself to external business environment -both economic and non-economic. The firm should demonstrate adaptability and adoptability.

Decision-making involves making a choice from a set of alternative courses of action. Choice is at the root of all economic activity. The question of choice and evaluation arises because of the relative scarcity of resources. If the resources had not been scarce, an unlimited amount of ends could have been met. But the situation of resources constraint is very real. A business firm thinks seriously about the optimum allocation of resources because resources are limited in supply and most resources have alternative uses. The firm, therefore, intends to get the best out of given resources or to minimise the use of resources for achieving a specific target. In other words, when “input” is the constraining factor, the firm’s decision variable is the “output”. And when “output” is the constraining factor, the firm’s decision variable is the “input”. Whatever may be the decision variable, procurement or production, distribution or sale, input or output, decision-making is invariably the process of selecting the best available alternative. That is what makes it an economic pursuit. Since business is an economic activity, a business firm an economic unit, and business decision-making an economic process, it is the economics environment of business which is the primary consideration in evaluating the business policies, business strategies and business tactics of a corporate entity in any national economy.

Foreign investment policies of many economies have come a long way since 1990’s . briefly discuss as to how the present policy is different.

2011-05-18T06:22:00.000-07:00

Foreign investment policies of many economies have come a long way since 1990’s . briefly discuss as to how the present policy is different from the past.

Ans. Foreign Investment Policy:-
The Ministry of Industry has expanded the list of industries eligible for automobile approval of foreign investments and in certain cases, raised the upper level of foreign ownership from 51 per cent to 74 per cent and further in certain cases to 100 per cent. In January, 1998, the RBI announced simplified procedures for automatic FDI approvals. The announcement further provided that Indian companies will no longer require prior clearance from the RBI for inward remittance of foreign exchange or for the issuance of shares to foreign investors.

Facilitating Foreign investment:-
In the recent budget the finance minister announced the governments commitment to a 90 day period for approving all foreign investments. Government officers will be assigned to larger foreign investment proposals and will facilitates central and state clearance in a time- bound manner. Unlisted companies with a good 3 year track record, have been permitted to raise funds in international markets through the issue of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). A number of recent policy changes have reduced the discriminatory bias against foreign firms.
The government has awended exchange control regulations previously applicable to companies with significant foreign participation.
• The ban against using foreign brand names / trademarks has been lifted.
• The FY 1994/95 budget reduced the corporate tax rate for foreign companies from 65 per cent to 55 percent. The tax rate for domestic companies was lowered to 40 percent.
• The long-term capital gains rate foreign companies was lowered to 20 percent; a 30 percent rate applies to domestic companies.
• The Indian Income tax Act exempts export earning from corporate income tax for both Indian and foreign firms.
Other policy changes have been introduced to encourage foreign direct and foreign institutional investment.
For instance, the securities and exchange Board of India (SEBI)recently formulated guidelines to facilitate the operations of foreign brokers in India on behalf of register Foreign Institutional Investors (FII’s). These brokers can now open foreign currency denominated or rupee accounts for crediting inward remittances, commissions and brokerage fees.

Relaxation:-
The condition of dividend balancing (off setting the outflow of foreign exchange for dividend payments against export earnings has been eliminating for all but 12 consumer goods industries. A 5 year tax holiday is extended to enterprise engaged in development of industrial facilities. Even without a registered office in India, foreign companies are allowed to start multinational transport services in India.
The Reserve Bank of India (RBI) now permits 100 percent foreign investment in the construction of roads/ bridges. The peak custom duty rate was reduced to 50 percent from 65 percent in the March 1995 budget. Import regime changes included enhancement of the scope of special Import License (SIL) programs and the expansion of freely importable items on the open general License (OGL) list to include some consumer goods.

Trade – Policy Year 2000:-
Special economic Zones to be set up export processing zones at Mumbai, Kandala, Vishakhapatnam and Cochin to be converted into special economic zones.
Quantitative restrictions on 714 items removed. Duty free replenishment certificate scheme for over 5,000 products introduced Major sector specific scheme initiatives in gems and jewellery agro-chemicals, bio – technology, pharmaceuticals, leather, garments, silk, etc.

Foreign Investment Policy of Nepal:-
Nepal has only recently opened the doors to foreign investment. The foreign Investment and Technology Act (1981) as amended in 1992 lays down the law governing foreign investment and the applicable rules and regulations. The New Industrial Policy of 1992 identifies foreign investment promotion as an important strategy in achieving the objectives of increasing industrial production to meet the basic needs of the people, create maximum employment opportunities and pave the way for the improvement in the balance of payments. Foreign investment is expected to supplement domestic private investment through foreign capital flows, transfer of technology, improvement in management skills and productivity and providing access to international markets. In this context HMG is encouraging foreign investments in Nepal by Providing attractive incentives and facilities within a liberal and open policy. The importance attached to foreign investment is clearly reflected in the new constitution adopted by Nepal in 1991.

China’s foreign investment politics:-
In 2008, china reversed its prior tax policy concerning FDI. Under the old policy, foreign investors were taxed at a lower rate than domestic investors. Investors in specific regions such as prolong were provided with various tax exemptions. All this was eliminated in the new income tax code, which mandates a neutral FDI investment framework, no incentives based on nationality or region, Incentives are instead provided for specific encouraged business activities. A limited exception to this policy is provided that allows for tax benefits for investment in the central and western regions.
The new investment policy in 2009: facing the global economic downturn. FDI in china saw a large down turn in 2008: as of November, approved projects were down by over 25%. An seven greater decline is expected in 2009.

Explain the reasons for the growth of private sector.

2011-05-18T06:20:00.000-07:00

Explain the reasons for the growth of private sector.

Ans. In the mixed economy of India, private sector plays a complementary role to the public sector. Undoubtedly the dice was loaded heavily in favor of the public sector in the strategy of development adopted in our plans, but at no stage the private sector was pushed back to the graveyard . on the contrary, it was explicitly recognized that the private sector possess unparalleled advantage in terms of entrepreneurial talent, skill and initiative. Its basic limitation may be that it may not be in a position to garner large resources required for building up key and basic industries and other industries that require large capital investment. The industrial policy Resolution, 1956, set the mood and tore for future. While reserving the key and basic industries for the public sector it made it clear that the private enterprise and initiative were to be provided all possible opportunities and incentives for growth with in the parameters by planned economic development.

More recently, the new economic policy and the accompanying economic reforms have opened up unlimited opportunities for growth in the private sector.

Entrepreneurial talent is the biggest asset of the private sector . as such all those functions that are expected to be performed by Schumpeterian dynamic entrepreneur during the process of economic growth come to be associated with the private sector.
We can briefly sum up these functions follows:-
(a) To promote new industrial units.
(b) To mobilize financial resources for meeting diverse heads of economy.
(c) To provide managerial skill.
(d) To carry out and intensify industrial research and development programmes so as to promote appropriate technology and help in the modernization of the economy and rationalization of industries.
(e) To facilitate global integration.
Privatization is a term that is employed to convey a variety of ideas such as part or full transfer of public assets to the private sector, providing autonomy in management with respect to investment decisions or liberalization administrative pricing or other controls without change in ownership of assets, dismantling and regulating monopolies owned by the public sector hitherto, the variety of ideas reflects diversity in perceptions regarding privatization. They have resulted partly from political circumstances; partly from country specific attitudes to growth and equity and partly from ethnic preference for foreign capital.

The reasons for growth of private sectors are:-
1. The private enterprise has gained immensely from governments
plan policies. The plans have provided the necessary infrastructure for the development of private business as well as very big market.

2. The Indian domestic market has been completely sheltered since the policy of developing indigenous resources led to almost total banning of such imports as might compete, with the products of local industry. This is the further reason why the private enterprise has been able to make good profits even when some of their products were sub standard.

3. Various developmental and financial institutions have been set up by the Government to see that industries are not standard of legitimate financial needs. These institutions provide long-term loans, underwrite their share and debenture issues, provide feasibility studies and other services relating to their projects. A study of the balance sheet of a large number of companies shows that the finance provided by these institutions has enabled the private sector to grow and prosper.

4. Private sector has received various direct incentives from the government. The finance set has often contained various tax concessions such as tax holiday as regards new undertakings, developmental rebate, etc. income tax Act also provides fiscal incentives to the individual and corporate sectors. State finance Acts have provided facilities to industry regarding land, factory, building, power, etc.

(b) Discuss the problems faced by the private sector.
Ans. Problems faced by the Private sector:-
1. Private sector in India has been operating in an environment heavy taxation before the recent scaling down of tax rates in 1997-98. heavy taxation acted as a disincentive to increased production and immobilized funds which might have focused industrial undertakings.

2. corporate sector, not with sanding all the recent reforms, continues to be subject to a number of restrictions. In a recent study conducted to gauge the extent of economic freedom, India has been ranked a lowly 118th in a list of 150- countries, the world over, India is also way down at the 20th position in the list of 25 countries in the Asia Pacific region.

3. there is heavy dependence of the corporate sector on the financial institutions and other government agencies. A recent study of 400 large companies that account for over 50 per cent of private corporate turnover revealed that the public sector has a significant presence in moist of these owning over 50 percent equity in a large number of these companies.

In the new economic policy environment dice is heavily loaded against private enterprise viz a viz foreign capital and enterprise. This is so on the following counts:
Foreign companies have the advantage of business friendly environment in their countries, while Indian private enterprise has still to cope with many controls and regulations.

ii) Indian business companies of high interest rates. High interest rates bring down profits and returns on equity employed. This again hampers its ability to make fresh investments and grow.

iii) Indian business complains of outmoded company law. This makes it difficult for Indian companies to become multinationals in the sense of the term.

iv) Indian business complains of unduly large delays in approvals for land, pollution, etc.

v) The Indian business is captive of its old ways. It is so set in its ways that it cannot get its act together under liberalization. Overawed by threat perception, business only talks of buying back shares of companies under its control. This is its one point programme. Indian business must realize that oligopolistic enterprise with no exportable surplus may be large in a self-sufficient economy but are puny. Unviable, in an economy going global.

vi) Large majority of industrial sectors with high growth potential are faced with legal barriers to growth. Food processing has attracted the highest share of investment but has to cope with a potently outdated food adulteration Act, software industry’s growth is threatened by VSNL’s monopoly over the Internet.In every sector of the infrastructure , the need for governing legislative reform has grown steeply. Consequently, growth in almost all sectors of interest to the private enterprises is paralyzed by the slow development of laws.

7. the issue of disinvestment has raised wider questions such as the need for restructuring PSUs, the extent of disinvestment of government shareholding in operating sectors and the partial / total withdrawal of government from certain industries.

The main dimensions of the disinvestment process are: preparation of the PSU; valuation and finally choosing appropriate disinvestment and sale modalities so as to meet overall goals.
The studies of global experiences indicate that it may often be useful to restructure the PSU before privatization as it can maximize sale proceeds. In particular, restructuring with a clear view to disinvest in a time fashion has been found to enhance share value. On the other hand; if restructuring requires considerable effort, or is laced with uncertainties it has been found prudent to disinvest on an as is where is basis.

The Sect oral contributions of the three sectors namely primary secondary and tertiary to the national income and employment hv changed over a period.

2011-05-18T06:18:00.000-07:00

“The Sect oral contributions of the three sectors namely primary secondary and tertiary to the national income and employment have changed over a period.” Briefly explain the above statement in the context of structural changes in the economy.

Ans. In seeking to establish turning points in the performance of the economy, or structural breaks in the pace of economic growth, most studies focus on the period since 1950. However, according to Deepak Nayyar, any meaningful assessment of economic performance in independent India must situate it in a long-term historical perspective to provide at least some comparison with the colonial era. Therefore, it would be logical to consider the performance of the economy before and after Independence during the 20th century.

During the first half of the 20th century these was a near stagnation in per capita income while the growth in national income was minimal. There was a steady growth in both GDP and GDP per capita during the second half of the 20th century.
There are two sets of growth rates for the period 1900-01 to 1946-47 based on two different estimates of national income. The Siva Subramanian estimates suggest that, in real terms, the growth in national income was 1 per cent per annum, whereas the growth in per capita income was 0.2 per cent per annum. The Madison estimates suggest that the growth in national income was 0.8 per cent per annum, whereas the growth in per capita income almost negligible at 0.04 per cent per annum. The growth rates for the period from 1950-51 to 2004-05 provide a sharp contrast. In real terms, the growth in GDP was 4.2 per cent per annum while the growth in per capita income was 2.1 per cent per annum.

The magnitude of the increase over the entire period is also revealing between 1900-01 and 1946-47, at constant 1938-39 prices, national income for the undivided India increased from Rs 15.4 billion to Rs 24.9 billion by 60 percent, whereas per capita income increased from Rs 54 to Rs 60 by a mere 11 per cent, GDP increased by 1,000 percent, while GDP per capita increased by 250 per cent.

Rates of Economic Growth in India during the 20th century
(Per cent per annum)

A. 1900-01 to 1946-47
Primary sector
Secondary sector
Tertiary sector
National income
Per capita income

B. 1950-51 to 2004-05
Primary sector
Secondary sector
Tertiary sector
GDP total
GDP per capita Siva Subramanian Estimates

0.4
1.7
1.7
1.0
0.2

2.5
5.3
5.4
4.2
2.1
Maddison Estimates

0.8
1.1
0.8
0.8
0.04

Two phases of Growth:-

There are two discernible phases of economic growth in India since Independence 1950-1980 and 1980-2005.
During the period from 1950-51 to 1979-80, growth in GDP was 3.5 per cent annum while growth in GDP per capita was 1.4 per cent per annum. During the period from 1980-81 to 2004-05, growth in GDP was 5.6 per cent per annum while growth in GDP per capita was 3.6 per cent per annum. The sharp step up in growth rates, not only aggregate but also sectoral, suggests that 1980-81 was the turning point. This conclusion is reinforced by a comparison of growth rates aggregate and sectoral during the sub-periods 1980-81 to 1990-91 and 1991-92 to 2004-05. The growth rates were almost the same. In fact, during the period from 1991-92 to 2004-05, growth in the primary sector and the secondary sector was somewhat slower while growth in the tertiary sector somewhat faster in comparison with the period from 1980-81 to 1990-91. Growth in GDP was 5.9 per cent per annum as compared with 5.4 per cent per annum, while growth in GDP per capita was 4.1 per cent per annum, as compared with 3.2 per cent per annum. These was some acceleration in the rate of growth of GDP per capita which was largely attributable to the slow down in population growth.

Economic analysis of time series data on GDP and GDP per capita for the period from the early 1950’s to the early 2000’s establishes that the structural break in economic growth since Independence, which is statistically the most significant, occurred around 1980.
Assessment of Performance:-

An assessment of performance, in terms of economic growth, should address two questions: first, how does this performance compare with performance in the past? Second, how does this performance compare with the performance of other countries?

It is clear that the pace of economic growth during the period from 1950 to 1980 constituted a radical departure from the colonial past. For the period 1900 to 1947, there are two sets of growth rates based on alternative estimates of national income. If the economy had continued to grow at the rate based on the Siva Subramanian estimates, national income would have doubled in 70 years whereas per capita income would have doubled in 350 years. If the economy had continued to grow at the lower rate, based on the Maddison estimates, national income would have doubled in 1750 years. The reality in independent India turned out to be different. The growth rates achieved during the period from 1950 to 1980 meant that GDP doubled in 20 years. In fact, between 1950 and 1980, GDP multiplied by 2.86 while GDP per capita multiplied by 1.5.

Growth matters because it is cumulative. If GDP growth, in real terms, is 3.5 per cent per annum income doubles over 20 years, if is 5 per cent per annum income doubles over 14 years, if it is 7 per cent per annum income doubles over seven years. Of course, the complexity of economic growth cannot be reduced to a simple arithmetic of compound growth rates, for there is nothing automatic about growth. In retrospect, however, the cumulative impact of growth on output is a fact.

This growth was impressive with reference to the near-stagnation during the colonial era. It was much better than the performance of the now industrialized countries art comparable stages of their development. This growth was not enough to meet the needs of a country where the initial level of income was so low. For this reason, perhaps, it was described as the Hindu rate of Raj Krishna.

This phrase, which became larger than life with the passage of time, meant different things to different people. For some, it meant a performance that was disappointing but not bad.
It has been shown that, during this period, India’s performance in terms of economic growth was about the same as in most countries in world. It was certainly not as bad good as East Asia. But it was definitely not as bad as Africa. It was Average. In fact the actual rate of growth of output per worker in India was very close to the average across the world. What is more, the rate of growth predicted for India, based on its initial output per worker, its share of investment in GDP and its population growth rate, was also very close to the world’s average.It is close that there was a sharp acceleration in the rate of growth since 1980. it went almost unnoticed and India grew almost by stealth.

It came into the limelight in the early 2000s. Some analysis, as also many casual observes attributed this performance to economic liberalization which began in the early 1990. Discerning scholars recognized the reality that the structural break, which was a second turning point in the economic performance of independent India, occurred around 1980.
In comparison with the preceding 30 years, there was a distinct step-up in rates of growth for GDP and GDP per capita. The growth rates achieved on an average, during the period from 1980 to 2005, meant that GDP doubled in 12.5 years where GDP per capita doubled in 20 years. In fact, between 1980-81 and 2004-05, GDP multiplied by 3.81 while GDP per capita multiplied by 2.37. this growth was impressive, not only in comparison with the past in India but also in comparison with the performance of most countries in the world. Instead, in terms of growth, India, performed much better than the industrialized countries which experienced a slowdown in growth, the transition economics which did badly, and much of the developing world. And it was only east Asia particularly china, which performed better.

The phenomenal expansion of services worldwide led to services being regarded as an engine of the growth and even as a necessary concomitant of economic growth.

For Management Movement to develop it is essential there should be emphasis on participative management analysis

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“For Management Movement to develop it is essential there should be emphasis on participative management analysis this statement in the context of present management scenario, citing examples.

Ans. Participative or participatory management, otherwise known as employee involvement or participative decision making, encourages the involvement of statement at all levels of an organization in the analysis of problems, development of strategies, and implementation of solutions. Employees are invited to share in the decision-making process of the firm by participating in activities such as setting goals, determining work schedule, and making suggestions. Other forms of participative management include increasing the responsibility of employees (job enrichment); forming self-managed terms, quality circles, or quality of work life committee; and soliciting survey feedback. Participative management, however, involves more than allowing employees to take part in making decisions. It also involves management treating the ideas and suggestions of employees with consideration and respect. The most extensive form of participative management is direct employee ownership of a company.

Four process influence participation. These processes create employee involvement as they are pushed down to the lowest levels in an organization. The farther down these processes move, the higher the level of involvement by employees. The four processes include:-Information sharing, which is concerned with keeping employees informed about the economic status of the company.
• Training, which involves raising the skill levels of employees and offering development opportunities that allow them to apply new skills to make effective decisions regarding the organization as a whole.
• Employee decision making which can take many forms, from determining work schedules to deciding on budgets or processes.
• Rewards, which should be tied to suggestions and ideas as well as performance.

A participative management style offers various benefits at all levels of the organization by creating a sense of ownership in the company,participative management instills a sense of pride and motivates employees to increase productivity in order to achieve their goals.

Employees who participate in the decisions of the company feel likethey are a part of a team with a common goal, and find their sense of self-esteem and creative fulfillment heightened.

For example, Mangers who use a participative style find that employees are more receptive to change than in situations in which they have no voice changes are implemented more effectively when employees have input and make contributed to decisions. Participation keeps employees informed of up coming events so they will be aware of potential changes.

The organizational can then place itself in a proactive mode instead of a reactive one, as managers are able to quickly identify areas of concern and turn to employees for situations.
Participation helps employees gain a wider view of the organization. Through training, development opportunities, and information sharing, employees can acquire the conceptual skills needed to become effective managers or top executives. It is increases the commitment of employees to the organization and the decisions they make.
Creativity and innovation are two important benefits of participative management. By allowing a diverse group of employees to have input into decisions, the organization benefits from the synergy that comes from a wider choice of options. When all employees, instead of just managers or executives, are given the opportunity to participate, the chances are increased that a valid and unique idea will be suggested.
A common misconception by managers is that participative management involves simply asking employees to participate or make suggestion box. In order for participative management to work, several issues must be resolved and several requirement must be met. First, managers must be willing to relinquish some control to their workers; managers must feel secure in their position in order for participation to be successful Often managers do not realize that employed respect for them will increase instead of decrease when they implementation a participative management style.

The success of participative management depends on careful planning and a slow, phased approach, changing employee’s ideas about management takes time, as does any successful attempt at a total cultural change from a democratic or autocratic style of management to a participative style. Long-term employees may resist changes, not believing they will last. In order for participation to be effective, managers must be genuine and honest in implementing the program. Many employees will need to consistency see proof that their ideas will be accepted or at least seriously considered. The employees must be able to trust managers and feel they are respected.

Successful participation requires managers to approach employee involvement. With an open mind. They must be open to new ideas and alternative in order for participative management to work. It is important to remember that although the manager may not agree with every idea or suggestion an employee makes, how those ideas are received is critical to the success of participative management.

Many companies have experienced the positive effects of participative management. Employees are more committed and experience more job satisfaction when they are allowed to participate in decision making. Organizations have reported that productivity improved significantly when managers use a participative style. Participative management is not an easy management style to implement. It presents various challenges and does not succeed overnight. Managers will be more successful if they remember that it will take time and careful planning before they will see results. Starting with small projects that encourage and reward participation is one way to get employees to believe that management is sincere and trustworthy.

MANAGEMENT MOVEMENT
• Some people such as Dennis Collins argue that “… workplace democracy is inevitable”. While this is not a proven movement more are more companies are giving participate management a chances. McNabb and Whitfield find that larger establishments that are part of big organizations have a strong willingness to embrace different forms of employee participation. Also, workplaces that have been recently established and those that make use of advanced technology arte more likely to have introduced some form of employee participation schemes. As new companies enter the organizational fray and technology based companies and services continue to multiply is a reasonable assumption that they make use of proven organizational systems. New organizations will have an easier time instilling the culture of participative management, than order organizations that have to go through a change in culture. With more studies being conducted on the success of organizations that use participative management, new organizations will more be more likely to adopt this form of management into their core values.

“Economic reforms have an adverse effect on food security.” Comment.

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“Economic reforms have an adverse effect on food security.” Comment.

Ans
Most of the things that I will be presenting are from a paper about economic reforms in agriculture liberalization program point to urban India and there is a tendency to believe that reforms not targeted to agriculture. Reformers, however, felt that they were targeting agriculture indirectly and that what they were doing would be beneficial to agriculture. In international development circles there is a view that when you protect industry by having high tariff rates, you are discriminating against agriculture because you are shifting the terms of trade in favor of industry. In 1950 we decided that industrialization and that was possible only if industry was protected and that's how we got high tariff rates. The principle manifestation of liberalization since 1991 if you ask any economist is that the tariff rate has been reduced for industry. The argument is that if tariffs for industry were lowered, industrial goods prices would be lowered and that prices of agriculture products would now be higher relative to industrial goods. Let me read out an address by Manmohan Singh to the Indian association of agriculture economists in 1994. "The policy of excessive protection of Indian industry hurt Indian agriculture in several ways. It raised the prices of industrial products relative to agriculture products that hurt the rural sector of the economy as consumers of industrial products. You also increased the profitability of industrial production compared to agriculture production thus drawing away inevitable resources from agriculture.

This shift takes place in various ways. Low returns in agriculture activity reduced the ability to pay economic prices for many inputs such as power, water and credit. Instead of continuing with the subsidies for these inputs it would be much better to reduce the protectionist bias against agriculture by lowering tariffs favoring industry and altering relative prices in favor of agriculture. This would create potentially a more profitable agriculture which would be able to bear the economic costs of technological modernization and expansion". In some sense, this argument of agriculture being worse off because of protection is not entirely correct because inputs that Manmohan Singh speaks about are not traded on the international market and the prices of this are set by the government in a way that is reasonable favorable to farmers or actually not priced at all such as in water. Let us take a look at some data and see if what they say is borne out. Let us take a loot at Table 2 titled protection and relative prices.

Year Tariff Rate Price
1990 87 108.5
1991 * 116.4
1992 64 113.2
1993 47 111.6
1994 33 114.4
1995 27.2 112.8
1996 24.6 117.5
1997 25.4 116.7
1998 29.7 126.3

Notes: 'Price' is the ratio of the index of agricultural prices to the ratio of index of manufacturing prices, base 1981-82=100; the tariff rate is the import weighted average percentage rate for the economy as a whole; the tariff rate for 1991-92 was not computed in the source.

Source: Economic Survey 1998-99 and the World Bank: 'India 1998: Macroecomonic update'

In a broad sense it is true but it comes about only after the second half of 90s. The question to ask is whether this bias has improved due to the process that the government had in mind of due to some other process. I think that it is not because what the government had in mind but due to the deliberate intervention by the government. Interestingly when we talk about the reducing of the government involvement as part of liberalization, government intervention in some sectors has been increasing.

Let us now talk about reforms and growth -what has happened to growth? While we all know that growth by itself is not enough, purchasing power is also important. Table 1. shows the annual rate of growth before and after 1991.

Table 1: Growth, Before and After 1991
Period FOOD GRAIN NON FOOD CROPS
1949-50 to 1964 2.93 3.54
1967-68 to 1989 2.74 2.72
1970-71 to 1979 2.08 1.66
1980-81 to 1989 3.54 4.84
1990-91 to 1997 1.66 2.36

Note : Annual Compound growth rate, except for non-food in th 1990s where it is the
average of the year-to-year change Source: Rows 1-2 from 'Area and Production of Principle Crops in India 1989-90' Directorate of Economics and Statistics, GoI;the rest from Economic Survey 1998-90, and author's estimates

The point is that in comparison to the 3 decades 70s, 80s and the 90s, the 1990s performs worse than 80s both in the growth of food grains and nonfood grains. The 80s was a period that grew exceptionally well. The 80s was a period when poverty declined at the fastest rate.

Even casual empiricism shows that general levels of prosperity in the economy rose quite rapidly. The point is that agriculture growth is very important for overall growth. Table 4 shows the progress of selected agriculture programs. It shows that the rate at which they all increased between 1970 and 1990 is faster than its increase in the 90s, the programs being area under HYVs, irrigated areas, fertilizer consumption, public investment.

Table 4: Progress of selected agricultural development programmes

Program 1970 1980 1990 1996
Area under HYV 15.4 43.1 65 76.4
Irrigated area 38 54.1 70.8 80.7
Fertiliser consumption 2.2 5.5 12.5 14.3
Public Investment 2.1 4 2 1.8

Note: Area is in million hectares, fertilizer consumption is in million tones and public investment is as a share of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics', Summary tables It is quite very worrying to note that public investment in the mid 1990s is lower than in 1970-71. One of the broad conclusions is that even though the relative price seems to have moved in the favor of agriculture exactly as the finance minister predicted, the rate of growth of agriculture has not improved. And as much as prices, development programs are a driver of growth of which public investment being one of them. Table 5 shows gross private capital formation and you will find that in the private sector there is a substantial increase in private investment as a share of total output and by 1996-97, private capital formation is higher than before.

Table 5: Gross Private Capital Formation
GCF 1970 1980 1990 1996
Volume 1969 2840 3440 5867
Rate 5.5 6.7 5.6 8.1

Notes: 'Volume' is in rupee crore at 1980-81 prices, 'rate' is volume as a percentage of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics',CSO There are 2 ways to interpret all this data. One is to say that the future is yet to come. Or you could say that that is a matter of faith and that unless public investment really improves, growth will not improve. Table 3 shows the intervention price.

Table 3: Intervention price (Rs quintal on a crop year basis)

Commodity 1980 1990 1994 1998
Paddy 105 205 340 440
Wheat 117 225 360 550
Cotton 304 620 1000 1440
Jute 160 320 470 650
Source: Economic Survey 1998-99

Even though relative price of agriculture has improved, you may want to ask if it is because of why the architects of reform had said. For most crops, intervention prices had grown faster in the 1990s than in any other period. So the relative price increase is because of intervention.
Most crops where there has been no intervention have been doing worse off. And I keep emphasizing this because I strongly believe that it is this form of intervention that has made food security even more tenuous after 1991 than before. Let us now discuss reforms and welfare. The simplest approach to this is the price of food in relation to your income. Given the price of a commodity, it is your income that determines your access to that commodity. It could be completely independent of the availability of the commodity according to Amartya Sen. The price of food is very important in determining the food security, especially in India where poverty is highest. If reforms don't improve poverty at a faster rate than before then it is useless. So will the reforms be able to reduce it at a faster rate? Let’s talk about the factors by which the reduction in poverty is being slowed down in the economy. It is related to the nature of intervention of the government in the economy.

Table 7 gives data about 4 indicators -procurement price, market price, general price level (general price of all commodities in the economy which is how inflation is measured), stocks in the economy.

Table 7: Foodgrain price, inflation and stocks

Foodgrain price, inflation and stocks
Year Procurement price Market price General price level Stocks MnTn
(index) (Index)

1980 100 100 100 16.7
1990 193 179 185 11.3
1991 225 216 218 17.9
1992 261 242 235 13.9
1993 296 261 251 11.8
1994 314 293 283 22
1995 333 313 304 30.3
1996 375 354 328 28.5
1997 406 363 340 20
1998 455 384 379 18.2

Notes: (1) The procurement price index is based on a weighted average of the price of rice and wheat, the weights being the quantities procured. (2) Stocks of rice and wheat are as of January 1s; the prescribed norm for the buffer stock is 15.4 million tones. Source: Economic Survey, God, various issues.

Once again by the mid 90s the procurement price had increased as much as it had increased in the entire 80s. So procurement prices are rising at a very fast rate. Same for market price of food. The general price level has not risen quite that fast. Which is the point that I want to make? In India the relative price of food is rising. This is happening precisely at a time when reforms are being carried out which are meant to make the economy more modern. A high relative price of food is a feature of a very under developed economy. If you look at international trade market, from 1940-80 the relative price of food is declining at a steady rate and from that point of view the Indian experience is contrary to the rest of the world and it is extremely worrying. So for those sections whose incomes are fixed or not rising as fast as the rest of the economy, it is a matter of even more concern. This is no doubt the result of the nature of government intervention in the market. The government is pegging the price of food and raising it from year to year at a rate higher than the inflation rate for which there can be no justification except for placation certain lobbies. Especially when the stocks of food are quite high. That explains the whole puzzle. Stocks are piling up because the government is raising the price above what the market will bear. And because there is a procurement policy where the government will take up whatever is given to it at the MSP that cannot be sold because most of the population is tightening is belt because they cant afford the food and are getting poorer and that results in greater stocks. So the point that I want to make is that there is a conflict between producer prices and consumer welfare. All this is happening at a time when the food subsidy is ballooning. It is happening not because more is being distributed but more is being held. The ballooning subsidy does not prove that the government is doing good work and giving more to our fellow citizens but the fact is that the food policy is being conducted in the maniacal sort of way where the price of food is constantly being raised and many sections are getting priced out. The stocks are also rising relative to total production and not just in absolute terms. The reason I mention food subsidy is that the argument from any economist cannot be from the level of subsidy but the use of the subsidy -in the Indian case it is just the operational loss of the FCI -it is not used to feed people. It is better to just go out and give the money to people who need it rather than buying food at a price determined at a political level and not being able to sell it.

There is a great deal of debate about the PDS. Well, there is some debate and there should be more in my opinion. There is the PDS being the answer to the high stocks. That is only the partial solution according to me. Generically, can PDS do anything much about poverty in the long term? I'd say no. The PDS is a supply side arrangement. It is giving you a certain amount of grain at a fixed price but it is getting the grain out of somewhere else in the economy. It is getting grain that the FCI has procured. If the FCI keeps getting grain at a higher price then unless it keeps increasing the subsidy to the PDS then it cant maintain the price of food in the PDS. In an accounting price it is not feasible to do it without subsidy. So my thought is that the PDS is some sort of an afterthought. The principle purpose is to ensure a high price to the farmers, everything else is an afterthought. If maintaining food consumption levels was the primary purpose then you will not keep doing that by raising producer prices. It is not sustainable. There is a complete contradiction between the 2 policies. There is lot of talk about Kerala's levels of living having improved due to the PDS;

Let me wind up by making another argument in the PDS. I have looked at some measure of the PDS and a measure of poverty. Table 6 has a ranking of the states in terms of the PDS and poverty
PDS and poverty: Statewide ranking
PDS Poverty
Andhra Prades 5 12
Bihar 11 2
Gujarat 4 10
Haryana 12 13
Karnataka 7 8
Kerala 1 11
Madhya Pradesh 9 5
Maharashtra 6 7
Orissa 10 1
Punjab 13 14
Rajasthan 8 9
Tamil Nadu 3 3
Uttar Pradesh 14 6
West Bengal 2 4

Source: The estimates, pertaining to the years 1986-87 and 1987-88 by ShikhaJha and thePlanning commission respectively, are as reported by Mooji(1999) If the PDS were an important element in combating you would expect a positive relation. The poorer should have a greater PDS. If you take off Punjab and Haryana, which are very rich states, then the correlation is negative. What it shows you is that the PDS is not where it is needed most. I'd like to relate my own experience when I lived in Bangalore. I went to the civil supplies office close to my house. You will really have a shock if you go there because the staff there have no idea what is happening and you can’t blame them. The government is not giving them any support. They are in no position to monitor what is going on. And this is the case for a person who was living with a valid address and paying income taxes. What if you are migrant labor? What if you live in a slum? I'm not sure if the PDS will help in its current state. My more general point is that a system that gives you food at a fixed price when the input prices are rising cannot work. The origins of the PDS were in Bengal when the government was pumping in a lot of money for the war effort and demand for food soared and prices spiraled. So in order to maintain urban prices, the government procuredgrain from the farmers at any price. So it benefits the people in the urban areas. But what about the people in the rural areas who grow chills or fish or whatever? They are affected because their access to grain is limited because prices are being bid up. Hence the PDS's viability is questionable.

Name and briefly describe a sick unit with which you are familiar or identify one such unit

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Name and briefly describe a sick unit with which you are familiar or identify one such unit and briefly attempt the following:
a) Factors which caused sickness, including management failures and the present position.
b) Measures, if any, initiated for ensuring its healthy functioning.

Answer:
Industrial sickness is easily manifested in economies characterized by the existence of the market mechanism, it may be concealed in the economies where the market mechanism does not operate. In a market economy, the competition tests and exposes the strengths and weaknesses of the business enterprises and therefore sickness becomes easily visible. There has been an increase in industrial sickness, both in the large and small sectors, in India. By consoling that this is, to some extent, a corollary Of industrial growth, one shall not belittle the seriousness of the problem. Industrial sickness affects not only the owners, employees and creditors but also causes wastage of national resources and social unrest. It is, therefore, considered very much essential to devise suitable measures for dealing with sick units as well as to make suitable arrangements for detecting symptoms of industry sickness at an early stage so as to take measures to prevent sickness. There are different perceptions of the symptoms and characteristics of indi sickness. Sickness is a relative concept. Further, “a given sickness manifests itself in several fonns, and at a point of time these forms may not throw unambiguous or clear-cut signals. No wonder, then, that sickness is found being understood, interpreted and measured differently be individuals and even by institutions”.’ “To a layman, a sick unit ion is not healthy. To an investor, it is one which skips dividends. To an industrialist, it is a unit which is making losses and tottering on the brink of closure. To a banker, it is a unit which has incurred cash losses in the previous year and is likely to repeat the perform once in the current and fo1lo years.” In terms of the definition evolved by the Reserve Bank of India, an industrial unit is regarded as sick f it Mg incurred cash loss for one year and in the judgment of the bank, it is likely o
continue to incur cash loss in the two following years and it has imbalance in its financial structure such as current ratio being less than 1:1 and worsening debt equity ratio. The sick Industrial Companies (Special Provisions) Act, 1985, as amended in 1993 defines a sick industrial company as an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. The definition is for the purpose of application of the Act and it covers only registered companies which have been existence for at least five years.

The number of sick units has grown considerably from 22,366 at the beginning of 1980 to 2.71 lakh at the end of March 1995 and the total bank credit blocked up in these units increased from Rs. 1,809 crores to Rs. 13,739 crores during this period. 99 per cent of the sick units were in the small-scale sector. The above figures included 476 non-SSI weak units.
Data for the recent years show that, in the large-scale sector, the incidence of sickness was high in industries like engineering, cotton textiles, jute textiles and sugar. It was also revealed that the indust advanced states accounted for a major share of the large sick units.

Causes of sickness
Industrial units may become sick at different stages and due to different reasons. Indeed, “some industries are born sick, some achieve Sickness and some have sickness thrust upon them”.

Born Sick: Industries born sick are those which arc destined,(or disaster right from their conception due to various causes. A study conducted by the Institute of Economics Hyderabad, found that 50 per cent of the dead units closed within three years of opening. This proves that these industries never had any reasonable survival prospect right from birth.

Any one or more of the following factors may cause the birth of sick units:

1. Lack of experience of the promoters, wrong Selection of the project, faulty Pmject etc., may give birth to sick units. The mushroom growth of the so-call consonance firms has been regarded as a factor contributing to these sorts of problems because the primary interest of such COflSultancy fans is to make money by selling some ideas or project reports to the aspirants who may thus be misguided or made overenthusiastic We must also think that the rosy hopes generate by the high promises and schemes including the self-employment schemes of the financial institutions and other promotion agencies of the Governments also contribute to this Unfortunate Situation.

2. Paucity of fun and faulty financial management may also cause the birth of sick units. Many new units have been found to be under utilised and the strains of undercapitaljratjon become evident when the unit becomes operational. In case of some companies, the heavy investment in non-productive capital assets likes laugh housing projects even before they commence production distorts the liquidity and causes a lot of problems. Problems also crop up due to inadequate provide for contingencies, faulty fund flow and cash flow estimate, etc.

3. Time and cost over-runs sometimes prove to be very disastrous. Particularly in case of large projects, delays in project commissioning due to delay in supply of equipment, both indigenous and imported, slippage in the schedule of civil works, creation of equipment, etc., are not uncommon. Such delays cause cost escalations leading to capital shortage, liquidity problems, hike in the production costs and break-even point etc.

4. Sickness may arise from lavational problems also. It has been observed that “hightechnology based units are established in areas without skilled labour or supporting infrastructure; industries based on imported raw materials are founded in regions without adequat transport and communicate ion system”.

5. Technological factors like selection of obsolete or improper technology or the technology becoming outdated due to innovations while the project is being executed, sub-standard machinery, wrong collaboration, etc., also cause sickness.

According to the Tiwari Committee, 14 per cent of the large sick units suffered from technical factors and faulty initial planning.

6. Wrong assessment of the market potential or faulty demand forecasting, change in the market conditions, including the change in the consumer tastes and preferences and competitive situation, etc. can also cause birth of sick units.
(ii Achieved Sickness: Industries which achieve sickness are those which fail after becoming ope ional due to internal causes. Such internal causes which are common are the following:

1. Bad management, which “covers a wide range from inexperience, inefficiency, lack of professional expertise, neglect and internal squabbles to delinquency and dishonesty” is an important cause of industrial sickness. According to the Tiwari Committee Report, 1984, “the factor most often responsible for industrial sickness can be identified as ‘management’. This may take the form ofpoorproductiommanagement, poor labour nianagement, poor resources management, lack of professionalism, dissensions within the management, or even dishonest management”. The Committee found that 65 per cent of the large sick units were affected by this problem.

2. Unwarranted expansion and diversion of resources may also result in sickness. Some concerns tend to expand beyond the resources including managerial capability. Diversions of resources to start new units or to acquire interest in other concerns without due regard to the capability of the unit to provide such funds sometimes lands the unit in trouble.
Extravagances and acquisition of unproductive fixed like company guest houses or corporate luxuries like air cars, etc., also may contribute to sickness.

3. Poor inventory management in respect of finished goods as well as inputs may land a unit in trouble.

4. Failure to modernise, the productive apparatus, change the product mix and other elements of the marketing mix to suit the changing environ ment is a very important cause of industrial sickness.

5. Poor labour-management relationship and the associated poor worker morale and low productivity, strikes, lockouts, etc., also may ruin the health of aunit to survive),

(iii) External Causes: Sickness may be caused also due to factors beyond the control of an industrial unit. Some of these common external factors are the following:

1. Energy crisis arising out of power cuts or shortage of coal, and oil have almost become a constant problem for many industrial units in India.

2. In a number of cases the units are not able to achieve optimum capacity due to shortage of raw materials due to production set-backs in the supply industries, poor agricultural output clue to natural reasons, changes in the import conditions etc.

3. Infrastructural problems like transport bottlenecks also sometimes cause serious problems.

4. It is a general complaint of the industrial circles that the credit squeeze very adversely affects the industrial sector. According to the Tiwari Committee, 24 per cent of the large sick units were affected by shortage of working capital/liquidity constraints.

5. Artificial economic constraints also make their contribution to the growing industrial sickness. Government controls on the product mix and prices are said to be causing serious problems for certain industries. Some times, it is not possible to automate or rationalize due to unfavorable government policy about attitude.

b) Measures, if any, initiated for ensuring its healthy functioning.

There has bee demand for take-over of sick units by the Government, particularly to protect the employment. However, a relevant question to be considered here is the opportunity, cost of the government decision. Should the government utilize the scarce resources to create new productive employment or should they be spent on maintaining some jobs at heavy social co Further, it is also necessary to guard against the managements, looking forward’ to the government take-over of an undertaking after fleecing and mismanaging it to the point of making it permanently sick.

However, in an economy where the government has assumed strong regulatory and promotional roles, it should take nesses steps to prevent sickness and to help cure incipient sickness.

The Companies Act, 1956, empowers the government to collect information from the companies which would enable it to assess the state of affairs of the companies and to take certain measures to prevent mismanagement. The Industries (Development and Regulation) Act, 1951 (IDRA), empowers the government to regulate the management of industrial undertakings, including the take-over of the management or the undertaking. The Sick Industrial Companies (Special Provisions) Act, 1985, is a very important law to deal with industrial sickness.

In 1981, the government announced certain policy guidelines to deal with industrial sickness. These guidelines require the ministries administratively concerned with various industries to take responsibility for rehabilitation of sick units. Banks and financial institutions are required to strengthen the monitoring arrangement for prevention of sickness.

Indeed, both Government and financial institutions have been concerned at the problem of growing sickness, and attempts have been made to devise suitable measures to tackle it. The approach followed has been to nurse sick units which are potentially viable back to health through a managed programmed of financial assistance for modernization and recovery. The Reserve Bank took the initiative in the matter of identifying sick industrial units, and coordinating the lending operations of the term lending institutions and commercial banks.

An important limitation on the ability to tackle sickness arises from the fact that commercial banks may legitimately consider sick units as poor security risks. Government policy towards the prevention and treatment of industrial sickness is guided by the following considerations:

On the preventive side, it is considered that closer and more vigilant involvement of the financial institutions in the units with management of doubtful competence or integrity is essential. Financial institutions have jointly set up a group of professional directors who are full-time employees of the institutions and who could be nominated on the Board of Directors of companies with doubtful management and in which the institutions have a substantial stake. These directors report to the institutions on the measures that should be taken to prevent sickness. If any such director comes across features of a company’s operation which give cause to suspect malpractice or gross incompetence, he would report to the financial institutions for further investigation. The concerned institution will then report the matter to an inter-institutional group under the Chairmanship of Industrial Development Bank of India. If this group comes to the conclusion that the management has acted in a patently incompetent manner or has indulged in malpractice, all the institutions and the commercial banks should take a decision that this unit or any other unit under the same management will not be extended financial assistance until the management is changed.

The rehabilitation scheme for a sick unit will depend on the extent of sickness of the unit, its future prospects and the management. Financial institutions have realised that the usual methods of rehabilitation are not quite adequate for acute cases of sickness. Such cases may require extraordinary efforts and measures including leasing out an undertaking, merger and amalgamation restructure of capital and liabilities, selling a unit on block basis, etc. In such cases, the cooperation of all concerned agencies is of utmost importance and invariably workers are called upon to extent greater co operation. It has been agreed that the lead financial institution and the lead bank will jointly ensure that a scheme is prepared within a time limit of 90 lays as fixed under the Sick Industrial Companies (Special Provisions) Act. Some of the State Governments have also started taking preventive measures by announcing certain reliefs and concessions in advance even for units which do not attract the definition of industrial sickness. The Government has recently specified the economic size of units in many industries. This measure is expected to help check sickness arising out of uneconomic size of
industrial units.

The RBI has been closely monitoring certain specific industries where the incidence of sicknes is high. Standing Committees have been set up in the RBI for the jute and sugar industries to consider the specific problems of these sectors. Another significant policy initiative has been the introduction of liberaiised margin money scheme for supplementing the efforts of the State Governments in reducing
sickness in the small-scale sector in June 1987. Under this scheme, the State Governments are to make a matching contribution on a 50:50 basis in providing assistance to sick small-scale units in their rehabilitation. In the revised scheme, the maximum quantum of assistance has been enhanced from Rs.20,000 to Rs.50,000 per unit.

IDRA

The Industries (Development and Regulation) Act, 1951, empowers the Central Government to take over an undertaking or its management in certain cases. In the case of industrial units that are already sick the following options will first be explored before the question of the take-over of management under the Industries (Development and Regulation) Act is considered:

(i) Rehabilitation through State Governments and financial institutions who would provide both fmancial an I managerial support with suitable restructuring of management wherever necessary. In cases where co-ordinated action is necessary for the revival of the unit outside the framework of the Industries (Development and Regulations) Act, the concerned Administrative Ministry will take the initiative to co-ordinate the arrangements.
(ii) Proposals, if any, for the merger of the sick unit with a healthy unit in the private sector will be examined by the Specified Authority under the Income -Tax Act, 1961, with reference to the guidelines on the subject. It is only where neither of the above alternative course of action is feasible or desirable that action under the Industries (Development and Itegulation) Act would be considered.

In the past, the Government took over, selectively, the management of a number of sick industrial undertakings under the IDRA. For example, a large number of sick textile mills were taken over and brought under the National Textiles Corporation (NTC). The objective was to revive these units by providing management support and financial assistance through banks and other financial institutions. While some units were nursed back to health, a number of others continued to suffer huge losses. The Government do not now favour takeover of sick units. Now the approach of the government towards rehabilitation of a sick unit is very selective because the government is convinced that there is no point in throwing away further resources in support of the units which are irretrievably sick. Only such units which are found to be potentially viable need to be taken up for formulation of rehabilitation packages to restore them to health. The package consists of concessions from banks, financial institutions, government (Central/State), government agencies, sharehold ers, labour, suppliers of goods as viable it if would be in a position, after implementing a package of concessions spread over a period not exceeding seven years from the commencement of the package, to continue to service its repayment obligations, as agreed upon, including those forming part of the package, without the help of any further concessions after the aforesaid period. The repayment period for restructured debts sho not exceed 10 years from the date of implementation of the package.

Discuss the impact of politico-legal environment on business organizations.

2011-05-18T06:00:00.000-07:00

Discuss the impact of politico-legal environment on business organizations. Illustrate your arguments with reference to your organization or any organization you are familiar with (Name and describe the organization).

Ans :
The political and administrative system in a country dictates policies formulation its implementation and control of business. Whenever there is a change in the political scenario of a country, there will be a change in economic policies. This is due to the fact that each and every political party does some promises with the people in their election manifesto. Business activities of a country are affected by the policies and directions, shelters and control exercised by the prevailing political system. In this regard, John Kenneth Gaibraith has rightly commented, “no country with a stable and honest Government that does not have or has not had a reasonably satisfactory state of economic progress.” He further argues that “In all these countries, the early emf is was not on capital investment but on political and then on cultural development.” The democratic political system like India under democratic set up comprises three major institutions, viz., legislature, executive I Government and judiciary. Legislature is the most powerful institution having powers as policy making, law-making, budgeting, executive control and acting a mirror of public opinion. Executive or Government is the authority who implements the dec of legislature. The third political institution judiciary determines the manner in which the work of the ext cutive has been fulfilled. It settles also the relationship between private citizens, on the one hand, and between citizens and the government upon the other, where these give rise to problems which do not admit of solution by government. The powers of the judiciary are of two types:

(I) the authority of the courts to settle legal disputes; and
(ii) Judicial review — the authority of the courts to rule on the constitutionality of
legislation.

Therefore, it is necessary for a business to acquaint themselves with all the above three institutions It is also necessary for a business to make changes according to changes of political situations. The following points are necessary to be looked into by the business:

(1) Political administration such as democracy and totalitarianism

Changes in Environment

The legal environment refers to the principles, rules and regulations established by the government and applicable to people. These regulations come through various legislations. The government has passed and enacted various Acts. Now due to globalisation of economy, it became necessary to make changes in these Acts. For details of this section, see the chapter of Business and Government. Gary Hamel and C.K. Parallax have rightly observed the changing environment of the business Substantial challenges face any organization intent on getting to the future first. The first challenge, how to navigate from here to there arises as both public and private institutions struggle to plot a course through an increasingly inconsistent environment where experience is rapidly devalued and familiar landmarks no longer serve as guideposts. Never before has the institutional terrain been changing so quickly or have industry boundaries so malleable. Never before have competitors, partners, suppliers and been so indistinguishable. How, then, does one get to the future first even when there is
no map.

Organization Burger King Corporation

B urger King Corporation, owned by U.K.-based Diageo, operates in almost 60 countries and territories. Its independent franchise in Israel has been successful from the outset, operat ing 46 restaurants by 1999. In that year, Burger King opened a new restaurant in Ma’aleh Adumim, a sub urb that extends beyond the “green line” demarcat ing the 1967 border between Israel and the West Bank, which is now part of Jerusalem under Israeli sovereignty. The Ma’aleh Adumim branch drew both Jewish and Arab customers seeking brand-name fast food. How-ever, soon after its opening, the com-1, pany argued that it was unaware the restaurant was located outside Israel’s 1967 borders and informed the frank chide holder that their agreement covered only pre-1967 Israel—which the Israeli frank cheese disputed—and that its authority to operate the branch was being revoked. The decision
was prompted by Arab political pressure (the company has restaurants in Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), as well as by pressure from Moslem groups in Asia, Europe, and the United States, who threatened a boycott of the company. Israelis and American Jewish groups decried the company’s bow ing to Arab pressure and called for a worldwide boy cost on their part. In the meantime, the restaurant remained open pending the outcome of interna tional arbitratior to which Burger King and its fran chisee agreed to submit. The prolonged delay prompted U.S. Moslem groups to renew the boycott threat.
The political-legal environment provides a critical context for the MNE at home and abroad. As the Burger King case illustrates, political constraints and political risk are part and parcel of conducting business across national boundaries. Facing mul tiple national constituencies, it is often difficult to meet the demands of one con stituency without aggravating another. The MNE must not only respond to pres sures exerted by those constituencies, but also be proactive in identifying and responding to their concerns.

If the political environment identifies key constituencies, the legal environment sets the “rules of the game” as well as the range within which legitimate business activity is conducted. Since, at least in democratic systems, laws are enacted by elected legislative bodies, political processes both determine legal issues and are guided by them. Under U.S. law, boycotting Israel altogether would not be an op tion for Burger King despite its ownership by a British conglomerate. The company and the franchisee eventually agreed to binding arbitration to determine whether their agreement allowed for the opening of branches outside the green line. The ar bitration is to be conducted in the United States, as is customarily the case in in ternatiônal franchise agreements.

The reform process has helped to accelerate the growth but the benefits of the growth have not percolated to poor

2011-05-18T05:50:00.000-07:00

“The reform process has helped to accelerate the growth but the benefits of the growth have not percolated to poor and weaker sections of the society”.
What measures would you suggest to modify reforms so as to achieve the objective of growth with social justice?

Ans: Need for economic reforms or the new economic policy was felt mainly because of the following reasons:
1. Fall in Foreign Reserves: In 1990-91 India’s foreign exchange reserves fell to such a low level that the same were not enough to pay for as import bill for even 10 days. Foreign exchange reserves that were Rs. 8’151 core in 1986-87, decline sharply to Rs. 6’252 core in 1989-90. The situation grew so acute that Chandrasekhar government had to mortgage country’s gold to discharge its foreign debt servicing obligation.
2. Rise in Prices: In India prices continued to rise rapidly. Average annual rate of inflation increased from 6.7 percent to 16.7 percent . Prior to 1991 despite good monsoon for three consecutive years, prices of food grains rose substantially.
3. Mounting Adverse Balance of Payments(BOP): Deficit of balance of payments had been rising continuously since 1980-91. For instance, in 1980-81, balance of payments on current account was adverse to the tune of Rs 2’214 core and its rose in 1990-91 to Rs. 17,367 core. To meet this deficit large amount of foreign loans had to be obtained
4. Increase in Fiscal Deficit: Prior to 1991 , fiscal deficit of the govt. had been mounting year after year on account of continuous increase in its non-development expenditure. Fiscal deficit means difference between the total expenditure and total receipts minus loans. In 1981-82, it was 5.4 % of gross domestic product.
5. Poor performance of public sector undertaking(PSPs): In 1951 there were just 5 enterprises in public sector in India but in 2001 their number rose to 232. Several thousand cores of public funds were invested therein.

THE REFORM OR MEASURES TAKEN UNDER LIBERLISATION:

1. the economy was opened to other countries to encourage more exports. To facilitate the import of foreign capital and technology and other allied imports, reduction in import duties and other barriers were brought about.
2. Chronically sick public sector enterprises were referred to the Broad for industrial and Financial Reconstruction for the formulation of revival/ rehabilitation schemes.
3. Areas hitherto reserved for the public sector were opened to private sector. The govt intended to transfer the loss making units to the private sector, but it failed because there were no takers for them.
4. By permitting the private sector to set up industrial units without taking a license, the govt removed certain shackles which were holding back or delaying the process of private investment.
5. To improve the performance of public sector enterprises , greater autonomy was given to PSU managements and the Broads of public sector companies were made more professional.

“despite remarkable growth, India has to go a long way in diversification of exports in terms of heavy manufactures”.

2011-05-18T05:48:00.000-07:00

“despite remarkable growth, India has to go a long way in diversification of exports in terms of heavy manufactures”. Examine the statement with the help of data from 1995-96 to 2005-06 (Refer Economic Survey).

Ans: The following requirements are to be complied with by an industrial undertaking to be graded as small scale industrial undertaking w.e.f. 21.12.1999
An industrial undertaking in which the investment in fixed assets in plant and machinery whether held on ownership terms on lease or on hire purchase does not exceed Rs 10 million.

Investment Limits
The definition of small scale industries has undergone changes over the years in terms of investment limits in the following manner:-

YEAR INVESTMENT LIMITS ADDITIONAL CONDITIONS
1950 Up to Rs. 5lacs in fixed assets Less than 50/100 persons with or without power
1960 Up to Rs 5 lacs in plant & Machinery No Condition
1966 Up to Rs 7.5 lacs in plant &Machinery No Condition
1975 Up to Rs 10 lacs in plant &Machinery No Condition
1980 Up to Rs 20 lacs in plant &Machinery No Condition
1985 Up to Rs 35 lacs in plant &Machinery No Condition
1991 Up to Rs 60 lacs in plant &Machinery No Condition
1997
( Dec) Up to Rs 100 lacs in plant &Machinery No Condition

Performance of small scale industries
• Employment
• Production
• Exports
• Opportunities

Employment Generation
SSI Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture. It has been estimated that a lakh rupees investment in fixed assets in the small scale sector generates employment for four persons.

Generation of Employment- Industry Group- wise
Food products industry has ranked first in generating employment, providing employment to 4.82 lakh persons (13.1%).
The next two industry groups were Non-metallic mineral products with employment of 4.46 lakh persons (12.2%) and Metal products with 3.73 lakh persons(10.2%).

Per unit employment
Per unit employment was the highest (20) in units engaged in Beverages, tobacco and tobacco products mainly due to the high employment potential of this industry particularly in Maharastra , Andhra Pradesh , Rajasthan, Assam and Tamil Nadu.

Rural
Non-metallic products contributed 22.7% to employment generated in rural areas. Food products accounted for 21.1% . Wood products and Chemicals and chemical products between them accounted for 26.2% of employment.

Production
The small scale industries sector plays a vital role for the growth of the country. It contributes 40% of the gross manufacture to the Indian economy. It has been estimated that a lakh rupees of investment in fixed assets in the small scale sector produces 4.62 lakhs worth of goods or services with an approximate value addition of ten percentage points. The small scale sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive.

It would surprise many to know that nontraditional products rates in this decade. It has been mostly fuelled by the performance of garment, leather , gems and jewellery units from this sector.

The lucrative products groups where the SSI sector dominates in exports, are sports goods, readymade garments, woolen garments and knitwear , plastic products, processed food and leather products.

Opportunities
Small industry sector has performed exceedingly well an enabled our country to achieve a wide measure of industrial growth an diversification.

The opportunities in the Small scale sector are enormous due to the following factors:
• Less capital intensive
• Extensive promotion and support by the government.
• Reservation for exclusive manufacture by small scale sector
• Project profiles
• Funding
• Finance & subsidies
• Machinery Procedure
• Raw material procurement
• Man power training
• Technical managerial skills
• Tools& Tools utilization support
• Export production.

What are the factor responsible for inflation?

2011-05-18T05:45:00.000-07:00

What are the factor responsible for inflation? As a student of management how would you look at the problem of inflation? Collect data on inflation for the last five years and analyze the trends.

Ans: A persistent and appreciable rise in the prices is called inflation. During inflation all costs and prices do not rise together and in same proportion . But it is an increase in general level of prices measured by price index which is average of consumer or producer prices.
Inflation is the increase in prices caused by increases in money supply. An increase in the money supply is what constitutes inflation.
There are different measurements price inflation , depending on the basket of goods selected. The most common measures are of consumer inflation, producer inflation and GDP deflators , or price indexes. The last measures of inflation in the entire economy.
General price inflation is a fall in the purchasing power of money within economy, as compared to currency devaluation which is the fall of the market value of a currency between economies . It is referred to as a rise in the general level of prices. The formal applies to the value of the currency within the national region of use, whereas the latter applies to the external value on international markets.

Some terms related to inflation:
 Deflation is a rise in the purchasing power of money, and a corresponding lowering of prices
 Disinflation refers to slowing the rate of inflation, that is , prices are still rising , but at a slower rate than before.
 Reflation is a term used to denote inflation after a period of deflation, meaning inflation designed to restore prices to a previous level.
 Hyperinflation is a rapid inflation without any tendency towards equilibrium that is an inflation that produces even more inflation.

Examples of common measures of inflation include:
 The M0, M1, M2, M3, M4 measures of money supply
 The price of Gold and Silver.

Causes
There are different schools of thought as to what causes inflation. The too most prevalent theories are the neo-classical theory that inflation is driven by increases in the money supply, often used to finance govt. spending and the neo-Keynesian view that inflation is the result of diminishing returns of productivity.
• Demand pull inflation- inflation due to high demand for GDP an low unemployment , also known as Phillips Curve inflation.
• Cost push inflation- nowadays termed “ supply shock inflation”, due to an event such as a sudden increase in the price of oil.
• Built-in-inflation- introduced by adaptive expectations, often linked to the “price/ wage spiral” because it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a “vicious circle”.
• If GDP exceeds its potential , the theory says that, all else equal, inflation will accelerate as suppliers increase their prices and built –in-inflation worsens.
• If GDP falls below its potential level all else equal inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in-inflation: there is disinflation.

Stopping inflation:
There are a number of methods which have suggested to stop inflation.

Price controls:
Another method attempted is simply instituting wage and price controls. They are related to price supports, which set minimum prices to prevent deflation , or to maintain a particular good or service in production.

Inflation in India

ALL INDIA CONSUMER PRICE INDEX NUMBERS

Industrial workers
Base: 1982=100

YEAR
FOOD INDEX
GENERAL
1986-1987 141 137
1987-1988 154 149
1988-1989 168 163
1989-1990 177 173
1990-1991 199 193
1991-1992 230 219
1992-1993 254 240
1993-1994 272 258
1994-1995 304 284
1995-1996 337 313
1996-1997 369 342
1997-1998 388 366
1998-1999 445 414
1999-2000 446 428
2000-2001 453 444
2002-2003 467 463
2003-2004 477 482
2004-2005 495 500
2005-2006 506 520

Index Number of Whole sale price
Base : 1993-1994=100
1994-1995 116.9
1995-1996 122.2
1996-1997 128.8
1997-1998 134.6
1998-1999 141.7
1999-2000 150.9
2000-2001 159.2
2001-2002 161.8
2002-2003 172.3
2003-2004 180.3
2004-2005 189.5

How business environment influences business management? Explain with suitable examples.

2011-05-18T05:44:00.000-07:00

How business environment influences business management? Explain with suitable examples.

Ans: The term business environment refers to the aggregate of all forces, factors and institutions which are external to and beyond the control of individual business enterprises and their managements, but which influences their functioning. Business environment is the macro framework within which the business firm-a micro unit carries out its activities. The business environment furnishes the macro economic context in which the firm operates.
The analysis of business environment assumes that business environment remains external to the firm. The internal dynamics of the firm is meant to adjust itself to the external environment. The business firm must show adaptability to as well as adoptability to the environment.
Managers must have both capability to deal with the environment. The manager has to stay in tune with the environment if he/she is to be successful manager, by running the business environment, he will not be able to survive as a manager, because his firm’s business will be in jeopardy.
The environment imposes several constraints on the enterprises and has considerable impact and influence on the scope and direction of its activities. The basic job of the manager of an enterprise is therefore, to identify itself with environment in which it operates, and to formulate its policies in accordance with the forces which operate in its environment.
The environment of a large developing country like India has huge human natural resources and a planned and mixed economy. It seeks to attain socialistic pattern as a welfare state within a democratic political system. It demands a specific type of role to be played by the managers of the business and integrate with global economy, the business organization being part and parcel of the economy, have to play a vital role in the ongoing processes of such as liberalization and globalization.

THE MAJOR COMPONENTS OF THE BUSINESS ENVIRONMENT:

1.Economic problems and prospects: The economic problems like inflation, unemployment, recession, have to be analyzed with the objective of making the national economic management efficient.

2.Economic policy and legal aspects: Indian government has formulated fiscal cum budgetary policies, industrial policy and general policy statements on foreign trade, investment and technology transfer, collaboration , export and import and foreign exchange regulations.

3.The functioning of the economic: With the help of money flows the consumption, investment , saving income, employment and output , all these affect the price level and influences the real value of all macro variables. E.g. black economy results in tax evasion causing a huge loss to government . This results in the more taxes levied by the govt. and corporate sector is also a participant in the suffers.

4. India ‘ A mixed economy’: India is mixed economy. In India public sector and pvt. Sector co exist. There are joint ventures, cooperative workers sectors and also tiny sectors. The mixed economic system operates through the combination of planning and pricing.

5. Composition of Indian economic: Indian economic is composed of household, corporate business sector, govt. administration , capital market and foreign sector. Strength of all these sectors influence the economic environment.

6. The nature and level of economy: Availability of resources, human or material, the precipitate income, the occupational structure, the output structure , the foreign trade, investment , income distribution, rural an Durban population distribution all these affect the decisions of the corporate business sector.

7. Economic planning: India follows economic planning path of development in the form of five year plans. The resources are estimated and targets are set according to the needs and funds are allocated.

What are the basic objectives of a fiscal policy?

2011-05-18T04:24:00.000-07:00

What are the basic objectives of a fiscal policy?
Analyze the objectives given in Table 21.1 (Unit-21, Block-5) and put
forward your arguments as to:
i) Whether they are conflicting or not? Explain how?
ii) Which ones should be given greater priority in a developing country?

Answer. Fiscal policy is the economic term that defines the set of principles and
decisions of a government in setting the level of public expenditure and how that
expenditure is funded. Fiscal policy and monetary policy are the macroeconomic
tools that governments have at their disposal to manage the economy. Fiscal
policy is the deliberate and thought out change in government spending,
government borrowing or taxes to stimulate or slow down the economy. It
contrasts with monetary policy, which describes policies concerning the supply of
money to the economy.
Fiscal policy is described as being neutral, expansionary, or contractionary. An
expansionary fiscal policy occurs when the government lowers taxes and/or
increases spending; thus expanding output (national income). An increase in
government spending or a cut in taxes shifts the aggregate demand curve to the
right. An expansionary fiscal policy will expand the economy's growth. A
contractionary fiscal policy occurs when the government raises taxes and/or
lowers spending; thus lowering output (national income). A decrease in
government purchases or an increase in taxes shifts the aggregate demand
curve to the left. A contractionary fiscal policy will constrict the economy's overall
growth.
Fiscal policy in India always had two major objectives, namely, improving the
growth performance of the economy and ensuring social justice to the people.
Fiscal policy influences growth performance of an economy mainly in two ways.
In the first place, it affects growth by influencing the mobilization of resources for
22
development. Secondly, it exercises its influence by improving the efficiency of
resource allocation.
Apart from tax revenue other important aspects of resource mobilization are
generation of non-tax revenues, restricting of current government expenditure
and raising of surpluses of public sector enterprises.
Fiscal policy also influences growth performance of an economy through its
effects on the allocation of resources. A efficient and rational allocation of
resources will obviously be helpful in raising the rate of economic growth.
Therefore, if fiscal policy favorably affects the efficiency of resource allocation,
then in the process, growth performance of the economy is bound to improve. An
indifferent fiscal policy adversely affecting the efficiency of resource allocation on
the contrary retards the productive activity and thereby results in lower rate of
economic growth.
It is often doubted whether Indias fiscal policy conforms to the principal of equity.
For assessing the equity implications of the fiscal policy it is necessary to analyze
as to who benefits from public expenditure. For India so far no comprehensive
study has been made on this aspect of the fiscal policy.
Major and Subsidiary objectives of economic policy
Static efficiency (short-run)
 Satisfaction of private consumption wants
 Satisfaction of public wants.
 Balance of payments equilibrium.
 Price stability.
 Removal of market imperfections.
National cohesion
 Economic independence
23
 Provisions of economic symbols of nationhood.
Social justice
 Increased employment
 Reduced inter-personal income inequalities.
 Reduced inter-regional income inequalities.
Economic development (long-run)
 High savings
 Maximum capital inflows from the rest of the world.
 Structural change.
 Reduced population growth.
Conflicts
The short-run objective of private consumption wants implies greater disposable
incomes with people, more imports of goods to improve the consumption
standards of people, and more spending in the economy.
This comes in conflict with,
 The objective of satisfaction of public wants-which requires, more savings by
people which are channeled into public sector to provide for public goods.
 Balance of payments equiblirium which requires-controlling import bills.
 Price stability which requires controlling disposable incomes of people and
ultimately demand.
 Long run economic development that aims at bringing about high savings and
a phased out development with conservation of essential resources.
The objective of social justice implies:
 Increasing employment (which may sometimes result in an unproductive work
force).
 Reducing inequalities
24
But these come in conflict with, long run economic development objectives that
require:
 Elimination of inefficient workers.
 Creation of a rich class that can save in huge proportions and invest for future
development and growth.
 The objective of national cohesion comes in direct conflict with the objective
of economic development since in modern complex set-up, economic
development cannot come above without a lot of global interaction and these
can threaten national cohesion to some extent if people regulatory measures
are not adopted.
The long term objectives are very important and should be given maximum
priority. If population rate is brought down, and high savings rates achieved then
in the long run the remaining objective of employment generation, improved
consumption levels, self-sufficiency will automatically achieved. If economic
development is raised and self sufficiency attained in long-run then the objective
of national cohesion will also be fulfilled.
So, in my view the maximum preference should be given to long run objectives.

Identify the major factors that have been responsible for inflation and what policy measures have been taken by the government to tackle this problem?

2011-05-18T04:21:00.000-07:00

Identify the major factors that have been responsible for inflation and
what policy measures have been taken by the government to tackle this
problem?

Answer. Inflation is the expansion of the monetary base usually effected through
a central bank's borrowing or printing of currency. Inflation results in a persistent
rise in the general price level as measured against a standard level of purchasing
power. There are many varying measures of inflation in use because different
prices affect different people. The most widely known indices are the Consumer
Price Index (CPI) which measures the change in nominal consumer prices and
the GDP deflator which measures inflation in new products and services created.
Inflation is no stranger to the Indian economy. In fact, till the early nineties
Indians were used to double-digit inflation and its attendant consequences. But,
since the mid-nineties controlling inflation has become a priority for policy
framers.
Types of Inflation
Demand-pull inflation: This is basically when the aggregate demand in an
economy exceeds the aggregate supply. It is also defined as `too much money
chasing too few goods'. Bare-boned, it means that a country is capable of
producing only 100 items but the demand is for 105 items.
It's a very simple demand-supply issue. The more demand there is, the costlier it
becomes. Much the same as the way real estate in the country is rising.
Cost-push inflation: This is caused when there is a supply shock. The best
example to describe cost-push inflation is the oil shock in the 1970s. When
OPEC was formed, it squeezed the supply of oil and this caused oil prices to rise,
contributing to higher inflation. This is similar to what has happened recently
when the oil price hike increased inflation in many a country.
15
Inflation in India: How to tackle it
Global imbalance the cause for global liquidity
To understand the text of the present bout of inflation, let us at the outset
understand the context: the functioning of the global economy, which is in a state
of extreme imbalance. This is simply because developed western economies,
particularly the United States, are consuming on a massive scale leading to
gargantuan trade deficits.
Crucially their extreme levels of consumption and imports are matched by the
proclivity, nay fetish, of the developing countries in having an export-driven
economic model. Thus while a set of developing countries produces, exports and
also saves the proceeds by investing their forex reserves back in these countries,
developed countries are consuming both the production and investment
originating from the developing countries.
In effect, developing countries are building their foreign exchange reserves while
the developed countries are accumulating the corresponding debt. After all, it
takes two to a tango.
For instance, the US current account deficit is estimated to be 7 per cent of GDP
in 2006 and stood at approximately $900 billion. Obviously, the current account
deficit of the US becomes the current account surplus of other exporting
countries, viz. China, Japan and other oil producing and exporting countries.
The reason for this imbalance in the global economy is the fact that after the
Asian currency crisis; many countries found the virtues of a weak currency and
engaged in 'competitive devaluation.'
Under this scenario, many countries simply leveraged their weak currency vis-avis
the US dollar to gain to the global markets. This mercantilist policy to maintain
their competitiveness is achieved when their central banks intervenes in the
16
currency markets leading to accumulation of foreign exchange, notably the US
dollar, against their own currency.
Implicitly it means that the developing world is subsidizing the rich developed
world. Put more bluntly, it would mean that the US has outsourced even
defending the dollar to these countries, as a collapse of the US currency would
hurt these countries holding more dollars in reserves than perhaps the US itself!
Rather than demand pushing the value of commodities higher in the past 18
months, it has been the (impending) dollar's devaluation against commodities
that has pushed commodity prices to record highs."
Naturally, as the players fear a fall in the value of the dollar and reach out to
various assets and commodities, the prices of these commodities and assets too
will rise.
The psychological dimension
But as the imbalance shows no sign of correcting, players seek to shift to
commodities and assets across continents to hedge against the impending fall in
the US dollar. Thus, it is a fight between central banks and the psychology of
market players across continents.
As a corrective measure, economists are coming to the conclusion that most of
the currencies across the globe are highly undervalued vis-a-vis the dollar,
which, in turn, requires a significant dose of devaluation. For instance, a
consensus exists amongst economists and currency traders that the Yen is one
of the most highly undervalued currencies (estimated at around 60%) along with
the Chinese Yuan (estimated at 50%) followed by other countries in Asia.
This artificial undervaluation of currencies is another fundamental cause for
increasing global liquidity.
17
What has further compounded the problem is the near-zero interest rate regime
in Japan. With almost $905 billion forex reserves, it makes sense to borrow in
Japan at such low rates and invest elsewhere for higher returns. Obviously,
some of this money -- estimated by experts to be approximately $200 billion --
has undoubtedly found its way into the asset markets of other countries.
Most of it has been parked in alternative investments such as commodities,
stocks, real estates and other markets across continents, leveraged many times
over. Needless to reiterate, the excessive dollar supply too has fuelled the
property and commodity boom across markets and continents.
The twin causes -- excessive liquidity due to undervaluation of various currencies
(technical) and fear of the US dollar collapse leading to increased purchase of
various commodities to hedge against a fall in US dollar (psychological) -- needs
to be tackled upfront if inflation has to be confronted globally.
Higher international farm prices impact Indian farm prices
What actually compounds the problem for India is the fact that lower harvest
worldwide, specifically in Australia and Brazil, and the overall strength of demand
vis-a-vis supply and low stock positions world over, global wheat prices have
continued to rise.
Wheat demand is expected to rise, while world production is expected to decline
further in the coming months, as a result of which global stocks, already at
historically low levels, may fall further by 20 per cent. These global trends have
put upward pressure on domestic prices of wheat and are expected to continue
to do so during the course of this year.
18
No wonder, despite the government lowering the import tariffs on wheat to zero,
there has been no significant quantity of wheat imports as the international prices
of wheat are higher than the domestic prices.
Growth and forex flows
Another cause for the increase in the prices of these commodities has been due
to the fact that both India and China have been recording excellent growth in
recent years. It has to be noted that China and India have a combined population
of 2.5 billion people.
Given this size of population even a modest $100 increase in the per capita
income of these two countries would translate into approximately $250 billion in
additional demand for commodities. This has put an extraordinary highly demand
on various commodities. Surely growth will come at a cost.
The excessive global liquidity as explained above has facilitated buoyant growth
of money and credit in 2005-06 and 2006-07. For instance, the net accretion to
the foreign exchange reserves aggregates to in excess of $50 billion (about Rs
225,000 crore) in 2006-07. Crucially, this incremental flow of foreign exchange
into the country has resulted in increased credit flow by our banks. Naturally this
is another fuel for growth and crucially, inflation.
This Reserve Bank of India's strategy of dealing with excessive liquidity through
the Market Stabilization Scheme (MSS) has its own limitations. Similarly, the
increase in repo rates (ostensibly to make credit overextension costly) and
increase in CRR rates (to restrict excessive money supply) are policy
interventions with serious limitations in the Indian context with such huge forex
inflows.
19
How about the revaluation of the Indian Rupee?
The current bout of inflation is caused by a multiplicity of factors, mostly global
and is structural. Monetary as well as trade policy responses, as has been
attempted till date, would be inadequate to deal with the extant issue effectively.
Crucially, a stock market boom, a real estate boom and a benign inflation in the
foodgrains market is an economic impossibility.
It has to be noted that the Indian market is structurally suited for leveraging
shortages rather effectively. Added to this is the information asymmetry among
various class of consumers as well as between consumers, on the one hand, and
producers and consumers, on the other.
Further, the sustained flow of foreign money, thanks to the excessive global
liquidity in the world, has fuelled the rise of the stock markets and real estate
prices in India to unprecedented levels.
This boom has naturally led to corresponding booms in various related markets
as much as the increased credit flow has in a way resulted in overall inflation.
Measures taken by RBI
The Indian Central Bank has taken measures designed to curb inflation in one of
the worlds fastest growing economies.
The central bank has increased the cash reserve ration, attempting to reduce the
overall amount of money loaned from banks.
The monetary measures to tackle inflation are meant to increase the cost of
funds for banks, make loans dearer and temper the demand for credit. But for
inflation targeting to be uniformly effective, due emphasis has to be placed on the
supply-side constraints as well, even while making banking inclusive.
20
The increasing cost of funds and rising interest rates are of little consequence in
the economic life of a financially excluded population. The impact will be critical
on smaller segments and will take awhile to yield results for the economy.

What do you understand by the term `Removal of Quantitative Restrictions and what are their implications?

2011-05-18T04:19:00.000-07:00

What do you understand by the term `Removal of Quantitative
Restrictions and what are their implications?

Answer. Quantitative restrictions or QRs are specific limits imposed by countries
on the quantity or value of goods that can be imported or exported. QRs can be
in the form of a quota, a monopoly or any other quantitative means. In other
words, QRs refer to non-tariff measures, which are taken to regulate or prohibit
international trade. According to the WTO notification procedures for QRs, these
measures specifically include: licensing requirements (i.e., both automatic
licensing and non-automatic licensing); global quotas allocated by countries;
bilateral quotas, quantitative restrictions made effective through state trading
corporations; minimum prices triggering a quantitative restriction and "voluntary"
export restraints.
Removal of Quantitative Restrictions
GATT/WTO does not allow imposition of quantitative restrictions (QRs).
However, India (and few other countries) had maintained quantitative restrictions
on its imports under provisions of article XVIII:B of GATT system/WTO. This
article allows member countries whose economies are in the earlier stage of
development to 'apply quantitative restriction for balance of payment position'.
Before the launch of WTO, dispute settlement mechanism of multilateral trading
system was loose. India had been maintaining QR regime, despite the fact that
Article XVIII:B, relating to Balance of Payment (BOP), mentions that a member
country has to publicly announce the time-schedule for elimination of QRs. After
the formation of WTO, the U.S. filed a dispute against India that the continued
maintenance of QRs on India's import was inconsistent with her obligations under
the WTO agreement. A number of other developed countries, Australia, Canada,
Japan, the EU, New Zealand, and Switzerland, later joined in this dispute against
India.
9
In November 1997, a panel by the WTO was constituted to examine this U.S.
allegation against India's quantitative restriction on imports for agriculture, textile
and industrial products. The panel report was not favourable to India; but it
challenged the finding of panel, leading to formation of an appellate body. In
August 1999, the report of the appellate body1 of WTO ruled that 'India maintains
quantitative restriction on agricultural, textile and industrial products falling in
2714 tariff lines' and recommended that 'India bring its balance-of-payments
restrictions, which the panel found to be inconsistent with articles of the
GATT into confirmatory with its obligations under these agreements'. After this
report, India had no option but to reach a mutual agreement with the U.S., or face
arbitration. India signed an agreement with the U.S. on December 28, 1999, for
phasing out of quantitative restriction (QRs) on all imported items by March 2001,
i.e. within 15 months.
India started its economic reforms in early 1990s. In the pre-reform era, India's
import policy was highly protective with different categories of importers, different
types of import licenses and alternate ways of importing. A number of concrete
steps towards liberalization had been taken during the 1990s within the
framework of economic reforms.
After the removal of QRs, as per India-U.S. agreement under provisions of the
WTO, there was panic that India's import of some sensitive products may
significantly increase. There were many reasons for this. First, Indian industry
was subject to a high level of protection for a long time. Second, India had not
bothered to bound its tariffs appropriately in the Uruguay round because it was
possible to put restriction on imports through QR. Thirdly, there can be adverse
impact of increased import on welfare indicators like employment, out put, etc.
Removal of QRs is not an end-game
 With the QRs removed, it is not an end-game. A country has various WTO
compatible ways for monitoring imports to protect its national economic
10
interests. All countries, even the Quads (i.e. USA, EU, Canada and Japan) do
it; India also does it and will continue to do so, in a WTO-compatible manner.
 A section of Indian industry has been crying wolf because they are afraid of
increasing competitive imports due to the removal of the QRs, particularly
relating to these 1,429 items.
 But the removal of QRs itself is not likely to increase imports instantaneously.
It is the removal of QRs, plus the prospect of further reduction of tariffs in the
coming three years, which may eventually accelerate import competition.
During this transition period, both the Indian economy and the Indian
corporate sector will have to put their house in order and prepare to become
globally competitive. In this broad sense, there is a serious concern, not just
because of the removal of QRs per se.
There are several ways the government can monitor imports even when QRs are
gone:
 By keeping tariffs high during the transition period
 By imposing anti-dumping duties
 By amending the Foreign Trade Act, 1992
Economic Implications
(i) Short Term Results of Import Restrictions
Because quantitative import restrictions, including de facto restrictions and
voluntary export restraints by exporting countries, protect particular domestic
products from competition with foreign products having a high level of
competitiveness, they may be beneficial in the short-term in protecting and
increasing profits of the domestic industry producing competing products and
maintaining stable employment in that industry. In order to establish sales
channels, foreign companies frequently respond to such restrictions by
increasing their direct investment in import-restricting countries and by
commencing production, which might create jobs and encourage technology
11
transfer. Quantitative restrictions, however, distort the distribution of economic
benefits between importing and exporting countries in favour of the producers in
the importing country. The restrictions also harm consumers and downstream
industries in the importing countries, which have to bear the economic cost of
losing access to competitive imported products.
(ii) Mid and Long Term Results of Import Restrictions
Quantitative restraints impose mid- and long-term costs that clearly outweigh the
benefits of protecting domestic industries. For example, quantitative import
restrictions may impede efforts of domestic producers to improve productivity or
streamline operations in order to survive a tough business environment,
depending on the operation of the quantitative restriction. Unless it is clarified
that the restrictions are temporary, and appropriate measures are taken to
ensure that protected producers acquire sufficient competitiveness, quantitative
restrictions could harm the mid- or long- term development of the affected
industry and the economic benefits of the country employing such restrictions.
Without mid-term plans to eliminate restrictive measures, domestic producers will
be unlikely to develop the ability to earn foreign currency through exports, which
is the true indication of competitive strength.
The quantitative restrictions leave, at best, an import-substitute effect, and
consumers and downstream industries in the importing country also suffer from
higher prices and other disadvantages that are the immediate results of import
restrictions. Therefore, such measures may cause a negative overall effect on
the importing nation's economy in the mid- or long term.
Impact on Exports and Imports
The Quantitative Restrictions (QR) regime inflicted very high costs on most
Indian exports. In comparison, India's competitors used to obtain basic inputs at
world prices and could import any input without delay. Products that required a
quick export response and complex backward linkages were heavily penalized by
12
the trade regime. Unfortunately, it is precisely these products that had high value
added large export markets and high unit value. Thus, India's exports tended to
be simpler and with very low unit value. Furthermore, Indian firms tend to hold
much larger inventories due to uncertainties in the availability of imported inputs
and local supplies. This raised their costs of production significantly above the
competitors that followed just-in-time inventory policies. Keeping this in mind, the
new policy packages of the post-reform period aimed to reform the tax and the
QR system.
The statistics show that India's trade has increased significantly during the postreform
period. To be precise, the share of India's export in world mercantile trade
has increased from 0.52 per cent in 1990, to 0.8 percent in 2002 (Table 1).
During the reform period India's exports have increased from US$ 18.1 billion in
1990-91 to US$ 52.8 billion in 2002-03, while India's imports have increased from
US$ 24.1 billion in 1990-91 to US$ 61.6 billion in 2002-03. The higher growth in
India's exports over imports has led to a decline of India's trade deficit. The
composition of India's export/import by commodities and destination markets also
changed significantly

What according to you are the areas of the economy where government intervention is considered desirable?

2011-05-18T04:17:00.001-07:00

What according to you are the areas of the economy where government
intervention is considered desirable?

Answer. GOVERNMENT INTERVENTION: Actions on the part of government
that affect economic activity, resource allocation, and especially the voluntary
decisions made through normal market exchanges. Government, by its very
nature, is designed to intervene in voluntary market activity. Some of the more
common types of government intervention includes taxes, price controls,
assorted regulations, and control over government spending. The general
justification for government intervention is that voluntary decisions by consumers
and businesses fail to achieve efficiency or other goals deemed important by
society.
One of the major area in which the government intervenes is in the agricultural
sector of the economy. The government has three ways it can intervene and help
its producers. These ways include price policies, direct payments, and input
policies. Price policies have the largest effect on producers. Tariffs, quotas, and
taxes are just a few examples of price policies. While these policies bring
revenue into the government, in the end they hurt consumers. Each of these
policies raise the prices of both imported and native goods. They are designed to
help stabilize prices and give the native producers a chance to compete with
foreign goods. Under the doctrine of laissez-faire, the government would not
interfere with prices and the native producers would be forced to lower their
prices, giving the nation’s citizens a better deal in the market.
The government not only intervenes in the agricultural sector of the economy, it
also intervenes in the business sector. The ways it can do this are innumerable,
but some of them are strict safety and health regulations, tariffs, and subsidies
and government loans. The use of tariffs is another way that government
intervenes in the business sector. Subsidies and government loans are another
method of intervention for the government.
6
Areas where Government Intervention is Desirable
Government intervention is not necessarily bad, although it has been generally
accepted that the best government policy for the growth of a nation's wealth is
that policy which governs least. There are some essential services that simply
will not be provided by the market without the support of government: either the
services are financially not viable, or the charges for the services are too high for
the less well-off to bear. There are examples of government intervention
everywhere. The physical infrastructure - roads, tunnels and bridges - to allow
the safe movement of people and products, and the financial infrastructure -
payment, settlement and clearing systems - to enable the safe mobility of money
are essential to economic wellbeing. The upholding of law and order, taking care
of those members of the community who are less able to take care of
themselves, education and housing all involve government intervention to varying
degrees. Whether or not government intervention is desirable in a particular case
is always debatable. It is tempting, particularly when bureaucrats do not wish to
take on responsibilities, to argue against intervention. It is equally tempting, when
particular sectors of the economy are experiencing difficulties, to argue for
government intervention, even if that means committing taxpayers' money to
sustaining activities that are destined to fail. Politics and vested interests often
come in, and emotions may run high. It is for those responsible in government to
weigh the pros and cons of government intervention and those of leaving things
alone.
Government undertakes market study to understand the competition and hence
the assumption regarding nature of market, etc. All the types of goods are not
taken into account in analysis process. Government makes plans to ensure that
there exists a perfect competition among buyers and sellers, and the sellers are
guided by small quantity of product. Both are guided by economic consideration.
Thus government intervention is needed for optimal resource allocation, high
prices, excessive advertising.
7
Government intervention is also required to make sure that the industrial units
don’t bother each other and there lies harmony. This is implemented through a
set of protocols that must be followed. For example, Noise control.
Government has set up rules for quality products. For this every production unit
has to pass the quality test for its goods before being able to be marketed. ISO
standards etc, are outcomes of such government interventions.
Free market economies require the government monitoring through a policy of
monetary and fiscal combination. This ensures stability in employment, national
income, price, etc.
Inequalities of profit distribution has led to gap between the income groups.
Moreover there is uneven distribution of income in various groups. Government
intervention is necessary here.
Government intervention is also desirable in education. More subsidized schools
and institutes should be opened for backward class people.
Governments intervention is desirable in nuclear energy matters. The reasons for
government intervention in nuclear energy have evolved as governments
confront their limits. Privatization and competition mean that many decisions are
no longer directly made by governments. However, there will always be strategic
reasons for government intervention – national security; emergencies, disasters
and health crises; national projects of such importance or urgency that only
government can do the job.

What are the different view points about the role of the government in an economy?

2011-05-18T04:15:00.000-07:00

What are the different view points about the role of the government
in an economy?

Answer. While consumers and producers make most decisions that mold the
economy, government activities have a powerful effect on the economy. The
government plays important role in all economies of the world. Normally the
government plays the following roles.
Stabilization and Growth
Perhaps most importantly, the government guides the overall pace of economic
activity, attempting to maintain steady growth, high levels of employment, and
price stability. By adjusting spending and tax rates (fiscal policy) or managing the
money supply and controlling the use of credit (monetary policy), it can slow
down or speed up the economy's rate of growth -- in the process, affecting the
level of prices and employment.
Regulation and Control
Private enterprises may indulge in various unfair practices like, misleading
advertisements, price discrimination, formation of cartels, and so on, in the
absence of perfect competition. The government regulates private enterprise in
numerous ways. Regulation falls into two general categories. Economic
regulation seeks, either directly or indirectly, to control prices. Traditionally, the
government has sought to prevent monopolies from raising prices beyond the
level that would ensure them reasonable profits. At times, the government has
extended economic control to other kinds of industries as well.
2
Government also exercises control over private companies to achieve social
goals, such as protecting the public's health and safety or maintaining a clean
and healthy environment. The Food and Drug Administration bans harmful drugs,
for example; the Safety and Health Administration protects workers from hazards
they may encounter in their jobs; and the Environmental Protection Agency
seeks to control water and air pollution.
Direct Services and Direct Assistance
Direct Services. Each level of government provides many direct services. The
federal government, for example, is responsible for national defense, backs
research that often leads to the development of new products, conducts space
exploration, and runs numerous programs designed to help workers develop
workplace skills and find jobs. Government spending has a significant effect on
local and regional economies -- and even on the overall pace of economic
activity.
State governments, meanwhile, are responsible for the construction and
maintenance of most highways. State, county, or city governments play the
leading role in financing and operating public schools. Local governments are
primarily responsible for police and fire protection. Government spending in each
of these areas can also affect local and regional economies, although federal
decisions generally have the greatest economic impact.
Direct Assistance
Government also provides many kinds of help to businesses and individuals. It
offers low-interest loans and technical assistance to small businesses, and it
provides loans to help students attend college. Government-sponsored
enterprises buy home mortgages from lenders and turn them into securities that
can be bought and sold by investors, thereby encouraging home lending.
Government also actively promotes exports and seeks to prevent foreign
countries from maintaining trade barriers that restrict imports.
3
Government supports individuals who cannot adequately care for themselves.
The Medicare program pays for many of the medical costs of the elderly. The
Medicaid program finances medical care for low-income families. In many states,
government maintains institutions for the mentally ill or people with severe
disabilities. The government provides Food Stamps to help poor families obtain
food, and the federal and state governments jointly provide welfare grants to
support low-income parents with children.
Entrepreneurship
Government in most countries is an entrepreneur also. There are many areas
where profits are low, or gestation period of initial investment is long (as in
infrastructure projects) and returns come after a long time, or it is difficult to
charge to charge an exclusive price from different buyers and thus private sector
is not willing to come forward to invest in these areas. Therefore, government
undertakes investments in these areas.
In India at the time of independence private sector neither had funds nor enough
skilled manpower to invest in these areas and so these became the responsibility
of the government. Besides, there are areas of strategic importance, which
cannot be left to the private sector like, defense, and so the government may be
the sole producer of defense goods.
Promotion
The government promotes business and economic activity for employment
generation. The government is taking the right steps to provide an atmosphere
conducive to innovation and entrepreneurial ventures. Even in India's recent
history, the government has offered incentives such as tax breaks, subsidies,
and small venture capital funds to assist with entrepreneurship. In addition, the
Indian government established the Technology Institutes that are now some of
the most prestigious in the world.
4
Planning
In modern times with increasing global competition and increasing political
pressures, even in private enterprise economies all decisions pertaining to, what
to produce, how to produce, for whom to produce, cannot be left entirely to
private sector, more so for developing economies.
The government ahs to plan the total economic activity in terms of production in
various sector, resource allocation, generation of incomes, borrowings and debt
management, imports and exports, and so on.
In India planning is done by way of five-year plans.

Economic Reform and Employment

2011-05-18T03:53:00.000-07:00

Economic Reform and Employment

The new economic reforms have been emphasing new power projects both in the public and the private sectors. Besides causing environmental problems, these projects have been displacing people from their traditional livelihood systems. By encouraging multinationals to enter food-processing industries, the reform process by the sheer competition from these business giants has led to labour displacement. The entry of big business in agriculture has also led to displacement of labour displacement. The entry of big business in agriculture has also led to displacement of labour engaged in the marketing of agricultural produce. The case of fisherman is glaring and has resulted in massive protests from fishermen who were faced with a threat to unemployment as a consequence of competition from mechanized boats. Consequently, there is a good deal of evidence to corroborate the view that the process of economic reform has generated far greater backwash effects in terms of labour displacement, than in generating spread effects in terms of enlarging new employment opportunities. The net effect of these trends is the deterioration in the quality of employment opportunities. The net effect of these trends is the deterioration in the quality of employment and this is witnessed in the growing increase in the number of casual labourers – the most unprotected form of Indian labour. Casualisation of a labour is witnessed even in industry as a result of the growing phenomena of lockouts and closures. G. Parthasarthy reviewing the impact of structural adjustment on employment concludes: “Given this short period experience, what the medium-term has in store for the Indian poor is anybody’s guess. It is essentially dependent upon the rate and composition of growth and its effects on employment. With past experience as a guide, we may achieve a high growth rate, the benefits of which may flow to the affluent and middle class. The poor may not gain because jobs are not found to grow with incomes. This type of scenario could call for effective safety nets for unorganized sectors in the form of right to work at a minimum subsidized wage and guarantee against unemployment through unemployment insurance.” (Parthasarthy G, Social Security and Structural Adjustment, the Indian Journal of Labour Economics, Vol. 39, No. 1, Jan-March 1996).

TRADE POLICY REFORMS

2011-05-18T03:52:00.000-07:00

TRADE POLICY REFORMS

It is now widely acknowledged that major reforms in trade policy and procedures since the EXIM Policy (1992-97) announced in 1992, have stepped up the transitional process of Indian economy towards globalization by encouraging exports and permitting imports of essential inputs as well as capital goods.
A major objective of the EXIM Policy (1992-97) and the subsequent changes introduced during the last five years was to phase out quantitative restrictions in the form of licensing and other discretionary controls. Another significant objective was to continuously scale down the tariff barriers. To a large extent, these objectives have bee ' met:
In 1991, imports were regulated by means of a positive list of freely importable items; Since 1992, imports are regulated through a limited negative list, which has been consistently pruned year by year.
Quantitative restriedons on imports of most intermediate inputs and capital goods have been eliminated.
In July 1991, out of 5021 Harmonised System (HS) tariff lines (6 digits), 4000 lines were subject to import licensing restrictions. As of December 1995, more
A large numbeJ; of items covering 1487 tariff lines whose import is otherwise restricted, are now allowed to be imported under freely tradable Special Imports Licences.
Customs duty rates have been substantially cut down across the board, from a peak of 300 percent in 1990 to a peak of 40 percent in 1997.
All these clearly show that India is consistently marching towards globalisation by opening up its economy, by removing the importers as well as exporters from the clutches of unwanted controls and regulations and also by bringing down the tariff rates to that level comparable to international standards.

EXTERNAL DEBT AND DEBT SERVICING BURDEN

2011-05-18T03:51:00.001-07:00

EXTERNAL DEBT AND DEBT SERVICING BURDEN

The level of external debt and problems of debt servicing burden have become a widely debated issue in India. Till the early 80s, external debt was not a major problem since• India had not resorted to much of market and market related external borrowings. But the trend of borrowing externally gained momentum in the late 80s. As a result, India's overall debt and debt-servicing burden increased over the 80s as well as in the growing magnitude of external debt has attracted increasing attention of the Government in the 90s. The Government of India and the Reserve Bank of India have introduced a number of measures to contain the growth of expensive external debt. These include:
• moderation in the interest rates on non-resident deposits,
• discontinuation of some high cost forms of non-resident deposits where the Government bore the exchange risk limits 011 external commercial borrowings and prioritization of such borrowings in favor of infrastructure, term lending institutions and exporters, a more open and pragmatic policy for non debt creating foreign direct investments. These measures' are being combined the an overall trade policy which gives top Priority to promoting exports.
In fact, India should go for a two pronged strategy to reduce its debt-service ratio:
(i) Encourage foreign direct investment inf1~w through further liberalization of foreign investment laws. Bureaucratic hurdles must be removed with an iron hand, to realize larger-inflow of foreign direct investment.
(ii) A big push to exports to grow at the rate of more than 20 percent annually.
Accelerating the development of infrastructure itself will give a big boost to export growth. Achieving current account balance, if not surplus, should be the medium term objective.
This strategy will reduce the need for external borrowings and bring down the debt servicing burden gradually.

Critically analyse the impact of regulatory framework on growth and efficiency of industry.

2011-05-18T03:39:00.000-07:00

Critically analyse the impact of regulatory framework on growth and efficiency of industry.

As a part of this assignment I met with few small scale entrepreneurs and enquired extensively about their experiences with the government agencies and the existing scheme/ policy framework for SSI sector. Except some of the problems associated with procedural delay and the bureaucratic style of the government working, most of the entrepreneurs appreciated the policies and schemes of the government in this sector. Presented below is the outcome of my discussion with these entrepreneurs which is self explanatory and exhibits some of the answers for the posed question.

Reservation of products for exclusive manufacture in the SSI Sector has been one of the important policy measures for promoting this sector. This policy was initiated in 1967 with 47 items which was enlarged to 807 items in 1978. At present 812 items are reserved for manufacture in this sector. This Policy got a legal backing when the I(D&R) Act was amended in March, 1984 empowering the Government to reserve items under this Act. The overwhelming consideration for reservation of an item is its suitability and feasibility for being made in the small scale sector without compromising quality aspects.
The small units manufacturing items served for manufacture in small scale sector do not require any prior licence. This is a major relaxation where no licensing or restriction in production in small scale sector exists. The locational restrictions have also been minimised. Similarly, Labour Act has been simplified in 1988 to assist the small establishments.

Single Window Scheme

The Scheme envisages sanction and disbursement of working capital and term loan together from a single agency. It is applicable to projects with cost upto Rs. 50 lakhs. The Scheme is operated both by banks and financial institutions. State Financial Corporations under Single Window Scheme provide working capital loan along with the term loan to new tiny and small scale sector units so as to overcome the initial difficulties and delays faced by them to start production expeditiously.

Industrial Estates

Industrial Estate Programme in India is perhaps the biggest undertaken by any developing country. The programme started in 1952 when the first such estate was established at Hadapsar in Maharashtra. The main objective of the programme is to encourage and support the creation, expansion and modernisation of SSI through provision of factory accommodation, common service facilities and assistance and servicing throughout, all stages of establishment and operation and developing sub-contracting relationships within the small scale and large scale industries and specialised manufacturing activities. Subsequently, the programme has also assumed the role of regional development through provision of built-in factory accommodation with the requisite facilities and services in semi-urban, rural and backward areas.

National Awards for Outstanding SSI Entrepreneurs

To bolster and motivate small entrepreneurs for setting up SSI and modernisation, quality upgradation, market expansion, export development, innovation and technological improvements, an Incentive-cum-Recognition Scheme of National Awards for outstanding SSI entrepreneurs has been introduced since 1983. The Awards consist of a citation, trophy and cash prize amount of Rs. 25,000/-, Rs.20,000/- and Rs. 15,000/- for I, II and III positions respectively and are given on national basis by SIDO. Special Awards to SC/ST and women entrepreneurs have been introduced since 1993-94 in this category. Apart from the National-level Awards, State-wise Special Recognition Awards are also given in this category to the entrepreneurs in each State.

National Awards for Quality Products in Small Scale Sector

Since 1986 a Scheme for giving National Awards to small scale units producing quality products in 15 selected group of industries of consumer interests has been introduced. The selection of 15 industries vary from year to year. This Award also consists of a citation, a trophy and lump sum amount of Rs. 25,000/- as prize money for each of the 15 selected products. The purpose of this Award is to bring awareness amongst entrepreneurs for manufacturing quality products both of National and International standards

Excise Exemption Scheme Tax Holiday

Excise duty concessions have been given to the small scale industries in what is called the General Excise Duty Exemption Scheme for small Industries. This is to enable the small scale industries to compete on favourable terms with their counterparts in the large and medium sector. As of now, the Excise Duty Exemption Scheme applies to the entire small scale industries spectrum, barring a few specified items.

Venture Capital

Venture capital is a relatively new phenomenon. Technology based small scale units and first generation entrepreneurs keen to enter new technology areas are the ones who can be supported by venture capital. Small Industries Development Bank of India has recently introduced a venture capital scheme to extend venture capital support to SSI units. This concept needs to be widely practiced in both the public and private sector. Venture capital funds can give fund support to new units in a variety of ways. Setting up of limited partnership with the entrepreneur is one such.

Factoring Services

Factoring services make available the much needed working capital to Small Scale Enterprises and is likely to induce customers to make timely payments for fear of adverse "customer-image" in the market. Factoring services are being increasingly set up, which is a good sign. Some private factoring companies have also come up.

Technology Development & Modernisation Fund

SIDBI has set up Technology Development & Modernisation Fund (TDMF) scheme for direct assistance of small sale industries to encourage existing industrial units in the sector, to modernise their production facilities and adopt improved and updated technology so as to strengthen their export capabilities. Assistance under the scheme is available for meeting the expenditure on purchase of capital equipment acquisition of technical know-how, upgradation of process technology and products with thrust on quality improvement, improvement in packaging and cost of TQM and acquisition of ISO-9000 series certification.

National Equity Fund

National Equity Fund (NEF) under Small Industries Development Bank of India (SIDBI) provides equity type assistance to SSI units, tiny units at one per cent service charges. The scope of this scheme was widened in 1995-96 to cover all areas excepting Metropolitan areas, raising the limit of loan from Rs. 1.5 lakhs to Rs. 2.5 lakhs and covering both existing as well as new units.

Participation in International Fairs/Exhibitions

With a view to ensure that exporters from small scale sector exhibit their products in the International Exhibitions, required assistance & support is provided. Expenditure on account of space rent, handling and clearing charges, insurance and shipment charges etc. are met by the office of the Development Commissioner (Small Scale Industries) under one of the plan schemes. Enquiries generated during such exhibitions abroad are disseminated to all SSI units through a net work of field offices of this organisation. This strategy has been found to be successful for exporters from small scale sector in identifying new foreign buyers/markets.

Packaging for Exports

Role of packaging for exports has gained much significance in view of trends in the world markets. The need for better and scientific packaging for exports from small sector was recognised long back. With a view to acquaint SSI Exporters of the latest Packaging standards, techniques etc. training programmes on packaging for exports are organised in various parts of the country. These programmes are organised in association with Indian Institute of Packaging which has requisite expertise on the subject.

Technical & Managerial Consultancy Services

Technical & Managerial Consultancy Services to the SSI manufacturers/exporters is provided through a network of field offices of this office so as to ensure higher level of production and generation of higher exports.

Marketing Development Assistance

Marketing Development Scheme (MDA) is being operated by Ministry of Commerce under which MDA is given to exporters through FIEO and Export Promotion Councils/ Commodity Boards to plan their marketing strategy for export growth.

Awards to exporters

Ministry of Commerce gives awards to exporters for their outstanding export performance, under the scheme of National Export Award for export performance. Earlier, a total of 17 Awards including 5 Awards for Small Scale Sector in the form of Trophy were given every year. However, from the year 1997-98 and onwards, the number of awards have been increased to 20, out of which the number of Awards (Trophy) earmarked for small scale sector have been increased from 5 to 8. Upto 8 awards will be given to the exporters in the small scale and cottage sector subject to achievement of normative level of performance by the concerned SSIs and cottage sector units. Out of 8 Awards., one will be given for Khadi & Village Industry.

Industrial sickness is essentially a managerial failure. Discuss the statement referring to some managerial decisions.

2011-05-18T03:37:00.001-07:00

Industrial sickness is essentially a managerial failure. Discuss the statement referring to some managerial decisions.

We shall now focus our attention on the factors in the non –SSI sector first, and then on the SSI sector.
Non-SSI Sector: The factors responsible for industrial sickness can be divided into two categories:
Exogenous factors and Endogenous factors.
Some of the exogenous factors relate to such factors as government policies pertaining to
Production, prices and distribution. Change in the investment pattern following new
priorities in the plans I yet another factor. Further, shortage of power, transport, raw
materials, deteriorating industrial relations as some other factors to be noted in this
connection. Such factors are likely to affect all units in an industry. These factors may
cause sickness of the industry. If state policy is the cause of sickness, then corrective
action should be taken at the government policy level. An illuminating example of
government policy causing industrial sickness is the controlled cloth scheme. Another is the administered coal prices before nationalisation of coal mines.
The most important endogenous factor causing industrial sickness has been weak management or mismanagement. In a large number of units, sickness was caused by bad management. In a highly protective environment (prior to 1991’s new economic policy), many persons with no managerial abilities entered the field and set up industrial enterprises. Some of them indulged in malpractices. Some took a short-sighted view of development and concentrated on making quick money. Many managers found it easy to meet their cash loses through borrowed capital, rather than through efficiency improvements. In a significant number of cases, sickness has resulted from managerial failure to adapt the production pattern and methods to the changing market conditions. Not much was done to replace the obsolete machinery or to upgrade technology. In the absence of favorable atmosphere (incentives, competition etc.), quite a number of managers preferred their units to go sick. Some did so to seek financial help from the government. According to Mr. Prem kumar Jha (“To Nationalise or not to Nationalise”, The Illustrated Weekly of India, February 18,1979), “In fact as 4the take-over of sick units and textile mills has shown in every case what the Government has inherited is a load of worn-out machinery, a mountain of debts and a distraught workforce. Nationalisation in such circumstances has become a means of indemnifying the entrepreneur against the consequences of his misdeeds instead of punishing him – first he milks an enterprise dry, then hands it over to the government for salvage.”
George Fernandes makes a similar assessment when he says “I do not want the Government to be a scavanger for the private sector. Look at the National Textile Corporation. The NTC today has 111 textile mills. They were taken over after the private sector sucked them dry of all their money and abandoned them and 1,50,000 workers employed in them to their fate. In the Buter, Gresham and Gravan and other Engineering units takes over the Government after similar mismanagement.
Managerial faults and failures thus contributed a lot towards industrial sickness.
Other endogenous factors may be summarily stated as follows:
- Diversion of funds
- Wrong dividend policy
- Excessive overheads
- Lack o sufficient provision for depreciation
- Overestimation of demand, and
- Bad planning.

Briefly explain the growth of private sector in India.

2011-05-18T03:36:00.000-07:00

Briefly explain the growth of private sector in India. Also mention the major differences between private and public sectors.

A major segment of the organized private sector is the corporate sector. Let us now look at the private corporate sector: As the organized private sector is generally equated with the private corporate sector in a narrow sense, it is convenient and useful to study the growth of private corporate sector and compare it with the growth of public sector. Table brings out clearly the growth of the corporate sector in India over the period 1957 to 1991. The public sector companies in the early 1990’s occupied a major position in terms of the amount of paid up capital. Even though the number of government companies the rate of growth of public sector companies has been faster than those of the private sector companies. Between 1957 and 1991 the number of government companies increased by nearly 16 times from 74 to 1779. During the same period, the number of non-government companies increased by about 7.5 times only, from 29283 to 219542. As can be seen from table the same is the trend in respect of paid-up capital.
The largest industrial activity among the private sector corporate units in terms of paid-up capital was processing and manufacture of foodstuffs, other processing and manufacture, commerce, agriculture and allied industries, construction, etc.
Selected Growth Rates
Table gives selected growth rates in respect of organized private and public sectors. Nominal sales (value of sales at current prices) in the case of corporate private sector recorded a growth rate of 17.93 per cent during the period 1985 – 1995, while the corresponding growth rate for public sector was 13.18 per cent. Gross fixed assets in the case of private corporate sector recorded an annual growth rate for public sector being 15.1 per cent. Profits before depreciation interest and tax (PBDIT) in the case of private sector grew at an annual average rate of 22.0 per 16.2 per cent. Thus during the recent decade all the growth rates mentioned above are higher in the case of private sector as compared with the public sector.

The public sector is relation to the private sector. Any activity owned, controlled, and managed by the government (Central, State and local) comes under public sector. After the attainment of independence and the advent of planning, there has been a rapid expansion of the scope of the public sector.

There are four types of public sector enterprises in India:

1. Those which are managing by the department (departmental enterprises such as the Indian Railways)
2. Those which are managing by the independent boards.
3. Those which are running as public corporations (which comes into the act of Parliament)
4. Those, which are organising as by the companies (registered under the Companies Act.)

The objectives of the public sector, can be briefly described as:

1. to accelerate the economic growth and industrialisation of the country by creating the necessary infrastructure for development;
2. to promoting the fair distribution of income and wealth, interpersonal as well as inter-regional;
3. to promoting the balanced regional development;
4. to promote the growth of strategic defence-oriented industries;
5. to assist the development of small and ancillary industries;
6. to create employment opportunities;
7. to getted socialist pattern of society;
8. to ignore and circumvent the limitations and abuses of the private sector; and
9. to generate forces of economic and technological self-reliance.

What are the critical elements of social environment of business?

2011-05-18T03:35:00.000-07:00

What are the critical elements of social environment of business? Explain each with examples.

Business must have a social purpose; business concerns must discharge social responsibility and social obligations and have social commitment. Otherwise, business cannot enjoy social sanction. This makes it necessary for us to understand the social environment of business. You may question: what factors constitute this environment? There are a host of factors like social values, culture, beliefs, tradition and convention, social attitudes, social institutions, class structure, social group pressure and dynamics, and what have you. The nature of social objectives and priorities, along with the set of social constraints, give form and content to several social movements, and their underlying ethos. Business ethics are very much influenced by social movements, social systems to be the culmination of forces operating from different platforms such as history, culture, polity, ethics and morality, values and institutions, geography and ecology, and the like. Society itself has to balance the achievements and aspirations of various individuals, groups, communities and institutions. No business can survive and grow without social harmony. Different countries, over different time periods, attain social harmony and order of different forms, through different ways and means. Thus the social environment differs over space, time and methods.

You have observed how business and society interact with each other. Business exists in the context of a society. In a (traditional) pre-industrial society, business transactions are negligible or nil; in that society production is mainly done for self-cnsumption and the need for exchane is minimum. In a modern industrial society, business grows by leaps and bounds: production is meant for the market; the subsistence system is replaced by the commercialized system and, therefore, exchange transactions multiply. In a post industrial (recent) society business gets specialized and professionalised. With growing monetisation, both primary and secondary, the complexity of business grows manifold. Business grows in variety. Business becomes more and more service-oriented from being production-oriented. Thus as transition takes place in a society through various stages, business changes in terms of size, structure, strategy and system. On the other hand, as business changes in terms of its form and organization, society also undergoes changes. Social values, social institutions, social order, social contract, social conflict, social problems – everything changes along with a change in the business culture. In other words, business determines society as much as society determines business. Therefore, business must be socially responsible.

Over two decades ago, Peter Druker stated in the context of American business, “If there is one development during the last ten years that stands out above all others, it is the eagerness with which business has embraced social responsibilities”. This is true of Indian or any other national business today. It is no longer fashionable for business corporations the world over to take a gleeful pride in making money. What is more fashionable is to show that it is a great innovator, more specifically a great public benefactor and that it exists to serve the public.

From the standpoint of business, we have already identified each element of this public. They are: owners/shareholders, managers, workers, suppliers, distributors, consumers, Government officials and similar social groups. All these have a stake in business and can be known as stakeholders.

Each and every social group has a very definite expectation from business. The shareholders, promoters and owners expect a fair return n their investment; unless lucrative dividends are paid, they do not want to supply venture capital for business.

The workers expect fair wages and bonus, otherwise they feel exploited when they produce output more in value than the input. The salaried managers likewise expect a remunerative packet of pay and perks, otherwise they do not find any incentive to work hard and long for their business concern. The consumers expect a quality product and service at fair prices, otherwise they feel cheated. The suppliers expect a prompt settlement of their bills. The distributors expect after sales service as well as fair commission on sales, otherwise they do not find incentives to promote sales. The Government expects business to pay taxes and to be accountable for subsidies. And, importantly, there are others who are not directly concerned with business, yet they have a lot of expectations from it. These could be ordinary citizens forming themselves into clubs or associations of some type, expecting charitable donations for promoting education and culture; the ecologists who want business to minimize, if not avoid totally, pollution and degradation of the physical environment; the social workers who want business to adopt backward villages and undertake all round development of housing, health, and sanitation. There is no end to the expectations of these various social groups. The more you come up to their expectations, the more they expect from you and your business.

Business has to balance these manifold expectations and optimize a general social welfare function subject to the constraint of maintaining social harmony. This is a difficult and stupendous task and it involves a measure of social efficiency of business operations. Normally, private business enterprises do not bother about social efficiency, they are guided by the commercial profitability criterion. For them, social responsibility is more a facade and a decoration; it is mostly a means of maximizing the long-run return on investment. But, for public enterprises, social desirability is an important consideration. Therefore, they have to attempt a detailed social cost-benefit analysis of their projects and operations. Such enterprises, which produce public goods and services, have to maximize net social return. However, social responsibility does not mean that they should continue to run losses. After all, they are not meant for supplying free or subsidized social service. Social obligations should not eclipse their economic viability, which in itself is a social purpose. Thus, even public enterprises have social as well as commercial obligations. In fact, in India we want our public enterprise to generate source of financing planned economic development. A losing public enterprise is ultimately a burden on society, and therefore if the unit is sick, even if it is a public and hardship in the short run, but in the long run it will be good for society. Social achievements like employment creation and import substitution should never be made an alibi for an unsatisfactory economic and financial performance.

Public enterprises in a democracy like ours are accountable (a) to Parliament, (b) through audit and (c) through annual reports. Parliamentary control over public enterprises is a well-established form of social control. Similarly, as an instrument of accountability, public enterprises are subject to financial audit, efficiency audit and propriety audit. Finally, a well-drafted annual report is an important medium of communication between the enterprises and the public.

Public accountability of private enterprises is also statutorily required. Very often, the Annual General Meeting (AGM) is an occasion where annual reports/balance-sheets can be seriously examined and the shareholders can take their public limited company to task. But this requires the shareholders’ movement to be organized and strong. In fact, strong trade unionism, a strong conservationist movement, and a strong consumer movement are additional requirements to enable any business – private or public, national or multinational, small or big – to discharge – its social obligations and commitment.
Finally you must note that as society has expectations from business, so does business have from society. Society must also act responsibly. Social groups, through violent and irresponsible methods, may hold the business to ransom and ruin it. Ultimately, that will be a social loss. Business can discharge its responsibility, provided it enjoys some authority and support facilities. Social movement should support business by indicating right directions in the national interest.

Describe the overall impact of the Industrial Policy, 1991 on Indian industry. Give illustrations.

2009-06-10T05:36:00.000-07:00

Describe the overall impact of the Industrial Policy, 1991 on Indian
industry. Give illustrations.

Answer. New Industrial Policy, 1991:
The New Industrial Policy of 1991 incorporated the concepts of liberalization,
globalization, internationalization, and privatization. They also incorporated the
following significant features: emphasis on consumer concerns, such as quality, cost,
and variety; encouragement of competition; quality assurance and the need to
continuously upgrade quality, and at reduced costs; a border-less, boundary-less
world, incorporating free exchange of money, ideas, and expertise; fostering of
strategic partnerships and alliances in the best service of the consumer; and human
resource development.

The recent economic and industrial policy reforms call for integration of the Indian
economy and industry with their global counterparts. This calls for quantum leaps in our
levels of productivity and efficiency to survive in the face of international competition. In
addition to resource constraints, we will have to conform to international levels in terms
of energy use and environmental appropriateness, in addition to quality, reliability, and
costs. Simultaneously, we have to maximize employment opportunities. The basic
philosophy of the new policy has been summed up as continuity with change.
Objectives:
To consolidate the strengths built up during the last four decades of economic
planning and to build on the gains already made.
To correct the distortions or weaknesses that may have crept in the industrial
structure as it has developed over the last four decades.
To maintain a sustained growth in the productivity and gainful employment; and
To attain international competitiveness. The pursuit of these objectives will be
tempered by (a) the need to preserve the environment, and (b) the need to ensure
the efficient use of available resources.
Policy Changes Important changes in the NIP 1991, including the subsequent
changes, can be recounted as follows:
Industrial Licensing Policy
Industrial licensing has been abolished for all projects except for a short list of
industries related to security and strategic concerns, social reasons, hazardous
chemicals and overriding environmental reasons, and items of elitist consumption.
Only three industries groups where security and strategic concerns predominate
will be reserved exclusively for the public sector.
In projects where imported capital goods are required, automatic clearance will be
given in the following cases:
Where foreign exchange availability is ensured through foreign equity.
If the CIF value of imported capital goods required is less than 25 per cent of the
total value of plant and equipment, up to a maximum value of Rs.2 crore.
There is no requirement of obtaining industrial approvals from the Central
Government (except for industries under compulsory licensing) for location not
falling within 25 kms. Of cities having population of more than one million.
Industries of non-polluting nature such as electronics, computer software and
printing can hi located within 25 kms. Of the periphery of cities with more than one
million population. Other industries are permitted only if they are located in
designated industrial areas.
The mandatory convertibility clause will no longer be applicable. for term loans
from the financial institutions for new projects.

Since July 1991, Indian industry has undergone a sea-change in terms of the basic
parameters governing its structure and functioning. The major reforms include widescale
reduction in the scope of industrial licensing, simplification of procedural rules
and regulations, reduction of areas reserved exclusively for the public sector,
disinvestment of equity of selected public sector undertakings, enhancing the limits of
foreign equity participation in domestic industrial undertakings, liberalization of trade
and exchange rate policies, rationalization and reduction of customs and excise duties
and personal and corporate income-tax, extension of the scope of MODVAT etc.
Separate policy measures have been announced in the form of specific packages
aimed at upliftment of the small scale, tiny and cottage industries as well as 100 per
cent EOU's (Export Oriented Units) and units located in the EPZs (Export Processing
Zone) and Technology Parks.

It is observed
from the table that since 1992-93, all the major sectors had responded to economic
reforms with dynamism and witnessed significant acceleration of their respective
growth rates. However, during the current year until October 1996 there has been a
deceleration of industrial growth rates due to poor performance by mining and
electricity generation.

The adoption of a New Industrial Policy in 1991 was accompanied by a series of
complementary reforms in fiscal, trade and foreign investment policies, which gradually
opened up the industrial sector to international competition. There was a shift in focus
from import substitution to competitiveness in international markets, with trade
liberalization contributing to reducing effective protection for industry.
The Foreign Direct Investment (FDI) policy was further liberalized and limits for foreign
equity participation in domestic industrial undertakings were enhanced. In 1996, a list
of nine industries, which included infrastructure, electronics and software, for which
joint ventures upto 74% foreign equity would be automatically cleared, was approved.
The number of industries eligible for automatic approval upto 51% foreign equity was
also expanded from 35 to 48.
Domestic industry is increasingly open to competition from international markets, with
quantitative restrictions on imports removed with effect from April 1, 2001 (Planning
Commission, 2001a). Tariff levels have also been decreased drastically since the
initiation of reforms. It is estimated that India's weighted import tariff has declined from
around 90% at the start of reforms to around 34% in 2001/02.
Environmental Impact
The energy and resource intensity of industrial production has been associated with
adverse environmental impacts. These can be categorized under four heads:
emissions, effluent discharges, generation of wastes including hazardous wastes and
the production of ozone-depleting substances (ODS). The quantum of industrial solid
wastes (non-hazardous) generated has nearly doubled in the last decade, from 77
MTPA (million tonnes per annum) in 1990 to 147.05 MTPA in 1999. In addition, about
7.2 million tonnes of industrial hazardous wastes are generated in the country (MoEF,
2000). A discussion of the extent of industrial emissions and effluent discharge is
presented in the chapters on Atmosphere and Water.

Employment generation and labour welfare
The industrial sector is an important source of employment in the country. The estimate
of employment in organized public and private sector stood at 27.9 million (MoF, 2002).
In addition, large numbers are employed in the unorganized sector. In the context of
economic reforms and restructuring of the industrial sector, changes in the labour
market involving redeployment and retrenchment of labour would be associated with
social costs. These costs would have to be minimized by providing for social security
mechanisms. Most importantly, productive employment generation and labour welfare
in the unorganized sector, where it will have the greatest poverty-reducing impact, will
have to be ensured.

Write a note on the annual trends of these collaborations

2009-06-10T05:32:00.000-07:00

Collect data on foreign technical and financial collaborations for the past onedecade
and write a note on the annual trends of these collaborations.

Answer. Developing countries like India have been using import of technology through
foreign collaboration as a strategy to bridge the technological gaps in the country, to
expedite economic development.
The number of foreign collaborations has been increasing on a cyclical manner in the
first forty years, from 1951-91, starting with a meager 44 collaboration in the year 1951,
it increased to 592 in the year 1961 and then suddenly to 402 in 1962, the year in
which India faced war with China. The number of collaborations hovered around the
same figure. until 1965, when India faced war with Pakistan, when number dropped
further to 343. This was followed with further decline due to political turmoil and rapid
changes in government policies, marked with stricter regulatory requirements. The
trend continued more or unchanged during 1970s, when the country underwent
dramatic changes is political arena, with the imposition of emergency followed by short
lived Janata Party government at the Centre. Eighties, however, saw the return to the
rising trend, which became steeper and steeper in the 1990s, Total number of
collaborations in the eighties equaled the total number of collaborations in the three

decades of 1950s, 1960s and 1970s. The period 1991-2000 saw total number of
collaborations in the decade surpassing the total number of all the collaborations in the
4 decades preceding it. Indeed, the total number collaborations in the 9 years of postliberalization
(1992-2000) period is observed to be 17810, while in the 41 years of preliberalization
(1951-91), there were only 15105 foreign collaborations. India is thus
banking on expert technological support for goods and services at an accelerated pace
than in the pre-liberation era. The rise in number is substantial in the post liberalization
era, 10-fold compared to the decade of 1950s, 5- fold compared to the decades of
1960s and 1970s and 2-fold compared to the decade of 1980s.

An interesting development is observed in terms of number of countries with whom
India has foreign collaborations.

In the 41 years of pre-liberalization era, the foreign collaborations were limited to 25
countries only. In the post liberalization era, the number of countries, with whom India
has entered into foreign collaboration, swelled to 112, a dramatic over 4-fold rise
indeed. It would be noticed from the table 2 that the number of countries with whom
India has very large number of collaborations (more than 1000 each) during the 41
years of preliberalisation era (1951-91) and the 9 years of post- liberalization era
(1992-2000) has not changed substantially, except that NRIs have engaged in a big
way in the post liberalization era.

The approvals of foreign collaborations have been classified in two classes; namely
technological (without foreign equity participation) and financial (having Foreign equity
participation).

"Business must be run in a socially responsible manner". Comment on the statement.

2009-06-10T05:28:00.000-07:00

"Business must be run in a socially responsible manner".
Comment on the statement in the context of Indian business along with
examples.

Answer. Social responsibility of a business refers to what the business does, over and
above the statutory requirement, for the benefit of the society. The term corporate
citizenship is also commonly used to refer to the moral obligations of the business to
the society. This implies that just as individuals, corporates are also integral part of the
society and their behaviour shall be guided by certain social norms. The operations of
business enterprises affect a wide spectrum. The resources they make use of are
limited to those of the proprietors and the impact of their operations is felt also by many
a people who are in no way connected with the enterprise.
The current concept of CSR (corporate social responsibility) covers a range of issues
that could perhaps be covered under and be linked to the fabric of sustainable
development. Protection of the environment and a country's natural resources would
certainly be a paramount element of this concept of sustainable development. But what
would be equally important is the need to ensure that society does not suffer from
disparities of income and provision of basic services like health care, education and
literacy. To carry this list further, it could be argued that the United Nations' Millennium
Development Goals (MDGs) and the WEHAB (Water, Energy, Health, Agriculture, and
Biodiversity) agenda of the UN Secretary General are key essentials for bringing about
a solution to the very basic problems facing society. Consequently, if corporate actions
are to target the most fundamental problems facing a poor country like India, then the
components of the MDGs, including water and sanitation, prevention of eradicable
diseases and the items included in the WEHAB agenda in some sense become
guideposts for corporate social strategy and action. It is often asked why a company
should worry about anything other than the bottom line measured purely in financial
terms.
One response is of course to say what has been stated above, namely the cliche that
business cannot succeed in a society that fails. Hence, in an indirect but powerful way
the success of business even in narrow financial terms depends on the success of
society as a whole. The progress and welfare of society is not merely the responsibility
of governments alone. In an effective sense it involves appropriate actions by all
stakeholders, of which the corporate sector is extremely important. Hence, actions to
address some of these basic challenges also become important for leaders of business
and industry.
Social Responsibility Examples

Companies in India enjoy touting their socially responsible credentials, but are failing to
demonstrate accountability in real. Corporate responsibility in India has come out of its
infancy and has become a business in itself. If one goes by the number of companies
touting their achievements, civil society groups and consultants offering ethical
corporate services, and government framing policies to involve business in
development issues, then corporate responsibility has evolved to be acceptable to all,
at least in concept.
Case 1- A V Birla Group - Hindalco
The social projects are carried out under the aegis of the Aditya Birla Centre for
Community Initiatives and Rural Development, which is stewarded by Mrs. Rajashree
Birla, who is a Director on your Board.
The footprint of our social work straddles across 332 villages that we have adopted,
close to our plants at Renukoot and Renusagar in Uttar Pradesh and our mines at
Jharkhand and Chattisgarh. The work has touched the lives of more than 400,000
people.
Case 2: HLL's INITIATIVE IN RURAL DEVELOPEMENT
HLL has been proactively engaged in rural development since 1976 with the initiation
of the Integrated Rural Development Programme in the Etah district of Uttar Pradesh, in
tandem with the company’s dairy operations. This Programme now covers 500 villages
in the district. Subsequently, the factories that HLL continued establishing in lessdeveloped
regions of the country have been engaged in similar programmes in
adjacent villages.
ACTIVITIES
To improve the business skills of the SHG women, extensive training programmes are
being held. Such workshops have already covered a large number of Shakti
Entrepreneurs in Andhra Pradesh, Karnataka, Gujarat, Madhya Pradesh, Uttar
Pradesh, Tamilnadu, Chattisgarh and Orissa
As part of their training programme, all HLL Management Trainees spend about 4
weeks on Project Shakti in rural areas with NGOs or SHGs. Assignments include
business process consulting for nascent enterprises engaged in the manufacture of
products such as spices and hosiery items.
Shakti: The Vision
HLL envisions the creation of 25,000 Shakti Entrepreneurs covering 100,000 villages,

and touching the lives of 100 million rural people by the year 2005.
Case 3: Coca Cola
Coca-Cola continues to face agitation from local communities around its plant in the
southern state of Kerala; the agitation is now a thousand days old. Ironically, Pepsi and
Coca-Cola claim to be socially responsible in India, and have HIV/AIDS and water
harvesting projects respectively. Are they socially responsible in the true sense?
Case 3: Reliance Energy
Reliance Energy continues to pollute the soil around its plant in Maharashtra, even
after being held responsible for it. Rather than correcting its own operations, it is busy
influencing policymakers and authorities to revise the local law in its favour. This at a
time when its chief Anil Ambani was given the ‘CEO of the Year’ award at the Platts
Global Energy Awards for 2004 in New York.
These illustrations are not meant to disfigure all the genuine good happenings in India,
but to pause and reflect on the state of affairs. In conclusion, but a beginning of a
useful thought, corporate responsibility reports about India need to be absorbed with
caution. It is important to look beyond the obvious and question every statement made
by both businesses and NGOs about the improvements on the Indian environmental
and social responsibility scene.

"Liberalisation, privatization and globalization are the means to achieve certain ends by the society."

2009-06-10T05:20:00.000-07:00

"Liberalisation, privatization and globalization are the means to
achieve certain ends by the society." In the light of the statement, list five major
goals/ends, which these instruments are intended to achieve.

Answer.
Liberalisation
In general, liberalization refers to a relaxation of previous government restrictions,
usually in areas of social or economic policy.
Policies that make an economy open to trade and investment with the rest of the world
are needed for sustained economic growth. The evidence on this is clear. No country in
recent decades has achieved economic success, in terms of substantial increases in
living standards for its people, without being open to the rest of the world. In contrast,
trade opening (along with opening to foreign direct investment) has been an important
element in the economic success of East Asia, where the average import tariff has
fallen from 30 percent to 10 percent over the past 20 years. The goals of Liberalization
are listed below:
1) Opening up their economies to the global economy has been essential in enabling
many developing countries to develop competitive advantages in the manufacture of
certain products. There is considerable evidence that more outward-oriented countries
tend consistently to grow faster than ones that are inward-looking.
2) Indeed, one finding is that the benefits of trade liberalization can exceed the costs by
more than a factor of 10.
3) Countries that have opened their economies in recent years, including India,
Vietnam, and Uganda, have experienced faster growth and more poverty reduction.

4) On average, those developing countries that lowered tariffs sharply in the 1980s
grew more quickly in the 1990s than those that did not.
5) Freeing trade frequently benefits the poor especially. Developing countries can illafford
the large implicit subsidies, often channeled to narrow privileged interests, that
trade protection provides. Moreover, the increased growth that results from freer trade
itself tends to increase the incomes of the poor in roughly the same proportion as those
of the population as a whole.
6) New jobs are created for unskilled workers, raising them into the middle class.
Overall, inequality among countries has been on the decline since 1990, reflecting
more rapid economic growth in developing countries, in part the result of trade
liberalization.
7) The potential gains from eliminating remaining trade barriers are considerable.
Estimates of the gains from eliminating all barriers to merchandise trade range from
US$250 billion to US$680 billion per year. About two-thirds of these gains would
accrue to industrial countries. But the amount accruing to developing countries would
still be more than twice the level of aid they currently receive. Moreover, developing
countries would gain more from global trade liberalization as a percentage of their GDP
than industrial countries, because their economies are more highly protected and
because they face higher barriers.
Although there are benefits from improved access to other countries' markets, countries
benefit most from liberalizing their own markets. The main benefits for industrial
countries would come from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of manufacturing and agriculture.
The group of low-income countries, however, would gain most from agricultural
liberalization in industrial countries because of the greater relative importance of
agriculture in their economies.

Globalization
Economic "globalization" is a historical process, the result of human innovation and
technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to
the movement of people (labor) and knowledge (technology) across international
borders.
The term has come into common usage since the 1980s, reflecting technological
advances that have made it easier and quicker to complete international
transactions—both trade and financial flows. It refers to an extension beyond national
borders of the same market forces that have operated for centuries at all levels of
human economic activity—village markets, urban industries, or financial centers.
Markets promote efficiency through competition and the division of labor—the
specialization that allows people and economies to focus on what they do best. Global

markets offer greater opportunity for people to tap into more and larger markets around
the world. It means that they can have access to more capital flows, technology,
cheaper imports, and larger export markets. But markets do not necessarily ensure that
the benefits of increased efficiency are shared by all.
The globalization integrates the Indian Economy with world economy. It is a reform
package. It allows the:
Reduction of barriers in various countries regarding imports & exports. Various
trade norms have been setup that allows free flow of information, goods & services
countries have agreed to follow a common protocol with reference to the trade
polices. This allows an easy approach towards business activities, leading to a
win-win situation of business activities among various nations
There is an environmental setup where free flow of capital takes place. One
country can invest in the fruitful products / projects of the other countries & this
happens only when there is an environment of harmony for it. The disputes among
various nations lead to the friction in relationship thereby creating a distrustful
environment. No business can prosper in such an environment. In order to have a
prosperous business one need to have an environment of harmony. Thus a free
trade can only happen in an environment where capital flow occurs freely.
Technology is essential for prosperity of a nation. A nation can prosper only if it
has technology driven attitude. Technology could be imported from other nations
& can be developed in house as well. This can happen only when there is an
environment of the kind, maintained therein, Technical collaborations are the key
to globalization activities. There must be parity among the countries of world in
terms of technology being used, otherwise they would lag behind. In order to have
uniformity in the process, behaviour & price of technology there must be sufficient
measures to propagate it to the counties access the world. Thus free flow of
technology among nations and states is another benefit of globalization.
Globalization also makes sure that the manpower skills can be utilized effectively.
Once we have integrated the economy there happens a free flow of information,
labour, resources from one nation to another thereby reducing the distances &
narrowing the gaps. The labour forces learn to work in an environment that
belongs to foreign culture. Thus the world acts as a global village where everyone
can work as per international rules & scenarios.
Promotion of globalization has been prioritized in the Indian economy. Restrictions of
imports Exports, education, technical collaborations etc. have been lifted up. Bans on
certain restricted goods have also been taken off. This has provided a way towards
broadening of activities among the two nations. Foreign investment has been
encouraged & certain policies with effect to it have been framed. Direct foreign
investment has been invited by the government of India for better functioning. Now
technicians can move across the world to solve the problems of their clients. No

permission is needed for them to hire & take their services. Thus globalization has
eased the working among the technicians & businessmen. It has helped a lot in
generating effective development policy.?.

Privatization
Privatization (sometimes privatization, denationalization, or, especially in India,
disinvestment) is the process of transferring property, from public ownership to private
ownership and/or transferring the management of a service or activity from the
government to the private sector. The opposite process is nationalization or
municipalization.
Privatization is frequently associated with industrial or service-oriented enterprises,
such as mining, manufacturing or power generation, but it can also apply to any asset,
such as land, roads, or even rights to water. In recent years, government services such
as health, sanitation, and education have been particularly targeted for privatization in
many countries. In theory, privatization helps establish a "free market", as well as
fostering capitalist competition, which its supporters argue will give the public greater
choice at a competitive price. Conversely, socialists view privatization negatively,
arguing that entrusting private businesses with control of essential services reduces
the public's control over them and leads to excessive cost cutting in order to achieve
profit and a resulting poor quality service.
Types of privatization
In terms of outright privatization (that is, sale of a business), there are three major
types:
share issue privatization (SIP) - selling shares on the stock market
asset sale privatization - selling the entire firm to an investor, usually by auction
voucher privatization - shares of ownership are distributed to all citizens, usually
for free or at a very low price.
Share issue privatization is the most common type. Voucher privatization has mainly
been used in the transition economies of Eastern Europe - countries such as Russia,
Poland and the Czech Republic. Share issue can broaden and deepen domestic
capital markets, boosting liquidity and potentially economic growth, but if the capital
markets are insufficiently developed it may be difficult to find enough buyers, and
transaction costs (eg underpricing required) may be higher. Risks (political risk,
currency risk) are also higher, deterring foreign portfolio investors. As a result, asset
sales are more common in developing countries.
Arguments in Favour of privatization
Advocates of privatization argue that governments run businesses poorly for the

following reasons:
Performance. The government may only be interested in improving a company in
cases when the performance of the company becomes politically sensitive.
Improvements. Conversely, the government may put off improvements due to
political sensitivity — even in cases of companies that are run well.
Corruption. The company may become prone to corruption; company employees
may be selected for political reasons rather than business ones.
Goals. The government may seek to run a company for social goals rather than
business ones (this is conversely seen as a positive effect by critics of
privatization).
Capital. It is claimed by supporters of privatization, that privately-held companies
can more easily raise capital in the financial markets than publicly-owned ones.
Unprofitable companies survive. Governments may "bail out" poorly run
businesses with money when, economically, it may be better to let the business
fold.
Unprofitable units survive. Parts of a business which persistently lose money are
more likely to be shut down in a private business.
Political influence. Nationalized industries can be prone to interference from
politicians for political or populist reasons. Examples include making an industry
buy supplies from local producers (when that may be more expensive than buying
from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate
or control inflation, increasing its staffing to reduce unemployment, or moving its
operations to marginal constituencies. It is argued that such measures can cause
nationalized industries to become uneconomic and uncompetitive.
Privatization Goals
It reduces the fiscal burden of the State by relieving it of the losses of the SOEs
and reducing the size of the bureaucracy.
Privatization of SOEs enables the govt. to mop up funds.
Privatisation helps the State to trim the size of the administrative machinery.
It enables the government to concentrate more on the essential State functions.
Privatization helps accelerate the pace of economic development as it attracts
more resources from the private sector for development.
It may result in better management of the enterprise.
Privatization may also encourage entrepreneurship.
Liberalization, Globalization & Privatization are the economic reforms aiming
towards the regulation of the basic activities related to opening new arenas,
providing better control & defining uniformity in operations across the world. It
helps the countries to achieve higher growth rates, employment & self reliance.

Distinguish between free trade and protection.

2009-06-10T05:18:00.000-07:00

Distinguish between free trade and protection. Discuss the merits
and demerits of free trade vs. protection for a developing country like India.

Answer. External Sector Management refers to Policies adopted by a country with
reference exports and imports. It can be free trade policy or restricted trade policy. A
restricted trade policy seeks to maintain a system of trade restrictions with the objective
of protecting domestic economy from competition of foreign products. A free trade
policy involves complete absence of tariffs, quotas, exchange restrictions etc.
Thus, external sector management strongly influences the direction, trend and growth
of foreign trade of country. This is an important economic instrument, which can be
used by a, country, with suitable modifications from time to time, to achieve its longterm
objectives.?
Trade policy is alternatively called as (EXIM) Export- Import policy. In India Trade
policy is a policy, which is adopted by a country with references to exports and imports.
FREE TRADE POLICY: A policy that doesn’t impose any constraints on the
interchange of goods and services between separate countries. A policy includes full
absence of tariffs, quotas; interchange constraints on production taxes and subsidies.
Case in favour of Free Trade
Most arguments for free trade have been built on the grounds of efficiency, economic
growth and welfare. According to Samuelson "trade promotes a mutually profitable
regional division of labour, greatly enhances the potential real national product of all
nations, and makes possible higher standards of living all over the globe"
Free trade policy is economically advantageous to the participating countries since it
maximizes their social product. Free trade is supposed to be carried out under the
conditions of free competition in which price mechanism "… automatically ensures that
each country, specialized in the production of those goods, and those goods which it
can produce more cheaply, talking account of transport (cost)". Given the real
resources of a country, if it specializes in the production of goods in which it is
relatively more efficient, or its cost of production is comparatively lower, its total
national product will be much larger than if it spreads its limited resources over the
production of all goods, irrespective of the cost of production. With specialization in the
efficient sectors, a larger national product can be achieved; a larger exportable surplus
can be generated; and a larger volume of goods & services of the country’s
requirements can be imported from other countries at lower prices. This increases total

availability of goods and services and raises the standard of living of the people.
Possibly the mist attractive argument in favour of free trade is that ‘it lowers the prices
of imported goods’. Moreover, free trade in international market has an ‘educative
effect’ in the sense that it compels countries to enhance their efficiency through better
management of resources and quick adoption of improved and more efficient
techniques of production.
In theoretical terms, free trade offers various MERITS in realistically below developed
countries where as DEMERITS in such a system of international trade. As an
inference, international economy survives a difficult period of protective trade policies.
Trade policies may be outward looking or inward looking.
(i) Outward looking: An outward looking trade policy encourages not only free trade
but also the free movement of capital, workers enterprises and students, a welcome to
the (MNC) organizations and an open system of communications
Primary outward Policies: Goaled at encouraging export of raw material and
agricultural.
Secondary outward Policies: Goaled at promoting manufactured exports
(ii) Inward looking: An inward looking true policy stresses the requirement for a
Country to its own style of development and to be the master of its own fate with
limitations on the movement of goods, services and people in and out of the Country.
Primary inward policies: Opinion is to get agricultural self-sufficiency
Secondary inward policies: By import substitution opinion is attaining
manufactured commodity self-sufficiency.
Merits of FREE trade
If free trade between nations did not exist, then economies would stagnate.
Free trade allows nations to flourish at what goods and/or services they excel at
providing, fits into this scenario like a hand to a glove.
Free trade gives consumers more, and cheaper, choices.
It also helps to facilitate co-operation between the weaker developing countries
and help the South build a joint economic perspective.
Demerits
FREE trade affects every country in the world and every section of society within

those countries.
Industries face stiff competition from foreign companies.
Small scale industries, which already have very less resources have to face high
competition.
Protection
For some political reasons most countries had adopted a projectionist policy. Perhaps
the world market never provided the perfect conditions required for free trade on a
global scale. For the purpose of regulating foreign trade or protecting a country’s
interest in foreign trade, tariff is one of the most important tools.
Merits
1. A protective trade policy by a country seeks to maintain a system of trade limitations
with the opinion of protecting the domestic economy from the competition of foreign
products.
2. During the decades of 50, 60 and 70 and some enhanced in 80. Protective trade
policy constituted a significant plank (part) in the commercial policies of below
developed countries.
3. It helps in development of the industries in the country.
4. Local industries don't have to face high competition from the foreign countries.
DEMERITS
Many undeveloped countries continue to have protective trade policies.
The product prices are high due to protective trade policies.
Consumers have to feel the heat of protective trade policies.
The economy can't grow at high pace.
It also discourages foreign investments.
In a developing country like India, we cannot have a full-fledged free trade policy due
to the following reasons:
Several industries in a developing country like India are in the initial stage of
industrial growth, most industries are in their infancy. In infant industries are
exposed to competition with the industries of developed nations, which have
achieved a high level of technical efficiency , economies of scale and financial
strength, they would run the risk of dying out in their infancy. The infant industries
of developing economy need protection.
Promotion of employment: Tariff protection is also suggested as an effective
remedy to the serious unemployment problem in underdeveloped countries.
Imposition of tariffs on imports directly competing with the domestic products helps

to expand employment opportunities in the import-competing industries by
securing the domestic market.

"All modern economies have certain economic problems to deal

2009-06-10T05:12:00.000-07:00

"All modern economies have certain economic problems to deal
with". Examine and illustrate the statement.

Answer. Most economic problems arise due to limited resources and unlimited wants.
The problem of economy is how to use the relatively limited resources with alternative
uses in face of unlimited wants. Society has to decide which commodities to make. For
example, do we make missiles or hospitals? We have to decide how to make those
commodities. Do we employ robot arms or workers? Who is going to use the goods that
are eventually made? Do we build a sports hall in Wigan or Woking? Seven general
problems that are faced by all economies, whether they are capitalist, socialist, or
communist, and mixed are listed below:
What commodities are being produced and in what quantities? This question
arises directly out of the scarcity of resources. It concerns the allocation of scarce
resources among alternative uses.
By what methods are these commodities produced? This question arises
because there is almost more than one technically possible way in which goods
and services can be produced. Agriculture goods, example, can be produced by
farming a small quantity of land very intensively, using large quantities of fertilizer,
labour and machinery, or farming a large quantity of land extensively, using only
small quantities of fertilizer, labour and machinery. Both methods can be used to
produce the same quantity of some good; one method is frugal with land and uses
larger quantities of other resources, whereas the other method uses large
quantities of land but is frugal in its use of the other resources. The same is true
with manufactured goods.
How is society’s output of goods and services divided among its members?
Why can some individuals and groups consume a large share of the national
output while other individuals and groups can consume only a small share? The
superficial answer is because the former earn large incomes and the latter earn
small incomes? Economists wish to know why any particular division occurs in a
free- market society and what forces, including government interventions, can
cause it to change.
Such questions have been of great concern to economists since the beginning of
the subject. These questions are the subject of Theory of Distribution.
How efficient is the society’s production and distribution? This question quite
naturally arises out of the 1, 2, and 3. Having asked what quantities of goods are
produce, how they are produced and to whom they are distributed, it is natural to
go on to ask whether the production and distribution decisions are efficient.

The concept of efficiency is quite distinct from the concept of justice. The latter is a
normative concept, and a just distribution of the national product would be one
that our value judgements told us was a good or a desirable distribution. Efficiency
and inefficiency are positive concepts. Production is said to be inefficient is it
would be possible to produce more of at least one commodity without
simultaneously producing less of any other – by merely reallocating resources.
The commodities that are produced are said to be inefficiently distributed if it
would be possible to redistribute them among the individuals in the society and
make at least one person better off without simultaneously making anyone worse
off. Questions about the efficiency of production and allocation belong to the
branch of economic theory called welfare economics.
Are the country’s resources being fully utilized, or some of them lying idle?
We have already noted that the existing resources of any country are not sufficient
to satisfy even the most pressing needs of all the individual consumer. Surely if
resources are so scarce that there are not enough of them to produce all of those
commodities which are urgently required, there can be no question of leaving idle
any of the resources that are available. Yet one of the most disturbing
characteristics of free - market economies is that such waste sometimes occurs.
When this happens the resources are said to be involuntarily unemployed (or,
more simply, unemployed). Unemployed workers would like to have jobs, the
factories in which they could work are available. The managers and owners would
like to be able to operate their factories, raw materials are available in abundance,
and the goods that could be produced by these resources are urgently required by
individuals in the community. Yet, for some reason; nothing happens: the workers
stay unemployed, the factories lie idle and the raw materials remain unused. The
cost of such periods of unemployment is felt both in terms of the goods and
services that could have been produced by the idle resources, and in terms of the
effects on people who are unable to find work for prolonged periods of time.
Why do market society's experiences such periods of involuntary unemployment
which are unwanted by virtually everyone in the society, and can such
unemployment be prevented from occurring in the future? These questions have
long concerned economists, and have been studied under the heading Trade
cycle Theory
Is the purchasing power of money and savings constant, or is it being
eroded because of inflation? The world's economies have often experienced
periods of prolonged and rapid changes in price levels. Over the long swing of
history, price levels have sometimes risen and sometimes fallen. In recent
decades, however, the course of prices has almost always been upward. The
1970s, 1980s and 1990s saw a period of accelerating inflation in Europe, the
United States and in most of the world, more particularly in the less developed

countries.
Inflation reduces the purchasing power of money and savings. It is closely related
to the amount of money in the economy. ,Money is the invention of human beings,
not of nature, and the amount in existence can be controlled by them. Economists
ask many questions about the causes and consequences of changes in the
quantity of money and the effects of such changes on the price level. They also
ask about other causes of inflation.
Is the economy's capacity to produce goods and services growing from year
to year or is it remaining static? Why the capacity to produce grows rapidly in
some economies, slowly in others, and not at all in yet others is a critical problem
which has exercised the minds of some of the best economists since the time of
Adam Smith. Although a certain amount is now known in this field, a great deal
remains to be discovered. Problems of this type are topics in the THEORTY OF
ECONOMIC GROWTH.

The achievements and adverse effects of regulatory framework in the course of India’s industrialization

2009-05-26T06:07:00.000-07:00

Critically analyze the achievements and adverse effects of regulatory framework in the course of India’s industrialization.

India's experience with regulation in the sense of control is not new. Till recently, all sectors of the economy were regulated. For example, in the infrastructure sectors, the governments or their instrumentalities owned, operated, and regulated services. The central government, the Central Electricity Authority, state governments, and state electricity boards regulate the power sector under the authority of the
Electricity (Supply) Act, 1948 and Indian Electricity Act, 1910; the Department of Telecommunications regulates the telecom sector under the Indian Wireless Telegraphic Act, 1933 and the Indian Telegraphic Act, 1885; the central government, state governments, Directorate General of Shipping, and dock labour boards regulate the port sector under the Ports Act, 1908, the Major Port Trusts Act, 1963, the Merchants Shipping Act, 1958, and the Dock Workers (safety, health and welfare) Act, 1986. In addition, there are other regulators created under various other acts relating to environment, safety, labour, etc. Regulation as it existed then, and still continues to exist in several areas, is rooted in the belief that only the public sector can provide basic infrastructure services, that the entry of the private sector should strictly be regulated if it cannot be altogether prevented, and that the public sector agencies providing services should serve the interests and compulsions of the government. There was no attempt to distance the government's role as the policy maker and
protector of public interest from its role as operator or provider of services. In fact, considerations of efficiency, productivity, and consumer interests were not of any importance. There was also the implied belief that accountability to the government and through the government to the Parliament or the legislature was adequate to ensure transparency and that no objectivity in regulation or disclosure to the public was necessary. This form of regulation or control inevitably resulted in unlimited discretionary powers to the service providers operational inefficiency and poor quality of service lack of transparency in the decision-making process and of accountability high barriers to entry and negligible flow of private capital
financial mismanagement lack of protection of consumer interest with non-competitive prices at the consumer end and highly restricted consumer choices.
Reforms and liberalization of the Indian economy started in 1991/92 with the power and telecom sectors being thrown open gradually to private investment and competition.
The telecom sector was opened up in 1991 with private investment being permitted in
the manufacture of telephone equipment. Value-added services were thrown open for
private investment in 1992, and in 1994, the National Telecom Policy reiterated the
government's commitment to further liberalize the sector. The guidelines of 1991
allowed private sector entry in the generation of power. This was followed by several
initiatives to attract and facilitate private investment in the power sector. Private sector
participation by way of leasing port facilities was permitted in 1994 and investment in
the creation of new facilities in the existing ports or establishment of new ports in 1996.
However, regulation in the power and telecom sectors was not contemplated or
provided for as a part of the initial reforms process, unlike in the UK where the
electricity industry restructuring and positioning of the regulator were simultaneous. In
the case of the telecom and power sectors, the regulators came much later, whereas in
the case of the port sector the decision to set up a tariff regulatory authority was
announced as a part of the policy statement in 1996. In the insurance sector, the
regulatory authority has preceded the opening up of the sector. This sequence would
seem to indicate that progressively there is a realization in the government that reform
cannot be put into force without independent regulation and that a regulatory authority
should be set up. In the hydrocarbons sector, where the pace of reform is rapid, the
regulator is not yet in sight. To what extent do the laws setting up these regulatory
bodies incorporate the requisites of a sound regulation? Annex 1 sets out the
provisions of the TRAI (Telecom Regulatory Authority of India) Act, 1997; the PLA (Port
Laws [Amendment]) Act, 1997; the ERC (Electricity Regulatory Commissions) Act,
1998; and the IRA (Insurance Regulatory Authority) Bill, 1998 under the categories of
scope, autonomy, accountability, and powers. The scope of regulation in the four
sectors differs widely. Whereas TRAI has been specifically mandated to regulate the
telecom sector as a whole and advise on the timing of entry of players, licensing
conditions, technical capability, etc., the CERC (Central Electricity Regulatory
Commission) is essentially set up to regulate tariff for central generating agencies and
for interstate transmission of power. On the other hand, TAMP (Tariff Authority for
Major Ports) is only a tariff regulatory authority on the lines of a tariff commission and is
not a regulator of port activities at all. The IRA is being assigned a bigger mandate,
which is comparable with that of TRAI, in the insurance sector. Also TRAI and the IRA
at the bill stage have been specifically mandated to protect the interests of the
consumers, monitor the quality of service, and ensure compliance of minimum service
obligations, whereas in the case of the CERC, these have been left as objectives of the
CAC (Central Advisory Committee), without any clear indication of the value of the
advice of the CAC or how such advice would be heeded. In the case of TAMP, these
issues have not been addressed at all.
The regulatory laws do not provide for any flexibility for speedy and effective response
to changing circumstances. Since a regulator facilitates the process of transition from
the monopolistic market to a competitive economy, its form, functions, and scope
cannot be static. It is possible that as services are unbundled and competition

increases, certain areas presently regulated may at some future date call for no
regulation. For example, in the power sector it is possible that at some stage
generation or distribution may not require tariff regulation. Secondly, as an economy
matures and becomes sophisticated, the approach to regulation may have to change.
The traditional practice of regulating the rate of return of the utilities is already
undergoing a change with concepts like performance-based regulation or marginal cost
approach being introduced. Technological advances may also alter the boundaries of
regulation, a possibility that is looming large with telecommunications and broadcasting
beginning to use the same pathways. Ideally, therefore, there should be some provision
in the laws or mechanisms to ensure that the scope and nature of regulation is
continuously under review.
India has had robust economic growth since 1991 when the government reversed its
socialist-inspired policy of a large public sector with extensive controls on the private
sector and began to liberalize the economy. Liberalization has proceeded in fits and
starts since then, mainly due to political pressures, but the economy has responded
well by posting strong growth in many sectors. A 2003 report by Goldman Sachs
predicts that India's economy would be the third largest by 2050.
With a GDP of $550 billion ($2.66 trillion at PPP) India has the world's 12th largest
economy in US dollar terms and the 4th largest in PPP terms. However, the large
population means that per capita income is quite low. In 2002 the World Bank ranked
India 145th in PPP per capita income and 159th in real terms, among 208 countries.
About 60% of the population depends directly on agriculture. Industry and services
sectors are growing in importance and account for 25% and 50% of GDP, respectively,
while agriculture contributes about 25.6% of GDP. More than 25% of the population live
below the poverty line, but a large and growing middle class of 300 million has
disposable income for consumer goods.
India embarked on a series of economic reforms in 1991 in reaction to a severe foreign
exchange crisis. Those reforms have included liberalized foreign investment and
exchange regimes, significant reductions in tariffs and other trade barriers, reform and
modernization of the financial sector, and significant adjustments in government
monetary and fiscal policies.
The reform process has had some very beneficial effects on the Indian economy,
including higher growth rates, lower inflation, and significant increases in foreign
investment. Real GDP growth was 4.3% in 2002-03, mainly due to a severe drought.
Growth in 2003-2004 is expected to be above 6%. Foreign portfolio and direct
investment flows have risen significantly since reforms began in 1991 and have
contributed to healthy foreign currency reserves ($85 billion in August 2003) and a
moderate current account deficit of about 1% (2002-03). India's economic growth is
constrained, however, by inadequate infrastructure, cumbersome bureaucratic

procedures, and high real interest rates. India will have to address these constraints in
formulating its economic policies and by pursuing the second generation reforms to
maintain recent trends in economic growth.

Examine the growth of SSI in the post-reforms period.

2009-05-26T06:03:00.000-07:00

Examine the growth of SSI in the post-reforms period.

According to the committee of economic development USA, a small business
is one which possesses at least 2 of the following 4 characteristics:
Management of the firm is independent. Usually the managers are also the
owners.
Capital is supplied and the ownership is held by an individual or a small group.
The area of operation is mainly local, with the workers and owners living in one
home community.
The relative size of the firm within its industry must be small when compared with
the biggest units in its field. These measures can be of sales volume, number of
employees or other significant comparisons.
The basic of distinction between the large, medium, and small scale industries is
generally the size, capital resources and labour force of the individual unit.
SSI Sector in India creates largest employment opportunities for the Indian populace,
next only to Agriculture. It has been estimated that a lakh rupees of investment in fixed
assets in the small scale sector generates employment for four persons.

Generation of Employment - Industry Group-wise
Food products industry has ranked first in generating employment, providing
employment to 4.82 lakh persons (13.1%).
The next two industry groups were Non-metallic mineral products with employment of
4.46 lakh persons (12.2%) and Metal products with 3.73 lakh persons (10.2%).
In Chemicals & chemical products, Machinery parts and except Electrical parts, Wood
products, Basic Metal Industries, Paper products & printing, Hosiery & garments,
Repair services and Rubber & plastic products, the contribution ranged from 9% to 5%,
the total contribution by these eight industry groups being 49%.
In all other industries the contribution was less than 5%.
Production
The small scale industries sector plays a vital role for the growth of the country. It
contributes 40% of the gross manufacture to the Indian economy.
It has been estimated that a lakh rupees of investment in fixed assets in the small scale
sector produces 4.62 lakhs worth of goods or services with an approximate value
addition of ten percentage points. The small scale sector has grown rapidly over the
years. The growth rates during the various plan periods have been very impressive.

The number of small scale units has increased from an estimated 8.74 lakhs units in
the year 1980-81 to an estimated 31.21 lakhs in the year 1999.
From the year 1990-91 this sector has exhibited a comparatively lower growth trend
(though positive) which continued during the next two years. However, this has to be
viewed in the background of the general recession in the economy. The transition
period of the process of economic reforms was also affected for some period by
adverse factors such as foreign exchange constraints, credit squeeze, demand
recession, high interest rates, shortage of raw material etc.
When the performance of this sector is viewed against the growth in the manufacturing
and the industry sector as a whole, it instills confidence in the resilience of the smallscale
sector.
The estimates of growth for the year 1995-96 have shown an upswing. The growth of
SSI sector has surpassed overall industrial growth from 1991 onwards. The positive
trend is likely to strengthen in the coming years. This trend augurs a bright future for
the small-scale industry.
Export contribution
SSI Sector plays a major role in India's present export performance. 45%-50% of the
Indian Exports is being contributed by SSI Sector. Direct exports from the SSI Sector
account for nearly 35% of total exports. The number of small-scale units that undertake
direct exports would be more than 5000.
Besides direct exports, it is estimated that small-scale industrial units contribute around
15% to exports indirectly. This takes place through merchant exporters, trading houses
and export houses. They may also be in the form of export orders from large units or
the production of parts and components for use for finished exportable goods.
It would surprise many to know that non-traditional products account for more than 95%
of the SSI exports. The exports from SSI sector have been clocking excellent growth
rates in this decade. It has been mostly fuelled by the performance of garment, leather
and gems and jewellery units from this sector.

Opportunities
Small industry sector has performed exceedingly well and enabled our country to
achieve a wide measure of industrial growth and diversification.

Economic Indicators
The Small Scale Industry today constitutes a very important segment of the Indian
economy. The development of this sector came about primarily due to the vision of our
late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a
supporting sector in the form of small scale enterprises.
Small Scale Sector has emerged as a dynamic and vibrant sector of the economy.
Today, it accounts for nearly 35% of the gross value of output in the
manufacturing sector and over 40% of the total exports from the country.
In terms of value added this sector accounts for about 40% of the value added in
the manufacturing sector.
The sector's contribution to employment is next only to agriculture in India. It is
therefore an excellent sector of economy for investment.

* Organisational measures, which promote privatization

2009-05-26T01:40:00.000-07:00

Discuss the various organisational measures, which promote privatization.

(i) Ownership measures: By the extent of ownership transferred the degree of privatisation is judged form the public enterprises to the private sector. Ownership almost transferred to a separate, co-operative or corporate sector. This can have three forms:
(a) Entire Denationalisation implies 100% transfer of ownership of a public enterprise to private sector.
(b) Joint venture implies partial transfer of a public enterprise to the private sector. It can have various variants – 25% transfer to private sector in a joint venture implies that majority ownership and control remains with the public sector. 51% transfer of ownership to the private sector shifts the balance in optimum to the private sector, through the public sector retains a substantial stake in the undertaking. 74% transfer of Ownership to the private sector implies a dominant share being transferred to private sector. In such a situation, the private sector is in a better position to change the character of the enterprise.
(c) Liquidation implies sale of assets to a person who may use them for the same purpose or some other purpose. This solely depends on the preference of the buyer.
(d) Workers’ co-operative is a special form of denationalisation. In this form, ownership of the enterprises is transferred to workers who may form a co-operative to run the enterprise. In such a situation, relevant provision of bank loans is build to enable workers to buy the shares of the enterprise. The burden of running the enterprises rests on the workers in workers co-operative. The workers become entitled to ownership dividend besides achieving wages for their services.
Organisational measures involve a variety of measures to limited state control. They added:
(a) In their day-to-day commands a structure of holding company almost designed in that the government limits its control to top-level big decisions and leaves a sufficient degree of autonomy for the operating companies. A big company like the Somnath enterprises of India limited (SEIL) or Raghvan Heavy Electrical Limited (RHEL) may acquire a holding company status, thereby transferring a number of functions to its smaller units. In this way, a decentralised pattern of management emerges.
(b) Leasing: In this arrangement, the government agrees to transfer the use of assets of a public enterprise to a private bidder for a specified period, say of 5 years. While entering into a lease, the bidder is required to give an assurance of the quantum of profits that would be built available to the state. This is a kind of tenure ownership. The government reserves the right to review the lease to the same person or to grant the lease to another bidder depending upon the circumstances of the cases.
(c) Restructuring there are two categories of restructuring: financial restructuring and basic restructuring.
(1) Financial Restructuring implies the writing off of accumulated losses and rationalisation of capital composition in respect of debt-equity ratio. The main purpose of this restructuring is to improve the financial health of the enterprise.
Basic Restructuring is said to occur when the public enterprise decides to shed some of its activities to be taken up by ancillaries or small-scale units.

Different sources of external assistance for India

2009-05-26T01:37:00.000-07:00

What are the different sources of external assistance for India? Why has external assistance utilization increased steadily over the period? Comment.

The sources of external assistance for India are grouped under:
1. Consortium Members: Comprising Austria, Belgium, Canada, Denmark, France, West Germany, Italy, Japan, Netherlands, Norway, Sweden, UK, USA, the World Bank, and International Development Association.
2. USSR & East European Countries: Which include Bulgaria, Czechoslovakia, Hungary, Poland, USSR, and Yugoslavia.
3. Others: Consist of Australia, European Economic Community (E.E.C), Oil Producing & Exporting Countries (O.P.E.C.), etc.

The external assistance – source wise, authorized and utilized are presented for select years in tables and Consortium members have been the major source of external assistance for India, be it loans or grants. The PL 480/665, etc. assistance was obtained from the USA for food imports. On an average, more than three-fourths of the total external assistance came from the consortium members to India.

A more disaggregated picture reveals that India acquires external assistance for various purposes from various sources:
· Loans are received from international institutions such as the World Bank and international Development Association for specific projects. The loans given by the I.D.A. are on easier terms, i.e., interest free loans for the development of ports, etc.
· Credits are given by individual countries such as the U.S.A., the U.S.S.R., the U.K., West Germany, Japan, Canada, etc. Most of these loans are project loans.
· Specific aid loans for a particular purpose, such as agriculture development loans from the World Bank, irrigation loans by the I.D.A., etc.
· Grants given for various social purposes including technical training, health, and nutrition by different countries like the U.S.A., U.S.S.R., etc.
External assistance to India is broadly classified under loans, grants and P.L. 480/665 assistance.

Independent India had a negligible share of external debt. However, after the beginning of economic planning in 1951, to cover the investment and the balance of payments gap, the government resorted to seeking external assistance. The amount of external assistance approved by different sources and utilized by India has grown steadily over a period of time since then.
India got external assistance in several forms. It includes outright grants, loans repayable in rupees and loans repayable in foreign currencies. Technical assistance has also been made available on different terms from different countries. Deferred credits have also been provided by foreign suppliers.
During the first five-year plan, the utilization of external assistance comprising loans, grants and commodity assistance amounted to approximately Rs. 400 crore. It was utilized mainly for the procurement of commodities like wheat and capital goods required for various development projects including irrigation and power projects, etc.
The emphasis on the development of basic and heavy industries for rapid industrial development during the second five-year plan prompted the Government to go for more external assistance. Besides, the trade deficit widened during this period owing to a large increase in imports. All this necessitated a huge foreign capital inflow. The total external assistance utilized was approximately Rs. 1500 crore, during the second plan.
During the third five-year plan, the policy of strengthening the industrial base of the country was continued. On the defense front, the Chinese invasion of 1962 and Indo-Pak war in 1965, forced the country to concentrate on defense industry production and development. Further, due to adverse monsoons, agricultural production was far insufficient to meet the country’s demand. This necessitated large imports of food grains and other agricultural commodities under the US Public Law 480 programme. As a result of all these, India had to utilize external assistance to the extent of almost Rs. 2900 crores, during the Third Plan period.
During the three annual plans. The drought conditions in the country necessitated heavy food imports under PL 480. In addition, the development of defense industries, trade deficit, etc. led to reliance on external assistance to the tune of more than Rs. 3000 crores.
During the Fourth Plan, thanks to recovery in agricultural production, the Country’s dependence on PL 480 food aid came down. Further, due to currency devaluation of 1966, exports grew significantly during this period thereby reducing the trade deficit. Due to these factors, the amount of external assistance utilization stood at Rs. 4183.7 crores.
After the Fourth Plan, external assistance sought by India increased dramatically. The major factors, which led to a sharp rise in India seeking external assistance, were:
· Steep rise in the international prices of crude oil and petroleum products, Increase in the prices of food and fertilizers in the world market.

Role of government and economic reforms

2009-05-26T01:31:00.000-07:00

How economic reforms have affected the role of government? Explain in detail with examples/illustrations.

Economy reforms have also witnessed a big change in the role of the Government over time. Ever since independence till around the 1980s, as we discussed in the previous units, our objective was to have planned economic development without adopting extreme forms of capitalism or communism.
Heavy industry and infrastructure were left in the hands of the Government to develop. The Government decided upon priority sectors. In agriculture, development was encouraged along capitalistic lines. To prevent monopoly, mitigate cyclical fluctuations, lessen interpersonal inequalities of income and wealth and promote economic development, measures of command and control were frequently resorted to, though some measures operating through the market mechanism were also adopted. Little attention was however paid by the Government to prevent environmental degradation or reduce inter-regional or gender-based inequalities.
The situation in which we found ourselves by the 1980s was not a happy one. Our
Government could not provide adequate infrastructure facilities. While we had some success in increasing agricultural production, the level of our per capita consumption of food was woefully low. Further, agriculture, even now, seems affected by the vagaries of the weather, causing cyclic fluctuations in the economy. You will find that there have been an official statement that while the Indian economy has grown, this growth has not trickled down sufficiently. Further, Government-owned enterprises in basic and heavy industries were functioning far from efficiently and have mostly been using outdated technology. Moreover, because of resort to command and control measures, a number of private sector units of the Indian economy were also more or less in the same boat. There were hence slow rumblings of change in India’s economic policy form the 80s.
It soon became clear, however, that such gradual changes will simply not work. The unprecedented crisis in the Indian economy in 1990-91 was the last straw on the camel’s back. Our foreign exchange reserves fell to an all-time low level of $ 2.2 billion. Inflation rate had already crossed the double-digit figure and was actually at 14%. Fiscal deficit had risen to 8.4% of the Gross Domestic Product. The current account deficit on balance of payments was as high as $ 9.9 billion. International Credit Rating agencies went on to considerably downgrade India’s creditworthiness.
The Government and many economists agreed that a shock therapy was immediately required to pull the Indian economy out of the woods. The World Bank agreed to bail India out, but imposed certain conditionalities for doing so. It wanted two major types of programmes to be carried out. Firstly, there were to be short-term stabilization measures to control inflation and wipe out the balance of payments deficit. These were agreed upon. You are aware that attempts are being made to rationalize subsidies and cut down wasteful Government expenditure to reduce the fiscal deficit. The rupee has been devalued to correct the balance of payments deficit. Secondly, there had to be structural reforms to make the Indian economy competitive and attain a high rate of growth with social justice. These have also been accepted and measures are being taken to liberalize and globalize the Indian economy.
As a result of all this, there was considerable rethinking, reinforced by the conditionalities imposed by the World band to help India out of her difficulties. Steps began to be initiated in the 1980s and these gathered considerable momentum in the 1990s. A sea change has thus come about in the economic role of the Government in India since the 1990s. Many of the sectors reserved for the public sector have now been thrown open to the private sector. More and more physical controls are being replaced by measures to guide the economy through the market mechanism. Restraints in the way of international trade and factor movements are being gradually reduced. The seeming intention is to make the Indian economy face international competition and become efficient in performance. The Government role in the provision of public goods is not likely to increase, but as regards the protection of the environment, the Government is likely to play an increasing role.

Comment: Economic reforms have an adverse effect on food security and health security’

2009-05-26T01:29:00.000-07:00

Economic reforms have an adverse effect on food security and health security’. Comment.

Food security and health security have been adversely affected for the poor as a consequence of new economic reforms. The poor avail of less than one-third of the food grains provided by the Public Distribution System.
Food security is related to (i) employment security via rate of growth of the economy, (ii) government policies regarding prices of food grains and food subsidies, and (iii) general rate of inflation and more especially the prices of food grains. Since the period of economic reform has been characterised as the period of jobless growth or very slow growth of employment, this has produced an adverse effect on food security of the poor by a fall on employment. The continuous rise in the prices of food grains, more especially of consumer price index of agricultural labourers, remaining above the double-digit level, also adversely affected food security of the poor. Agricultural labourers suffered the impact of double squeeze – firstly, lower level of employment resulted in an erosion of their real earnings over the year;
Secondly, the continuous rise of Consumer Price Index for Agricultural Labourers (CPIAL) by over 10 per cent for the entire 5-year period (1990-91 to 1995-96) has reduced their real wages in two ways – a depreciation of the purchasing power of the Rupee and the failure of the wage to increase commensurate with the rise of CPIAL. There is no doubt that the food security of the poor has been adversely hit by the reform.

Employment Security and New Economic Reform
The new economic reforms have been emphasing new power projects both in the public and the private sectors. Besides causing environmental problems, these projects have been displacing people from their traditional livelihood systems. By encouraging multinationals to enter food-processing industries, the reform process by the sheer competition from these business giants has led to labour displacement. The entry of big business in agriculture has also led to displacement of labour displacement. The entry of big business in agriculture has also led to displacement of labour engaged in the marketing of agricultural produce. The case of fisherman is glaring and has resulted in massive protests from fishermen who were faced with a threat to unemployment as a consequence of competition from mechanized boats. Consequently, there is a good deal of evidence to corroborate the view that the process of economic reform has generated far greater backwash effects in terms of labour displacement, than in generating spread effects in terms of enlarging new employment opportunities. The net effect of these trends is the deterioration in the quality of employment opportunities. The net effect of these trends is the deterioration in the quality of employment and this is witnessed in the growing increase in the number of casual labourers – the most unprotected form of Indian labour. Casualisation of a labour is witnessed even in industry as a result of the growing phenomena of lockouts and closures. G. Parthasarthy reviewing the impact of structural adjustment on employment concludes: “Given this short period experience, what the medium-term has in store for the Indian poor is anybody’s guess. It is essentially dependent upon the rate and composition of growth and its effects on employment. With past experience as a guide, we may achieve a high growth rate, the benefits of which may flow to the affluent and middle class. The poor may not gain because jobs are not found to grow with incomes. This type of scenario could call for effective safety nets for unorganized sectors in the form of right to work at a minimum subsidized wage and guarantee against unemployment through unemployment insurance.” (Parthasarthy G, Social Security and Structural Adjustment, the Indian Journal of Labour Economics, Vol. 39, No. 1, Jan-March 1996).

Health Security
As a result of the process of economic reform, privatisation of health services is recommenced. But according to the 42nd round of NSS, the average payment for private hospitals in rural areas was Rs. 735.4 as against Rs. 304.3 for Government hospitals i.e. 2.3 times more than charged by Government hospitals. In urban areas, the situation was even worse. Private hospitals charged Rs. 1,206 as against Government hospitals charging Rs. 355. In other words, charges in private hospitals in urban areas were 3.13 times more than in Government hospitals. Privatisation is thus bound to affect adversely the maintenance cost of health services of the poor. This has been compounded by the fact that in view of the patent rights payments to be made to patent-holders, viz. multinational corporations, the cost of medicines has been rising under the new economic reforms.

various kinds of external debt , need for external debt and its implications.

2009-05-26T01:27:00.000-07:00

Describe the various kinds of external debt and discuss the need for external debt and its implications.

External debt may be broadly classified under eight kinds. These include multilateral, bilateral and commercial loans and cover both the Government and non-government sectors. These also comprise highly concessional loans as well as loans on market terms.

(i) Multilateral Debt
This refers to loans and credits extended by multilateral organizations to the Government or, in some cases, with Government guarantee, to Public and Private sector corporate bodies. This includes long-term credits (40 years) of International Development Association (IDA) and long-term loans from the World Bank or the Asian Development Bank (ADB), which have market interest rates and long repayment period (15-20 years).

(ii) Bilateral Loans
This refers to borrowing on varying degrees of concessionality, from other governments. Such loans are given to the government and in some cases to public sector organizations.

(iii) Loans from the International Monetary Fund (IMF)
The IMF debt assumed significance in the early 1980s, when India resorted to withdrawals under the Extended Fund Facility (EFF)/supplementary Financing Facility (SFF) to ease out the balance of payments difficulties.

(iv) Export Credit
This comprises buyers’ credit, suppliers’ and exports credit for defense purchases. Buyers’ credit and suppliers’ credit are treated as forms of commercial borrowing.

(v) Commercial borrowing
This includes market borrowings abroad by corporate entities and public sector undertakings and includes commercial bank loans, securitized borrowings (including India Development Bonds) and loans or securitized borrowings with multilateral or bilateral guarantees. Commercial borrowings also include loans from International Finance Corporation (IFC), Washington, and self-liquidating loans.

(vi) Non-Resident Deposits
This refers to various types of Non-Resident (NR) deposits and Foreign Currency (Banks & others) Deposits (FC (B&O) D) with maturities of over one year.

(vii) Rupee Debt
This refers to debt denomination in rupees owed to Russia (with some very small amounts owed to other East European Countries) and paid through exports. Rupee debt is broken up into a defense and a civilian component. Since March 1990. The civilian component of rupee debt has also included rupee supplier’s credits.

(viii) Short-term debt
This refers to debt with a maturity period of upto one year. This is usually trade related debt.
The first seven categories may be termed as long-term debt. The eighth category is short term, as the very name suggests. A comprehensive definition of India’s external debt must include all these items although in different contexts external debt is defined to include only some of these kinds.