Business Environment
BUSINESS ENVIRONMENT
SYLLABUS
CHAPTER I
Business environment- Dynamic factors of environment- Importance of scanning the environment-Fundamental issues-Economics environment of business - Sock) - cultural environment- Political/ Legal environment -Cultural environment.
CHAPTER II
Political economy - Government and business -.Public control, of business -Trends and structure of Indian economy - Socio - economic problems of India
CHAPTER III
Government controls and regulations -, Regulating economic and industrial activities - Industrial Licensing policy - Control of monopolies -, Capital issues control - Government control over FDI and collaboration - Distribution and price control - New EXIM policy - Foreign exchange flow regulation -Technology transfer.
CHAPTER IV
Monetary and fiscal system - Banking and credit structure in India – Financial institution - Fiscal system - theory and practice.
CHAPTER V
Economic planning and development - Government and planning - India's eight five year plan and structural reforms - Industrial policies and promotion schemes - Government policy and SSI - Interface between Government and public sector.
CHAPTER VI
New Economic Policy Environment in India - Privatization - Liberalization and Globalization - Experiences and issues - Environmental assessment and evaluation.
REFERENCES : Mohinder Kumar Shartna - Business Environment in India Adhikary M, Economic environment of business Amarchand, D. Government and Business Francis Cheunilam : Business and Government Maheswari & Gupta : Government, Business and Society Kuchal, S.C : Industrial economy of India Fredrick Davis : Business and society.
Business environment
|1 |Environment - Introduction | |
|2 |Business Environment & Economy | |
|3 |Control of Business Environment | |
|4 |Monetary & Fiscal System | |
|5 |Planning & Development | |
|6 |Liberalization & Globalization | |
CHAPTER I
Business environment - Dynamic factors of environment - Importance of scanning the environment - Fundamental issues - Economic environment of business - Socio - cultural environment - Political / Legal environment -Cultural environment
This chapter focuses on the following aspects of Business environment: Definition of business, meaning of business environment, the classification of business environment, need to study environment in business decisions, the methods of scanning the business environment, issues that are to be addressed while scanning the environment, various types of factors that influence business environment, non-economic environment and its impact on business decisions.
To highlight the importance of the Business environment, three case studies have been appended at the end of this lesson.
Definition of business
The term business is understood and explained in different ways by different people. For some, business is an activity, for some it is a method of transacting, for sonic others, it is a method of money making and some people argue that business is an organized activity to achieve certain pre-determined goals or objectives. Dictionary meaning of business is: the act of buying and selling of goods and services, commerce and trade. Based on all these meanings of justness, we may define business as: gainful activity through which various elements of society conduct exchanges of the desirable things.
In the olden days, the people engaged in different activities in a society were classified into four groups : Brahmnas, Shatriyas, Vysyas and Sudras, Of these our fold classification of social activities, the activities of vysyas included basically, facilitating exchange. Hence, business as an exchange activity remained since the days of exchange started. It could also be recalled that business as a social activity became popular only when the wants of different people in a society were to be met with the available resources. In other words, whenever there was a scope for producing something, which is wanted, then business activity automatically emerged.
But now a days, business is viewed more as a profession or occupation. From the days of family owned business, we have reached a stage of professionals and experts starting and running business. It could also be noted that business administration and business management have emerged as the most prospective field of study and occupation. Persons with educational background in business, enter business or join business organizations to make them successfully function. Unlike the olden days, a number of interests are involved in business today, viz. owners, investors in business, suppliers, customers, employees, government, stake holders, administrators, managers, strategists, executives, and so many others. Hence, every business activity has to meet the goals or aims or objectives of these various groups of people. That in fact, has made business a most complicated activity.
Modern business has a number of features. Understanding of these would help to appreciate and organize business activities in a highly professional way.
1. Business is an economic activity :
Business involves organizing activities to satisfy human plants. These activities may result in the manufacture or production of a commodity or extension of a service. When a good or service is produced, resources are involved. Resources like human resources, physical resources and financial resources are all required to realize output to meet human needs. These resources are limited in supply, and so business involves identification of resources, evaluation of resource qualities, buying these resources and utilizing these resources. These resources being scarce in relation to their demand, the resources carry some value [i.e., price]. They cannot be procured at any cost to produce anything to meet human wants. So automatically selection among various resources come up which is made on the basis of requirement and cost. Once they are procured, then they are used in a very judicious manner so that there is no waste. That is optimal utilization-of resources is to be achieved. In this context, several decisions like resource selection, resource procurement, resource mix, resource utilization, etc. are all involved. As in all these stages, choice among alternatives is involved, every business activity is to be treated as economic in nature. Depending upon the business activity, the approach to selection among alternatives would differ. For example, in a manufacturing business, the choice is about input selection to supply quality output, in a service organization the choice is about-inputs and delivery process, in a government organization it is about production and equitable distribution of output, in an institution like bank, provision of various investment opportunities of short term and long term to the public, etc.
2. A business organization is an economic unit
Every business organization is engaged in transforming inputs into output to meet the requirements of the people. The selection of input and size of procurement will depend upon, the size of the organization. This would also depend upon the nature or product or service extended/by the business unit. All these are attended with the objective of making profit or surplus. Only when there is surplus achieved, can the business units grow. Hence creation of surplus in a business becomes the focal point and this is best achieved through optimal utilization of resources. That way, all business units have to achieve the maximum output with minimum inputs which in other words is the effort to achieve economic efficiency. Only economic efficiency can enable firms to be efficient in every other sense. Therefore, business organizations are only economic units in nature.
3. Business decisions making is essentially an economic process
All business decisions involve selection from alternatives. In other words, the rational choice of inputs is implied in every business decision. Hence, to be rational, a business unit goes through the process of : determining objectives, identifying opportunities, generating alternatives, classifying these alternatives as feasible and infeasible alternatives, then rank the feasible alternatives on some criteria and then select those alternatives fulfilling the constraints. For example, if the objective of a business unit is to maximize profits, then this would call for minimizing cost and maximizing revenue. On the cost side, the business unit have to identify, procure and utilize resources in the optimal way and on the revenue side, the business unit should determine the price which would facilitate maximization of revenue. Price determination again would depend on various factors like demand, supply, competitive scenario, government interference, statutory compulsions, conflicting interests of the stake holders of the business, etc. Therefore, every decision made in a business would automatically depend on the economic process.
Changing concept of business
It has been stated already that the concept of business has undergone a vast change. From a producer driven stage business has become consumer centered and driven stage. While the earliest concept was * sell what is produced' the modern concept is 'produce what is wanted' So every business depends on consumers and their ever changing needs. Any business unit which has successfully understood its customers and offer the product or service meeting their requirements alone is successful. But in this process, business units have to manage pressures from its owners and other stake holders. It should take into account the requirements of the workers and the trade unions. It should abide by the rules and regulations of a number of government agencies and institutions. It should meet the challenges and threats from competitors. Most important, it has to fulfill its social obligations. To survive every business unit has to also consider: the revolutionary changes in technology, market expansion, information explosion, competitor strategies. These are days when the consumers are better informed and so no business unit can afford to ignore consumer awareness and preferences. Technological development has brought with it the compulsion to use modern methods and techniques. Social obligations have made business units to meet pollution norms, etc. Trade union pressures have made them to design satisfactory service conditions for the work force. Then there is compulsion to provide for development of human resources in the organization to achieve organizational development. All these have made modern business ‘tight rope walking.’
BUSINESS ENVIRONMENT
Business involves activities, which links an organization with outside world. Within an organization, a business is governed by the behaviour of its employees, management or decision makers. But externally a business is influenced by a score of factors, which range from customers to competitors and government. Therefore, a business cannot be independent of (he influence of these external factors. It should also be noted that a business has absolute control over all the internal factors, it has no control over the external factors. So often it becomes necessary for business houses to modify their internal decisions and policies, on the basis of the pressure from external factors This highlights the need to be ever- cognizant of changes and influences of external factors so as to conduct business on healthy lines. It is in this context that business environment assumes all significance. Business environment therefore refers to the influences and pressures exerted by external factors on the business. The following Figure would help to understand the various factors which constitute the business environment.
From the Figure: 1, it would be clear that business organizations function in an environment subject to the influence of various constituents. Earh one of the constituents have in turn a number of factors influencing them. For example, economic environment has micro and macro environmental factors affecting it. To develop a right perspective about business environment, let us discuss briefly about each one of the external environment constituents.
1. Demographic environment : This refers to the size and behaviour of population in a country. Suppose a country has a huge size of population, then, the country would provide extensive business or marketing opportunities for all types of business organizations. On the other hand, a country with low size of population would force the business organizations to seek external market for their products or services. Similarly, if the population in a country is well - tuned to 'use and throw concept’ [like most of the Western countries] then there would be limited scope for repair shops and employment scope in that segment would be almost nil. But alternatively this would give wide marketing opportunities for manufacturing organizations. On the other hand, if the population is averse to 'use and throw' concept, then the business opportunities would be limited for manufacturing organizations but the repair shops, self-employed technical persons and spares manufacturers, would have roaring business. Hence, the size and quality of population emerges as a vital factor influencing business environment.
2. Economic environment: Economic environment refers to the overall economic factors like economic philosophy of the country, economic structure, planning, economic policies, controls and regulations, etc. All these have a serious impact on the functioning of business organizations in a country. For example, in a Capitalistic economic system, business organizations would be subjected to limited government regulations and controls. They would be more governed by market forces [demand and supply] rather than by other factors. On the other hand, in a Socialist system, the government would determine everything on behalf of the country. In a Communist set up, the government has absolute control over every aspect over production that private enterprises may not exist at all. In a Mixed economic system, government would be selective in allowing die presence of private enterprises in certain activities, reserving some spheres completely for governmental operations. Hence, the economic philosophy of the country directly determines the scope and functions of business organizations in that country.
3. Geographical and ecological environment: Geographical environment refers to climatic conditions and natural resources, which determines flu manufacturing scope and the nature of the products that could be marketed. For example, a country like Kenya has to manufacture more of products based on forest resources, while the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc., Countries in the tropical region would have organizations specializing in products from geographical resources available in abundant in that region, while organizations in Mediterranean countries have a Different business scope, Scandinavian countries have scope for dairy product manufacturing, etc. Similarly ecological imbalance is taking place at an alarming rate in the world today, that deforestation and hunting of rare species of animals for food are all prohibited now. Hence, while identifying the business opportunities, business organizations have to be conscious of the limitations posed by the geographical and ecological considerations.
4. Legal environment: It is well known that every country has a number of legal regulations to ensure that the interests of business organizations do not run counter to national interests. Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of customer complaints, payment of tax to government, manufacturing practices, human resources development to pricing of products and services, a number of legal regulations have to be fulfilled. For example, in USA and several western countries, consumer protection is very active, that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services. In India and other countries, very rigorous legal provisions arc in place to prevent hunting of rare species, that any organization, which manufactures products based on such species, have lo get legal sanctions. In case of failure to honor cheques issued, organizations are now a days made to pay hefty compensations. Hence, the deterrence in terms of legal provisions has become the order of the day. All organizations have to first of all address these provisions become coming in to steam.
5. Technological environment: This is a very significant external factor determining the destiny of business organizations. Supported by computerize operations, modem business organizations have succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time and place, etc. While communications use to take unduly long time in those days, business communications are instantaneous these days, thanks to modem satellite technology. Modern organizations have recognized that research and development alone can ensure organizational growth and stability. They have become more and more pro-active and remain as change agents of the economy. Governments have also become more technology conscious that right from police controls to registration of title deeds, computerizations has been adopted. Customer servicing through call centers is the latest necessity of organizations. Manufacturing activities have become more and more technically sophisticated. Therefore business environment has become highly dynamic.
6. Social environment: Social environment today has brought compulsions on business organizations to adhere to certain business ethics and morals. Social responsibility of business is an important force that modern business organizations cannot wriggle out of their duties and responsibilities towards the society. For example, every leather manufacturing or process unit is made to install pollution prevention system. Similarly, the expectations of various interests in the society have undergone a sea of change. The shareholders, promoters and owners expect a reasonable return on their investments. The workers expect security of service, terminal benefits, accident relief and various other compensations from the organizations. Government expects the business units to pay tax regularly and participate in social improvement. The distributors and agents expect the organizations to ensure smooth delivery process and demand more commission and compensation. Suppliers expect the organizations to give them continuous business and prompt payment of bills. Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all these groups remains successful and grows.
7. Educational and cultural environment: Educational environment in a country determines the quality of population. A country with very high illiterate population would always experience political and economic instability. Similarly, lack of education may also give scope for the existence of superstitious beliefs, fatalistic attitude, etc. People's choice of goods and services would be more governed, by their religious faiths and beliefs. For instance, in the colonial days, the Indian population was a victim of the Britisher's divide and rule tactics. The economic development of a country completely depends on the literacy level which alone can pave the way for improvement in science and technology, modernization, industrialization, etc. In such a country, the business opportunities are plenty.
Cultural environment refers to the values, norms, customs, ethics, goals and other accepted behaviour pattern of people in a country. In olden days, religion was the basis of all activities in a society. The religious leaders and institutions determined what business should do and what people must consume. In India, the existence of caste system has done more damage than any good. Caste based politics has become the order of the day. Under the pretext of working for backward and downtrodden people, several persons have amassed fortune. This is worsened by political support and policies. A modern organization does not have the liberty to recruit people on merit but it has to follow strictly die reservation policy of the government. Another serious aspect of the cultural environment is the attitude and behaviour of the people in urban and rural areas. The urban - rural divide has created enormous problems for administrators and specifically business organizations prefer urban educated person to persons from rural areas.
8. Political environment: Political stability is one important factor winch determines the business growth or downfall. A country with relative political stability would witness inflow of foreign capital and collaboration. By political stability we mean that the policies of government remaining consistent. As the business decisions arc based on government policies, frequent changes in these policies would force business organizations to change their policies too which, makes functioning very difficult. Sometimes, when the policies determined by a party in power are reversed by the succeeding party forming the government, there would be far reaching changes in business environment For example, India was following a policy of protectionism till late" 1908's. Hence, the industrial development and economic development could not take place at a rapid rate. In the absence of competition, the business organizations, made people to accept inferior quality goods and services. Once, the liberalization policy is adopted, the scene has completely changed. Today, no business can survive unless it provides quality goods or services on par with the multinational corporations. Another aspect of political environment is the political ideology with which a party is wedded to, would make the government tow the lines of countries with similar ideologies. Until the disintegration of USSR, India was simply following USSR's lines, but after the disintegration, India has to literally fend for itself. With the pressures mounted by the Western countries, India had to accept various trade and monetary policies. This has brought about a complete change in business environment.
NEED TO SCAN ENVIRONMENT
Having discussed very briefly the features of each one of the constituents of business environment, let us discuss why the environment should be analyzed by the business organizations.
It is well known that business enterprises cannot remain independent of the society and the institutions. So whatever decision they take as to be in tune with the requirements of society and the dictums of the institutions. A business organization has to continuously monitor the environment so as to identify the business opportunities and threats. By exploring its strengths and minimizing its weaknesses, if the organizations can capitalize these opportunities and effectively thwart the threats, then it would be able to grow. Let us elaborate this with an example.
Suppose an organization wants to introduce a new consumer durable product in the market. Then it would study whether there would be demand for this product and the product would be accepted by the society. At the outset, the organization would examine whether the product would suit the culture in the society. Suppose the product is 'use and throw' type. Then people would certainly be influenced by this feature of the product while evaluating the price of the product. In India, such a product would never be accepted as the culture here is to lengthen the life of every product by repairing it. Similarly suppose the product requires some critical component from abroad. Then unless the government policy is favourable the component has to be imported at a very high cost, which in turn would drive the price up. .Suppose the product is only one of its types, the organization would then emerge as a monopoly supplying the product. This may not be tolerated by the government. Suppose the manufacturing of the product involves advanced technology, then the type of human resources required would be well educated and trained. Obviously this will rule out the job 'opportunities for persons educated in rural areas. Further, if the manufacturing process involves scope for pollution, then the organization has to address it in relation to the provisions of the pollution control norms. Hence, in every decision of the organization, the external environment has an important role to play. Any future plans of expansion and forecasting of demand will depend upon the changes in the business environment. These changes may include both the current and expected changes. Unless these changes are also foreseen, decisions taken would turn out to be suicidal. In the case of organizations which have been pro-active, the changes in the environment do not affect them much. But those which fail to understand from their own experience or that of the other changes would remain challenges for ever.
Among the various constituents of business environment discussed above briefly, we will focus on the following constituents and discuss them in greater detail. The constituents now elaborated are: Economic environment, political environment and cultural environment.
1. Economic environment
The economic environment is composed of various set of economic policies, economic system, strategy of economic growth and development, resource endowment, size of market and status of infrastructural facilities in a country. All these affect the business environment one way or the other. To understand the impact of these on business environment, let us discuss each one of these components in detail.
Economic policies: Economic policies include fiscal policy, monetary policy, foreign trade policy, licensing policy, technology policy, price policy, etc. These policies lay the framework within which every organization has to function.
A] By fiscal policy we mean, the government's tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them. For example, suppose there is inflation in a country. Inflation implies that the people have high purchasing power and so they demand goods. To curb this, the government may raise the personal tax and also the corporate tax. Consequently, individuals will be left with lesser disposable income and to minimize tax, they may start saving through various tax -saving schemes. As far as the corporate are concerned, they have to part with more by way of tax to the government and this would bring down the rate of profit and dividend declared. As a result the corporate would resort to upward price revision, which might lead to further fall in demand for their products and services. During deflationary period, the government would reduce the tax so as to encourage more spending and investment. Even in tax policy, the government can be selective in taxing more of rich and exempting the poor completely. This would facilitate income re-distribution and improve the conditions of poor.
Similarly, by altering its expenditure on various public projects, the government would be able to influence the prevailing economic condition. Government expenditures are incurred on infrastructural development, public utility services like hospitals, new industrial units of very huge size, etc. For instance, suppose there is inflation in a country. The government would reduce its level of expenditure, thereby reducing the income of the people. With lesser income, the demand would, go down and so the price. At the time of deflation, the government would expand its public expenditure by investing in a number of public projects, so that there will be income generation find demand generation which will revive the economy.
Public borrowing is one more instrument in the hands of the government to influence the economic condition in a country. This involves government issuing bonds and encouraging common public and other institutions to buy them. By this, the government would be able to bring down the level of purchasing power in the economy and control the inflation. During deflation, the government would redeem the bonds and so with more purchasing power, the economy would be able to revive.
B] Monetary policy refers to the set of policies determined and implemented by the central bank of a country to control the economic condition. The central bank of a country has the basic responsibility to maintain the price level and money supply in a country. This is possible only when the central bank has certain instruments. These instruments available with the central bank to control the money supply and price level are called monetary policy instruments. They are called Credit control policy. Credit controls can be of two types: Quantitative credit controls and Qualitative credit controls. The former aims at limiting the money supply, while the latter is used to channelize the available credit in the country.
Quantitative credit control policy includes three tools: bank rate, open market operations and variable reserve ratio. Bank rate refers to the rate at which the central bank would re-discount the eligible bills already discounted by the commercial- banks. By revising the bank rate upwards, the central bank would be able to make the discounting by business organizations with commercial banks costly. This would discourage discounting and thereby money supply in the economy, would come down. Alternatively, by lowering the bank rate, the central bank makes credit available at a cheaper rate, and so the business organizations would go for a larger discounting of eligible bills with commercial banks. This liberal credit policy would have expansionary effects on the economy. Similarly, using open market operations, the central bank would buy or sell the securities in the open market and through that increase or contract money supply in the economy. For example, suppose there is inflation in an economy. To bring down the money supply, the central bank would sell the securities it has which will be bought by the commercial banks and other institutions. In this process the excess money with these institutions would be siphoned off, there by they have to restrict credit. Alternatively when there is deflation, the central bank would buy the securities and the money equivalent transferred to the banking system would facilitate adoption of liberal credit. Variable reserve ratio refers to the increase or decrease in the quantum of Statutory liquidity ratio and the Cash reserve ratio which the commercial banks have to maintain as a proportion of their total deposits. By increasing the ratios, the commercial banks would be left with lesser volume of funds and so they can lend less. By reducing the ratio, the commercial banks would be left with more funds with which they can make lending liberal. All these policies would have a direct impact on the business organizations and their operations.
Through qualitative credit controls, the central bank can : regulate consumer credit, alter the margin requirements, resort to persuasive efforts, take direct action on erring commercial banks, etc. Through these policies, the central bank would be able to regulate and direct the available credit to the priority sector and discourage credit for less priority or no priority sector. Hence, business organizations, which fall under priority sector, would be able to expand their business with cheap funds and assistance
C] Foreign trade policy: The foreign trade policy determines the scope for trade between countries. It would directly affect the business prospects of the business organizations. A liberal policy would extend the scope for exports and imports, while a restrictive policy would narrow the scope. Similarly, if protectionism is favored, then the business organizations will have lesser market threats from multinational corporations. Alternatively if liberalization is the policy, then every domestic business organization has to tune itself to every type of challenge posed by the business giants from abroad. Foreign trade policy also includes the exchange rate policy and exchange controls and customs duties. All these are fundamental to the growth of a business organization. For example, suppose there is full" convertibility, then the business organizations would be able to export and import and make payments with lesser restrictions. On the other hand, if there is only partial convertibility, the scope for trade is correspondingly less and the business organizations have to go through a sickening process of getting licenses for export or import and route all their payments through proper channel. Customs duties also play a vital role in determining the volume of external trade. A rise in customs duties would discourage domestic demand because the price of imported goods and services would go up find remain at a high level compared to the domestically produced goods and services, A reduction in customs duties would encourage imports and be favourable to the domestic manufacturers.
Government frequently changes the foreign trade policy, keeping in view the requirements of the country and the economic condition. To tide over the Glance of payments difficulties, government may resort to various policy measures like devaluation, exchange clearing agreements, tariffs and duties, exchange control regulations, etc. These tools would be suitably modified to achieve the desired goals. For example, to encourage exports and discourage imports, the government may devalue the currency, by which the imports of Indian goods abroad become cheaper and the imports of foreign goods in India become costlier. Hence the business organizations have to continuously monitor the changes in the trade policies so as to position themselves accordingly.
D] Licensing policy: In the pre-liberalization days, India adopted licensing policy in regulate the growth of industries in India. Since the days of independence, India adopted licensing policy, which in effect made the government control the growth of independence in accordance with the national priorities. For example, in India, till 1985, the industries in India were classified into four categories: industries completely owned by public sector, industries where both public and private sector participation was permitted, small scale industries and collage industries. Except the first category in all the other categories, private sector presence was permitted through licensing. This was resulted in several adverse effects, which were all explained in detail by the Dutt committee report. But till 1985, liberalization was never accepted as a part of growth strategy. But after 1985, the situation slowly changed that by 1991 India adopted a policy of liberalization. Consequently, the business scope and prospects of the Indian business organization changed since 1991. As has been already pointed out they were exposed to market competition and threats after liberalization. Performance has become a necessity for survival. By about the end of 20th century, the government also proceeded to disinvest several public sector units thereby opening up the challenges all the more for Indian industries. Therefore, the licensing policy and its direction have a lot of impact on the business organizations.
E] Technology policy: One of the most important economic policies is the technology policy. Improvement in technology is a condition for growth and survival in any organization. From a stage of man-dependent environment, the business organizations are all fast becoming machine-dependent [computer dependent]. Right from the stage of enquiries down up to planning the logistics, computers are widely used. Only from the mid -1990's the government started adopting a favourable technology policy. Apart from permitting free imports of computers and components as well as telecommunication equipments, the government has devised a number of schemes like Software Technology Park, to give a Phillip to the technology in India. Computerization has come to stay in telecommunication, railways, roadways, postal services, educational services, medical services, engineering, financial services, etc. This liberal technology policy has resulted in the growth of new industrial segment, viz., and information technology. Millions of youngsters get trained and are gainfully employed. Indian software engineers are considered as the best in the world and several of the multinational corporations depend on Indian supply of trained software and hardware professionals. The business environment has completely transformed over the past five to six years that unless organizations also accordingly change themselves, their survival will become a serious question.
F] Price policy: This refers to the controls that government has on the price in a country. This is necessary, because, unless price is controlled, there is bound to be inflation and then economic instability. Further in Indian context, nearly 35% of the population is living below the poverty line. They do not have any permanent employment. Especially the rural poverty is very serious. To overcome this situation, the government resorts to price control policy. All the essential and basic necessary goods are subjected to price control. While the poor and downtrodden are provided the essential goods at a controlled and subsidized rate through public distribution, the others are expected to meet their requirements through open market. Through demand and supply management, the government makes all the efforts to keep the prices under--control. For instance, by building up buffer stocks, the government overcomes the shortage of food commodities during adverse period. Similarly, specific concessions are given to industrial units located in backward regions and rural areas. This helps them to run on sound basis. As regards the manufactured products, the government adopts the administered price mechanism to control the prices. For example, the cooking gas is supplied to the public at one price, to the commercial establishments at a different price. This helps to minimize the strain of the population using LPG as cooking media. Similarly till April, 2002, petrol and diesel were subjected to administered price controls. Sugar, cement, etc., are also subjected to administered price. Hence, through price policy the government protects the interests of the people and this policy has a direct impact on the functioning of the business organization in our country.
2. Political environment
It is well known that the business environment in a country is very much interlinked with the political environment. The political environment simply means the political ideology which is adopted by the government. In a democratic country like India, this political ideology changes as and when there is a change in the party ruling the country at the Centre and the State level. A number of examples could be cited to prove how the political ideology has influenced the business environment of the country.
Before independence, under the guidance of Mahatma Gandhi, India was wedded to the policy of ‘Swadeshi’. That is, Gandhi advocated the use of only Indian made goods and to completely abstain from imported goods, specifically British goods. As a result immediately after independence, Indian government followed a restrictive, trade policy imposing very heavy customs duty on imported goods. This was thought that such a policy would help to achieve both the political commitment as well as protection of domestic producers from the invasion of foreign-manufacture-s and traders. A deeper look into such a policy would reveal that India never wanted to entertain a policy of allowing foreign trading activities on Indian soil as this would lead to colonization. After all the British East India Company entered the Indian shores under the pretext of trading with India in 1600 AD and the country had to pay a heavy price for the next 350 years being a colony. Hence, a restrictive trade policy was very much favored by every one and in such an environment the business environment was such the domestic producers could operate under the umbrella protection of the government.
This is also evident from the Industrial policy of the government in 1948, which clearly posed a threat to foreign interests in India. At the same time, the Indian government was very much influenced by the Russian type of planning. Being a declared democratic socialist country, India adopted planning as the strategy of economic development. The First Five Year plan was formulated and implemented without relying much on industrial development, when at the end of the I Plan it was realized that growth is impossible without industrial development, a shift focus was necessitated that the government gave emphasis on industrial development. But here again, the government approached the issue with caution. It felt that a controlled and guided industrial development would yield better results than a free unrestricted industrial development. The consequence was the Licensing policy. Though imports were permitted, industrial development through collaborative efforts with entrepreneurs abroad was subjected to a very critical scrutiny. When the Licensing policy led only to concentration of economic power in the hands of a few private sector units like TATA, Birla, and others, the government brought in the Monopolies Restrictive Trade Practices Act, in 1970. This has on the one hand put a check on growth of monopolies in India, on the other hand the industrial development was not taking place at a desired pace. The seeds for liberalization were sown in 1985, when the government felt that India could achieve miraculous growth through this liberalization course, it proceeded in that direction. This culminated in the introduction of Liberalization policy in l99l. This resulted in a peculiar scenario in –which ‘democratic socialism with capitalistic ideologies’ existed. Throughout the four decades after independence, India's policies were more governed by the political factors rather than economic necessities or compulsions. Hence, at the beginning Indian government adopted a purely socialistic pattern of development strategy while by 1990’s development by subscribing to capitalistic pattern has become the reality. This shift has a great impact on the business environment that domestic business today has to realign itself to survive and grow, in a competitive atmosphere.
Having discussed the effect of political environment on business environment let us examine how far the economic system is an important factor influencing business environment. Economic system refers to the organizations and institutions created for the purpose of satisfying the wants of human beings. In a country, available resources have to be utilized to manufacture and distribute goods and services, which would meet the needs of the people so that they are satisfied. These institutions and organizations function with their own rules and regulations. The economic system has certain broad characteristic.
1. The economic system always functions with scarcity of resources. How the system effectively and efficiently uses the resources will determine the extent to which the needs of the people are met.
2. An economic system comprises people. That is, a society of human beings alone can constitute economic system.
3. A set of institutions are created and used for the purpose of smooth functioning of an economic system. For example, banks, money, technology, government, price mechanism, planning etc., are all institutions through which the systems operate.
4. The basic objective with which an economic system functions is to satisfy the wants of the people. Unless there is want for a commodity or service, nothing can be produced. Hence, the economic system allocates the resources in such a way that the wants of the people are satisfied.
5. On the basis of the above characteristics of an economic system, it should be clear that the economic system is very dynamic in nature. That is, the economic system undergoes changes with every change in the institutions, though the rate of change would differ from institution to institution.
The economic system functions to answer three vital questions: a] what to produce b]how to produce and c] for whom to produce.
Answering these questions assumes enormous significance as that would determine every activity within a country.
The first question 'What to produce' depends on what is wanted. The economic system would throw signals through which the requirements of the people could be understood. But not all wants could be satisfied. This is because; a country may not be gifted with all the necessary resources to produce all the goods. Hence, depending upon the resource endowment a country would decide what it could produce. Then there is a problem of prioritizing the available resources among the goods to be produced. Resources should not be used for the production of unwarranted goods. The production of goods, which are harmful to human beings, like narcotic drugs, should be prevented. Hence, considering the availability of resources, the economic system should opt to produce only goods that would satisfy the wants of human beings. In this context it is also necessary to weigh the individual requirements and the national requirements for goods. The latter should be given preference over the former.
The second question ‘How to produce’ addresses basically, issues relating to selection of right strategy, technology and investment. For example, a country like India, with very huge population should not prefer capital -intensive technology, as that would lead to more unemployment of human resources. Similarly, while selecting the technology, a country should weigh a number of considerations like relevance of technology, cost of technology, support in case of failures, consequences of the technology used, etc. Another vital aspect is the investment that a country has to make while selecting the strategy and the technology. A very important question is whether the available funds should be invested in sophisticated research and development or meeting the basic needs of the people. Hence, the second question would ultimately determine the efficiency with the available resources are utilized.
‘For whom to produce’ implies that based on the resource utilization, the country as a whole should benefit and not a few segments. Hence, having produced the goods and services, how they could be equitably distributed is an important aspect. The distribution of national product would differ from country to country depending upon the economic system in vogue.
It has been already pointed out that the way in which the above three questions are answered depends on the economic system which functions in a country. To understand how these answers differ among the economic systems, we should understand the different types of economic systems. In the next section, the details of different types of economic systems are discussed.
Types of Economic system
Economic systems may broadly be classified into three categories: Capitalism, Socialism and Mixed economy. A number of other types also emerged but all of them came close to any one of the above three types of systems. Such systems include: communism and Marxism Let us now discuss the features, strengths and weaknesses of each one of these systems.
1. Capitalism
Capitalism is an economic system based on the principle of free enterprise. Individual ownership of resources is an important feature. With control and command over resources, individuals can conduct any type of business. The object in such a system is to maximize private gains. Any type of enterprise or production of any commodity or service is permitted, so long it is wanted by the society. In such a system the market forces determine the resource allocation and price. That is, the demand and supply forces together determine what to produce, how to produce and for whom to produce. Price mechanism is the nucleus of the capitalistic society. The price mechanism clearly reflects the wants of the people. Once this is known, the producers would allocate the resources to manufacture and sell the products in great demand. While doing so, there is no control or regulation over production. In other words, oligopoly environment prevails. But each producer differentiates his product that he would be able to stay in the market. Technology and innovation ensure the stability and growth of organizations. As a result only efficient organization would survive. The resources would be fully utilized. The system is so flexible that it can adjust itself for any economic condition. The workers get equal opportunities and those with skills would be able to command better wages and salaries. On the whole capitalism offers scope for growth of efficient individuals and organizations.
But capitalism has a number of weaknesses. The important ones are discussed below.
1. Economic inequality is invariably found in capitalistic societies. Individuals and organizations with ownership of resources and hold over the market for (heir product or service, would be able to maximize their gains. Those who have no such property would remain poor and become poorer. So it is said that under capitalism, rich becomes richer and poor becomes poorer. The inequality in wealth and income widens over a period under capitalism.
2. The scope for the emergence of monopolies in capitalistic societies is very high. Organizations by virtue of their economic power would be able to easily eliminate rivals and competitors in the market. There is also possibility of such monopolies influencing the government in policy making and intervention.
3. Though it is said that capitalism would always lead to ideal allocation of resources and fuller utilization of resources, in reality the experience is that resources are held by individuals and organizations and under utilization is the result. Sometimes, products which are not really national priority are produced and forced on the public, through advertisements and sales promotion techniques.
4. Though it is expected that in capitalistic societies the output would increase to optimal level, in. practice this is never found. Producers always restrict output to maintain a high price and also maximize profit. So excess capacity would exist in many industries.
5. In a capitalistic society the divide between the haves and have-nots widen that over a period. Existence of poverty among the sophisticated sections of people is also seen. This results in built up of frustration in the society. Over a period this might lead to revolution and social upheaval.
2. Socialism Socialism refers to an economic system ir which the following features predominant:
The resources are owned by the State or state owned institutions. Production takes place in the interest of the society and not for maximizing profits of individuals or organizations. Government decides the type of productive efforts to be permitted. In other words, in a socialist country, government can adopt licensing system and other types of regulations to prevent the emergence of monopolist and exploitative tendencies. Maximization of Community welfare is the objective than profit maximization. Another very important feature is the government ensures equitable distribution of national product. Public distribution system assumes enormous significance in such an economic system. On the whole, the socialistic society differs from capitalist society in every sense. In the broad spectrum of economic systems, socialism and capitalism occupy two extremes. In the world today, pure capitalistic society is not seen in any country. Even in USA, government interference in various economic activities is found. For example, in the field of national defense, atomic energy, space technology, social security, etc., the presence of government is almost complete. Government also retains the right to interfere in the market system, whenever there is deliberate and intentional attempt to monopolize the resource ownership or the market. Similarly, in the erstwhile Soviet Union, socialistic principles were followed. But even here, there were instances of private ownership of property, enterprises, etc., were reported. • That is why it is very difficult to come across pure capitalistic or socialistic societies.
The merits of socialism includes: 1. Collective ownership eliminate emergence and existence of monopolies. 2, Resources utilization is planned and achieved in the interest of the society. 3. Government with its control over the resources is able to use resources fully utilized and avoid wastage and production of unnecessary goods. 4. As equality in distribution is the fundamental feature of socialism, there is no scope for widening inequalities rind the government takes steps to narrow the gap between the rich and the poor through various measures.
However, socialistic states suffer from the following limitations: 1. Excessive dependence on government decisions often result in delay in offering any public service. 2. Bureaucratic control becomes an integral part of the socialistic principles. As a result the benefits and its direction of flow is determined by the bureaucrats. 3. Government by undertaking excessive responsibility on its shoulders, abets inefficiency and corruption in the society. 4. No incentive and motivation for individual excellence or achievements is possible in such a society and so innovations and inventions do not really lake place in large scale in such a society. 5. With governmental presence in every walk of life, efficiency and productivity suffer. 6. Lack of support for individual liberty kills initiative.
3. Mixed economy
Evolution of the concept of Mixed economy:
There was no reference to the mixed economic system in Economic literature in the past. Economists were mainly familiar and advocated the Laissez faire or free enterprise system, as several countries could develop fast following the free enterprise system, in which there was no or little government intervention. The entire economic system operated with the price mechanism at its center point. The producers produced what the consumers wanted and this provided very little scope for the government to intervene in the system. The Classical economists and their ardent supporters believed that the invisible hand will direct the economy and with private initiative and enterprise, every country should be able to record a faster growth as proved in the case of UK, USA, Europe, Australia, and other countries.
But over a period under the leadership of Karl Marx, a new economic system was developed called socialism, in which there is no scope for any private enterprise as everything owned and controlled by the government. The government decided the type of developmental activities and me requirements of the society and used the available resources in the provision of these requirements. Several countries like USSR, Communist China, Vietnam, Cuba and others preferred this socialist system in which government is made the custodian of the society. The main reason for Die emergence of this new economic system was the failure of capitalism during the 1929 depression to revive every economy from depression. Keynes himself thought that capitalism without some of its evils could certainly help economic recovery. Hence, a time came when economists felt that cent per cent free enterprise or cent per cent government governed economic development cannot work satisfactorily. A compromise between these extremes was thought of as an ideal economic system. The new system called 'mixed economic system' contained the merits of both the capitalism and socialism and appeared to be full of promise. This mixed economic system is adopted by India as indicated by the First Industrial Policy Resolution 1948.
Characteristics of mixed economy:
i. Co-existence of public and private sectors:
In a mixed economy, one will find the existence of both the private and public sectors. In such a system, the government will undertake the responsibility to build and develop certain sector activities and leave the other activities for the private initiative. In India, the government announced the adoption of the mixed economy system through its 1948 Industrial Policy Resolution. The government clearly earmarked the industries to be completely under the state control, the industries which are to owned and controlled by the state as well as the private sector and industries which are completely left for the private sector. In this way the Resolution provided for the simultaneous existence of both private and public sectors.
ii. State participation in economic development:
This is the second feature of mixed economy, according, to which the state reserves its right to design and decide the type of development to be achieved. In such a set up, the government strives to promote the welfare of the country by ensuring social order, social justice and establishing all the necessary institutions which are required to achieve the desired pattern of growth and development.
iii. Distribution of ownership and control of resources:
This is the next feature of mixed economy. In this system, the government itself enters the field of production so that the available resources are fully utilized. This will also help to avoid concentration of wealth in the hands of a few and enable distribution of ownership and control of productive activities. As a result there is no scope for exploitation of any group, say labor, by any other group. In this way the weaker section of the community is well protected and taken care of. Only the mixed economy will enable the government to attain the objectives of the Directive Principles of the Indian Constitution.
iv. Directing the investment in socially desirable projects and channels:
Mixed economy facilitates the flow of investment into channels which confers the society with several benefits. For example, the Indian government has invested huge amount in several projects to develop the infrastructural facilities. This forms the basis for the development of other sectors. The investment in these infrastructural areas will not come forth from the private sector as the return is nil. Hence, the government in a mixed economic set up provides the thrust by developing the necessary background and strength which will encourage the private sector to invest in profitable opportunities. In this way the government plays a key role in a mixed economic system.
v. Scope for achieving balanced economic development:
I Left to itself, the private sector would establish its enterprises only in urban or sub-urban areas and that too in already well developed states. This will mean other areas will have no scope for development. But in a mixed economy, the government will itself undertake the initiative to set up industries in backward areas and encourage the private initiative to set up industries in such areas by offering several concessions and exemptions. In the absence of nixed economy, several states in India would have remained industrially backward.
vi. Ultimate control and regulation in the hands of government:
This feature of mixed economy clearly spells out that in every activity affecting the economy, the government will be the ultimate authority. Though the private sector is assigned its role to perform, the government will still monitor and control the way in which the private initiative is performing its role. Infact, according to the 1948 Industrial Policy Resolution, the government made it clear that the industries already established by the private sector belonging to that category in which new industries will be established by the government alone, the government would undertake the review of the working of these industries in private sector after a period of ten years and if found not satisfactory, they would be taken over by the government. Though this was criticized as a threat of nationalization, yet through such a provision the government underlines its authority. Similarly in the banking and insurance sectors, the government nationalized banks emphasizing its powers to control and regulate any sector.
vii. Co-operation in the field of economic development:
According to this feature of mixed economy, the government formulates the design for development and invites the private sector to participate in the development. It clearly spells out the guidelines which would govern such cooperative efforts and the limits of freedom granted to the private sector. In Indian case, the government prepares the plans for development and spells out the areas left for the private initiative and the areas that will be under state control. Hence, there is scope for the development of private sector, though only according to the design developed by the government.
Planning process under mixed economy:
As has been already stated, in a mixed economy there is a need to achieve a compromise between self-interest and social interest This is a very difficult task as the government has to carefully foresee the type of development it wants to achieve and closely monitor the activities of the private sector to ensure that the social interest is never at stake. Obviously, planning is a very difficult exercise in a mixed economy set up. The success of planning will depend upon; i) the extent to which the public sector is able to rise to achieve the social gains aimed for, ii) the success of the state in guiding and regulating the private sector activities towards social goals and iii) the extent lo which (lie state is able (o check the distortions taking place in investment by private sector affecting (he interest of the public sector. Hence in the planning process the state has taken up the following steps to ensure the accomplishment of the objectives of the mixed economy, a. By holding complete ownership of defense and heavy industries, the government has provided an industrial base with which the private sector is expected to plan its investment activities.
b. The state also has made huge investments in economic infrastructures so as to help the extension of market for goods, raising the productivity in agricultural and industrial sectors, encouragement of further productive investment
c. The government has complete control of the financial institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the state. The government could also realize the expected gains by encouraging the priority activities in every sector. The economic institutions are made to support the weaker sections of the community.
d. Through powerful legislations like MRTP Act, FERA, etc., the government could ensure that there is no scope for exploitation of the common people by the private enterprise. Such a legal framework lays down the rules of the game and ensures fair play in a mixed economic set up.
e. As a method of protecting the weaker and downtrodden people, the government has policies like rationing, price controls, etc. Such regulations are built in the planning mechanism itself, so that the private sector cannot exploit the community.
f. Towards the improvement of welfare in the economy, the state has undertaken several specific programs aimed at specific target groups. For example schemes aimed at the backward and schedule tribe providing them reservation in educational, employment and other opportunities, rural oriented schemes for the rural folks, health for all schemes, provision of free educational and medical facilities up to a certain level, etc. All these schemes aim at improving the social welfare. In all these activities the private sector is also welcome to play its role.
g. The government makes effective use of the tools of fiscal policy viz. taxation and public expenditure, so as to achieve the objectives of economic planning.
Distortions in the planning process :
We have explained above that the fundamental objective of the mixed economy is to subordinate the self-interest for the national-interest whether this has been achieved in Indian situation is a moot question. In spite of various types of regulations and controls, the fruits of mixed economy have not appeared to have reached the common men. Even after four decades after the adoption of mixed economy principle, we come across glaring distortions which go to prove that mixed economy in practice has not been very effective. This is mainly because of the influence exercised by the private enterprise through political influence, corruptive activities, dishonest bureaucrats, powerful national and international lobbying, etc. The extent of distortions could be understood if we study the following points: 1. One of the basic objectives of Indian planning is to eradicate poverty, but five decades after the adoption of planning strategy, the proportion of population below the poverty line has not significantly changed.
2. The planning mechanism has failed to check the rise in price level. Inflation has come to stay in India with no policy being effective. When double digit inflation is controlled and results in single digit inflation, the country boasts of having achieved something very great.
3. The emergence and existence of black money is yet another yardstick to prove the failure of the mixed economy. The high level of taxation has only resulted in effective tax evasion and tax avoidance. As a result the distance between the rich and the poor remains wide.
4. Till date there has been no effective method to prevent the concentration of economic power in the hands of a few. The rich becomes richer and the poor, the poorer.
5. In spite of five decades of planning, unemployment is very much on the increase and the backlog in every plan is assuming dangerous proportions. This is mainly because of the failure to control fee growth of population and the adoption of capital intensive production techniques.
6. The failure to achieve re-distribution of income is yet another glaring distortion. All the efforts to bridge the gap between the wages of rural and urban workers or increase the real wage of the working class has not succeeded.
When we study the above points, it is clear, that mixed economy has not carried us in the desired direction. This is mainly because of the inability of the government as it is frequently yielding to the pressure exerted by the vested interests. Even the recent liberalization measure could be viewed from this angle. But a country cannot remain independent of the international pressures, especially when India is depending upon the IMF and EBRD, all its internal policies are indirectly governed by these lending agencies: Whether this is right or wrong is a question that could be answered only after we evaluate the gains of liberalization policy. But on the whole, the expected benefits of mixed economy have not been realized as is clearly proved by the distortions discussed above.
4. Marxism
Marxism is essentially socialism in different garb. The pure socialism is proved to be impractical and it made role of government the center point. Most of the government could not fit in this role effectively. Further capitalism with its explicit goals threatened the success of socialism. It was at this juncture that Karl Marx came up with his ideology, which led to the evolution of Marxian socialism. Marx succeeded through his logical reasoning that economics dominates every activity of a society. This leads to class struggle. When one struggle is tackled another one crop up. The continued onslaught of the capitalist on the society would result in the creation of haves and have-nots. This division of the society would widen with the continuance of capitalism, which ultimately will result in class struggle. Marx explained through his theory of value that every product should be valued in accordance with the value of labor contained in it. But the laborers are rewarded at a very much lesser rate than what they create. That is,, every laborer contribute more by way of his work to produce the product but he is paid a very low wages. The difference is the gain realized by the capitalists. The capitalists would accumulate profits this way at the cost of worsening labor condition. Over a period the divide between the proprietary class and the labor class would widen that much, that there would be social upheaval. Karl Marx predicted class war and argued that unless the capitalist class realizes this, there would be severe impact on production and economic condition of a country. His argument came true in the case of France that the French revolution broke out in 1789. There were similar problems in different parts of the globe, like in erstwhile USSR [Scissor's crisis], and China. China, especially remained a closed economy till early I990's. But in China, the Marxism led to the emergence of communism. This is discussed in detail below.
Though Marxism held sway over a number of countries for some time, yet it has inherent defects. Firstly, Marx's view that all activities in all countries are basically economic in nature is not true. Secondly, his argument that class struggle continuously takes place in every country did not hold water. A number of other reasons of economic, social and cultural nature led to the struggle and not the way Marx predicted. Thirdly, the theory of surplus value could not be applied in practice in service industry. Fourthly, Marx never took into the interference that a government could make in case of exploitation of society by the capitalists.
5. Communism
Communism is Marx's prediction at the fall of capitalism. Marx argued that the widening inequalities in a society coupled with class struggle should ultimately sound the death knell of capitalism. He is of the view that when capitalism falls, the communism will emerge in which, the laborers will lead the country. The government will own all the resources and determine the needs of the society. It will also decide various other issues of macro and micro importance. Government will turn out to be the custodian of the society and in a pure communistic society; people will lead a life where basic necessities are provided by the government. Unemployment will be very low as every one is occupied in some avocation or other.
But the way in which communism was practiced in China created an impression that the government would be oppressive in its approach that the people will lead a life of slavery. One has to work to earn his bread. Military type of regimentation was enforced that common people were subjected to absolute control and regulation by government. The economy remained closed without any international relations, both economic and social. There were no two party systems that the nominated representatives of the Communist party attended to all the governmental responsibilities. Market mechanism is completely absent in such a system, as government determined everything on behalf of the country.
As has been already pointed out depending upon the economic system, the business environment will change. In a capitalist system, the environment provides opportunities for every one who wants to maximize gains. In a socialist system, the government undertakes the responsibility of providing everything to the citizens. In a Marxist economy, it is ultimately the laborers who will hold the reins. In a Communist economy, it is the group of administrators who run the economy in the interest of the economy.
4. Cultural environment
Culture refers to the behaviour, attitude, way of living, belief, faith, law and custom of people in a country. It; could be immediately understood that these aspects would differ from country to country and also in different regions of the same country. It is always said mat the culture determines the people's preferences, which directly determines the success or failure of business. Hence, cultural, environment has a direct impact on business. A number of examples could be cited to prove this.
In olden days, eating in hotels was considered unhygienic and majority of the people never used to accept food from outside. But today, even the orthodox/ people freely take their requirements from fast food restaurant. This change has come about, because of the changing culture in the society. For instance, with the presence of a large of multi national corporations, the executives working in such organizations are very well paid that they rarely find time to spend on food. Such executives prefer working lunch rather than lunch. So provision of such working lunch should not take time and if food is made available readily without any time loss, then the executives would be able to save their time. Further when executives leave home very early, it is impossible for them to prepare some food and get for their lunch. So when their working lunch requirement is met nearby by their work Spot in am ambient atmosphere it would be welcome. This has given a fillip to the growth of Fast food restaurants. In this manner, certain new cultural practices are transmitted to the society. Similarly, regarding the requirement of clothes, people are slowly switching on to ready made garments of different varieties and design. Sensing this, several international brands in ready garments are entering the market. This is how the business adapts itself to the cultural environment in a country. Business also conducts research continuously for the purpose of innovating and inventing new products and uses for the existing products. It is through this process that several consumer durable products like wet grinder, mixer, washing machine, geysers, etc., have been introduced in the market. Having created them, the business impress upon the people to use them as time saving devices.
Hence, cultural environment can create business opportunities. Any organization which is able to sense the business opportunity and capitalize it, would be able to succeed and grow. But it should be noted that changes in culture do not affect every part of the country or people in the same way or at the same time. It is possible to observe certain^ regions/people lag in adopting a particular culture. This is what is referred to as ‘cultural lag.’ For example, even to day in rural areas, certain practices like untouchability is found, though it is a crime. Such cultural lag is found mainly because of illiteracy, ignorance, conservatism, sentimental factors, political factors and vested interests. Business should be aware of this while addressing the requirements of people in different regions and nations. One more aspect of cultural is the change. While some of the changes are accepted very fast the others are resisted. While in some families divorce is accepted as a common feature, in others, divorce is viewed very seriously and extreme efforts are taken to pacify the parties in conflict. Another important example is the women's employment. While in olden days women were destined to domestic works, today women entrepreneur lead several fields. Attitude towards work is yet another area when Indian culture lags much behind the Western and Japanese culture.
In the light of the above discussion, the following case studies would make sense and prove how business environment can either give a boost to an organization or cause a doom.
CASE STUDY: 1
WILLIAM HENRY GATES, III AND THE MICROSOFT
MONEY MACHINE
Several years ago, when his fortune was a mere several hundred million dollars, a weekly magazine labeled Bill Gates as ‘America’s richest nerd.' In 1992, at age 36, he had passed Donald Trump, Ross Perot and others to be listed as America's wealthiest person by Forbes magazine; the value of his holdings had grown to an estimated $ 6.3 billion. How did the free enterprise system help him to attain such phenomenal wealth?
After graduating from high school in Seattle in 1973, Gates went to Harvard. While there, he learned that the personal computer [PC] was in the development stage. He dropped out of school and threw himself completely into designing an operating system [the program that coordinates the hardware and software of the computer] for the PC. His system, [S - DOS the Microsoft Disk Opening System] was so good that IBM agreed to use it in their line of, personal computers. With IBM setting the industry standard, other computer manufacturers quickly adopted MS DOS as well. Today it is estimated that more than 80 per cent of all personal computers in the world use this system: Gate's firm, Microsoft, Inc., makes money on every computer sold with MS-DOS as the operating system.' In the 1992, the firm recorded $2.8 billion in revenue and $ 708 million in net profit. It ranks third in size in the industry, behind IBM and Hewlett - Packard. Gate's personal holdings of some 90 million shares of common stock represent about 33 per cent ownership share of the company.
Microsoft also produces programs for word processing, spreadsheets, and a variety of other applications. One of Gate's latest ventures has been to purchase the electronic reproduction rights to thousands of art and photographic works from museums and libraries around the world. These will be used as a part of his plan for interactive home entertainment systems.
With extremely hard work, a creative mind, and a willingness to take risks, Gates has demonstrated how the market rewards the successful entrepreneur. He was able to produce what consumers wanted at a price they were willing to pay the result was that both and they are better off ! This is the essence of free market economic system.
From the above case study, it would be clear how a pro-active, imaginative and innovative entrepreneur can, carry the business with him. Though a school drop out. Gates has climbed the pinnacle of business world, merely by his ability to anticipate the changes, in the personal computer industry.
Failure to read the business environment and initiate appropriate steps to protect the business, can lead to a serious threat to existence itself. This would-be clsar from the following case on Maruti Udyog of India and Doordarshan.
Case study : 2
MARUTI UDYOG LTD.,
When Indian car market was opened for new private players, Maruti Udyog limited, which had till then enjoyed an enviable position in the market, suddenly faced severe market erosion. Even though Maruti is the market leader and has the largest range of products, cheaper cars, good service network and better cost structures, it has been steadily losing its market share for the last three years and the valuation of the company has halved in 4 years time from Rs. 80 bn in 1996 to Rs. 40 bn in 2000.
A Marjti udyog rival: What MUL did to Premier Automobiles and Hindustan motors is now being done lo it.
Empire under siege
Jagdish Khattar, MD MUL was a man in trouble. He was facing what was the biggest setback ever for the company. With all strategies backfiring, he seemed to be fighting a losing battle.
Problems were aplenty - the Maruti 800 segment was facing demand - erosion, Zen and its arch-rival Santro were very close in terms of volumes, Esteem was losing ground, Baleno, Wagon R and Alto were yet to prove themselves, while Gypsy was snugly ensconced in its niche. [Gypsy was not generating many volumes needed for MUL]
Despite the fact the fact that MUL had the biggest range of products, the cheapest cars in the market and a service network and cost structures that were better than anyone else, it had steadily lost market share - down from 82.62 percent in 1998 to 52 per cent in 2000. With the impending disinvestments, [Government's. policy of disinvestments in Public sector units includes MUEL also along with other profit making PSUs.] MD was facing flak from the government as well. With market share declining, MUL’s valuation had also come down drastically. While it was valued at Rs. 80 bn in 1996, by December, 2000, the figure had touched Rs. 40 bn.
The building blocks
MUL was the largest car manufacturer in India with a market share of over 52 per cent. It was a joint sector corporation set up by the government of India and Suzuki Motor Corporation, Japan. MUL was incorporated in 1981 to take over the assets of the erstwhile MUL set up in June 1971 and wound up by a High Court order in 1978. The assets of MUL were then acquired buy the Government under MUL Acquisition and Transfer of Undertakings Act, 1980. In 1982, the Government signed a joint venture agreement with Suzuki of Japan. Suzuki's stake increased from 26 to 40% in 1987, and to 50.25% in 1992. The company was a significant exporter with exports to over 50 countries.
The company manufactured passenger cars at its factor in Gurgaon, Haryana, with an installed capacity of 350,000 vehicles. The first product, Maruti 800 was launched in 1984, followed by the all-terrain vehicle Gypsy in 1985. Over the years, MUL expanded its portfolio with the launch of the Maruti 1000 [1990]; the Zen and the Esteem [1993]; Zen Diesel [1998]p Baleno, Wagon R and the Alto [2000].
MUL was known for its ‘value for money pricing’ strategy, which had been made possible due to the high levels of indigenization of its vehicles. While the Maruti 800, Zen, Esteem, and Omni were indigenized to the extent of over 90%, the Gypsy was indigenized to the extent of 82% and the Alto to the extent of 76%. The company had a network of about 375 vendors and had several joint ventures with some of them to source its raw material requirements It's sales [comprising 112 dealers and sales outlets in 86. locations] and service [comprising 1010 service workshops covering 412 locations] network was one of the largest in the country.
The Stumbling blocks
Till October 1998, MUL enjoyed a market share of 83.6% reacting to the increasing number, of players, its-MD commented, “Obviously, our market share will decline with the entry of new manufacturers and models in percentage terms, but not in actual volumes.”
With cars ranging from Rs. 0.21 mn to s. 0.67 mn, problems associated with an ever-expanding product portfolio ‘constantly plagued MUL. Besides the declining market share, cannibalization was another issue the company could ill-afford to ignore. Forced to take stock of what went wrong, MUL realized that it was dependent to a large extent on a single product - the Maruti 800.
The 800, along with the Omrii [build on the same platform accounted for 75% of units sales in the car. market in 1998; it had always been the 'breadwinner' for MUL. One of the biggest success sagas in Indian automobile history, the 800 started losing its sheen in the 1990’s as newer players emerged in the market. The entry-level segment ceased to be the center of action as easy car finance availability and the lure of new cars made the Rs. 0.3 inn to Rs. 0.4 mn segment the most attractive one. The fact that MUL made only minor changes in the models over the years led to the perception that MUL was selling old models.
To tackle these problems, MUL adopted a two-pronged strategy. One, to introduce new models; two, it decided to increase the number of variants rapidly, offering a new model with every increase of Rs. 25000. MUL also revamped its engines and took the 800 to semi-urban and rural areas, to compensate for the declining urban sales. The company was aiming to move entry-level prices up without losing out on volumes by launching cars in the segment just above the 800. As part of this, Baleno, Wagon R and Alto were launched in quick succession. [Alto was launched in the same league as the 800. Industry observers contended that Alto's launch in the 800-cc category signaled the beginning of a gradual phasing out of the 800. However, MUL sources were quick to deny this- and-asserted that the 800 would be retained:] However, despite favourable reviews, these cars did not go on to become the saviors of MUL was hoping for.
The engine-revamp exercise for the 800 had pushed its price close the base model of rival Daewoo's Matiz, eroding the price advantage on which the model survived. As a final resort, MUL decided to play what it thought was its trump card - price reduction. The move was also justified on the gorunds that the company was following Product Pyramid Profit model. [The Product Pyramid incorporated the distinct customer segments and their varied purchase -behaviour in terms of style, colour, feature and price preferences. The base of the Pyramid was occupied by low price, high volume product s. like the 800, where the margins were slim. The apex of the Pyramid was occupied by high-price, low volume products such as the Maruti Esteem VX. Although -profits were concentrated near the top, the base played a crucial role as it created an entry-barrier for competitors, and insulated the profitable area near the top from competition. In the specific case of cars, the most common model was the new product profits model. Thus, the profits associated with a car followed the "s" curve of its life cycle, and declined as the product neared the end of the maturity. phase. MUL's decision to drop the prices of all the versions of the Maruti 800 came at this stage].
MUL reduced the prices of Maruti 800 and Zen by about Rs. 24000 and Rs. 51000 respectively in December, 1998, This resulted in a drop of Rs. 3 bn in net profit for the year 1998-99. The MD justified die price cuts, saying that MUL wanted to make up for the increase in the 800’s price due to higher sales tax figures for the period. The move was described as an attempt to "redefine the price-value equation." MUL sources claimed that they expected lower prices to bring an incremental growth of 25% over the next 12 months. However, despite the price cuts, by March 1999, the company's market share decreased to 54.57%
In early 2000, MUL announced that it would pass on the cost of installing Euro-II compliant engines with Multi-point fuel Injection [MPFI] to its customers. There was a rush in the market for the 800. as many first-time consumers who did not want to bear the hike, hastened their purchase. MUL had to increase the price of the 800 from. Rs. 0,18 mn to Rs. 0.22 mn. Around the same time, MUL decided to meet the competition head-on by having a model or variant with every increase of Rs. 25000. The idea was to give the customer the widest choice possible. By mid-2000, the company offered 43 models in a market, which had only 127 models.
In June 2000, sales of the 800 stood at 5296 cars compared to the 11000 plus cars it had been selling per month for the previous few years. MUL had no option but to again slash prices of various models by Rs. 25000 to Rs. 30000, to bring back the sales to normal levels. Other changes initiated by the'-company included a transformation in its customer - interface and a revamped branding strategy with the new cars [Wagon R and Baleno] coming with the Suzuki prefix. The price cuts, however, only added to the declining bottom line problem. MUL reported a loss of Rs. 6792. II on every car sold between April and October 2000. MUL sources, however, attributed this to the fact that MUL had not passed on the cost of up-gradation to meet the Euro;I and Euro II emission norms to its customers. '
The industry strikes back
The Indian car market of the early 21s1 century was a burgeoning one with over 127 models on the roads, and many more in the pipeline. Increased competition had radically transformed the market, manifested clearly in carmaker's pricing strategy overhaul. Manufacturers were breaking the conventional rules of auto pricing by moving from cost-based to value-based pricing and the market soon, became a buyer's market.
When the new players entered the market, there were no doubts that the main artillery for the companies in the car-wars would be the pricing strategies. It was not just a case of competition forcing a downward revision; the players were even ready to forego profits in the short run. Brand building and technology / feature driven campaign were to be add-ons to the above plan. Industry observers were quick to point out that MUL would have to get entangled in the price reducing game.
A Business India report pointed : No one is better equipped to fight a price war than Maruti. Its phenomenal profitability, cash reserves and efficiency in manufacturing will allow it to slash prices on all its models without feeling the pinch as much as others.
However, Hyundai was the first company to introduce what came to be known as, pricing based on customer's value perceptions. It introduced the base model of Santro at Rs. 0.29 mn, while two other versions were priced at Rs. 0.34 and Rs. 0.37 mn. The basic version was targeted at buyers of the 800, and the other at the Zen. Thereafter, hunches in the Rs. 0.2 mn to Rs. 0.6 mn segment by Ford and Hyundai showed highly innovative pricing strategies being adopted. Soon after, Ind Auto dropped the price of the Fiat Uno Diesel by Rs. 64867 and Premier Automobiles Ltd lowered the prices of the four versions of the Premier Padmini by Rs. 5000 to make it Rs. 53000.
MUL had adopted a skimming strategy for Esteem. Launched in 1993, it was positioned as a luxury car. This continued till the arrival of Daewoo's Cielo in 1996, which started eating into Esteem's share. In 1999, the segment saw the arrival of Fiat Siena, Opc-1 Corsa, Ford lko.n and the Hyundai Accent. MUL resorted to price slashing and brought the prices down. While the top end version's price was reduced to Rs. 0.52 mn, from Rs. 0.59 mn, the basic version was brought down to Rs. 0.44 mn from 0.46 mn. However, this was possible only because it enjoyed substantial margins over costs, being the first mover in the market.
MUL also followed the- same modus operandi for Zen, albeit in a different manner. The company increased the number of Zen variants to 10, with prices ranging hom Rs. 0.3 mn to Rs. 0.43 mn. The price stood reduced for the Rs. 0.3 mn variant in terms of stripping down the model’s features.
The competition responded with similar moves. Daewoo offered price-variants for Matiz, Ind Auto offered seven variants of Fiat Uno, ranging from Rs. 0.27 mn to Rs. 0.41 mn. Hyundai's Santro offered six variants between Rs. 0.29 mn and Rs. 0.37 mn; Telco's Indica came in the range of Rs. 0.25 mn to Rs. 0.38 mn with four models. NK Goila, VF Honda - Sicl cars, aptly summed up the situation : It is important to be present with grade - variation and a range to cover the range of potential customers being targeted. The price - points in the car market were replaced by price — bands. The width of a price band was a function of the size of the segment being targeted besides the intensity of competition. The thumb rule being, the higher the intensity, the wider the price-band.
Ford’s research, before the launch of the Ikon, a car made for the/Indian market, revealed that over the previous two three years, the 800 segment had graduated to the next level of Zen, Santro, Matiz, Uno and Indica. Ford's research on the existing market segments and the consumer response to new cars revealed that beyond the Zen segment, the choice of the consumer was limited. Models like the Esteem and Cielo had had a long innings outside the country and were not exactly contemporary. The other options were Escort, Lancer and Honda, which were priced above Rs. 0.7 mn Between them and the Rs. 0.45 - 0.5 run range of the Esteem and Cielo, thee was a vacuum. The gap was identified by General Motors' Corsa and Fiat's Siena as well. All three competitors plugged the gap by offering several versions at various price points. Ford first launched Ikon 1.6 but later came up with a lower engine capacity Ikon I.3CLXI at a lower price. GM and Fiat also followed the same approach.
About price reduction
The fact that 82% of the Indian market was accounted for cars priced below Rs. 0.43 mn, proved how strongly price influenced volumes. Moreover, with domestic car sales dropping by 15.01% in November 1998 over November, 1997 manufacturers had to turn towards price to resuscitate demand.
In the prevailing conditions, the 'Second P of aulo marketing' price reduction, seemed to be (he only factor able to rejuvenate the stagnant demand.
However, not every player had the financial-muscle to play the price card. Instead of cutting the price of Matiz, Daewoo Motors introduced an enhanced version with product features like power steering, and product-plus features like better service and customer-care. Players like Hyundai and Telco did not opt for price reduction, as they simply did not have the economies of scale to profit from such moves. Such strategies worked best for companies with offering in several segments of the market. Higher volumes from the combined sales of products across segments enabled them to drive harder bargains with their suppliers; unit marketing and distribution costs decreased; and the higher margins on products positioned near the top compensated for the pared margins on the basic product.
The players who chose to stay out of the race to cut prices had to convince their customers that the higher prices they charged were justified by the greater value they offered. A product and promotional mix had to be specifically designed to convey the above message. Most manufacturers of mid-size cars, including General Motors, Ford, Honda-Siel, adopted this strategy rather than cut costs to increase sales. They argued that because of the 'snob-value' of a costlier car, buyers in this segment were not that susceptible to be swayed by price cuts.
They cited the Cielo price reduction fiasco as an example. When sales of Daewoo's Cielo went down from a peak of 2260 cars in September 1956 to 314 in December 1997, the company slashed the price of its base model Rs. 0.13 inn in January, 1998. Daewoo also introduced zero-interet finance schemes and its dealers gave unofficial discounts ranging from Rs. 0.08 mn to Rs. 0.10 mn, Sales increased by 300% to 906 and 1102 by March, 1998. However, this was far below the company's capacity of 6000 ears per month. Daewoo launched an upper end version, Cielo Executive and an upgraded versions, Nexia at higher price points. However, the market had discounted Daewoo by then and sales did not pick up further, falling to a low of 148 by February, 1999.
Companies realized that only when competing brands were perceived to be equal in all other aspects, would price be a deciding issue. As the target segment became more affluent, upgrades as well as first time buyers did not necessarily start at the lowest price level. Applied as a brand level strategy, price helped the auto marketers win over only the entry level customer.
The biggest price a manufacturer would have to pay for playing the price game continuously was undoubtedly the loss of customer loyalty. The world over, automobile brands succeed on the basis of their relationship with fiercely loyal customer communities, built around sharp brand images and unique value proportions. By choosing to shift the focus to price, MUL risked the loss of damaging its customer relations and brand valuation, as it ended up antagonizing the buyers who had bought MUL cars just before the price reduction. This led to a feeling of betrayal among MUL loyalist. When these customers replaced their cars, it was doubtful whether they would turn back to MUL or go in for a rival car with a vengeance.
Much ado about nothing ?
As the Indian automobile market moved from monopoly to free competition, market share comparisons from the old era seemed to have lost relevance. The alarm over MUL's declining market share somehow did not seem fully justified. In its heyday, huge waiting lists for its products ensured that Maruti’s market share was directly linked to the supply side of the equation. In other words, if MUL had an 80% share of the market, that was also its share of the total industry capacity. By the late 1990’s, things changed radically with over 12 car manufacturers having a presence in the country, with a total capacity of about 1,250,000 cars, of which MUL produced about 400,000 [33%]. Khattar commented tell me, if we have market share of 50% out of a capacity that is 33% [of the industry], are we doing badly? Why don't you ask the others who together have a capacity of 800,000, but cannot match our sales? All said and done, MUL was still the leader in early -2001. It still had its early mover advantages. Provided Khattar plays his cards right, MUL can still rule the roost for years to come. Whether this will happen for real, is a question too early to be answered.
Case study: 1.3
DOORDARHSAN: BROADCASTING BLUES
[DD India's national television network is one of the world's largest broadcasting organizations with respect to the infrastructure it possesses. It present telecasts programs on 19 channels. Over the years, DD has been losing its advertising revenues to its competitors [private channels]. The continuously falling Television Viewers Rating added to the problem. DD has also been facing many problems regarding its managements, right from the time when Prasar Bharati was created. In mid-90's, cable television reached many Indian homes and several private channels, were launched. All of a sudden DD had to content with a host of channels whose programs were better produced. Poor quality of transmission and program content prompted viewers, to switch to private channels. The case provides an overview of the problems faced by DD due to mismanagement and competition from private channels.] "DD needs an owner" - CEO, Carat Media Services India.
IS DD DEAD?
After years of falling revenues, in 1999-2000 DD had a revenue growth of 50%. In 1999-2000, DD earned revenues of Rs, 6.1 bn compared to Rs. 3.99 bn in 1998-99. DD showed signs of revival with the launch of DD Worlds [a channel for NRIs] and had a certain measure of success with some of its regional channels [Table-1 DD Channels: A snapshot]. However, by the end of 2000-01, DD's revenues were projected to grow at 6 - 15 % while private channels such as Zee T V, Star and Sony had a projected 40 -50 % revenue growth.
According to some analysts, DD's sagging revenues were only the tip of the iceberg. DD was plagued by several problems. By the late 1990's, most private producers and advertisers and a good part of the audience had deserted DD. Not even one car company advertised on DD and even two wheeler manufacturers kept away. Advertisements of Pepsi and Coca - Cola were found only during sports telecasts. Only FMCG companies stuck to DD, because its terrestrial network would help them to reach the rural and semi urban audience. Despite having over 21000 employees, DD outsourced 50 % of its programs from private producers.
In the late I990's, DD faced allegations of large scale scams and irregularities. Under-utilized infrastructure, improper investments and poor financial management adversely affected DD's performance. In 1992, when the Government opened the airwaves to private players, HD had to face competition from private satellite channels. In Cable and Satellite [C & S] homes it was found that DD programs had hardly any viewers. The depleting Television Viewer Ratings [TVRs] of the DD programs was also a cause of concern as advertisers deserted due to its low viewer ratings.
According to analysts, DD would need a budgetary support of Rs. 5 bn during fiscal 2000-01 to sustain itself, as its revenues would not cover its expenditure. Many analysts felt that privatization would be the only solution.
DD : THE INSIDE STORY
DD was launched in 1959 as the National Television Network with a modest 21 community sets in Delhi. In the year 1982, with the introduction of regular satellite link between Delhi and different transmitters, DD began the transmission of national programs. In the same year, DD switched to colour transmission. Soon it had penetrated every nook and corner of the country, cutting across demographic and geographic barriers.
DD had a three-tier program service - national, regional and local. The national programs focused on the national culture and included news, programs on current affairs, and science, cultural magazines, serials, music and dance recitals, plays and feature films. At the regional level the programs were similar to the ones broadcast at the national level, the only difference being that they were broadcast in the regional language.
In 1984, DD introduced a second channel [DD2] in cities like Delhi, Mumbai, Kolkata and Chennai. DD2 was targeted at urban viewers, particularly the young viewers.
In 1995, DD launched DD - India, its international channel to cater to the NRI population. This service covered SAARC countries.. Gulf countries, West Asia, Central Asia, North Africa and Europe. In the same year, DD entered into an agreement with the Cable News Network [CNN] and launched a 24 - hours news and current affairs channel : DD News. In 1999, DD launched a separate channel for sports.
In the early 1990s, about 479 mn people in Indian homes viewed DD and an additional 1.5 mn watched DD on community sets. DD was ahead of the private channels in terms of viewership with a 90% reach. However, in the late 1990s, it could not maintain the lead and phase channels were catching up in terms of revenue even though they lagged behind in viewership and reach.
Cable onslaught
In 19S4, cable television entered India. For local entrepreneurs, cable television provided a good business opportunity, as investments required to install a cable network were low. In the early 1990s, many-private television channels were launched. Zee TV launched in 1992 led the pack. During 1992-94, there was rapid increase in the number of cable connection in Western and Northern India. In Tamil Nadu and Andhra Pradesh, a number of Tamil and Telugu channels came up in the mid-1990’s.
Though by 2000, DD had an incredible reach of 70 mn homes, in comparison to C & S’s reach of only 30 mn homes. It could not turn this network into an advantage [Table II for growth of cable and satellite penetration in India]. In urban households, DD programs had hardly any viewers. DD was also behind the private channels in terms of ad revenues, as its TVRs were very low compared to the TVRs of programs on private channels.
Falling Revenues
During 1996-99, the TV advertisement market grew by 76%, but DD's revenue from advertisement registered a negative growth [Table III for fall in revenues of DD]. Though DD continued to be number one in overall audience share, it lost out on viewership segments that had the highest purchasing power.
In 1998-99, DD's revenue from advertisements was Rs. 4 bn [25.8% of the market], Zee TV was close with Rs. 3.85 bn, Sony had Rs. 2.53 bn and Star channels grossed Rs. 2 bn. But the ad revenues of private channels have grown significantly, when compared to those of DD. During the period 1996-99, Zee registered a growth of 122% in ad revenues, Sony 299% and Star channels 206%. During the same period, DD's ad revenues went down by 70.17 %. DD's falling TVRs were a matter of concern for clients like Hindustan Lever - DD's largest advertiser. Said Ashutosh Srivastava, VP, HTA-Fulcrum, the media-buying arm of HLL, “Our only source of reaching 40% of this country is going down.” Till 1998-99, 70% of HLL’s ad spend went to DD but by 2000-01, due to tailing TVRs HLL's ad spend to DD had gone down to 50%.
During 1999-2000, producers and distributors stopped giving films to DD when it began to demand a minimum guarantee of Rs. 10 mn to broadcast a film. This forced DD to repeat the same old films that it had aired several times, and the RVRs went down further.
According to some analysts, DD's revenues were going down because advertisers considered it a down market channel, which catered only to the lowest socio-economic groups, whose purchasing power was limited. The revenues earned by DD showed a negative growth during 1997-99. In 1999-2000, DD saw its revenue grow by 52.8%, but in 2000-01, it was projected to grow only at 6% [Table III]
Identity Crisis
DD's problems were largely attributed to what Kiran Karnik, former CEO, Discovery Communications; India called 'its loss of identity. Said Karnik, The channel has lost its identity, What is Doordharshan : Is it a public broadcaster or a commercial entity? Initially, DD officials had envisaged that the national channel would play the role of public broadcaster, while DD Metro would be the commercial channel. Private producers and advertisers pointed out that this attitude increased the confusion. They argued that no other network had two channels competing against each other.
With the launch of the Star News Channel, [the first independent news channel] in 1998, DD News lost its viewers to Star news. The in-depth analysis of news items»by Star News caught the imagination of the viewers [Table IV Comparative study of different news channel]. DD's image of being the propaganda machinery of the Government also went against it.
Some analysts said politica1 interference and corruption were another reason for DD's poor performance. In 1997, The Indian Broadcasting Bill was introduced in Parliament. The Bill was not passed, but it was enforced through an ordinance nearly a decade after it was enacted. DD was brought under a holding company called the Prasar Bharati. In 1998, the Government sacked Prasar Bharali CEO SS Gill and the Government made DD answerable to a parliamentary committee. Political interference at the top level made matters worse for DD.
There were allegations that members of the Central Commissioning Unit of DD look bribes from producers to air their programs. In 1998, the CBI arrested two DD officials for taking bribes from a serial producer. This, incident focused attention on the rampant corruption in the organization and forced management to issue guidelines regarding acceptance of gifts by employees.
DD had a poor track record in both payments to and collections-from private players. Over 50 companies owed Rs. 18.2 mn to DD, 45 on July 2001, Amitabh Bachchan Corporation Limited was DD's highest debtor with outstanding dues of Rs. 330 mn.
Another allegation that DD faced was that it had allowed International Cricket Council's [ICC] ex-chief Jagmohan Dalmiya and World Tel's Mark Mascarenhas to defraud it of Rs. 160 mn over the telecast of 1998 tournament in Dhaka.
The exorbitant prices that DD charged for advertisements slots also contributed to its poor performance. DD charged the producers around Rs. 1 lakh for 10 seconds, while some of the highest rated soaps on private channels charged half that price.
DD did not have a marketing team, which could market the advertisements slots as a package. Private channels like ZEE and Star had their own marketing teams/ which provided the advertisers with a package of advertisement slots on their programs. But DD had 5o different producers with 56 different half-hour programs slots for four hours of prime time each week. Each producer sold commercial time separately, to the advertisers. But advertisers preferred package deals, which, would give them airtime across the programs for a whole week.
Breathing fresh life into DD
After SS Gill was sacked in 1998, Rajeeva Ratna Shah was appointed as new CEO of Prasar Bharti. Shah began overhauling the programs of the two DD channels and weeding out corruption in the network. He stopped commissioning programs on DD1 and DD2. He decided to auction programming hours to the private players who produced the programs for DD and market them. Shah also announced the setting up of a board comprising eminent film-makers, actors, poets, writers and people from different walk of life. This board was to be entrusted the task of revamping DD.
In 2000, the government appointed a committed headed by Shunu Sen [CEO, Quadra Advisory, a strategic marketing Consultancy], NR Narayana Murthy [CEO, Infosys] and Kiran Karnik to work out a program for reviving DD. The committee considered three options. : Privatizing of DD, continuing to run it as a Public Service .Broadcaster [PSB], and running DD on both PSB and commercially viable lines. Of the three options, the committee recommended the third option. The committee felt that there was no need to privatize DD, but recommended drastic steps for reviving it.
Some of the important steps suggested by the committee were : • Downsizing 25 % of DD's 21000 strong staff • Getting into new media • Setting up its own marketing department • Developing a sharper programming focus.
One of the recommendations was to improve the quality of broadcast. DD sought the help of BBC to digitize its channels. Modi Entertainment Network began distributing the five DD channels via satellite. DD went in for a revenue sharing deal with B4U for showing movies, arid auctioned the 7:10 pm slot on DD Metro to the HFCL - Nine networks. In addition to Rs. 1.21 bn that DD got from this deal, the move helped DD to penetrate urban homes as well as C & S homes to some extent. DD also entered into an agreement with Direct to Home platforms like Echostar and Astra to distribute DD - World in 79 countries. DD employed Accenture to advise it on how to go about revamping its financial, management and administrative systems. The National Institute of Design was employed to redesign the logo.
In 2000, DD announced that it would start its own people meter project through a separate corporate entity in partnership with a few private channels and some advertisers. DD felt that its programs were not getting enough viewership ratings because the viewer samples used by the two firms doing the ratings -IMRB - AC Nielsen and ORG MARG were largely from C & S homes. Their ratings did not accurately reflect the viewing habits of the Indian populace.
According to most, these steps were bound to have a positive effect on revenue. However, for real growth DD had to be freed from political interference.
TABLE I :DD CHANNELS : A SNAPSHOT
|DD 1 |Primary channel with national, regional, local and educational programs on a time |
| |sharing basis |
|DD2 |Metro entertainment channel targeted at urban viewers, particularly the young|
| |viewers. Programs relayed by the terrestrial transmitters in 47 cities |
|DD4 to DD 13 |Ten separate regional language channels : Malayalam, Tamil, Oriya, Bengali, |
| |Telugu, Kannada, Marathi, Gujarati, Kashmiri and Assamese |
|DD 14 to DD 17 |Networking of the regional services of the four Hindi speaking states : UP, Bihar, MP and|
| |Himachal Pradesh |
|DD18 |Punjabi Regional Service |
|DD India |International channels |
|[DD World] | |
|DD Sports |Sports channel |
|DD News |24 hours news channel |
TABLE : II ; CABLE TV GROWTH IN URBAN INDIA
|YEAR |NUMBER OF HOUSEHOLDS WITH CABLE TV [IN MILLION] |
|1992 |1.20 |
|1993 |3.30 |
|1994 |11.80 |
|1995 |15.00 |
|1996 |18.00 |
|2000 |22.00 |
|2001 |30.00 |
TABLE III: FALL IN REVENUES OF DD
|YEAR |REVENUE |GROWTH OVER PREVIOUS UYEAR [%] |
| |[RS. BN.] | |
|1995-96 |4.30 |8.10 |
|1&96-97 |5.72 |33.20 |
|1997-98 |4.90 | - 14.30 |
|1998-99 |3.99 |- 18.50 |
|1999-00 |6.10 |52.80 |
|2000-01 [Estimate] |6.50 |6.00 |
TABLE: IV COMPARISON OF THE NEWS CHANNELS
|STAR NEWS |ZEE NEWS |DD NEWS |
|Channel encrypted |Channel not encrypted |Channel not encrypted |
|Decoders are required |Can be freely aired |Can be freely aired |
|Content caters to the premium segment |Content caters to the mass market |Content caters to the mass market |
|English predominant language |Hindi predominant language |Hindi predominant language |
|Only premium brand's ad taken. Very |All brands accepted. Not selective |No ads. Only social messages were |
|selective regarding ads |regarding ads. |broadcast |
REVIEW QUESTIONS :
1. Discuss the features of modern business 2. What is business environment ? What are the constituents of business environment ? 3. Write a short note on : a] political environment b] social and cultural environment c] economic environment d] religious environment 4. Why should the environment be scanned? What purposes would it serve? 5. Explain in detail (he features and elements of economic environment. 6. What is an economic system? Discuss various economic systems with their merits and limitations. 7. What are the features of mixed economic system ? Explain in detail the working of mixe-1 economy in India. 8. What type of distortions could take place in planning in a mixed economic system? 9. Analyse the strengths and weaknesses of capitalism and socialism. 10. Distinguish between Marxism and communism. Trace their evolution.
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Chapter - II
Political economy- Government and business - Public control of business - Trends and structure of Indian economy - Socio - economic problems of India
Political economy —Government and business
The question of government interference in economic activities has been debated for a very long time by the economists. While the early economists considered economics as a handmaid of politics, the modem view is that politics is the handmaid of economics. With the growing importance of the role of government in economic welfare, the modem economists firmly believe that the sphere of government in economic development has no boundary. However, there is no unanimity among the economists about the extent and mode of state intervention in the economic sphere. Hence, we can identify the following political ideologies regarding the government intervention in an economy.
i. The earliest opinion was that the government has nothing to do in an economy as the society will regulate itself. This opinion also stated that the government will wither away over a period of time. These ideologists are called ANARCHISTS.
ii. Opposing the anarchists’ view is the COMMUNISTS’ view. According to them, the individuals cannot do anything on their own and there is a need for government to supervise and regulate individuals. The state will own everything and it is the fundamental duty of the government to organize and direct all economic activities. Hence, government becomes the custodian of the society and it has a very wide role to perform.
In between the above two views, there are two more views about the extent of government intervention in an economy. While one view highlights the individuals, the other lays emphasis on the need for the government. According to the individualists view, the government a necessary evil. Even Adam Smith advocated very limited functions for the State and to him the government should confine to the maintenance of law and order. This view was holding good in the case of Western countries while in most of the under developed countries the economists themselves argued for larger intervention of the state. Individualism was found to be exploitative and against the welfare of the society. Hence, another ideology that emerged was COLLECTIVISM. According to collectivism, interest of the society is more important than the individuals. They considered that state has a very useful and desirable role to play in an economy. So they assigned unlimited powers on the State and argued that the state intervention is necessary to promote social welfare. The State should therefore, play a very vital role in economic development. These two limits about the role of government are often referred to as CAPITALISM and SOCIALISM. The modern view is that state must play a significant role in an economy that all the essential services should be State owned and controlled. According to the modern view the role of government includes maintenance of law and order, achieving equality and social justice, protecting the weak from the economically strong, fighting against poverty, etc. The areas of government intervention in modern state may be broadly discussed under the following heads :
1. PROTECTIVE FUNCTIONS :
By performing these functions, the modem government creates the necessary atmosphere for performing productive activities. Protection from external attacks and maintenance of internal peace are necessary so that economic activities will be performed to maximize the welfare of the society. Some people argue that this function of the government is unproductive, but without this function, no economy can ensure performance of productive activities.
2. ADMINISTRATIVE FUNCTIONS
Government activities include a host of administrative works. All these works are performed through various departments and so the government maintains a large number of officials and agencies who implement the government policies. Works of routine nature are performed by these officials and the efficiency in the administration is a must for rapid economic growth.
3. PROVISION OF SOCIAL SECURITY
This is a major function of the modern government as it is concerned with the improvement in public welfare. Maintenance of public health, provision of unemployment insurance, free medical and educational facilities, granting old-age pensions, provision of decent housing facilities, maintenance of public perks, libraries, museums, etc., have become part of the government functions. Though these functions are not in any way productive, yet they are necessary to encourage and promote productive activities.
4. ECONOMIC FUNCTIONS
One of the basic economic functions of the modern government is to ensure optimal utilization of the available resources. This involves both identification and proper use of the resources. Especially these days every country needs to put the available resources to the best use so that the society gets the maximum benefits. Further if the resources utilization is left in the hands of the private enterprise, they will under utilize the resources as they have only profit maximization as their objective. There are also possibilities of the emergence of monopolist tendencies, concentration of wealth in the hands of a few, etc. hence, every modern state should interfere in resources utilization. Another important function of the government is to maintain economic stability. This means protecting the economy from the influence of business cycles. In the process of growth, boom and depression are inevitable. But they must be under check, as otherwise, there will be uncertainty affecting the business prosperity and through that industrial development. Hence, the modern governments control and regulate the working of the economic forces so as to achieve economic growth with stability.
Another very important economic function of the government is price control and rationing. This measure aims at preventing escalation in prices of essential commodities and controls the price of other commodities. By resorting to retail and wholesale price maintenance policies, the government can strive to bring down the price level. This calls for buffer stock operations as well as efficient demand and supply management of commodities which the country is badly in need of. This is achieved by introducing rationing of essential commodities through well designed public distribution mechanism. All these mean, enormous efforts are required on the part of the government apart from the willing cooperation from the traders and businessmen. In practice it is found that price control and rationing are very difficult to be implemented during inflationary period due to the exploitative and monopolistic attitude of the businessmen and traders.
Yet another area where government intervention is needed is the removal of inequality in a country. This inequality arises because of the mal-distribution of the economic wealth and prosperity. Though national income increases, the rich becomes richer and the poor the poorer. This tendency should be changed through legal and political steps. For this purpose government in several countries have enacted legislations and announced concessions in favour of poor people. Implementation of these legislations and concessions involve a lot of difficulties and they have to be periodically revised. The object of the government in this connection must be to prevent concentration of economic power and wealth in the hands of a few. Another important economic function of the modem government is to achieve economic growth. For this purpose the government has to plan for economic development and in this task the government part from deciding the targets, planning process, resources identification and allocation, etc., It should also arrange for financing the plans. It should be noted that planning has become important in both developed countries as well as under developed countries. In the developed countries planning is used to achieve stability in development, while in under developed and developing countries it is used for accelerating economic development.
The government intervention in an economy is a must for the following reasons: 1. In developing economies the vicious circle of poverty impedes the economy from developing faster. This vicious circle can be broken only with the government intervention. In the absence of it, any amount of planning will fail to bring about the necessary impetus to growth in such economies.
2. In the process of economic development, instability should be avoided at any cost. Even in developed countries, such instabilities are avoided with government intervention. In developing countries, therefore, the government should plan for proper allocation and utilization of resources as well as economic stability. Allowing the market forces to operate has certainly some advantages. But in under developed countries market forces do not operate smoothly because of external rigidities and structure bottle-necks. To overcome these forces pinning down economic development, government intervention is needed.
3. The basic requirement for rapid economic development is the economic and social infrastructure. The investment requirement for the provision of such infrastructural facilities runs to crores of rupees. This can be provided only the government and not the private sector. Further such investments are not income or profit yielding and so private enterprises may not come forth to undertake such investments. So government has a concrete role to play in inventing on such social and economic infrastructures.
4. Investment in social overheads is undertaken by the government by mobilizing financial resources from various sources. These sources of government include taxation, public borrowing and deficit financing and these sources cannot be resorted to by the private enterprises. It is also well known that private enterprises lack comprehensive approach to economic development.
5. Government intervention is indispensable in under developed economies because in such economies, there are several obstacles to economic development which can be overcome only by the government. As Mir and Baldwin observed every under developed economy needs a critical minimum of government intervention to reduce indivisibilities and discontinuities in the economy, to overcome diseconomies of scale and offset certain other forces that arise to depress development, once development begins.
Public control of business
In a mixed economic set up like India, the government retains control over strategic and key industries and operations. This is done through the creation of public sector units. The role of public sector units is explained below.
Discuss the role of Public Sector in India
Since 1948, the public sector in India has been playing a significant role in every sphere along with the private sector. These two sectors have been functioning as complementary to each other, though the government policies have been usually more favourable to public sector than to the private sector. Inspite of this, the private sector has also emerged victorious in several fields and since the announcement of Liberalization polices in 1991, we can reasonably expect the private sector to reach its potential and the public sector would also strive its best to withstand .he domestic and international competition. Hence, the future offers excellent scope for both the sectors, but it is clear that only the most efficient sector can survive, so how the private and public sectors are going to react to this challenge will be known in due course. However, let us now discuss the role of public and private sector in India in detail.
1. Role of public sector:
First of all it is necessary to understand that the public sector includes the autonomous corporations, the departmental enterprises owned and controlled by both the State and Central Governments. The role of public sector would be discussed with reference to various indicators like employment, investment, output, national income contribution, savings, coital formation, capital stock, etc.
a) Public sector and employment generation:
One of the important contributions of public sector to the Indian economy is that it has generated huge employment opportunities and this has reduced the problem of unemployment to a large extent. The employment opportunities in public sector includes government administration, defence, health, education, research and development, enterprise owned by Central and State governments. It offered employment for 107 lakhs of people in 1971 which slowly increased to 154.8 lakhs in 1981 and it has touched 190 lakhs in March, 1991. This constituted nearly 71% of the total employment generated in the economy, in 1991. As regards the sector-wise employment opportunities created by the public sector, in 1989 public sector accounted for 47,8% of the total employment generated by it through employment in government administration, community, social and personal services, followed closely by transport, storage and communications with 16.1% and manufacturing 10.1%
Hence, it is clear that with the growth of public sector, the country is benefited with more and more employment opportunities.
b) Public sector and income of the public sector:
The share of public sector income in the net domestic product has been increasing consistently from 7.5% in 1950-51 to about 25% in 1987-88. In a matter of about 35 years the public sector contribution to net domestic product has risen appreciably and constitutes one fourth of the total net domestic product This is mainly because of the rapid expansion of the public sector since 1951. This 25% of contribution in net domestic product is certainly better than 9.6% of contribution by the public administration. However, the private sector income constituted 75.1% of the total net domestic product. It should be noted that the public sector units are run on service motive and very little commercial motive.
c) Public sector and saving and capital formation :
This is yet another crucial yardstick to evaluate the contribution of public sector. The percentage share of public sector in total domestic savings increased from 1.7 to 2.3 of Gross national product at market prices. But in absolute terms it increased from Rs. 169 crores in I Plan period to Rs. 7815 crores in VII Plan. When we consider the percentage share in total sayings, the contribution of public sector has actually gone down from 17 in I Plan period to 11 in the VII Plan. However, the contribution of public sector in capital formation (gross domestic) is really commendable. It increased from a modest figure of 3.5% of Gross national product at market prices in I Plan period to 10.7% in VII Plan. As a result the ratio of percentage contribution by public sector and private sector in total domestic capital formation changed from 33 : 67 in the I Plan to 47 : 53 in the VII Plan. From this it is clear that the contribution by the private sector during the same period has declined from 67% to 53%
d) Public sector and capital stock:
Capital stock refers to the total stock of plant and machinery, equipment and tools and other capital goods available at a point of time for further production. Based on the data available up to 1979-80, it was found that the percentage share of public sector in total capital stock between 1960-61 and 1979-80 increased from 26 to 37 while that of private sector declined from 74 to 63 during the same period. In absolute terms, the capital stock increased from Rs. 16,377 crores in 1960-61 to Rs. 68,478 crores in 1979-80 in public sector (i.e., an increase by over Rs. 52,000 crores) but in the private sector the increase was from Rs. 46,583 crores to Rs. 1,16,089. crores (i.e., an increase by over Rs. 65,000 crores). The increase is less pronounced in public sector because of the following reasons:
1. Public sector investments are mostly in economic infrastructure which does not contribute any output. 2. Public sector is mostly concerned with high capital intensity projects like railways, iron and steel, power, irrigation, etc. 3. The gestation period of public sector projects are very long. 4. The capacity utilization is very much less in public sector units. 5. Most of the projects of public sector are having higher capital-output ratio.
e) Public sector and infrastructure:
The economic development of a country depends on the development and maintenance of infrastructural facilities. The essential requirement is provided by public sector. The industrialization is accelerated only through infrastructural development. Investment in power, roads, bridges, irrigation, etc., is non-income yielding, long gestation period oriented, and heavy investment projects. Hence these are not attractive for private sector. But without them the country cannot develop faster. Therefore it is apt to state that the public sector units are responsible for the creation of infrastructures which constitute the backbone of economic development and industrialization.
f) Public sector and industrial base:
There is no denying the fact that public sector has provided a strong base for our industrialization. Our industrial policy has clearly assigned a significant role for public sector, till the end of the third five year plan; industrialization was taking place at a slower pace because only the important public sector units were established till then. Since the private sector could not really rise up to meet the task, since the IV Plan the establishment of public sector units started on a brisk rate and the industrialization has been accelerated to a commendable level. Further private sector with its commercial objectives could not undertake several of the projects and investment requirement of these projects was also beyond the potential of the private sector. Hence, if at all India today is having a strong industrial base; it is mainly due to the contribution of the public sector.
g) Public sector and export promotion:
Public sector has responded well to the needs of the nation by taking up the task of exporting our products and finding market for them in other countries. In this respect the contribution of State Trading Corporation, Minerals and Metal Trading Corporation, Hindustan Steel Limited, Hindustan Machine Tools, etc., are worth noting. Infact, these units are primarily responsible for exploiting the captive market for our goods abroad. The foreign exchange earnings of the public sector has gone up from a modest figure of Rs. 35 crores in 1965-66 to Rs. 170 crores in 1969-70, to Rs. 5,831 crores in 1984-85 and then to Rs. 9,198 crores in 1991-92. The increase has been more than 300 times comparing 1965-66 figures with that of 1991-92. Though there may be criticisms about the performance of the public sector units, yet there can be no dispute about the export achievements of public sector units within a period of 25 years.
h) Public sector and saving of foreign exchange through import substitution:
India's balance of payments has been a cause for worry since Independence, the main reason being increasing imports. This trend had to be reversed and the government rightly selected public sector to establish units to produce domestically the goods imported so as to conserve the foreign exchange and also utilize more the domestic resources. Units like Hindustan Antibiotics Limited and Indian Drugs and Pharmaceutical Limited, have together effectively checked the inroads attempted by the multinational corporations in the field of drugs and pharmaceutical. Similarly Indian Oil Corporation Limited and Oil and Natural Gas Commission have succeeded in bringing down our dependence on other countries for crude to some extent. They are very active in identifying oil deposits and natural gas. Their efforts are supplemented by research and development to invent methods of using the natural gas and reduce the imports of crude. In this respect the public sector works towards achieving self sufficiency. With concerted efforts it should be possible for India to achieve self-sufficiency in the near future. However, the poor performance of the public sector is causing concern, as unless steps are taken to improve their performance, the achievement of self-sufficiency' may be delayed.
i) Public sector and generation of internal resources :
A close scrutiny of the public sector performance will certainly make one to note the contribution towards internal resources made by the public sector. For example, the internal resources generated by the public sector during V Five year plan was Rs. 3,439 crores, during VI Five year plan Rs. 11,721 crores and during the period 1985-86 to 1989-90, the generation was Rs. 37,678 crores. In 1990-91 and 1991-92 also the public sector undertakings together generated Rs. 24,376 crores. This indicates that the public sector units have turned the corner and with the measures taken up already to spruce up their working we should be able to realize still greater generation of internal resources.
j) Public sector and contribution to exchequer:
Public sector contribution to the Central Exchequer is, in terms of dividend, corporate tax, excise duty, customs and other forms. These contributions add to the mobilization of resources for our planned development. It is interesting to note that the contributions totaled Rs. 27,570 crores in the VI Plan period, Rs. 70,893 crores during the VII Plan and Rs. 19,520 crores in 1990-91 and Rs. 20,366 crores in 1991-92. It may be noticed that the annual contributions during the VII Plan period is nearly 75% of the contributions during VI Plan. Among the different forms in which these contributions are made, Excise duty and Customs alone constituted more than 82% of the total in the VI Plan period, while this was 76% during the VII Plan. Subsequently, in 1990-91 these two accounted for 82% of the total contributions and in 1991-92 it was almost 83% indicating that public sector units do make a valuable contribution to the Exchequer. Since the performance of the public sector is poor, their contribution in terms of dividend is very insignificant and this has to be changed at the earliest so as to make them contribute sizably even in this form.
k) Public sector and growth of ancillary units:
Public sector also makes a valuable contribution by helping the growth of ancillary units and small scale units. The Bureau of Public Enterprises have undertaken the study to find out the public sector units which could transfer their production and other facilities to small scale sector. Under this scheme about 1800 units were set up till 1986. The public sector also enters into regular contracts for purchasing the entire production or 50% of the production of small scale and ancillary units. Such purchases from ancillary units amounted to Rs. 451 crores in 1985-86.
I) Public sector and development of states and backward regions:
One of the objectives in establishing public sector units is to facilitate the states and the backward region to develop faster. In this connection, public sector has certainly creditable performance. Public sector contributes to the State government's resources in terms of sales tax and other state level taxes. Public sector investments are directed towards the projects in the backward regions and industrially poor districts. In this way the public sector works in its own way to eliminate the industrial imbalance in states and districts.
So far we have explained in detail the contributions made by the public sector towards Indian economic development. It is often said, that even when their performance is poor, the public sector contributions have been so much, and by improving their performance, we should be able to make them contribute their full potential to achieve a higher rate of economic development. It is satisfactory to note that efforts in this direction to improve the public sector performance have been initiated and by the turn of the century public sector will emerge as the main contributor to our economic development.
TRENDS AND STRUCTURE OF INDIAN ECONOMY Features of India as an under developed country
To classify a country as developed or under developed, one should study the features of an under developed country. There are several indicators of under development. Let us discuss each one of them with reference to India to ultimately answer the question whether India is a developed or under developed country.
1. Existence of low per capita income:
It is customary to compare the per capita income of a country with other countries to determine whether the country in question could be categorized as under developed or developed. The IBID is also adopting this method and it has classified the countries as i. low income countries, ii. Middle income countries and iii. high income countries. According to the World Development Report, 1993, the annual per capita income of these three types of countries is estimated as under: Low income countries $ 350 Middle income countries $ 2480 High income countries $ 21050
It is clear from the above figure that any country with just 1.5% of the percapita of the high income countries can be categorized as low income country and as under developed country. In these under developed countries, the per capita income is very low because i. net national income is very low or ii. Population is very high or iii. the national income is very low and the population is very high. Though this used to be the basis for categorizing the countries, "recently the IMF has measured the value of each country's national income in terms of the purchasing power of its own currency at home, instead of the currency's value on international exchanges. Following this India's per capita income in 1991 was assessed as $ 1150 as against $ 330 calculated following the old basis. Hence, on the basis of the new methodology India can no longer be considered as an under developed economy.
2. Existence of very heavy population:
The size of population is one more index of development status. It is found that a country with low population is developed and that with a small size of population is under developed. It should be noted that in the case of former the annual growth rate of population is very low, compared to the growth rate in the later. According to the World Development Review, 1993, the annual growth rate of population in the low income countries was 2.0 between 1980 and 1991 while in middle income countries it was 1.8 and in the high income countries the rate was 0.6 during the same period. Hence, it is clear that with a higher rate of growth, the low income countries will experience population explosion over a period of time. This population explosion will have serious impact on the economy and impede every effort to achieve higher rate of development. For example, the population explosion will result in increased poverty, high rate of unemployment, scarcity for essential goods, etc.
3. Predominance of agricultural sector;
This is another important characteristic of the under developed economy. In such economies, the percentage of population depending upon agriculture for livelihood will easily be 70%. The contribution of agricultural sector to national income will be high and it is estimated to be over 35%. The nature of exports will be mainly primary goods like agricultural raw materials. In the case of India nearly 70% of the population depends on agriculture sector (both directly and indirectly) whereas in a developed country this used to be only about 20% The contribution by agricultural sector to national income will be around 4 to 5% in developed countries and the composition of exports will be mostly manufactured goods and high-tech products. It may also be noted that in under developed economies, the productivity in agriculture will be abysmally low due to the use of out-dated technology, conventional method of cultivation, poor quality seeds and fertilizers, illiteracy of farmers, very high rural indebtedness, etc. The result is agricultural production will be low and so the contribution to national income will also be low. Added to this, the sector depends on the success of monsoon and failure of monsoon directly affects the economic growth and development.
4. Existence of large scale unemployment:
In under developed country there exists very large scale unemployment due to various factors. Further the unemployment will continue to increase over a period of time. The unemployment is due to factors like, huge population, low level of economic activity, poor technology, lack of investment, large illiteracy, etc. Even those who are employed may not add anything significant to production. That is there will be disguised unemployment too. The problem is worsened by the existence of under employment, which means the available labour power is not fully utilized. The overall effect of all these is that the labour productivity will be very poor. The efforts to improve the productivity may rot succeed due to resistance by labour unions and organizations. The economy will remain under developed so long as the unemployment remains high.
5. Existence of widespread poverty:
Poverty exists in every country. But the difference is that in developed countries, poverty exists only in certain pockets, while in under developed countries, poverty is widespread - almost 3/4 of the country lives below the poverty line. In under developed countries, the preponderance of agricultural sector, large scale unemployment, income disparities, high illiteracy, etc., account for widespread poverty. Added to these, the lack of investment opportunities, low productivity, primitive technology, etc., also result in poverty as any amount of production will not generate income. The wage level is so low that the people have very low saving. Any amount of efforts to alleviate poverty does not bear fruit due to maladministration, corruption, etc.
6. Primitive production condition:
The excessive population pressure leads to heavy demand for land. The available land is not put to productive use. There is very high capital deficiency, one because of low saving and second the conspicuous consumption is very high. In other words, the little saving is used in unproductive ways. With poor capital formation, the government would invest heavily in capital intensive projects as well as welfare projects. The return is very poor and prolonged. The technology is so backward and primitive that the input output ratio is very high. The obsolete technology also results in poor return and low productivity. Another major weakness is that there is lack of entrepreneurial ability. Hence, investment opportunities are not easily identified and risky ventures are never undertaken. The size of market is small, the market information is absent, market intelligence is very poor, the administrative ability is at lowest level and there is lack of investment opportunities. All these culminate in poor utilization of the available entrepreneurial ability and talent
7. Foreign trade composition:
The composition of foreign trade in under developed country is very much influenced by its historical relations with other countries. Most of the under developed countries were colonies in the recent past and naturally their foreign trade composition clearly reflects this. They export unfinished, agricultural raw materials and import heavy capital goods. Obviously, their terms of trade will be unfavorable. Further there exists heavy geographic concentration in their trade. Any failure of agricultural sector worsens the foreign trade position. With heavy reliance on the imported machineries, these countries lack latest production technology. The poor balance of trade and balance of payments deficits force them to borrow heavily from the developed countries and international financial institutions. They are caught up in the debt trap and outgo of interest on international debt is so heavy that the county will struggle to maintain the exchange rate. The increases reliance on other countries for manufactured goods will subject the countries to economic and political subjugation of the exporting countries.
8. Existence of wide disparity in income and poor standard of living:
These countries are also noted for very high income disparities because of concentration of productive factors in the urban areas, very low mobility of labour from rural to urban, low rate of employment in the rural areas in relation to urban areas, high wage rate in the urban and poor wage rate in the rural areas, etc. The income disparity is further widened by deteriorating terms of trade between agricultural and industrial sectors. As a consequence, the standard of living will be very poor in the rural areas than in the urban areas. Even in urban centers, there will be growth of urban slums. As already pointed out in these countries the population depending on agriculture is very high and so the employment opportunities as well as income generation is very low compared to that in the industrial sector. As in the initial stage of development the industrial growth will be confined to urban centers, the standard of living will be on the whole very poor.
9. Existence of dualistic economy:
Dualism refers to the existence of a developed sector side by side with an under developed or undeveloped sector. We will come across the co-existence of sophistication and primitive characteristics in every walk of life. For example, in the urban areas, one will find the use of modem technology in the production field as well as households, while in the rural areas, the age old, antiquated techniques will be used in the production as well as in households. This dualism retards economic growth. That is, the subsistence sector in the rural areas will pull down whatever little economic progress is achieved with the developed and modem sector. Further in the urban areas, one can come across the existence of dualism, in every activity. For instance there will be modern, technologically sophisticated industries existing side by side with industries with labour intensive and poor technology. There will be high wage executives existing with poorly paid slum dwellers. Firms with international collaboration producing ultra modem products will be found along with the domestic firms using inferior technology. In the rural areas also the dualism can be found. We can find the co-existence of farms with vast expansive areas using modern production technology along with small farms where such technologies can never even be dreamt of. The bigger farms will be using trained and skilled laborers whereas the small farms will mostly be depending on the family labour and untrained, semi-skilled labour. While the capital investment by the big farms will be several times higher than those of the small farms, the rural indebtedness will be found more with the small farms than the large farms. The marketing strength, holding power, storage facilities, processing facilities, bargaining power, etc., will all be very much different between large farms and small farms. From the above explanation, it could be understood that every effort to develop the economy should be designed so as to make it applicable to both the modern sector as well as the undeveloped one. Hence, the overall growth will be more determined by the contributions of the undeveloped sector.
10. Existence of weak and inefficient administration:
Under developed countries always evince this feature. The political and social factors influence to a large extent the efficiency of administration. In these countries, the administrative system is noted for lethargy, red tapism, bureaucratic interference, delay in decision making, partiality, political influence in decision making process, bending the laws for favourable people, etc. The result of this is inefficiency. An efficient employee never gets his due as the rules and regulations do not permit this. The accountability at the higher levels is very much less. The responsiveness of the administration in a critical situation is more rules ridden or ritualistic rather than realistic. There is lack of managerial and administrative talents in these countries. The lack of know how, the resistance to change, lack of motivation, etc., are responsible for this administrative inefficiency.
SOCIO ECONOMIC PROBLEMS OF INDIA
1. Discuss the features of Indian Population
The Demographic features of India can be discussed in terms of the following ideas: i. Trend in population ii. Growth rate of population iii. Life expectancy iv. Infant mortality rate v. Density of population vi. Age and sex composition vii. Rural-urban distribution and viii. Literacy and levels of development.
Let us now discuss each one of these features in detail.
i. Trend in population:
As the country with second largest population .in the world, India has been handicapped with very large population found in a small area. It is said that India has 16% of the total land area of the world. This situation has been remaining for decades as shown by the Table 1 below. It could be seen from the table below that till about 1931, the size of population was not increasing at an alarming rate. Specifically between 1911 and 1921, the population size almost-remained stagnant. There was a slight increase in the size between 1921 and 1931. The decade 1931 to 1921 probably was the only period when Indian population almost remained the same. This probably was due to the epidemics, wars, etc., which took a heavy toll during the decade. After 1941 we find a consistent increase in our population cruising ail concern. More specifically the increase in population was by : about 4 crores between '41 anc. '51, 11 crores between '61 and '71, about 15 crores between '71 and '81 and about 16 crores between '81 and '91.
Hence, after the decade 1921-1931, we find the increase in population remained almost the same during the decade '71 -'81 and '81-'9l. In the past nine decades, i.e., since 1901 the addition to our population has been by about 60 crores. But with the slowing down of the population growth since 1981, we may expect the population to grow at a slower rate in the corning decade.
TABLE 1 : SIZE OF POPULATION (in crores)
|YEAR |POPULATION |
|1901 |23.8 |
|1911 |25.2 |
|1921 |25.1 |
|1931 |27.9 |
|1941 |31.9 |
|1951 |36.1 |
|1961 |43.9 |
|1971 |54.8 |
|1981 |68.3 |
|1991 |84.6 |
In 1993, India’s population was estimated to be 88.5 crores.
ii. Growth rate of population:
The growth rate in population is measured as the difference between the Crude birth rate and Crude death rate. Of course, the migration and population should also be taken into account. But in Indian experience, the migration as a percentage of the total population is very insignificant. Hence, ignoring migration, we should lake the difference between the crude birth rate and crude death rate as the normal growth rate in our population. The Table 2 below gives the normal growth rate in our population.
TABLE : 2 NORMAL GROWTH RATE OF INDIAN POPULATION
|PERIOD |CRUDE |CRUDE |NORMAL GROWTH RATE |
| |BIRTH RATE |DEATH RATE | |
|1901-1911 |49.20 |42.60 |6.60 |
|1911-1921 |48.10 |48.60 |0.50 |
|1921-1931 |46.40 |36.30 |10.10 |
|1931-1941 |45.20 |31.20 |14.00 |
|1041-1951 |39.90 |27.40 |12.50 |
|1951-1961 |41.70 |22.80 |18.90 |
|1961-1971 |41.20 |19.00 |22.20 |
|1971-1981 |37.20 |15.00 |22.20 |
|1981-1991 |35.20 |11.40 |21.10 |
From the Table:2 above, it could be observed that the normal growth rate of population was very low from 1901 to 1921 mainly because both the crude birth rate arid crude death rate were high. But ever since 1921, there has been quite notable decline in crude death rate but not such a pronounced decline in birth rate. As a result the: normal growth rate of population has remained high and Infact has been increasing. One sign of consolation is that during 1981-1991, the crude birth rate has declined by 2.00 points and the normal growth rate has also declined by about 1.00 point. This trend, if continued, by the turn of this century India may have lesser addition to population which is a good sign. It is estimated that our birth rate would fall down to 27.5 during 1991-1996 and the death rate would go down to 9.4 during the same period thereby the normal growth rate would be 18.1 for this period. Based on this the projection for the period 1996-2000, birth rate will be 24.9, death rate will be 8.4 and the normal growth rate will be 16.5.
iii. Life expectancy:
Life expectancy is usually used as a measure of gauging the health condition of population of a country. A country with a high death rate and with death occurring at early age, the life expectancy will be low and a country with a low death rate and with death occurring at an advanced age, the life expectancy will be high. Hence, a high life expectancy is a yardstick for health condition of the population of a country. In Indian case, there has been a significant fall in death rate since 1951 and so our life expectancy which was just 23 years during 1901-1911 increased to 46.4 years during 1961-71 and further to 58.2 years during 1991. However, this is very much low compared to some of the countries like Sri Lanka and Thailand, another interesting feature is that in India the average life expectancy is more for female population than for the males. The reason for this could be that the number of male deaths at early stage is more than that of the females. The increase in life expectancy is certainly ^ welcome sign, but i; carries with it some social problems like, the increase in number of joint families, multi-generation families, unemployment due to extension of service for those who retire lead to unemployment for youngsters, increase in dependents per family, etc.
iv. Infant mortality rate:
This refers to the number of child death, from birth before reaching the first birth day. This is measured as number of children that die before completing first year after birth per 1000 children born. The infant mortality rate was very high in India during the early part of this century and it was 204. But thanks to the development in science and concerted efforts taken by the government, the mortality rate has come down to about 80 per 1000 in the 90's. However, there is a variation between urban and rural areas. As on date the mortality rate is about 50 per 1000 in urban areas and 86 per 1000 in rural areas. It is also found that there is variation among the states in mortality rate. As for example, in Kerala it is only 17 per 1000 while it .is 122 in Orissa. Comparing other countries, the mortality rate is very high in India. For example, in Srilanka it is only 32, in Philippines it is 49 and in Thailand it is 44. With improvement in science and extension of medical facilities to rural areas, the infant mortality rate is coming down rapidly in India, but there is much to achieve in this direction.
v. Density of population:
This measure helps to determine the extent of burden on land area in a country. It is measured as the ratio of number of persons per square kilometer of land area. India's density is one of the highest among the countries in the world with 267. This is very high compared to countries like Canada. Though density is high, Japan has a very high per capita income of $ 25430. It is well established that there is no relationship between density of population and the economic development. Countries like Canada with very low density of 2.5 persons/sq. km. has very high per capita income of $ 20470 and as already indicated Japan with very high density has also a very high per capita income. Among the Indian states also we come across wide variation in density as for example the Union Territory of Delhi has 6319 as density against Arunachal Pradesh with just 10 persons/sq.km. It is said that countries which are industrially advanced will have higher density and wherever the climatic conditions, rainfall, etc., are good the density will automatically be high.
vi. Age and sex composition :
This information helps to determine and answer certain questions relating to employment, dependents, birth rate, etc. Age composition in India is such that (he young persons (0 - 40 years of age) constitute more than 65% of our total population. Hence, even if the birth rate declines, yet the addition to our population because of the predominance of younger aged persons will be more for some more years to come. The immediate implication of this feature is that the dependency ratio will be very high. On an average it works out to be 50%. But when the birth rate declines, this would also decline and the proportion of working population would go up leading to increase in claimants for employment.
As regards sex composition, in India it has come down over the decades from 962 females per 1000 males in 1901 to 930/3000 in 1971 and then to 929/1000 by the turn of this century. It is found that this sex ratio is one of the lowest among the countries in the world. The reasons for this lowest sex ratio is the deliberate termination of pregnancy of female child, legislation on abortion, increasing infanticides of female children, lesser care for female children resulting in their early death, etc. But with the spread of literacy, improvement in medical facilities, change in social attitude, etc., the sex ratio is likely to increase. Even now in some of the states like Kerala, and Tamilnadu the sex ratio is high.
vii. Rural-urban distribution:
This is yet another feature of population which clearly indicates the extent of change in the concentration of population in rural and urban areas. In the past, the rural concentration was very high and slowly this is changing that the urban concentration is increasing. While this is a good sign of development, yet increasing urbanization has led to several social problems like urban poverty, increasing number of urban slums, congestion, lack of social amenities, artificial demand for important facilities like transport, health, education, entertainment, etc. The proportion of population in urban areas has consistently increased from 14.1% in 1941 to about 26% 1991. It is likely to touch 32% by 2000. The rural-urban distribution is not even among the states. While in advanced states, the urban concentration is high, in less developed states the rural concentration is still continuing to be high.
viii. Literacy level:
Literacy level refers to the number of people in the population who can read, write and understand arithmetic. The literacy rate determines the economic development. Any country with low literacy rate is bound to be less developed than countries with high level of literacy. In India the literacy level was very poor before independence and since then with all the positive steps taken the literacy rate has gone up. This could be understood when we compare the literacy rate of males and females in 1951 and 1991. In 1951 the literacy rate of males was 25% and that of females was just 8% and in 1991, the literacy rate of males increased to 52.6% and that of females 32.38%.
The substantial increase in literacy level is due to schemes like compulsory free education for children upto 14 years of age, noon meal scheme, increasing opportunities for educated in employment, especially among women, increasing self-employment opportunities for women, etc. It is also to be noted that the literacy level is high in both males and females in urban areas than in rural areas. This is obvious because in the urban centers the facilities are more than in die rural areas. It is also a good signal that over the period the gap between literacy rate in males and females is narrowing down. In 1991 the female literate formed about 61.56% of male literate as against just 33% in 1951. As in the case of other features discussed so far, literacy rate is not uniform in all the states. Economically developed states report a higher percentage of literacy among males and females than the less developed states. With the increase in allocation of fund for education with a thrust to primary education, establishment of more and more correspondence course institutes, formal arid non-formal education spread, etc., the literacy level is bound to pick up still before 2000 A.D.
Nature of population problem in India and the effects of population growth on Indian economic development
The population problem in India is a basic problem faced by the economy. The population explosion is due to various factors. We will discuss these causes for population explosion first and then understand how this affects our economic development.
Causes:
It is convenient for us to classify the causes for population explosion by identifying the causes for high birth rate and the causes for declining death rate.
1. Causes for high birth rate:
It has been already discussed that birth rate in India has not shown any significant decline over the decades. This slow fall in birth rate is one reason why the country has population explosion. The following are the reasons for high birth rate in India :
i) Climatic factors:
Unlike the other countries, India has a climatic condition which affects the maturity age of girls. An Indian girl matures at an early age of 13 years which means the reproductive span or the child bearing span is very high. In Western countries the climate is cool that the maturity age is not so low. Obviously the reproductive span is much shorter.
ii) Social institutions:
a) Marriage is a social compulsion in India. That is, once a girl matures, the social opinion is that she should get married at the earliest after maturity. The age of maturity being 13 years, the number of women in the reproductive age group is very large. This means females in the age group of 15 to 49 years can bear child. Once the marriage takes place at the age of 13, every woman can bear child, at least theoretically for 30 to 34 years. This age group constitutes 47% of the total female population in India. It is also found that the percentage of women in this reproductive age group is very high i.e., 81.44% in 1981. However, this proportion is slowly falling over the period. One more reason for high population is the practice of child marriage. Though this practice incoming down, yet the average age of marriage among females was below 19 years even by 1987-88.
b) The prevalence of JOINT FAMILY SYSTEM is another reason for high population growth in the country. The main belief in a joint family system is that the married couple should have babies. People who do not have babies are looked down and there is a social stigma attached in such cases. Further there is a specific preference for male babies. So until a couple gets a male baby they tend to encourage child bearing. This preference for male baby is due to various reasons like old age security, labour value of male child, laws of inheritance, social customs like death rituals, getting dowry, etc. However, with the spread of education and increased employment of women in various occupations in the society, the tendency is to have lesser and lesser babies and the specific preference for male babies is also on the decline. The Joint family system is slowly disintegrating and giving place to independent small family due to increasing cost of living, preference for remaining independent, increasing employment after retirement, encouraging use of contraceptives replacing the conventional techniques of birth control, etc.
iii) Economic factors:
The most important factor under this category is poverty. The poor people prefer to have a large number of children Inspite of poverty due to the following reasons:
i) Whether the family size is small or big, poverty is all pervasive, hence, an average family prefers to have more children than a few. ii) Children are treated as an asset in poor families as more children can help the family in work, even at very young age, thereby raising the income earning capacity of the family. iii) As the condition in the poor families is very poor, the infant mortality rate is very high. To neutralize this every family prefers to. have more children as this iv) Would be in a way an insurance against high infant mortality rate. v) A large number of children in a family can look after the aged better with large earnings and so the preference for more children, vi) The failure of family planning programme to convince the poor people, as the consider the number of children as the best way to get more income through odd jobs. vii) Indirect government support and subsidies for poor families like ration quantity based on the size of family, etc viii) Possibility of getting pecuniary benefits on occasions like election, philanthropic functions, free distribution of basic necessaries, etc., from the political parties is yet another reason for a big family size.
On die whole the economic factors indicate that Inspite of being poor, there are several reasons for maintaining a large family size than small ones.
Let us now discuss the impact of population explosion on economic development of India.
1. The size of population has a direct impact on the size of national income of a country. In Indian experience, the net national product at factor cost went up by 215% between 1961 and 1991 but since the population increased at a rate of 92% during the same period, the percapita income increased only by 58% during the period. As the population increases, the increase in national income, even if it is substantial, will be spread over a larger number of persons thereby the percapita income is low. With lower percapita income all the other dependent variables of income, viz., saving, consumption, investment, etc., will also be lower.
2. The most important effect of population growth is on the food supply. In the - past, Malthus has explained this in terms of his geometrical ratio and arithmetical ratio. He pointed out that the population increases at a slow arithmetical ratio. Consequently over a period of time the rate of growth of population will exceed that of food production. This leads to food problem. In the case of India, Inspite of a spectacular achievement on the food front, the scarcity for food continues as explained below. The net availability of food grains between 1956 and 1992 increased by 140% but the population during the same period recorded an increase of 118% and so the percapita availability of food grains increased only by 10% . With ever increasing population, there is a need for the government to maintain the public distribution system with all its malpractices at a phenomenal cost to the exchequer.
3. Another vital aspect of impact of population on economic development is that with rising population, the percentage of dependents also increases apart from the increase in non-working population deteriorated between 1961 and 1981. In 1961 the number of unproductive consumers was 256 million but it increased to 464 million by 1981, which in percentage terms is 57% and 62% respectively. The unproductive consumers are those who do not contribute anything to national income. Hence, with every addition to population the absolute number of unproductive consumers increases who make no contribution to national income, but claim a substantial share of national income. As a result the economy is impoverished. It should also be noted that with 40% of our population in the age group of 0 to 14 years of age and 6% belonging to aged group of above 60 years of age, there is increase in dependency with every addition to population. This is clearly a drain of savings of every household and the society is denied of precious savings and the capital formation.
4. A very significant effect of population growth is on employment. It is very simple idea to understand. With increase in population there is sizeable addition to the labour force, but when the employment generated is less than the addition to the labour force, the result is unemployment and underemployment. For instance during the VI plan period the number of unemployed was 20.7 million accounting for 7.74% of the labour force, while by 1990 this has increased to nearly 23 million. Inspite of eight five year plans and generation of employment, it is proved that the number of employment generated is clearly less than the addition made to the population. This means that a valuable resource is unutilized or under utilized. This is a national waste. If we consider among the unemployment, the educated unemployed, then the gravity of the situation will be easily understood.
5. The increase in population makes a heavy demand on the community facilities like education, health, housing, etc. In the case of education, in India primary education is made free of cost and the expenditure incurred by the government on this account alone is Rs. 2,246 crores. Since the number of children in the age group of 6 to 14 years is about 156 million and expenditure at the rate of Rs. 144 per year per child will mean a heavy drain on the financial resources. In the case of medical facilities the number of people depending on public hospitals and other medical facilities is increasing day after day causing a heavy drain on resources for the government. Apart from the availability of education and medical facilities being threatened by the growing population, the quality of service rendered is also found to be very poor. The rising population has made housing a major problem. The result is up coming of slums in every part of the country. Leading a life of abject poverty, the poor people neither have access to education, medical or housing facilities. Added to these is the expenditure of the government on populist welfare schemes like noon meal scheme, free books and note books, free chappals, etc. All these political compulsions have denied the economy the crucial financial resources for developmental purposes.
6. Rapid population growth affects capital formation in a country. With rising population, it is already pointed out that the national income is shared by a larger number of people and so the per capita income is low. Consequently, the saving potential of the people is also low. In order to achieve rapid economic growth, there is. a need to at least maintain the growth in national income. But India with 2.2% growth rate (annual) of population, national income must rise at the same rate so that the per capita income remains the same. For this purpose capital investment should take place at least in the order of about 12% whereas in India the capital investment growth is poor because of poor saving.-Even though it is said that our annual saving rate is about 23%, majority of saving is used for unproductive purposes like marriage, on jewels, etc. Hence, the capital formation is very poor and the population growth eats away whatever increase in national income is possible.
7. Population growth has impact on environment. This was explained by Anne Ehrlich in terms of a formula I = PAT, where I refers to environmental impact, P stands for population, A refers to per capita consumption and T refers to environmentally harmful technology that supplies A. The three factors PAT have multiplicative relationship and so their combined effect is very serious. Further with every significant addition to population, there is misuse of resources like water, electricity, land, etc. The result of this misuse is that a huge quantity of waste is generated in different forms which directly affect the environment. For example, the demand for fuel will go up with increasing.
8. Population, then people will start cutting trees to get the cheapest fuel available. Slowly this leads to denudation of forests leading to ecological imbalance affecting the environment. Substitutes used also affect the environmental purity as in the case of atomic power or plastics, etc.
9. Population explosion carries with it severe social problems. When the population increases, we will find migration of workers from, rural to urban centers seeking employment which directly means additional pressure on the urban facilities. Apart from mushrooming of urban slums, several problems like communal riots, thefts and other such anti-social activities are committed. The crime rate goes up disturbing the peace and mental strain, causes a change in attitude and social values get eroded. People become more and more self-centered and such an environment is not good for shaping the future generation.
10. There is a direct impact on quality of population due to population explosion. By quality of population we mean the work potential, mental make up, work culture, etc. With ever increasing population, every individual family is unable to maintain the standard of living and this affects the health and mental conditions of people. Automatically these would affect the productivity of workers. The work force is so weak physically and mentally. With pressure of family, the workmen demand for more wages and salaries. They try to earn maximum by carrying out inferior quality work or working in more places with lesser efficiency. The work culture is tampered that every person wants to minimize work and maximize leisure. The effect of all these is the productivity is very low and the country loses.
11. In an agricultural oriented country like India, the increasing population exerts a heavy pressure on limited land resources. With millions depending on agricultural sector, the pressure would be more and this leads to sub-division and fragmentation of land holdings making them unfit for adopting modem methods of cultivation. This affects the productivity of land. Though this is neutralized through scientific methods like using high yielding variety of seeds, application of fertilizers and pesticides, multiple cropping, etc. All these depend on availability of water. With environmental degradation, the monsoon fails and the increasing demand for drinking water, etc., will result in scarcity of water for multiple cropping: Further more frequent use of the same land even with application of fertilizers, would result only in the operation of law of diminishing returns.
Therefore, without controlling population growth it is not possible for any country to achieve rapid economic growth, and maintain it if achieved. For this a suitable population policy is very much needed.
Population policy of government since independence
During the first five year plans, the government was not sufficiently concentrating on a sound population policy. It was merely allotting funds through every five year plan for family planning. From a modest sum of Rs. 65 lakhs during the I Plan, the amount increased to Rs. 5 crores in II Plan, Rs. 25 crores in III Plan, Rs. 277 crores in the IV Plan. With such a serious problem on hand viz., control of population, the amount allocated till the IV Plan was sufficient enough to sustain the family planning programs but not for extending it to the rural areas in a big way. During the V Plan the allocation touched Rs. 409 crores which was increased to Rs. 1,448 crores in the VI Plan, hence, only V Plan onwards, was there any concrete attempt to control the population. Till the IV Plan the government was focusing on the following lines of action to control population: 1. Spreading knowledge of family planning technique. 2. Supply of contraceptives to all in the rural and urban areas. 3. Financial incentives for people who undergo family planning operations. 4. Conducting a large number of camps for sterilization operation for both males and females.
After the lifting of emergency the government seriously considered the following for controlling population: ii) raising the minimum marriageable age of males and females through legislative provisions iii) raising the level of education among the females iv) raising the monetary compensation for sterilization operation especially in the rural areas v) making sterilization operation compulsory for couples with two children etc.
But such coercive tactics failed to yield the fruit, as in most of the cases, the officials were more concerned about the target fixed for them than the public sentiments and reaction.
The VI Plan fixed the target for net reproduction late as one to be achieved by 1996 against the present level of 1.67. The target for sterilization operation, IUD insert ion and CC usage, could not be reached due to the following reasons: absence of infrastructural facilities, political compulsions, cultural values, religious sentiments, high infant mortality rate, etc.
During the VII Plan certain basic understandings about our population as given below made the government to approach the problem from a different angle. i) It was understood that the majority of Indian population is living below the poverty line and it is this group which has a very high birth rate. ii) In a democratic set up it is necessary to set the minimum age for marriage and also the prescription of sterilization operation through legislation. iii) To increase the acceptance of sterilization operation, the infant mortality rate should be brought down. iv) Using other incentive like priority in housing, increase in salary, preference in employment, adult ration for child, etc., as followed by China, which could successfully bring down its birth rate significantly in a decade.
The VU Flan accordingly fixed the following targets :
(Current level given in brackets) i. Population growth rate 1.2% (2.03%) ii. Crude birth rate21/1000 (30.6/1000) iii. Crude death rate 9/1000 (10.3/1000) iv. Infant mortality rate 60/1000 (91/1000)
With these targets, the Plan formulated the Family planning and maternity and child health strategies. Through this the Plan also aimed at reducing the maternal mortality rate. .The family planning programs were re-oriented to make them family welfare programs, thereby giving emphasis on every aspect of the family than on'/ the birth rate and reproduction rate. However, mere was a heed for orientation of everybody concerned in order to achieve that target set. The government on its part made a hefty contribution through plan allocations.
Population policy in the VU Plan :
With the findings of the Census conducted in 1991, the government has decided lo formulate an Action plan on following lines : i. To extend the family welfare services to more areas and improving the quality of service.
ii. To give more autonomy for States to manage these programs so as to avoid the target focused action.
iii. To introduce innovative programs for achieving higher level of family welfare especially among the urban slums.
iv. To identify the districts with birth rate above 39/1000 and develop special programs for these districts.
v. To invite and appreciate the involvement of voluntary and nongovernmental agencies to these programs.
vi. Relating the grants to the village panchayats and the State government for rural development with the achievement in bringing down the birth rate.
vii. To encourage small family concept.
viii. To dispel the son-preference attitude.
ix. Devising schemes for post-retirement period so as to discourage unnecessary issue of children.
x. To improve the political will in implementing all these programs.
With these policy options, one may expect that during the VIII Plan, the rate of growth of population would slow down so as to bring down the net reproduction rate to 1 as targeted already.
Balance of payments position since 1991 and critical evaluation of the New export-import policy 1992 - 1997.
The balance of payments position, which had reached a point of near collapse in June, 1991, slowly stabilized during the course of 1991-92. Although new policies to deal with the situation were quickly formulated by the new government and implemented within a few months the external payments situation took time to stabilize primarily because it had been allowed, to deteriorate to a state of near bankruptcy in June 1991. Foreign currency reserves had declined to $ 1.1. billion despite heavy borrowing from the IMF in 1990-91 and a substantial part of this was held in illiquid deposits which could not have been easily mobilized if needed. International confidence had all but collapsed, commercial borrowings had dried up-and even letters of credit opened by Indian banks were being generally rejected unless accompanied by confirmation by foreign banks.
The strategy for the management of the balance of payments outlined in the Budget for 1991-92 which was presented in July, 1991 relied upon a combination of macro economic stabilization and structural reforms industrial and trade policy. It was recognized that in the medium term, the solution to the balance of payments problem would have to come from a much stronger export performance, but in the shorter run the strategy had to be underpinned by mobilization of external financing from the multilateral agencies and from bilateral donors. Restoration of access to imports through liberalization had to depend initially upon additional financing since the export efforts would take time to show results. Since access to external commercial borrowing was constrained the only other sources of funds were the bilateral and multilateral agencies. Visible support from the multilateral agencies was important for restoring international confidence.
Accordingly, the government negotiated a standby arrangement with the IMF in October, 1991 for $ 2.3 billion over a 20-month period, a Structural Adjustment Loan with the IBRD of S 500 million and a Hydrocarbon Sector Loan with the ADB for $ 250 million. Parallel with the effort to draw on multilateral sources, the government also launched the India Development Bonds aimed at mobilizing NRI sources of funds.
With the assurance of external support through these efforts, there was a gradual stabilization of the balance of payments position in the course of 1991-92. Foreign exchange reserves were restored to more normal levels increasing from $ 1.1 billion in June, 1991 to $ 5.6 billion at the end of March, 1992, The entire amount of drawls from the IMF in 1991-92 with the accretion from India Development Bonds together amounted to an inflow of $ 2.87 billion. This was less than the increase in reserves of $ 4.51 billion from June 1991 to end March, 1992. In effect, the exceptional financing mobilized in 1991-92 was used primarily to build up reserves.
Import restrictions were gradually lifted in the course of 1991-92 as the balance of payments stabilized. By the end of 1991-92 the new Liberalized Exchange Rate Management System introduced in the Budget for 1992-93 eliminated import licensing in most capital goods, raw materials, intermediates and components and introduced a dual exchange rate system with one rate effectively floated in the market. The Budget for 1992-93 also reduced the customs duties in line with declared Government policy in order to make the Indian economy more competitive and gradually exposing Indian industry to external competitive pressure. The trade and exchange rate policy regime for 1992-93 was therefore characterized by major progress in eliminating unnecessary administrative and discretionary controls over foreign trade which were contributing to making our economy uncompetitive.
The year 1992-93 saw a revival of imports to more normal levels. The total value of imports in US $ in the period April-December 1992 increased by 16.5% over the level in the corresponding period of 1991-92. The increase appears large only in comparison with a highly depressed level prevailing in 1991-92. In fact the level of imports in 1992-93 as a whole is expected to be around $ 25 billion which is somewhat lower than the level in 1990-91.
Exports in 1992-93 performed far better than in 1991-92. Total export growth in the period April-December was 3.4% in dollar terms compared with an observed decline of 1.5% in 1991-92, The performance of total exports is depressed by the decline of more than 60% in exports to Russia and other States of the former Soviet Union in 1992-93. The growth of exports to the general currency area in the period April-December was 11.4%. The average growth rate in April-December, 1992 has been adversely affected by a decline in exports of I2.5%! in December, reflecting the disturbed conditions prevailing in that month, figures for January are also likely to be depressed by the riots US $ 19 billion. But it is hoped that the export performance in subsequent months will return to the high growth rates of 15 - 16 per cent observed during September-November.
The current account deficit in 1992-93 is expected to be around $ 7 billion, reflecting the revival of imports to more normal levels. This deficit is being financed through a combination of traditional financing sources and exceptional financing.
However, there are important uncertainties in the balance of payments. The full impact of the disturbances in December, 1992 and January, 1993 on exports and-imports is difficult to assess at this stage. Clearly, the receipts on account of tourism would be less than anticipated. The inflow of NRI deposits has in any case been small this year. The inflow of external assistance is also subject to some uncertainties consequent upon constraints that affect the rate of utilization. A step up in commercial borrowings was, in any case, not envisaged. Finally, there is the uncertainty arising from leads and lags. Interest rates and, exchange rate expectations do affect the timing of receipt of export proceeds and payment of import costs. However, while these uncertainties justify a measure of caution in assessing prospects, the balance of payments in 1991-92 has performed more or less as expected.
New export-import policy 1992 -1997 :
On March 31, 1992, the Government announced a new export-import policy for the period 1992-1997. This policy has the following objectives:
1. To institute the required framework for globalization of the India's foreign trade. 2. To improve the export capabilities of our industry, the policy aims at promoting the productivity, modernization and competitiveness. 3. To facilitate improvement of image of our products in foreign markets, the policy encourages the attainment of high quality in the export products. 4. By allowing liberal access to raw materials, intermediates, components, consumable and capital goods etc., in the international market, the policy wants to achieve higher exports. 5. The policy provides for deregulation to achieve self-reliance so that the domestic producers can improve their efficiency and become competitive internationally. 6. The policy also lays emphasis on research and development as well as technological advancements so that the domestic producers will benefit from globalization. 7. A significant object is to simplify the procedure for exports and imports.
Subsequently, the government announced further modification to the above policy by April 1, 1993. The important features of this modified policy are:
i) The duty-free export benefit given to the Export oriented units and the units in Export Processing Zones is extended to units engaged in agriculture and allied activities provided they export 50% of their total production. ii) The government removed 144 items from the negative list of exports leaving only prohibited items, items requiring license and canalized items. iii) As a step to tap the potential of farm sector, professionals, hotels, travel agents and diagnostic centers, the government extended the Export promotion capital goods scheme to them. iv) For more than 2200 items, standard input-output norms are fixed to enable the issue of license under the duty exemption scheme. v) The criterion for recognizing export houses is now based on the foreign exchange earning to FOB values of physical exports. vi) The procedure relating to export and import has been further simplified. vii) Compensation would be given for unutilized import licenses for duty free license scheme and exam scrip holders.
These provisions in the latest export-import policy would certainly enable India to improve her exports and bring down imports. This has been experienced during the first half of 1994 itself.
Structural composition of national income in India. The limitations of National income estimation in India.
According to the First report of the National Income Committee, "National income estimate measures the volume of commodities and services turned out during a given period, counted without duplication." This means the total volume of goods and services produced in a year in a country is valued in monetary terms to obtain the National income of the country concerned.
Regarding the measurement of National income, it could be done in three different ways depending upon the interpretation of concept of national income. If National income is considered as a flow of goods and services, then the method used is called Product method. If National income is treated as a flow of income then the relevant method of measuring it is called Income method. Alternatively, if National income is treated as a flow of expenditure, the method used is called the Expenditure method. Apart from these traditional methods of measuring National income, one more method is evolved and it is called the Value added method. Let us now look into the contents of each of these methods.
i) Product method: In this method, the value of goods and services produced in an economy during a year is found at the market prices, to obtain the gross national product at market prices. By subtracting indirect taxes and adding subsidies, we obtain the Gross national Product at factor cost. By deducting from Gross national product the depreciation, we obtain the Net national product.
ii) Income method: When we aggregate the income received by various factor services, like rent, wages/salaries, interest and profit we obtain the National income at a factor cost. By deducting depreciation from this we obtain the Net National income at factor cost.
iii) Expenditure method: By classifying expenditure as consumption expenditure and investment expenditure, and then adding them will get is the National income. This could be calculated at market prices or at factor cost as in the other methods.
iv) Value added method : .In all the above methods, there is a possibility of double counting and to avoid this the best method is to sum up only the value added to the product or services at every stage. In that manner only the net accretion in value of a product or service will be taken into account to arrive at the final value of all goods and services produced in a year. This method is by far considered as the best though it bristles with certain problems and-difficulties.
In India we adopt a combination of the product method and income method for measuring National income.
Trend in National income since 1951 :
The growth of National income in India since 1951 can be understood from the Table given below.
RATE OF GROWTH OF NATIONAL PRODUCT-IN INDIA
(Figures in percentage)
|PLAN |ACTUAL |TARGET |
|FIR5T |3.6 |2.1 |
|SECOND |4.0 |4.5 |
|THIRD |2.4 |5.6 |
|FOURTH |3.3 |5.7 |
|FIFTH |5.0 |4.4 |
|SIXTH |5.4 |5.2 |
|SEVENTH |5.7 |5.0 |
|EIGHTH |--- |5.6 |
Analysis of the National income in India has yielded the following trends :
1. There has not been a consistent increase in our National income as revealed by the growth figure given in the table above. Our real national income was going up at an annual average rate of 3.9% while the population was also increasing at an average annual rate of 2.13% Consequently the per capita income increased at an annual rate of only 1.8%
2. It could be observed that the rate of growth declined over the decades. While it was around 3.8% during 50's, it came down to 3.5% during 60's and then further to 3.1% during 70's. I980's witnessed a reversal of the trend by recording 5% per annum. But again in the first three years of 90's the rate came down to 3.5% , A similar movement was also observed in the per capital income.
3. Changes and fluctuations in the growth rate of National income was very nigh between years. The main reason for this is that we continue to depend on uncertain monsoon to succeed every year. A successful monsoj3fi boosts up the rate of growth while an adverse monsoon brings down the rate. In Indian experience, the failure of monsoon is a regular feature and so the growth rate in National income has been declining over the decades.
4. As years rolled, it was observed that the fluctuations in growth of national income also widened. For instance during the first decade the fluctuation was between - 1.7257 and + 8.1568 while it widened in the second decade lying between - 4.7565 and + 9.2071. Fortunately there was negative growth rate in the eighties and the fluctuations were ranging between + 2.2 to + 11.2 but early nineties repeat the earlier performance with the growth rate varying between + 1.5 and + 5.8. The fluctuations widening over the decades clearly indicate that our planned efforts are not really bearing fruits and that we still depend on uncertain monsoon.
5. An interesting observation is that this overall fluctuations over the period is quite consistent with the fluctuations recorded by the primary, secondary and tertiary sectors. In other words, these basic sectors were not free from fluctuations and in a way the fluctuations in them cause the over all fluctuations. Among the sectors, the primary sector understandably recorded wide fluctuations followed by the secondary and then the tertiary sectors. This observation is more confirmed when we study the sectoral contribution.
6. Composition of Net Domestic Product (NDP): The contribution by different sectors to the NDP will vary from country to country and even for a country from time to time depending upon the stage of economic development. It is usual that in the initial stage of development the contribution by primary sector will be very much higher than in the other sectors and over a period this would change. In Indian case also this has become true. For example in the table given below the; contribution of the three sectors underwent a change over a period of four decades.
It would be clear from the table below that the contribution by the tertiary sector is on the increase over the period followed by the secondary sector and then the primary sector. This is because the rate of growth of the tertiary and secondary sectors has been more than double that of the primary sector. The secondary sector which accounted for a higher growth rate till the end of the II Plan started receding and the tertiary sector has retained the lead in growth rate.
1. COMPOSITION OF NET DOMESTIC PRODUCT (In percentage)
|SECTOR |1952-53 to 1955-56 |1985-86 to 1989-90 |1991-92 |
|PRIMARY |56.06 |34.58 |27.00 |
|SECONDARY |15.63 |26.57 |29.00 |
|TERTIARY |28.31 |38.95 |41.30 |
2. When we study the compound growth rate of commodity and non-commodity sectors, we find that the rate of growth is higher in the case of latter. This tendency is welcome because the primary and secondary sectors can only generate limited employment opportunities while the service sector or the tertiary sector or the non-commodity sector has greater potential in respect of employment. With economic development, the share of transport, communication, energy, banking and insurance to the national product would automatically increase as is experienced in India.
3. The study of per capita distribution of GDP in agricultural and non-agricultural sectors indicates that over four decades the per capita distribution is more in the case of non-agricultural sector than the agricultural sector. The reasons for this are that:
a) the growth rate is high in the non-agricultural sector than in the agricultural sector and b) as the population increases, there is no significant shift taking place from the agricultural to non-agricultural sector.
This is clear from the table given below:
PER CAPITA DISTRIBUTION OF GDP
(Amount in Rs.)
|SECTOR |1950-51 |1960-61 |1970-71 |1980-81 |1990-91 |
|AGRICULTURAL |860.83 |956.17 |955.60 |940.48 |1143 |
|NON-AGRICULTURAL |1886.52 |2573.32 |3302.69 |3506.47 |5189 |
4. Share of the rural and urban sector to NDP is also used to understand the composition of NDP. In Indian case, the contribution by the urban sector to NDP is very much higher than that of the rural sector. Similarly the per capita income in the rural and urban sectors in terms of ratio shows that the per capita income was high in the urban sector and low in rural sector. The ratio increased from 1: 208 in 1951 to 1 : 241 in 1970-71. But subsequently it declined because with the increase in population, the size of urban population increased and that of rural population declined. Hence, in 1980-81 the ratio was 1 : 232 and 1 : 246 in 1989-90.
5. The analysis of the share of organized and unorganized sectors in the NDP in terms of the factor income revealed that the share of factor income in the organized sector increased consistently over the last three decades, but that of the unorganized sector remained dormant even in 1990. This is because the size of unorganized sector consisting of agricultural sector, corporate sector and service sector. The share of factor income in the organized and unorganized sector is given in the table below.
SHARE OF ORGANIZED AND UNORGANIZED SECTORS IN NDP (In percentage)
|SECTOR |1960-61 |1970-71 |1979-80 |1989-90 |
|UN-ORGANIZED |74.40 |72.28 |64.81 |63.35 |
|ORGANIZED |25.60 |27.82 |35.15 |36.65 |
6. To study the share of public and private sectors in-the GDP let us look into the table below:
|SECTORS |1960-61 |1970-71 |1980-83 |1990-91 |
|PUBLIC |10.56 |14.49 |19.80 |26.40 |
|PRIVATE |39.34 |85.51 |80.20 |73.60 |
The table above clearly indicates that the share of private sector in GDP remains high and constitutes nearly 75% of GDP even in 1990-91. But the share of private sector has declined from about 90% to about 74% between 1960-61 and 1990-91. On the other hand, with the emphasis on public sector, its share in GDP has shown a consistent increase in the past three decades and it is constituting more than 25% by 1990-91. The reason for the low share of public sector in GDP is mainly because that it started developing late, and that the agricultural sector is mostly in private sector.
Based on the above indicators we may come to a conclusion that over the past four decades, the secondary and tertiary sectors have emerged as important sectors with the tertiary sector occupying the top position. The urban sector is continuing to hold a more important place than the rural sector. The unorganized sector still remains in the predominant position and the public sector is yet to make a significant leap in contribution to GDP.
Limitation of national income estimation in India :
The conceptual confusions associated with national income estimation have not been cleared satisfactorily and so the estimation process is subjected to various interpretations. Apart from these the following limitations are also found in the estimation:
1. The existence of non-monetized sector and the output flowing from it has remained outside the computation of national income. In Indian case, in the agricultural sector the barter system still continues that a sizeable quantity of produce does not enter into the market system at all. For example, the wages paid in kind itself is substantial quantity and it is not included in the valuation process.
2. Lack of data relating to the income of small producers and household enterprises is yet another serious limitation. Most of the households engage in alternative occupation and the income earned through that is never accounted for. For example, the services of cook, household preparations of edible items, etc., are valuable but the income earned through such occupations is never known, similarly in the rural areas, the small producers never maintain details of income, expenditure and other data relating to their production. It is reasonable to expect that the income generated through these sources is substantial and when it is not included in national income the estimate of national income is very much less.
3. Difficulty in differentiating (he economic functions performed is yet another limitation in. the estimation of national income. For example, an agricultural peasant during the season may work in his own field, and also in the farm yard of the neighbour, during the off-season he may work at a match factory, or just rear cattle of others, etc. Then how to classify his income? The usual practice is to classify the income earned under industry origin. but with a sizeable section of the people depending on agricultural sector where the occupation is seasonal, it is very difficult to estimate the income earned from various occupations. 4. Existence of black money and unaccounted money is another major hurdle in the estimation of national income. Of course this problem is experienced by every country. In India the National Institute of Public Finance and Policy h:ts estimated in 1983-84, the size of beck money to be around 18 to 21% of the total income. With every possible increase in this category of income over the period, the estimation of national income is bound to be very much less.
5. The compilation of data for national income estimation is taking place in a very loose manner. Usually the data at the village level are compiled by the village head man who may not collect these data in the scientific way in which it should be collected. Obviously the aggregation of these data will involve lot of inaccuracies. Further there is more than one official agency supplying the data which rarely tally. Another bad practice is to round off the data in an unscientific manner. All these have serious implications on the data base for national income estimation.
On the whole, the national income estimation is subjected to the above limitations. Efforts are being taken at every stage to improve the estimation process, computerization of data, has been started only recently and with tins a reasonable j level of accuracy in the data can be expected. Further centers like Center for Monitoring the Indian Economy have been established and their work is integrated. With these, national income estimation should become satisfactory in future.
PROBLEM OF POVERTY
1. Distinction between absolute and relative poverty. Poverty line in Indian context. The causes for poverty in India and evaluate the various poverty eradication programme.
Absolute poverty is a state in which a person lacks resources even to meet or his family's biological needs,-lives in a condition of isolation with a high degree of insecurity. This condition is likely to be hereditary.
Further the person may neither be educated nor have anyone to care for him and may live in poor or inadequate housing and work in inhuman conditions. Basically such persons may not be able to meet the fundamental costs of living.
Relative poverty is a state in which the position of a person or a family can be f expressed in relation to others in the society, especially in terms of the living and f working conditions. This clearly picturises the inequalities in the society. The poverty of a person or a family is always explained and understood with reference to the average level of the society. Those people who are found to live with low income, less remunerative employment, poor living conditions, etc compared to the average determined for the society are said to be living under poverty.
In Indian context, we examine absolute poverty to understand the extent of poverty and also the causes as well as the eradication programs undertaken by the f government. In order to estimate the poverty and the number of poor people in the country, the concept of poverty line' is used. In defining the poverty line usually three important factors are considered viz., i) minimum nutritional level for subsistence, ii) cost of this minimum diet and iii) per capita consumption expenditure. .While using these factors, care is taken while making inter-year comparison of poverty by using appropriate deflators to neutralize the effect of inflation. Most of the studies on poverty have used the data supplied by the National Sample Survey. But all these studies have been able to make only a rough measure of Indian poverty. Hence, for our purpose we will consider the measure adopted by the Planning commission.
The Planning commission has used the nutritional requirement as the basis for computing the poverty line. According to the Commission, there is a need to define poverty line for rural areas and urban areas separately. Accordingly, interms of calorie requirement per person per day, the Commission fixed 2400 calories for rural areas and 2100 calories for urban areas. In terms of monetary unit, it works out to be Rs. 10,890 for rural areas and Rs. 12,570 for urban areas (at 1991-92 prices).
On this basis the Economic survey 1992-93 estimated the percentage population below the poverty line as shown in the table below :
|AREA |1987-88 |1989-90 |
|RURAL |33.40 |28.20 |
|URBAN |20.10 |19.30 |
|ALL INDIA |29.90 |25.80 |
The estimate of poverty given in the above table by the Planning Commission is contradicted by various studies undertaken by research scholars. For example, while the Planning Commission estimated about 22% points fall in poverty between 1972-73 and 1987-88, Prof. Minhas and others have pointed out that the decline during the above period was only by 12% points.
Another aspect of the poverty estimate is that there is a significant regional difference as well as inter-state difference. For example, in 1988, the percentage population living below the poverty line in different regions is as given below:
|REGION |1970 |1983 |1988 |
|SOUTH |61.0 |46.2 |43.2 |
|EAST |61.8 |57.3 |51.3 |
|CENTRAL |46.9 |40.2 |37.2 |
|WEST |46.1 |38.2 |34.9 |
|NORTH |12.6 |9.8 |8.3 |
Based on the above tables, it could be understood that "the poverty has declined over a period and significantly during the 80's. This is attributed to the following reasons : i. The GNP increased by 5J% during the 80's compared to about 3.5% increase till the 70’s. ii. The poverty eradication programs undertaken by the government has started yielding the fruits. iii. The increasing urbanization has resulted in the increase in income, especially the urban migrants remit sizeable amount of money to their relatives in the rural areas resulting in improved standard of living in rural areas. iv. The spread of education and impact of education together have contributed to the reduction of poverty. v. The development of non-farm activities in the rural areas has also helped to improve the status of the rural poor.
Causes of poverty 1. The ever increasing population: This is one of the basic reasons for poverty, especially the rural poverty. It is well known that the annual addition to population was more than the rate of economic growth. The quality of our population, especially the productivity and health condition, is so poor that population growth merely adds only the size of claimant to the available resources without making any significant contribution to the output.
2. The large scale unemployment is the next factor which is both a cause for poverty as well as the effect of poverty. It is a cause in the sense that when millions of people remain without employment, their contribution to output is nil but they claim a share in the output. When the claimants to the limited output is high, then the per capita availability -is so low which causes poverty. Unemployment is the result of poverty in the sense that when the poor people, mostly unskilled, want employment, they do not get employment Even if they manage to get the employment is purely seasonal and temporary.
3. Another important reason is the under utilization of the available resources. Inspite of technological advancement, scientific improvements, etc., the utilizationis very much far from satisfactory. As a result the total output is less whereas the claimant is more which causes poverty.
4. The growth strategy adopted by the country through Five year plans has not yielded the desired or the targeted results. Most of the schemes of poverty
5. Eradication has touched only a small segment of the population. The agricultural sector is still remaining in the same position that it is unable to contribute significantly through increased production and productivity to our national income.
6. The existence of inequalities in income is yet another reason for poverty. The inequalities are mainly due to the concentration of wealth and property in the hands of a few. As a result the percapita income is very low resulting in poverty.
7. Ecological degradation and deforestation are also causing poverty. The urban poor reed forest based resources mainly wood for fuel purposes. This they obtain by indulging in indiscriminate felling of trees and denudation of forests. This directly affects the earning scope for the rural poor, as they depend mostly on the forest resources and agricultural lands for their livelihood. With the fast denudation of forests, the rural poor become poorer.
8. The distribution of resources in the country is not even and this is evident from the inequalities existing among the states. For example, even in the 90's Orissa remains a backward state while Maharashtra is in the forefront like Punjab, Haryana, Uttar Pradesh, etc. This is one of the reasons for the prevalence of poverty in certain states.
Measures to alleviate poverty 1. The first step towards eradication of poverty is to achieve fast economic growth. It is realized that poverty in India is more due to institutional factors and so there is a need to attack directly poverty through programs aimed at particular group of people. That is why programs like Integrated Rural Development Programme, Jawaharlal Rojgar Yojana, etc have been introduced.
2. The large scale producers have to be oriented towards v/elfare of the community and the small scale industries should be Moro employment generating and help in the removal of unemployment, especial in the rural areas.
3. At the national level, the country should improve the rate of surplus generation by increasing resources mobilization. But this will be difficult when the propensity to save and invest is very low among people and the tax rates are very stiff. This could be achieved by achieving better utilization of resources, using better techniques, improving the technology, etc. All these will help to generate the income in the economy and the percapita income will also go up.
4. With the application of improved technology, use of high yielding variety .seeds, fertilizers and insecticides, it should be possible to increase the production and productivity in the agricultural sector which directly will increase the income of the farmers. This in turn means higher per capita income for the rural folks thereby reducing poverty in the rural areas.
5. It is well known that nearly 70%, of Indian population is depending on agricultural sector and the agricultural sector is completely depending on monsoon, Monsoon is most uncertain that the famous saying is “Indian agricultural is gamble with monsoon.” There is a need to improve the irrigation facility .and relieve the dependence on monsoon so that the agriculturists will have good production and achieve a higher level of productivity with which they can be relieved from poverty.
6. Several other measures like a forestation, massive rural employment generation, improving soil conservation, adopting latest technology in production process, improving the allied occupation to provide alternative employment opportunities for the farmers during the off-season, etc., can certainly bring down the level of rural poverty.
7. As recommended by the World Bank, the rural employment schemes should be more oriented towards women as it is found that in nearly 35% of the rural family women’s’ share in the family income is quite significant. Special schemes could be devised to improve the employment opportunities for women so as to supplement the income of the family with women’s’ earnings.
8. The rural credit system needs review, especially after nearly 25 years after nationalization of banks. The banks should be involved more in the rural schemes and new employment oriented schemes have to be identified and liberal financial assistance should be provided for such schemes so as to help remove poverty in the rural areas.
9. Efforts should be made to discourage conspicuous consumption among the people and encourage them to make productive investment. This, calls for a change in life style of the people and their consumption behaviour. Though it would fake a long time to achieve this, yet steps should be initiated at the earliest in this direction.
10. Encouraging co-operative efforts in various fields, improving and spreading educational opportunities, creating the awareness among the people that the poverty is only a stage and it could be overcome with consistent efforts, devising new schemes targeting specific group and its peculiarities, rigorous implementation of land reform policies, etc are all other measures which would bring down poverty in India.
All the schemes were in operation for quite some time and an evaluation of these schemes has brought out certain deficiencies of them. Efforts have to be taken up to overcome these deficiencies so that these schemes would help to eradicate poverty in India.
i) The first deficiency is that these schemes are weakly integrated with other plans for area development. ii) The community assets created through various schemes has not been employment generating in nature. iii) The welt to do farmers and people in the rural areas are found to be the beneficiaries of the schemes aimed at eradicating poverty. iv) The delay in the implementation of the schemes and the allotment as well as release of funds for these schemes is robbing the expected benefits of these schemes. v) Politicians interfere in the process of identification of the beneficiaries that the fruits of these schemes do not reach the targeted group of people. vi) Failure to provide adequate training to the persons: in-charge of implementing various schemes is also another reason for the schemes not being effective. vii) Poor flow of communication and details about the various schemes to the rural folks is one more reason for the deficiency of these schemes. There is a need to strengthen the publicity for these schemes so that the needy will be benefited.
As has been already stated, the government has introduced various schemes aimed at eradicating poverty, especially in the rural areas, but the above mentioned deficiencies should be viewed seriously so that the efforts to eradicate poverty will start bearing fruits.
Problem of unemployment in India
Unemployment is of different types. Every type of unemployment is found in India. Before we analyse the nature of unemployment, we should understand the types of unemployment
1. Structural unemployment: This is a type of unemployment caused 'mainly by the change in the development strategy adopted by an economy. For example, suppose a country basically agricultural in nature, plans to adopt industrialization as a strategy. This will result in displacement of labour in agriculture and not all of them can be accommodated in the industries. This type of unemployment caused is called Structural unemployment.
2. Cyclical unemployment: Every economy goes through the ups and downs in the process of development. This type of economic fluctuations is studied through the behaviour of business cycles. Hence, during the period of inflation, the unemployment will be less and during the period of depression unemployment will be more. Such type of unemployment is caused mainly because of the deficiency of effective demand. Keynes has discussed this type of unemployment in his theory. Such unemployment is caused due to the economic fluctuations and every country will experience this type of unemployment.
3. Frictional unemployment: This is another type of unemployment which is caused by shift in the productive effort. For example, during war time, workers are absorbed in war-time industries. Once the war is over, these workers are rendered unemployed as the war-time industries and production do not continue. Such an unemployment is called factional unemployment. An economy which is flexible can quickly solve this type of unemployment.
4. Seasonal unemployment: This type of unemployment is very closely linked with the seasonality in production in any sector. For example, in the agricultural sector, during the harvest season, there is heavy demand for labour. All unemployed laborers will get work. But once the harvest season is over, these laborers remain unemployed.
5. Under-employment or disguised unemployment: This is the type of unemployment which is never practically seen, but only experienced. Suppose a job which can be performed by just 10 worker, has in reality has 20 workers, then the excess 10 workers who are not actually required are said lo be under employed or disguised unemployed. In other words, the surplus labour do not make any addition to the output. Technically, their marginal product is zero. Such a situation is called wider-employment or disguised unemployment. In India this is the type of unemployment which is found in large scale in agricultural sector and public sector. Alternatively, when a Post-graduate qualified person is employed as a peon, then he is said to be under employed as his true potential is not really put into use.
6. Educated unemployment: This type of unemployment is found among the educated persons. Though there are different levels of education, at any level, if a qualified person is unemployed, then he adds to the number of educated unemployment.
7. Rural and urban unemployment: Depending upon where there is unemployment, we may classify unemployment as rural an.1 urban unemployment.
TREND IN EMPLOYMENT IN INDIA
When we analyse the growth rate of employment by sex and residence we observe the following trend:
1. The employment on the whole has been growing at the rate of 2.21 per annum during the 15 year period (1972-73 to 1987-88).
2. The rate of growth in urban employment was found to be more than that of the rural employment, the respective rate being 4 per cent and 1.75 per cent. As a result, the share of employment in the total employment had gone from 16% to 22% during the 15 year period studied.
3. It is of interest to note mat unemployment among male and female increased more or less at the same rate and their share in total employment also remained the same over the 15 year period.
4. However, the rate of growth of employment had been declining when we divide the 15 years into three 5 year period. 5. As regards the growth rate of employment in organized and unorganized sectors, it was found that in both the rate of employment was on the decline, though the rate of employment in the unorganized sector was greater than that of the organized sector during the 15 years studied.
6. Among the sub-sectors in the organized sector, the rate of employment was more in public sector than in private sector. While in public sector the rate of employment was growing at the rate of 3% per annum the employment in private sector increased at a lower rate of 0.5% per annum.
7. The study of growth rate of employment in major sectors of our economy indicated that in terms of growth rate of employment the sectors could be listed in the following order: Construction, Electricity, gas and water supply. Mining, Transport, storage and Communication, Manufacturing, Services and Agriculture.
NATURE OF UNEMPLOYMENT IN INDIA
Even before we discuss the extent of unemployment in India, it should be noticed no accurate estimate of the problem is available. This is mainly because of various types of unemployment and lack of data base on unemployment even agencies like Directorate General of Employment and Training or Census or National Sample Survey or the Employment exchanges can give accurate information on unemployment. However, the available estimates could be used to understand the magnitude of this problem.
Looking into the Plan documents one can get the information about the backlog of unemployment at the beginning of each Plan. This is given in the Table below.
BACKLOG OF UNEMPLOYMENT DURING FIVE YEAR PLANS
|PLANS |I |II |III |Annl |VI |VII |
|Back log - at the start of the Plan |3.3 |5.3 |7.3 |9.6 |11.3 |7.8 |
|Addition to the labour force during the |9.0 |11.8 |17.0 |14.0 |32.1 |36.3 |
|Plan | | | | | | |
|Total (1+2) |12.3 |17.1 |24.1 |23.6 |43.4 |44.1 |
|Additional employment |7.0 |10.0 |14.5 |11.0 |35.6 |40.4 |
|generated | | | | | | |
|Back log - at the end of the Plan |5.3 |7.1 |9.6 |12.6 |7.8 |3.7 |
From the Table it could be seen, that the unemployment at the end of every Plan has gone up to the Annual Plans and after that the Backlog had come down during the VI and VII Plans, This implies that efforts taken to generate employment have yielded the desired result, though the entire backlog could not be erased completely.
It may be noticed that this reduction in backlog need not be taken as an indicator of the problem being solved.
It is necessary to study the unemployment sex-wise, and residence status-wise to understand the problem in right perspective. This are being studied below.
The analysis of unemployment rates sex-wise and residence status-wise indicated that:
i) The current daily status unemployment rates was found to decline both in urban and rural areas for both males and females ii) A current weekly status unemployment rate was found to increase for males whereas among the urban females this rate was almost constant while in the case of rural females it was found decline. iii) The usual status of unemployment was found increasing among males and females in both the rural and urban areas.
CAUSES FOR UNEMPLOYMENT
The problem of unemployment in India is caused by various causes. Let us now discuss the main causes for this problem:
1. The first cause for unemployment is the steady increase in population. The rate of population growth is around 2.2% per annum while the rate of employment growth is hardly matching with it. Hence, the unemployment situation worsens with every addition to population.
2. The rate of labour absorption in the organized sector in India is very limited as most of the segments in this sector are already full with labour force. Hence, the best way to absorb the surplus labour is by expanding the small scale units which are highly labour intensive.
3. The low productivity in agricultural sector is another reason for unemployment. With a large scale under-employment and disguised unemployment in the rural sector, there is limited addition to the output. As a result majority of the rural folks remain unemployed and they cannot also be absorbed by the industrial or other sectors as they do not have training.
4. The indiscriminate increases in the number of graduates coming out of the universities and the lack of link between the curriculum and the actual requirement by the industries are the next set of reasons for large scale unemployment among the educated persons.
5. The mushrooming of technical institutions throughout the country is yet another reason for the unemployment among the technicians.
6. The large scale failure and sickness among the small scale units in the country is another reason for unemployment.
7. The failure of several schemes for generating employment is itself a reason for the existence of large unemployment.
8. The lack of co-ordination among various agencies engaged in generating employment also results in unemployment prevailing.
9. The delay in identifying the potential sectors for generating employment has resulted in the building tip of huge backlog of unemployment.
10. The lack of training facilities and the lacunae between the training institutions and employing agencies is another reason for unemployment among the trained persons.
11. The inherent resistance to mobility among the laborers itself is a reason for unemployment For example; laborers do not prefer to go to places where jobs are available even if it amounts to remaining unemployment otherwise.
Solutions to solve the problem of unemployment:
The unemployment problem needs solution at different levels. The solution for this problem at the urban level is different from those at the rural level. Hence, steps are to be taken at both the levels to bring this problem under control. We discuss below the solutions for this problem under urban level and rural level separately.
Suggestions for solving urban unemployment:
1. The foremost step is to make education relevant to the society. Instead of continuing with the purely academic orientation, efforts should be made to spread vocational education.
2. Industries with low capital intensity should be started in large scale so that they can generate more employment. Though the small scale units have come into existence in large scale, yet the failure rate among them is very high. Steps should be taken to minimize this sickness among small scale units so that they can generate employment in large scale and help to solve this decades old problem.
3. The import of technology should be discouraged and the domestic technology should be updated so that it can generate more employment.
4. Industrial units with short gestation period should be encouraged in large scale.
5. Decentralization of units and incentives for location outside the urban limits to industries, would help to relieve the urban unemployment to a large extent.
6. Financial assistance to self-employed persons should be made more liberal that such types of employment will help to minimize the intensity of the unemployment problem.
7. Considering the potential of the service sector, organized and co-coordinated efforts are required to encourage establishment of units in the service sector which can take the load to a large extent.
8. Productivity in industrial sector should be improved that more opportunities arc automatically created.
Solutions for rural unemployment includes the following points : 1. Establishment of small scale units to utilize the locally available resources is one important step. 2. Providing training facilities for the rural folks in various areas will help them to improve their skills so that they can get employment in various sectors. 3. Extension of rural oriented jobs will also help to solve the problem. 4. Large irrigation schemes with excellent capacity to generate large scale employment should be started 5. Community development projects should be initiated with guidance to effectively tap the rural man power. 6. Several agricultural oriented small units like dairy farm, poultry farm, beekeeping, etc., should be set up in large scale so as to provide off-season employment and also supplement agricultural income. 7. Spreading vocational education among the rural folks will also help them to improve their skills with which they can get employment. 8. Liberal financial assistance, managerial and technical guidance will go a long way to minimize rural unemployment. 9. Effectively monitoring the rural employment schemes to prevent malpractice and wrong diversion of funds will, help in realizing the objectives of these rural employment schemes arid projects. 10. Establishing links with the urban market to ensure ready market for the products from the rural areas will help to ease the unemployment among the self-employed rural folks,
The problem of rural unemployment Measures to solve this problem
The agricultural sector offers livelihood for millions of people in India. One segment of these dependents is the agricultural laborers. There is no parallel to the sufferings of these agricultural laborers. This is a unique group of laborers with certain peculiar characteristics. Infact it is because of these peculiarities of agricultural laborers that they remain always in object poverty.
One of the peculiarities is that these agricultural laborers remain unorganized. Unlike the laborers in industrial sector, the agricultural laborers have no opportunity to come together. They remain independent that once a laborer gets the work on a day he does not bother about others. When he remains unemployed no other laborer takes any interest or shows any concern. Being illiterate these laborers have not understood the importance of collective bargaining.
Another peculiarity of the agricultural laborers is that they mostly remain unskilled. This is because of their nature of occupation, which is seasonal and mostly temporary. Further there is no specific work that any laborer concentrates and every laborer is prepared to do any type of work connected with cultivation. Hence, no specialization or skill is acquired by them. The extent of illiteracy among them also stands in their way of improving their skill through training.
The agricultural laborers are highly migratory in nature unlike the industrial workers who are more stable in their jobs. This is a peculiarity that could be found only with agricultural laborers. The nature of their occupation is such, that these agricultural laborers get temporary job wherever they go. Being unskilled they go in search of job and accept any offered to them. Further, unlike the industrial workers who do more specialized and specific work, the agricultural laborers have several, odd jobs that they need not stick on to a particular job or employer for ever. It is because of this migratory nature of their work, that they are unable to command any remunerative reward for their work and get organized.
A very important peculiarity of the agricultural laborers is that their employers in most of the circumstances also are poor and so they do not offer remunerative wages. Further the employer and his family members also involve themselves in every work along with the hired workers. This results in very close contact between the agricultural laborers and their employers. Till very recently, there is no codified rule or regulation for protecting the interest of the agricultural laborers. In the case of industrial workers, several legislation are enacted at various points of time to protect their interest. In the absence of such well defined rules and regulations, agricultural laborers are subjected to various types of exploitations and they are denied of their dues. Further these workers have no appellate authorities to appeal and get their grievances redressed. Mostly, the disputes relating to agricultural laborers are settled at the village level where the money power is found to be final. In other words, the rich farmers and landlords always decide cases against the interest of the workers and the latter also do not react to such one-sided judgments, lest they should remain unemployed for ever.
With all the above peculiarities explained it is not a surprise that the agricultural laborers lead a .life of misery. This is clearer when we study their economic condition.
i) Majority of the agricultural laborers do not own any land. Even those owning land, the average size of landholding is just 1.33 acre.
ii) The employment that the laborers get is temporary and purely seasonal. It is well known that on an average an agricultural worker gets employment only for about 4 months per year and this too not at one stretch. Obviously, the laborers borrow heavily and remain in debts forever.
iii) With no fixed hours of work and regular wages, these laborers lead a life of penury and they are never able to balance their income and expenditure. It is estimated that more than 52% of the agricultural workers are in debts which range between Rs. 244 in West Bengal and Rs. 1808 in Rajasthan. Inspite of the minimum wages legislation, the wages of the laborers remain abysmally low as in most of the places the legislation has no relevance. Further, the agricultural wages do not go up on par with the industrial wages due to the absence of collective bargaining, exploitation by landlords, illiteracy of laborer, etc.
iv) A very significant feature of the agricultural laborers is that most of them come under ‘bonded laborers.’ This means, when a laborer is unable lo meet his family expenditure with his meager income, he borrows from the money lenders or landlords at very high rate of interest. The repayment does not arise with his income level. Hence, the entire family is indebted to the money lender or the landlord, who uses these laborers through generation for cultivation and other purposes. This if, how the agricultural laborers families become bonded laborers.
v) With very poor economic back ground, the agricultural laborers lead a life of misery. Naturally, their productivity is very low. This affects not only their ability to command better wages, but also the country with lesser productivity in the sector.
So far we have discussed the peculiarities and the economic conditions of agricultural laborers. What are the reasons for this? The causes; for the poor position of the agricultural workers are as follows:
1. The excessive growth of population is the basic reason for this condition of agricultural laborers. With sizeable addition every year, the dependence on agricultural sector increases which in turn increases the unemployment. As a result the laborers arc prepared to work even for very low wages. The employment that they get is not permanent and purely seasonal. They migrate from place to place in search of good employment but not permanent employment. With large scale unemployment, they lead a poor life and they have very little strength to be productive. Another outcome of this dependence on land is indebtedness.
2. It is well known that the agricultural laborers are paid poor wages and the wages are paid even today in kind. This affects the purchasing power or the capacity of the workers. Immediately after the harvest, when the laborers are paid their wages in terms of the crop, these laborers try to dispose of this in the market, or the village shops and they realize lesser money value much less than what they would get if they are paid in cash. Hence even if the agricultural laborers get their wages", their purchasing power is relatively low.
3. The tenure of employment is highly uncertain in the case of agricultural workers. In the absence of any rule or regulation the employment of laborers is subjected only to the personal likes and dislikes of the employer. They are exploited to the maximum extent by the land lords. There is no bargaining power in the absence of any organization to protect their interest. This in turn has encouraged bonded laborer system. The laborer? Always live in poverty and in the absence of alternative occupation work under suppressing conditions. This affects their productivity as well as initiative to get organized. They remain unskilled being satisfied with what they get.
4. One more important reason for the pathetic condition of the agricultural laborers is that they do not get any protection from the government also. Whatever legislation are there, they all only help the powerful landlords who are able to circumvent the legislation finding loopholes. Further, State is a silent spectator to the exploitations of the laborers, as without the aggrieved protesting, there is no scope for the government to intervene. The poor laborers also do not have any other alternative source of income. Another problem is even if the government is able to relieve the bonded laborers from their bondage; the expenditure on their rehabilitation is very huge that States hesitate to accept this burden. Once the laborers are free to work, they do not get job as they mostly are unskilled. There is also no scope for accommodating, them in any other productive sector as they do not possess any other skill. Assuming that the government is able to allot them land so that they can cultivate it and survive, these laborers do not have the wherewithal to use the land and survive. In several cases, these laborers who are given land, are found to pledge the land with the money lenders and once again remain agricultural laborers.
Hence, when we consider the above explanation, we find that the agricultural laborers have no scope for leading a normal life. However, we may suggest the following ideas with which their problems may be solved at least to some extent. The National Commission on Rural Labour has also made certain recommendations to improve the position of these laborers. Let us now discuss these in detail.
1. On its part the government has passed the Minimum Wages Act to ensure that the agricultural laborers are not exploited. While the Act has provisions to pay minimum wages, it has no teeth. In other words, though the Act has been passed, it remains ineffective, in the sense that the government is not able to enforce this Act. The main reason for this is that agricultural laborers are highly unorganized unlike the industrial workers. In the absence of unions, the provisions of this Act are not effectively implemented. Further the laborers are in debts and in certain cases these debts have been incurred in the past by their forefathers. They do not come forward to rise against their employers for fear of losing their occupation. Hence, mere passing of Minimum Wages Act would not help the workers, unless the government follows it up with measures for effective implementation.
2. In order to protect the interests of agricultural workers, the government has launched several special programs like Small Farmers Development Agency, and Marginal Farmers and Agricultural Laborers Development Agency. These are specific programs to protect a particular group of laborers falling in small farmers, marginal farmers and agricultural laborers category. These programs are implemented to start with in certain areas so that slowly they could be extended to other areas. In the past the government launched community development programs to protect the weaker sections in the agricultural sector. With such programs, the benefits ma^ flow to the target group, but there is a need to extend these programs to others in other areas and also to come up with corrective steps wherever these programs do not reach the targeted group.
3. Another important step taken to mitigate the condition of the agricultural workers is land reclamation and settlement. The government as well as service organizations are engaged in the process of reclaiming lands from the big farmers .and rich land lords. These land are pooled and then* redistributed among the agricultural- workers and landless peasants. Bhoodan movement was started by Vinoba Bhave mainly to encourage philanthropic land lords to donate voluntarily lands which were redistributed among the landless peasants and workers. These efforts met with very little success and the lands mobilized in this way either were found to be not fit for cultivation or in litigation. Further there were several problems in the redistribution process. For instance, proving die identity and domiciles bf agricultural laborers were main problems. In several cases after the lands were redistributed, the laborers either retained the lands uncultivated for want of funds for cultivation or pledged them for raising funds for running their families. Hence, there is an urgent need to attend to this problem of reclamation and resettlement and eliminate all the obstacles and hurdles in the process.
4. Several new rural employment programs have been launched by the government-at different points of time. Certainly these programs have helped to bring down the problem of unemployment in the rural areas and divert the surplus manpower in the agricultural field to the of her closely related occupations. These programs range from laying of roads to minor irrigation, canal construction, soil conservation, social forestry, etc. As lakhs of people are involved in these programs, to some extent there is scope for using the idle manpower in the rural areas. However, these schemes themselves cannot eradicate poverty or unemployment in the run areas. Apart from the shortage of funds for implementing such schemes the government has to monitor several such schemes at the same time which adds to the administrative burden of the government. Possibility of making the local rural agencies responsible for the administration and operation of these schemes would help to make the benefits flowing from such schemes to reach the targeted group.
5. A very significant improvement in this connection is the passing of The Bonded Labour System (Abolition) Act, 1976. This Act has completely liberated all the bonded laborers at one stroke. But the effectiveness of this Act is still in doubt, because laborers themselves have preferred to stay with the landlords or their employers for fear of losing their livelihood and the difficulty for the government to find them alternative employment. Hence, Inspite of this Act, the bonded labour system is still found in several parts of the country. The government should now seriously think of implementing this legislation and simultaneously create agencies which will arrange for the rehabilitation of the released bonded laborers. The contribution of the voluntary organizations can also be invited as government alone cannot attend to this task. As a step towards rehabilitation these agencies can train the displaced bonded laborers in simple works like printing press, book binding, stitching, carpentry, etc., so that the released laborers can start with a new occupation instead of once again coming into the fold of agricultural occupations.
6. Another positive step in this direction has been the Central government coming out with the insurance scheme for ails-the agricultural laborers. The premium of Rs. 10 per year is paid by the government and the insurance cover is for Rs. 1000. Every head of a family is insured, and this is a small beginning. This scheme should be slowly extended so that the family of agricultural laborers will have some tort of protection after the death of bread winner.
7. With the establishment of the National Backward Classes Finance and Development Corporation recently, the government has shown its determination to attend to the problems of the poor and downtrodden agricultural laborers. This Corporation will help to generate self-employment' opportunities, provide concession in finance and assist to improve the technical skill of laborers belonging to Backward Class.
8. A major development in alleviating the problems of agricultural laborers is the setting up of the National Commission on Rural Labour by the government, which submitted its report in July, 1991. The Commission has gone into the depth of the conditions of the small fanners, marginal farmers and the agricultural laborers and made a number of .recommendations. Basically the Commission felt that the level of living of the agricultural laborers should be improved and they should be involved in the development process.
In this connection the following are the recommendations made by the Commission: i) Free and compulsory education for all children in the rural areas upto the age of 14. ii) Prohibition of child labour in every form in any industry. iii) To provide collateral - free loans to women, a separate National Credit Fund has to be set up from which loans could be given to women. iv) Fixation of minimum wages as Rs. 20 per day with a provision to change it by linking the wages with Consumer Price Index. v) Provision of liberalized credit to laborers through co-operative banks. These suggestions are being examined by the State governments and the Central government and when they are accepted, then we may expect the condition of the agricultural laborers to improve.
THE INFLATIONARY TREND IN INDIA AND THE STEPS TAKEN BY THE GOVERNMENT OF INDIA TO CONTROL INFLATION IN INDIA.
Immediately after independence, the inflationary pressure was controlled by the government by taking the following measures:
1. The government imposed new taxes and increased the rate of old taxes to absorb the surplus purchasing power in the hands of the people. 2. The government also simultaneously reduced the money supply. 3. The public expenditure was also reduced to some extent. 4. The government announcement of increase in bank rate from 3 to 31/2 per cent in November, 1951 had a good impact. 5. Government also simultaneously took several steps to increase the volume of production. In spite of these efforts during the period five year plans the inflationary pressure continued.
During the I Plan period in spite of the increase in agricultural and industrial output, the inflation set in mainly because of the failure of monsoon in 1955 and a heavy dose of deficit finance to the tune of Rs. 420 crores. In the II Plan, the increases in prices of ail commodities continued to be experienced. There was very limited success on the control inflation. However, the government could resort to a lower level of deficit finance to the tune of Rs. 948 crores against a target of Rs. 1200 crores. The III Plan witnessed further spiraling up of prices. During this plan several factors contributed towards the inflationary pressure. Specifically the Chinese aggression, increased money supply, increase in government expenditure and acute shortage of foreign exchange fuelled the inflation. The actual deficit finance was Rs. 1133 crores much above the provision of Rs. 550 crores. The reliance on deficit financing continued during the annual plans the government resorted to nearly Rs. 682 crores of deficit financing. The IV Plan period witnessed some efforts on the part of the government to bring down the inflationary pressure. For instance, the government decided to finance its public expenditure through non-inflationary means as far as possible, the bank rate was raised from 6 to 7% The cash reserve ratio was jacked up from 3 to 5%. The minimum rate of interest to be charged by the commercial banks on their loans and advances was fixed at 10% But all these steps failed to bring the desired result as the government resorted to a huge dose of deficit financing to the tune of Rs. 2150 crores against the original target of Rs. 850 crores. During the V Plan period there was no let up on the price front. The inflation rate was so alarming that the government had to introduce several measures. Through several ordinances, the government froze all profits and wages at current levels and through the third ordinance, the compulsory deposit scheme for the income tax payers was introduced. So prices slowly started declining. By March, 1976 the price level in India rose by 11 % To control this high rate of inflation, the government resorted to supply management policies. It curbed further increase in money supply and the effort was to increase the supply of wage goods. But the policies failed because the government gave a greater emphasis on controlling credit rather than controlling money supply. During the VI Plan the deficit finance was to the tune of Rs. 5000 crores and so the inflationary pressure continued to build up. the government came up with its anti-inflationary policy by laying emphasis on: increasing the production, better capacity utilization, imports of essential commodities in short supply, regulated exports of those needed domestically, curbing the activities of hoarders and black marketers, constant monitoring of the prices of essential good and making permanent the Compulsory Deposit scheme and enhancing the rate of this deposit. The RBI increased the Bank rate from 9 to 10% and it also increased the CRR to 7% from 6% and the Statutory liquidity ratio from 34% to 35% It raised the minimum margin for the food credit to 10% inspite of all these tasks the inflationary pressure not only continued but became more aggravated. During the VII Plan period also the government continued with most of the above mentioned measures with greater seriousness. But even at the end of the VII Plan period the inflation rate was hovering above 10% which taken is really high. It is to be noted that there is nothing wrong with the measures taken up by the government of India to curb inflation in India. The main problem is the implementation of these measures. In practice there is no co-operation from the public and other financial institutions especially in the unorganized sector. As a result all the efforts of the RBI are nullified. Large scales smuggling, hoarding, black marketing, etc continue to take place in the economy without any check. Further large scales tax evasion and existence of black money and the working of the parallel economy, etc., have also posed serious challenges to the effective implementation of the policies of the government. On its part the government is unable to brig down the size of deficit finance due to its commitment to the welfare activities. Hence, the time has come to take a drastic decision in the interest of economic stability to put an end to all the evils nd evil practices in the economy.
THE PRICE MOVEMENTS IN INDIA SINCE INDEPENDENCE AND CAUSES FOR RISE IN PRICE IN INDIA
Price movements in a country can be analyzed only when the wholesale price index is available. In India, though this wholesale price index was computed after independence, yet the price quotations were not complete as they did not include all the commodities. Further the government had been changing the base year frequently with an anxiety to prevent people from really comparing the purchasing power over a period of time. Hence, in India the base year originally was 1950-51, which was changed to 1960-61 and then to 1970-71 and finally to 1980-81.
Of course, now the wholesale price index is more comprehensive as it includes almost all the commodities traded. We will discuss the price movements in four phases: phase I : 1951 to 1971, Phase II : 1971-1980, Phase III : 1981-1990 Phase IV : l990’s.
Phase I (1951-1971) :
In this phase, roughly we study price movements through the first three five year plans and the annual plans. During the I Plan, the price movements were very much less and the wholesale price index was 99 (base year 1952-53 = 100). As regards the food articles, the price index was hovering around 90 which indicated a very comfortable position during this Plan. But encouraged by this trend, the government undertook various new projects by resorting to deficit financing. The result of this was that during the II Plan the price level went up by 20 per cent. The price position worsened during the III Plan as this was the time when there was Chinese aggression and Pakistan invasion. As a consequence the defence budget went up leading to soaring up of prices. For instance, between 1961 and 1966, the prices of foodstuffs went up by 40 per cent, the price of cereals was up by 45 per cent and in the case of pulses it went up by 70 per cent. There was inflationary spiral. Fortunately in 1967-68, with the sudden spurt in food production (Green Revolution), the price level came down and in 1968-69, there was a marginal fall in prices by one percent.
Phase II (1971-1980) :
This is a very crucial period as far as Indian price situation is concerned. It was during this period that India witnessed a very steep rise in price level. Though the rate of increase in price level was very much less (around 5 to 7 per cent) in the first three years of the III Plan, it soared up by 19 points in the fourth year and by 47 points by the last year The reasons for this were: heavy influx of refugees from Bangladesh and the expenses incurred on them, the failure of the kharif crop in 1972-73, the failure of the take over of the wholesale trade in wheat and the rise in crude oil price. For the first time in India, the wholesale price index touched a peak of 331 in September, .1974. The government initiated a number of measures like compulsory deposit scheme, nabbing of black marketers, smugglers and hoarders invoking the provisions of the Maintenance of Internal Security Act (MISA), etc., which together resulted in the decline" in the price level. The wholesale price index stood at 309 by March, 1975 and then further dropped to 283 by March, 1976. Though immediately after the pronouncement of-emergency the price level declined, it once again started increasing at the September, 1974 level by March, 1977. After the emergency period, the Janata government came to power and following various policies it succeeded in arresting the price rise. It could maintain the price at 185 points applying the demand - supply management, higher buffer stock, high foreign exchange reserve, increased food production as well as industrial production. But the inflationary budget of 1979, contributed to the reversal of trend in price that by January 1980, the wholesale price index stood at 234.
Phase III (1980-1990)
In January, 1980, the Congress (I) government came back to power and it kept controlling inflation as the prime objective. The government tried to achieve this through demand and supply management. All the anti-inflationary policies were brought in to contain inflation. The temporary price stability found by the end of 70's did not continue as the inflationary spiral resulted in the alround increase in prices. The whole sale price index increased from 218 in 1979-80 to 338 by 1984-85. The demand side adjustments announced by the government included altering the cash reserve ratio of commercial banks, ceiling on lending by commercial banks, ban on recruitment by government, reduction in the money supply, etc. On the demand side, the government attempted to increase the supply of goods and services using short term and long term measures. With all these measures the annual increase in price was around 7 to 8 per cent.
However during the later part of 80's, the situation did not continue to be the same. The wholesale price index which came down to 125 by 1985-86 started increasing and by 1989-90 it was around 166. The annual rate of inflation which was just 4.7 per cent by 1985-86, shot up to 8.1 per cent by 1989-90. The main reasons for this was the serious shortfall in the production of essential agricultural goods like edible oils, cotton, pulses, etc. Government resorted to tightening of selective credit control policies, and also used the supply management side by side. Specifically, it used the buffer stock built up over the previous years effectively and even imported edible oils, introduced employment schemes, relief programs, etc.
Phase IV (po.st-1990) :
This phase was marked by hefty increase in price right from 1990. Several reasons could be attributed to this viz.: high administered prices, gulf-surcharge on petroleum products, high dose of deficit financing, high indirect taxes, etc. The combined effect of all these was that the wholesale price index stood at 180 by 1990-91 and increased to 229 by 1992-93. The annual rate of inflation, however, came down from 12.1 per cent in 1990-91 to 13.6 per cent in 1991-92 and then to 9.9 in 1992-93. Having experienced a decline in price rise, the government announced reduction of excise duties, customs duties, etc., in 1993-94 budget to achieve a further fall in price by 1993-94.
DEMAND-PULL FACTORS THAT CAUSED INFLATION IN INDIA.
The demand-pull factors which caused inflation in India are : Demand-pull factors:
The demand-pull factors are responsible for increase in price, because, when the demand for goods and services increase at a higher rate than the rate at which the supply of these goods and services increase, there will be shortage which results in price rise. Under demand-pull factors we may mention the following factors to be very important:
a) Heavy government expenditure :
The administrative expenditure of the Central and State governments increase from a mere Rs. 740 crores in 1950-51 to nearly Rs. 2 lakhs by 1991-92. Added to this was the increase in; government investment on several welfare schemes and programs from Rs. 1000 crores in 1950 to Rs. 50000 crores by 1990. Apart from the plan expenditure, the non-plan expenditure of the government increased at a greater speed. With higher government expenditure, more money entered into circulation of the economy which fuelled inflation.
b) Deficit financing:
Deficit financing-is one basic reason for the drag in our development and the inflation prevailing in the economy. The justification that in the initial stage of development every country is bound to have deficit financing is no longer reasonable in Indian case, as the time has come that our Five year plans should lead us to generate more resources from other sources instead of depending too much on deficit financing. The amount of deficit financing has increased from Rs. 330 crores during the I Five year plan to a huge amount of Rs. 20,000 crores during the VIII plan. This implies that our planners have started using deficit financing as the main source of funds for meeting our plan expenditure. It should be noticed, that over the five year plan period since I plan there has been an increasing reliance on deficit financing that the peak is found during the VII Plan. With consistent efforts, the planners are hoping to bring down this quantum of deficit financing to around Rs. 20,000 crores during the VIII Plan. Whether this is going to be achieved or not can be found out only in future.
c) Existence of black money :
One of the reasons for the existence of too much money supply in the economy is the circulation of black money in -the economy in very large quantity. There is no reliable estimate of the extent of black money in circulation in India. According to one estimate the quantum is about the same size as that of the legal tender money. The large scale tax evasion, tax avoidance, black marketing, hoarding, corruption, buying and selling of real estate in the urban centers, etc., are the reasons for the existence of black money. While the source of this type of money cannot be easily found out, it is very difficult to bring to book those who are indulging in such illegal activity. With uncontrollable volume of black money in circulation, the price level continues to rise, and any measure to control the price will not be effective. So inflation will continue to remain in the economy.
d) Population explosion :
Ever since independence the growth of population has eaten away all the fruits of development. With the annual rate of population increase hovering above 2 per cent, the scarcity for foodstuffs and essential commodities will persist. As a result the prices continue to spiral up inspite of efforts to check the price level. Basically the size of population will work on (he demand forces and so the available quantity of output is proved to be inadequate always. As a result the prices continue to soar.
THE COST-PUSH FACTORS CAUSED INFLATION IN INDIA.
There are factors which act on the cost of production. These factors push the cost upwards and once the cost of production is high, the producers and manufacturers have to raise the price to recover the cost of production. As a result the price level will go up. There are several reasons for the operation of the cost-push factors. They are:
a. Erratic fluctuations in the supply of goods
In Indian situation, as agriculture is a gamble with the monsoon, die food production depends on the successful monsoon. Except a few years, there had been failure of monsoon. The shortage in agricultural output affects the supply of not only the food grains but also the raw materials to agro-based industries. Added to this are the power shortage, fuel shortage, labour problems, strikes and lockouts, transport bottlenecks, etc., The end result is that both the agriculturists and the industrialists experience rise in cost of production. They recover this by fixing a higher price for the finished product The position is worsened by the operations of the black marketers, smugglers, hoarderers, middlemen and others.
b. Imposition of heavy taxes
Taxation in India is itself a reason for the inflationary situation. There has been all-round heavy taxation on individuals, corporate bodies as well as commodities. With higher taxes, the cost of production only increases leading to rise in price. Whenever a fresh tax is imposed, the manufacturers simply pass this on to the consumers by raising the price more than the amount of tax. Added to this is the heavy allocation of funds by the government to public sector which added a precious little to the coffers of the government. Considering the investment in the public sector units, the return from them is meager that even the available funds are fritter away that the government simply imposes new levies to augment funds. This in turn affects the cost and the price.
c. Administered prices
In a socialist economy like ours, the market forces are intervened by the government in terms of administered price policy. As per this policy the government stipulates the minimum price for most of the essential commodities and raw materials. For example the railways have been revising their freight rate and passenger fare that the cost of transportation is going up adding significantly to the cost of production and in turn the price level. In the case of steel, cement, coal, etc., the government fixes a higher price which inflates the cost of production in almost every sector indirectly contributing to the inflationary spiral.
d. Rising oil price
The heavy import bill on petroleum crude itself makes a significant addition to our price level. The international price has been going up and to meet the import commitment, the government raises the internal price of petrol, diesel and petroleum products. One argument given for the stiff rise in the price of these products is that it would discourage the consumption of these products. But the increasing sale of two wheelers, three wheelers, cars, trucks and Lorries prove that there has infact been an increasing demand for oil. Further the major consumer of oil is government. As a result the overall rise in price cannot be controlled with any measure. Any change in international oil price immediately affects the domestic price of oil. For instance in 1980 alone, the oil price went up by 130 per cent in the international market followed suit by the domestic price. The gulf surcharge which was imposed also caused the rise in price of petroleum products. On the whole the fuel price adds fuel to fire.
METHODS OF CONTROLLING INFLATION
Inflation has to be controlled, otherwise the extent of damage done to the economy will be something substantial and the economy would take a long time to recover from the effects of inflation. In this direction of control of inflation, the following are the theoretical measures available. These measures could be classified into three groups viz., 1. Monetary measures, 2. Fiscal measures and 3. Other measures.
I. MONETARY MEASURES :
Monetary measures are steps taken by the Central bank of a country as the head of the monetary system. These measures are usually refereed to as the, quantitative credit controls and qualitative credit controls. The former include bank rate, open market operations and the variable reserve ratio. The, latter include margin requirements, moral suasion, direct action, control through directives, Consumer credit regulation or rationing, publicity, etc.
a) Quantitative credit controls : Bank rate is the first, measure to curb credit creation activity of the commercial banks, as during inflationary period the volume of money supply has to be reduced. Bank rate is the rate at which the central bank of a country re-discounts the bills already discounted by the commercial banks. When the central bank wants to control credit creation by commercial banks, it would simply increase the bank rate. Correspondingly the commercial banks would increase the discount rate which acts as a disincentive for the businessmen and others to approach the commercial banks for discounting their bills. However, the success of this policy depends on the co-operation of the commercial banks. Open market operations are another quantitative credit control measure. In this, the central bank would buy or sell securities in the open market which are sold or purchased by the commercial banks for cash. During inflationary situation, the central bank would sell securities; in the open market, and when the commercial banks purchase them, for cash then capacity of the commercial banks to create credit will be very much restricted With less credit created, the money supply in the economy will come down bringing down the pressure of inflation. The third: policy is variable cash reserve ration. As per statute, every commercial bank should maintain a certain percentage of its total deposits in terms of cash reserve with the central bank. The percentage of reserve to be maintained, called as cash reserve ratio, is determined by the central bank. By increasing the cash reserve requirement, the central bank can reduce the cash available with the commercial hanks thereby controlling their capacity to create credit.
b) Qualitative credit controls : Qualitative credit-controls aim at channelising the available funds in the most productive uses or applications. In terms of various measures the central bank can govern the credit policies of the commercial banks. The first of these control measures is the margin requirements. According to this policy, the central bank specifies the amount of margin that each commercial bank should maintain while lending on securities to the common public. By increasing the margin requirements, the central bank can discourage borrowings on certain securities. If the central bank wants to help the priority sector it can accordingly instruct the commercial banks to maintain a lower margin on securities offered for borrowing for priority purposes. Moral suasion refers to the persuasive technique adopted by the central bank with; the commercial banks in making the later understand the need to pursue a particular type of credit control policy. Though the central bank is empowered with statutory powers to regulate the commercial banks, yet the central bank believes persuasive policies rather than using its statutory authority. Central bank can also issue directives to the commercial banks outlining the details of the objectives of the various credit control policies, the need to follow them, the expected result of them, etc. This will help the commercial banks to understand and co-operate with the central bank in times of financial crisis. Central bank also regulates the flow of credit towards consumer requirements. This called as regulation of consumer credit The central bank can even specify the types of consumer credit which could be encouraged and those that could be discouraged. On receipt of directions from the central bank, the commercial bank act accordingly, either by liberalizing consumer credit or restricting consumer credit. Direct action may also be taken by the central bank to control the commercial banks. This can range between issuing warning to cancellation of license. But in practice central bank never resorts to this measure as all the commercial banks invariably follow the policies of the central bank.
2. FISCAL MEASURES
By fiscal measures we refer to the steps taken by the head of the fiscal system viz., the government. The fiscal measures include .
a) government expenditure b) taxation c) public borrowing and d) debt management e) Over valuation of currency.
a) Government expenditure : This is also known as public expenditure. It is well known that in a socialist country like India, the government undertakes several activities ranging from defence to welfare activities. All these mean that government pumps in a lot of money into the economy which ultimately adds to the money supply and fuel inflation. During the period of inflation, the money supply is high, the purchasing power of the people is also high and so the private consumption and investment expenditures will be of the high order. If the government also continues to invest heavily then the inflationary spiral will be worsening. To avoid this the government should slowly reduce its expenditure during inflation so that at least to that extent, the money supply in the economy will be reduced. But in practice such a policy is not at all possible as with ever rising prices, the poor and downtrodden needs protection from the inflation and this will be lost if the government reduces its expenditure. However, this is considered as one of the measures to control inflation by combining it with the other measures.
b) Taxation: Taxation is a well conceived measure against inflation. Under this the government will be able to achieve two purposes at the same time. Firstly, it will be able to augment the revenue of the government and secondly it will be able to curb unwanted consumption expenditure of the people by bringing down their purchasing power and disposable income. During inflation the government should increase the taxes so that it can achieve both the purposes mentioned above. Further the government can also design its tax policy in such a way that the lax burden is more on the rich and less on the poor. This is achieved by imposing heavy direct taxes which will directly affect the rich people. By imposing moderate indirect taxes, the government will be able to collect more from those who spend more. The rich as well as poor will be contributing towards the exchequer. However, it is often said that imposition of indirect taxes will only add to the increase in prices, especially when the producers shift the burden of tax to the consumers. But the object of indirect taxes is to curb the consumption of unwanted commodities. Hence, with the direct and indirect axes, the government should be in a position to redistribute the income in the economy which is a must during inflationary period.
c) Public borrowing : Public borrowing or public debt is one more method of controlling inflation. According to this policy, the government aims at siphoning-off the excess purchasing power in the economy by encouraging people to lead to the government. This can be done either making lending voluntary or compulsory. Under the voluntary lending, the government educates the people of the need to lend to the government especially during the inflationary period. However, sometimes compulsory lending is to be resorted to because, the people may not respond to the calls of the government. Compulsory lending can be i different forms. But it is often said that such compulsory lending will affect only the salaried class and not the rich people. In that case, the salaried class is worst affected during inflation and making them to surrender whatever little surplus that they have with them amounts to double taxing them. Further compulsory saving or lending may also encourage people to find ways of evading Such policies. In general, economists have favored only the voluntary saving or lending by the public.
d) Debt management : Debt management refers to the way in which the , government deals with the retirement or repayment of the public debt. This has to be done in such a way that brings down the money supply in the economy. So when there is inflation, the government should retire or refund the debt to the commercial banks by encashing the securities only out of the budget surplus. This will help to curb the commercial banks' ability to create credit. But a major problem with this policy is that during inflation budgetary surplus is not so easily created. Alternatively, the central bank can retire the debt by sales of bank ineligible bonds to non-bank investors like insurance companies, savings bank individuals, etc. This will take away the spend-able money from the public thereby reducing the inflationary pressure. But even this method can fail as the non-bank investors can always refuse to exchange the spend-able money for these bonds.
e) Overvaluation of currency : This is another method used to control inflationary pressure in an economy. According to this method, the value of the currency is revised upwards so that exports will be costlier and imports cheaper. This will help in increasing the stock of domestically produced gods and encourage more imports. This will mean the availability of goods int he country will increase [hereby the price level of them will have to come down. But this measure has to be cautiously adopted as it carries with it seeds of deflation.
3. OTHER MEASURES :
Apart from the measures discussed above, the government can also implement the following policies :
a) Increase output : This policy may appear to be very easy one but in practice this involves several difficulties. To make the producers increase their output, they should be assured of their profit as otherwise they will not be inclined to increase the output. Further the increase in output can be brought about by fuller utilization of the existing resources, prevention and settlement of industrial disputes, updating the technology, lending liberally to expansion and new establishment purposes of the industry, maintaining industrial peace by activating all the machineries of settlement of industrial disputes, etc. Mere increase in output will not bring down the inflation, it has to be followed by increased availability of products for the consumers. This calls for curbing and punishing black marketing, hoarding and smuggling activities so that the benefits of increased production will be enjoyed by the economy.
b) Wage policy : This is another important control measure. This is often misunderstood as wage freeze policy. This means that the government should not stand in the wage increase sanctioned to the employees if their productivity is very high. The government can encourage the employees to make voluntary contributions and reduce their expenditure. Simultaneously, through other measures, the government should bring down the cost of living so that the laborers will not demand higher wages. Wage policy cannot be effective unless it is coupled with several other policies.
c) Price controls and rationing: This is one of the most popular policies applied in every country while they face inflation. Under this measure, the government should prevent escalation in prices of essential commodities and control the price of other commodities. By resorting to retail and wholesale price maintenance policies the government can strive to bring down the price level. This calls for buffer stock operations as well as efficient demand and supply management of commodities which the country is badly in need of. This is achieved by introducing rationing of essential commodities through well designed public distribution mechanism. All this mean, enormous efforts are required on the part of the government apart from the willing co-operation from the traders and businessmen. In practice it is found that price control and rationing are very difficult to be implemented during inflationary period due to the exploitative and monopolistic attitude of the businessmen and traders. However, with stringent penal measures the government can make this policy effective in controlling inflation in a country.
Review questions 1. Assess the need for government intervention in an economy. 2. Discuss the role of public sector in India 3. Comment whether India is an under developed country 4. Discuss the features of Indian population 5. Examine the nature of population problem in India and the effects of population growth on Indian economic development 6. Outline the population policy of the government since independence 7. Analyse the Balance of payments position since 1991 and critically evaluate the New export-import policy 1992-1997. 8. Discuss the structural composition of national income in India. Explain the limitations of National income estimation in India. 9. Distinguish between absolute and relative poverty. Discuss the concept of Poverty line in Indian context. What are the causes for poverty in India and evaluate the various poverty eradication programme. 10. Analyse Problem of unemployment in India. 11. Discuss the problem of rural unemployment and the measures to solve this problem. 12. Examine the inflationary trend in India and discuss the steps taken by the government to control inflation in India. 13. Discuss the causes for inflation in India and suggest measures to arrest inflation.
CHAPTER III
Government controls and regulations - Regulating economic and industrial activities- Industrial Licensing policy- Control of monopolies - Capital issues control - Government control over FDI and collaboration - Distribution and price control - New EXIM policy - Foreign exchange flow regulation -Technology transfer
GOVERNMENT CONTROLS AND REGULATIONS
Since independence, Government of India introduced a number of controls and regulations so as to lead the country on the path of progress. Originally these controls and regulations were considered to be a part of development strategy. But subsequently, they emerged as the need of the society. While the 1948 Industrial policy resolution did not lay much emphasis on the controls and regulations, in 1951 the government brought in the Industrial [Development and Regulations] Act. This Act made licensing a part of industrial development. The objectives of licensing were stated as: • Facilitate desired pattern of industrial development • Provide for development of backward regions • To encourage broad based ownership of industries • To prevent concentration of power in the hands of a few • To offer protective environment for the small scale industries • To regulate inflow of foreign capital and technology • To provide for the use of appropriate technology • To eliminate industrial pollution • To encourage more of exports and adopt import substitution measures • To ensure conservation of foreign exchange resources and to ensure proper allocation of the exchange resources • To achieve high growth in employment opportunities
With the above objectives, the government passed the Act. Consequent to this Act, the following categories of industries were required to obtain license:
• New undertaking • Manufacture of new article • Expansion of existing capacity substantially • Continuation of certain category of business in certain areas • Changing the location of the industry
This licensing policy continued for a long time till 1991 Industrial policy adopted the policy of liberalization. The licensing policy has resulted in a number of malpractices among the large industrial houses. This was brought to light by the Dutt Committee report in 1967 The revelations of the Dutt committee led to the enactment of Monopolies and Restrictive Trade Practices Act in 1970. In 1991, the government changed the contents of the Licensing policy and the important provisions are spelt out hereunder.
The Dutt committee identified 20 larger industrial houses, 53 large industrial. houses and 60 large independent concerns through its study. Some of the important findings of the Committee are given below: 1. a] 73 large houses accounted for 56 % of the total proposed investment on machinery by the entire private corporate sector b] 60% of the value of import of capital goods by the entire private corporate sector was accounted for by these 73 large industrial houses c] 20 larger industrial houses accounted for 41 % in the total proposed investment on machinery and for 40 % in the total approved import of capital goods.
2. The percentage of unimplemented issued licenses was the highest for the large independent companies and other foreign companies. The largest number of unimplemented licenses was for the house of Birlas [168] followed by Tatas [41J. The Birlas were also leading on charges of preemption.
3. The private sector was allowed to participate in areas reserved exclusively for the public sector,
4. The four industrially advanced states namely Maharashtra, West Bengal, Gujarat and Tamilandu were able to acquire 62 % of the J0tal licenses issued. This was against the spirit of balanced regional development.
5. There was no indication as to which industries could be treated as specifically reserved for the small and medium sector.
6. Foreign collaboration was allowed even in non-essential consumer goods. The Committee observed that: “as a matter of fact, by permitting foreign collaborations sometimes in multiple numbers, and thus permitting capacities to be created, an inevitable demand for import of various components and raw materials for feeding plants is set up. This, combined with the allocation of other scarce materials, helps to satisfy the demand of the higher income groups, but it is not necessarily a contribution to economic growth nor is it the best way of utilizing the scarce foreign exchange resources of the country.
7. Financial institutions showed a distinct preference to the large industrial houses over the public sector.
All these would help to judge that industrial licensing system failed to achieve the objectives of planned economic development as well as of preventing concentration of economic power.
The Dutt committee made the following recommendations • To set up a core sector consisting of industries of basic, critical and strategic importance to the economy • To adopt the concept of ‘Joint Sector’ or undertakings where both the public and private sectors acted as partners in a project. The Joint Sector could have collaborations with foreign concerns as well as with the private sector in India • To change the basis of financial assistance by nationalized banks and • public sector financial institutions i.e., away from the large industrial houses • The government to have the right to convert its loans and debentures into equity • The middle sector to be kept open for new entrepreneurs
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90’s a number of changes in the system of industrial approvals have been brought about. The domestic producers will be able to withstand the competition in the country as well as abroad only through procedural reforms. Hence, the role of government will be changed from that of exercising control to one of providing help and guidance. Changes in the policy towards public sector in the last few years have clearly indicated that private sector enterprises will be allowed to compete in many areas hitherto earmarked for public sector. Consequently, the new policy has completely reclassified the Indian industries as below:
a) Eight industries have been completely reserved for the public sector. They are: i. Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils, v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tin, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transport
b) Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries:
i. coal and lignite, ii. petroleum other than crude and its distillation products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco substitutes, vii. asbestos and asbestos based products, viii. plywood, decorative veneers and other wood based products such as particle board, medium density fibre board, block board, ix. raw" hides and skins, leather, chamois leather and patent leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and newsprint except bagasse based units, xiii. electronic aerospace and defence equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi. drugs and pharmaceutical xvii. entertainment electronics and xviii. white goods like domestic refrigerators.
As regards the provisions of the industrial licensing policy,
i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector ,and the list of 18 industries and the areas reserved for small scale industries will continue.
ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations.
iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported goods does 1101 exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required.
iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in ares other than cities of more than one million population. In cities with more than one million population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas.
v) New Broad banding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing units.
vi) The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects.
vii) A very significant step is to abolish all the existing registration schemes.
viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum.
ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system).
As a result of the wide changes in the Licensing policy, the government also brought about changes in the MRTP Act. The following is the summary of the changes effected in that Act.
MRTP ACT
A major deviant of the new policy is in respect of the MRTP Act. The new policy aim at removing the unnecessary bureaucratic controls and allow the industries to breathe in an atmosphere of freedom. The efforts of the government in the past intervening in the investment decisions of the MRTP companies; have been proved to be counter-productive. Hence, the newly empowered MRTP Commission will enquire into complaints received from individual consumers or classes of consumers. The following is the essence of the provisions in the new policy regarding MRTP Act.
i. The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course.
ii. The need to obtain the prior approval of the central government for establishing new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed.
iii. The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair tarde practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices.
iv. All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers to the MRTP Commission.
Control of capital issues
Since independence, capital issues in India have gone through different types of control mechanism. Initially control of Stock exchanges was contemplated and accordingly Securities Contracts [Regulation] Act was passed in 1956. It aimed at centralization of control, regulation of the stock exchanges and the transactions entered therein, the avoidance of illegitimate and manipulative speculation and the protection of genuine investors, The Act applied to all transactions whether forward or ready and it prohibited or regulated factors, which facilitated speculation in stock exchanges. But the Act could not abolish forward trading which ultimately caused erratic behaviour of the Stock exchange. The government basically depended on two institutions to control the capital market viz., the Controller of Capital Issues [CCI] and the Directorate of Stock Exchanges. CCI gave consent to the issue of non-government companies consisting of equity and preference shares, partly and fully convertible debentures, bonus shares and right shares. It also gave consent to the issue of bonds of public sector undertakings. But on the recommendations of the Narasimham committee, the government abolished the office of CCI and freed the primary capitol market from the government regulations.
The recommendations of Narasimham Committee – II on financial sector reforms
The main recommendations of the Narasimham committee are:
1. Phased reduction of Statutory Liquidity Ratio to 25 % over a period of five years 2. Progressive reduction in Cash Reserve Ratio 3. Phasing out of directed credit programs and redefinition of the priority sector. 4. Deregulation of interest rates so as to reflect emerging market conditions 5. Stipulation of minimum capital adequacy ratio of 4% to risk weighted assets by March 1993, 8% by March 1996 and 8% by those banks having international operations by March, 1994. 6. Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts. 7. Imparting transparency to bank balance sheets and making full disclosures 8. Setting up of special tribunals to speed up the process of recovery of loans 9. Setting up of Asset Reconstruction Fund to lake over from banks a portion of their bad and doubtful advances at a discount 10. Restructuring of the Banking system so as to have three or four large banks which could become international in character, 8 to 10 national banks and local banks confined to specific regions and rural banks including RRBs confining to rural areas. 11. Setting up one or more rural banking subsidiaries by public sector banks 12. Permitting RRBs to engage in all types of Banking business 13. Abolition of branch licensing 14. Liberalising the policy with regard to allowing foreign banks to open offices in India 15. Rationalisation of foreign operations of Indian banks 16. Giving freedom to individual banks to recruit officers 17. Inspection by supervisory authorities based essentially on the internal audit and inspection reports 18. Ending duality of control over Banking system by Banking division and RBI 19. A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI 20. A revised procedure for selection of Chief Executives and Directors on Boards of Public Sector banks 21. Segregation of direct lending functions of IDBI to a separate institution 22. Obtaining resources from the market on competitive terms by DFIS 23. Speedy liberalization of capital market by removing restrictions on premia dispensing with prior government approval etc. 24. Supervision of merchant banks, mutual funds, leasing companies, etc., by separate agency to be set up by RBI and enactment of separate legislation providing appropriate framework for mutual funds and laying down prudential norms for such institutions.
After the abolition of CCI, the government set up the Securities and Exchange Board of India [SEBI] in 1988 which became a statutory body since 1992. SEBI has the following objectives: ❖ Regulating the business in stock markets and other securities market ❖ Registering and regulating the working of the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers and other intermediaries associated with the securities market ❖ Registering and regulating the working of collective investment schemes including mutual funds ❖ Promoting and regulating the self regulatory organizations ❖ Prohibiting fraudulent and unfair trade practices relating to securities market ❖ Promoting investors education and training of intermediaries of Securities market ❖ Prohibiting inside trading in Securities ❖ Regulating substantial acquisition of shares and take over of companies ❖ Performing such functions and exercising such powers under the provisions of Capital Issues [Control] Act, 1947, and Securities Contract [Regulation] Act, 1956, as may be delegated to it by the Central government
Since its inception, SEBI has achieved the following: guidelines to suing companies, regulation of portfolio management services, regulation of mutual funds, action for delays in transfers and refunds, action for delays in transfers and refunds, issue of guidelines to protect investors, ensuring proper functioning of the Stock exchanges, regulation of foreign institutional investors and periodical review of the working of the capital market.
FOREIGN CAPITAL AND THE POLICY OF GOVERNMENT REGARDING THE USE OF FOREIGN CAPITAL
Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital.
Forms of foreign capital:
a) Direct entrepreneurial investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad may participate in the stocks or share capital of Indian companies. Whenever the Indian companies go for public issue of shares or debentures, the foreign investors may respond by participating in such public issue. This is also called foreign capital. In the past external business group used to invest in new companies and that form of foreign capital used to flow much, but now-a-days participation in the equity or debenture of companies by foreign investors and non-resident Indians is becoming more predominant.
b) Foreign collaboration: Foreign collaboration is another form of foreign capital. Under this a domestic company may join with the foreign company, mostly the reputed one in the industry, and start with the joint operation in India. Usually this type of effort is undertaken to get the state of the art1 or the latest technology available abroad in the Indian companies. Foreign collaboration may be only for technology or for funding or both. Accordingly we may have technical collaboration, financial collaboration or mixed collaboration. The collaboration may be between private parties or companies in the two countries, or the foreign company with Indian Government or between the foreign government and the Indian government.
c) Inter-government loans: This type of foreign capital refers to the loans granted by the government of one country to that of the other for a specific purpose or for general economic reconstruction. For example under the Marshall plan, USA gave loans to various European governments to help them in the reconstruction of their war-shattered economies. The developed countries also grant loans and grants to the under developed countries to help them in economic development programme.
d) Loans from international institutions: This source of foreign capital has emerged as a very important source in the recent years. Most of the developing countries get sizeable quantum of funds from this source. International institutions like International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD), Asian Development Bank, Aid India Consortium, and others have all become very important providers of funds for developing countries. The role of IMF and IBRD in tiding over the balance of payment difficulties and execution of power and irrigation projects, cannot be exaggerated. The Asian Development, Bank has also been a major provider of funds for development in Indian case.
e) External commercial borrowing: Another source of foreign capital is the borrowing in the capital market of other countries. This can be done either directly or indirectly by the government. In both ways, the inter-government understanding and political relationship apart from the domestic investment climate are all important. Such capital is normally used for international trade purposes and specifically for export credits. Agencies like US EXIM bank, Japanese EXIM bank, ECGC of UK, etc., are all playing vital role in this segment of foreign capital.
Need for foreign capital:
No country can be self-sufficient today. Even developed countries have to depend on the developing countries for certain purposes and also for marketing their products. Further the specialisation in finance has become world wide, that every investor wants to maximise return on his investments and minimize the risk. This is applicable both to government investment as well as corporate and private investments. These are days of multi-national corporations and giants that closed economic system can no longer be realistic. In this situation, flow of capital from one country to another in different forms takes place for several reasons. From the view point of a country, there is a need to execute their plans for economic development. Specifically in Indian case, the need for foreign capital cannot be exaggerated. This could be explained in terms of the points given below:
a) The availability of funds for execution of plans and achieve rapid economic development determine the objective of such plans. Domestic availability of funds, especially in the developing countries is becoming difficult with the government in these countries undertaking increasing responsibility for the welfare activities. Hence, these countries have to tap the source lying outside to get the funds required for their development purposes. In this respect the foreign capital should be attracted at any cost and in any form.
b) Domestic investors and managers of funds available, may not have the required expertise or entrepreneurship in identifying the right and profitable avenues for investment. This may be due to lack of experience or inability to identify opportunities. When foreign capital is allowed to flow, the benefits of the experience of the foreign technicians, finance specialists, production specialists, marketing wizards, etc., are made available to the domestic ventures. This will improve the efficiency of the domestic projects which is directly benefitting the country. On this count foreign capital should be welcomed.
c) One of the basic requirements for achieving rapid economic development is mobilising savings. Savings depend upon income and income depends on the level of economic activity. Hence, any attempt to increase savings should start with attempts for increasing income which necessitates increasing investment If the domestic rate of savings and the purpose for which savings is used is unproductive, then efforts should be made to obtain the necessary investment from abroad. This would accelerate economic development leading to income generation and increased savings. Hence, in the process of economic development foreign capital becomes an essential ingredient.
d) Foreign capital is necessary for one more reason. In every developing country, the economic development requires investment in certain projects relating to infrastructural development, basic industries, etc., which are long gestation projects, low income yielding, but accelerating economic development. No private investment or corporate investment in these projects will come about in the early stage of development either because the investors have no inclination or because the capital market in such a situation is not developed. But the government has to initiate development activities, for which foreign capital becomes essential. Once the ‘economic engine’ is activated, in due course, the economic development will start taking place. Until then foreign capital is needed.
e) Foreign capital can be in different forms as has been already explained. Countries like India having high rate of savings, but low investment in productive projects, with large human force but with less employment opportunities, have to seek technical know-how and technology available abroad. These can be slightly modified to suit the domestic conditions so that the production can take place in large scale, cost can be minimized and employment opportunities can be generated in large scale. Further there are areas like atomic energy, automobile industry, management, marketing and others where we do not have the best of experts or expertise. The best available talent or technology available abroad can be imported so that we can improve our strength in these areas and become a force to reckon with. This will also help us to achieve higher level of economic development.
f) One of the methods of achieving higher levels of development is through mutual co-operation with other countries through bi-lateral or multi-lateral agreements which provide excellent scope for transfer of technology, etc., between countries. Political wisdom warrants use of such agreements for mutual benefits which leads to flow of foreign capital from one country to another.
Problems of foreign capital:
So far we have discussed the need for and role of foreign capital in Indian economic development. Let us now study the problems that are associated with the foreign capital.
1. The foreign investors are choosy in extending their funds to projects floated in our country. It is found that foreign capital flows easily towards the private sector projects but with a lot of hesitation to the projects of public sector. While there is justification for hesitant flow towards public sector, our government has been giving pride of place only to pubic sector in achieving rapid economic development Hence, it is clear that there is no lack of investment opportunities, but there is difference in ideology. Therefore, flow of foreign capital is not uniform to all sectors. This trend has to be observed so that corrective measures can be taken to attract more foreign capital to public sector projects.
2. Another serious problem of foreign capital is the domestic technology is simply duplicated due to over indulgence and dependence on external assistance. There are several areas where India has achieved excellence as in electronics industry, but there are collaborations with foreign products in this field. Such duplication is in no way beneficial to the country. This has to be corrected.
3. One more experience is that under the pretext cf transferring technology, foreign countries simply Jump their obsolete technology in India. Apart from importing inappropriate technology, there are also situations when the technology not required is imported. Further, there are tie-up agreements with such imported technology which are unfavourable to India. But such agreements have been approved much against the interest of our domestic manufacturers and technologists.
4. Often me complaint about foreign capital is the restrictive conditions imposed by the exporting country. It may be relate to spares or technicians or repatriation of profits, etc. An increasing number of such agreements would only be against our own interest
5. Heavy remittance of profits, dividends, etc., is yet another problem under foreign capital. In Indian experience, there were cases when the inflow of foreign capital was less than the remittance of profits, the classic examples being ESSO and CALTEX, the two oil companies of US origin. Such remittances cause severe strain on our already strained balance of payments and foreign exchange reserve position. Even if the agreement provides for such remittances, the country cannot afford to lose the hard earned foreign exchange resources under this type of remittances.
6. One more consequence of foreign capital is that it causes serious balance of payments problem. When foreign capital in different forms is permitted, with the preference of the foreign investors, the private sector is able to attract more than the public sector. As a result the private sector indulges in importing heavily their requirements which results in heavy outflow of earned exchange reserves on the one hand and leads to balance of payments deficits on the other. Even if the government has to ultimately approve of such imports, yet the private sector is able to appease the officials through liaison officers and get the necessary approvals.
7. One of the essential conditions laid by the government while approving the foreign collaboration is that in due course there should be Indianisation of personnel. This policy is easily defeated in practice. In the past under the provisions of Foreign Exchange Regulations Act, every foreign multinational company is made to dilute their ownership to 74% and in case of branches of foreign companies their total holding should not exceed 40%. It is found that these foreign companies have very high profitability, as in the case of Colgate Palmolive with 89% of profit rate, are able to very easily raise capital from the Indian capital market. Their shares are being quoted at very high rate that they raise the necessary funds easily. The shareholders of these companies indirectly support the company through political lobbying. The Indianisation of personnel is easily by-passed as these companies retain the powers to appoint their own Chairmen and Managing Directors. Obviously even with a holding of only 26% of the shares, these foreign companies have control over the companies easily by-passing the policy. Whenever the multinationals become Indian companies they stand to gain. So long they remain multinationals they are subjected to heavy taxes. But once our Indianisation of Personnel policy is invoked, these multinationals become Indian companies and pay less tax. Hence, our policy is in no way affecting the foreign companies, in tact, the policy is turning out to be unfavourable to India itself
Government policy:
Since independence, the government has been declaring its policy towards foreign capital of different types. The policy declared in April, 1949 has remained the main framework for the subsequent policies. The salient features of the 1949 policy are: i) Foreign capital will have the same treatment as given to domestic capital. ii) The investors will be allowed to remit the profits earned. iii) The ownership and control of the foreign companies should in due course be in the hands of Indians. iv) In case of take over of the undertaking, a fair and equitable compensation would be paid. v) In case a foreign company wants to have control for some time, the government may examine this in each individual case before giving permission.
This policy in nut shell means that there will be no discrimination against the foreign companies or their investments in India. This remained as the basic framework of foreign policy all through. With this policy, the government pursued its foreign policy making minor changes at times. Broadly we may refer to three phases through which our foreign policy relating to foreign capital and investments evolved. In the first phase which lasted from 1951 to 1965, the government was liberal in its attitude towards foreign capital. This included concessions and incentives to foreign capital which helped us to achieve industrial development. The second phase which started from 1965, is a period in which the government was very strict and imposed several restrictions and regulations. Once again in Phase III, starting from 1991, a liberal policy is introduced. The salient features of the latest policy towards foreign capital (199i) is given below:
Foreign investments:
Foreign investments carry with it the benefit of technology transfer, marketing expertise, modern managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the New Industrial Policy (NIP) has clearly contained the following provisions relating to foreign investments:
1. In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed. Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments to the FERA will be made.
2. The general policies governing the domestic units in regard to import of components, raw materials and intermediate goods and payment of knowhow fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on payments are balanced by export earnings over period of time.
3. All the other foreign investments not included in the category 1 stated above will require prior clearance.
4. Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in 1 above. However, the provisions of his export-import policy applicable to the domestic units will also be applicable to such trading companies.
5. To encourage substantial inflow of foreign investment, a Special Empowered Board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
As regards foreign technology agreement, a welcome change in the outlook of the government is the realisation that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedures and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameters. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulation governing foreign technology agreement: 1. No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guideline of the RBI and such payments can be made through blanket permits.
2. Automatic permission will be given for foreign technology agreements, relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provisions. Upto the payment of Rs. 1 crore royalty will be at the rate of 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of the sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production.
3. In case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment.
4. In all the other cases, the general procedures in practice will be adhered to and such industries will require specific approval.
Foreign assistance and Indian five year plans:
In the Table given below we find that the external assistance is playing a vital role in the financing of our five year plans. Right from the I Five Year Plan, we find that in absolute terms the inflow of foreign assistance is very much on the increase. While it was a modest figure of Rs. 190 crores in the I Plan, it was Rs. 15,139 crores by VII Plan and during the VIII Plan it rose to nearly Rs. 28,700 crores. Hence, it is clear that the external assistance or foreign capital has become a major component of financing of Indian five year plans. In terms of percentage, the external assistance went up from a mere 9.6 in the I Plan to 28.2 in the III Plan, 35.9 during the Annual plans. From the IV Plan onwards, the percentage of external assistance declined from 13 to 8.2% during the VIII Plan, but this decline should not be misunderstood as declining importance of external assistance in the financing of our five year plans. The table given below will clarify this aspect
FOREIGN ASSISTANCE AND INDIAN FIVE YEAR PLANS
|PLAN |AMOUNT |Percentage |
| |(Rs.crores) | |
|FIRST |190 |10 |
|SECOND |1,090 |24 |
|THIRD |2,390 |28 |
|FOURTH |2,090 |13 |
|FIFTH |5,830 |15 |
|SIXTH |10,930 |11 |
|SEVENTH |15,139 |8.4 |
|EIGHTH |28,700 |8.2 |
POLICY ON FDI
The government policies on Foreign Direct Investment [FDI] have been changing since 1991 - 92. Analysis of these policies would help to place in proper perspective the prospects and problems of FDI. This was also taken into consideration while suggesting methods of improving the inflows of FDI.
As apart of the structural adjustment policies introduced in the Indian economy by Government of India since July 1991, policies relating to foreign financial participation in Indian companies and those relating to foreign technology agreements have also undergone a radical charge. Briefly stated, three tiers for approving proposals for foreign direct investment in this country were introduced: (1) the Reserve Bank's automatic approval system; (2) Secretariat for Industrial Approvals for considering proposals within the general policy framework but outside the powers delegated to Reserve Bank; and (3) Foreign. Investment Promotion Board, specially created to invite, negotiate and facilitate substantial investment by international companies that would provide access to high technology and world markets. The foreign investment policy was further liberalized during the period under review. Fully owned foreign enterprises will hence forth be allowed to set up giant power projects without the requirement to balance dividend payments with export earnings.
The general permission granted by the Reserve Bank under the provision of.: the Foreign Exchange Regulation Act, 1973 has brought the FERA companies (i.e. those having more than 40% foreign equity) on par with the Indian companies and thus provides a level playing field to all. The existing FERA companies have also been extended the facility of 51% equity. Also, the use of foreign brand names and trademarks on goods for sale within the country has been permitted. Significant amendments to the FERA for relaxing several of its restrictive provision have been contemplated.
The following measures were introduced in the recent period to further liberalise the foreign investment policy:
1) Except for 22 industries in the consumer goods sector, the earlier stipulation that dividend remittances of companies receiving approval under the foreign equity up to 51% scheme, must be balanced by export earnings over a period of 7 years, was scrapped in respect of all foreign direct investment (by non -NRIs) in June 1992. The measure was extended to investment by NRIs /Overseas Corporate Bodies (OCBs) in September 1992.
2) For the purpose of investment in oil refineries and development of discovered oil fields, foreign private equity participation to the extent of 26 per cent is considered as sufficient. For making investment in Indian companies, NRIs/OCBs have been granted automatic approval by the RBI to invest, with full repatriation benefits, up to 100% in the issue of capital or convertible debentures of a private/public limited company engaged in or proposing to engage in high priority industries, subject to certain conditions.
The existing scheme of 100% NRI investment in cent per cent export oriented units and also for the revival of sick units will continue cent per cent NRI participation in power generation has also been permitted. In the context of such revisions, the earlier 74% scheme has been discontinued.
The Government has set up a Bureau, officially known as the Interface for NRI Scientists and Technocrats (INRIST), that will bring NRI scientists and technocrats in contact with Indian industries which would benefit from the expertise of NRIs.
The Department of Industrial Development has set up an “investment promotion and project monitoring cell” popularly known as facilitation ceil, to provide pre and post investment services for different industrial approvals and respond to queries relating to various ministeries / departments.
RBI has granted general permission to foreign citizens of Indian origin, whether resident in India or not, to acquire / hold and transfer by scale or inheritance, residential properties situated in India subject to certain stipulations.
General permission has been granted to Non-resident Indian citizens and foreigns citizen of Indian origin to let out their residential properties acquired for their bonafide residential purpose but which on account of their residence abroad, are not required for their immediate residential purpose. The rental income or proceeds of any such income shall both be repatriable outside India at any time in future and such funds should be credited to the owner’s Ordinary Non Resident Rupee account maintained with an authorized bank in India.
In order to simplify and remove regulations which hinder free flow of foreign capita! in to India as also investment by Indian companies in joint venture overseas, restriction imposed on FERA companies (i.e. companies incorporated in India in which the non-resident interest is more than 40%) under sec 26 (7), 28, 29, and 31 of FREA, 1973 have all been removed as outlined below, there by placing them on par with other Indian companies in regard to their operations in India. FERA companies are now permitted.
a. To borrow money or accept deposits from persons resident in India. b. To accept appointment as agent or technical or management advisers in India, of any person or company. c. To allow their trademarks to be used by any person or company. d. To carry on in India any activity of trading, commercial, or industrial nature except agricultural and plantation activity. e. To acquire any undertaking in India carrying on any trade, commerce or industry or purchase the shares of any such company, and f. To acquire, hold, transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise any improvable property in India.
Person of Indian nationality or origin and others (returning home after a minimum stay of immediate preceding 6 months abroad) have been granted general permission to bring into India as part of their baggage, gold, in any form, up to 5000gms, provided duty is paid at the rate of Rs220 / per 100 gms. (earlier Rs, 450/- per 10 gms ) in any convertible foreign currency (I).
As part of the continuing efforts to provide an investment friendly environment in India for foreign investors, the following policy initiative were undertaken during the year 1992-93.
I) To keep pace with the ever expanding global technological revolution in the field of computers, an Electronic Hardware Technology Park (EHTP) scheme was set up allowing for 100% equity participation, duty free import of capital goods and a tax holiday i.e. exemption from corporate income tax for block of 5 years commencing from the date of the starting of commercial production.
II) In the new National mineral policy, the ceiling on foreign .equity participation in Indian companies engaged in mining activities was hiked to 50%. In the area of non-captive mines, equity participation of over 50% by foreign partners could be considered on a case by case basis.
III) Authorized dealers were delegated powers to allow remittance of dividend (including interim dividend) on equity/preference shares to non-resident shareholders of all Indian companies, as also those in which investments have been made by NRIs/OCBs under the 40% scheme or any other scheme with repatriation benefits.
IV) NRIs were allowed to invest up to 100% on non-repatriation basis, in any partnership / proprietorship concern or in private / public limited companies (expect in agricultural / plantation activities) without seeking prior approvals of other RBI. However, OCBs are not permitted to invest-In proprietorship / partnership concerns (2).
In keeping with the objective of attracting funds from the NRIs in the form of deposit and foreign investment several steps were taken during the year 1993 -94, such inflows, even while adhering to considerations of cost effectiveness and dampening of volatility. Major policy initiatives undertaken during the year were as follows:-
(I) Deposits Under Foreign Currency Non Resident Account (FNCRA) scheme proved to be volatile during the payments crisis, of 1990-92. They were also relatively costly given the spread above international interest in the prescription of interest rates for these deposits as also the cost implicit in the provision of exchange guarantee for such deposits. In this regard, the Bank's Annual Report for 1992-93 had observed: "attempts have been made in the recent period to restructure the existing FCNRA scheme and to put in place new schemes which (a) reduce the reliance on the FCNRA scheme, (b) make exchange risk cover a commercial proposition, and (c) reduce volatile components of deposits under the existing FCNRA scheme.” In pursuance of this objective deposits of four different maturities i.e. “6 months and above but less than one year", one year and above but less than two years” two years and above but less than three years,” and three years only" were completely withdrawn effective from May 15,1993, Oct. 12,;993, Feb 15, 1994 and August 15, 1994 respectively. Furthermore, interest rates prescribed on FCNRA of various maturities were fine-tuned from time to time to secure alignment with movements in international interest rates. Interest rates on Non Resident (External) Rupee Accounts (NR (E) R) deposits were also revised downwards effective Oct 18,1994 while the interest rate on savings deposits was brought down from 5% to 4.5% those on term deposits are not allowed to exceed 8%.
(II) In consonance with the move toward full convertibility in the current account, the interest accruing on deposits under Non Resident (Non - Repatriable) Rupee Deposits (NR (NR) RD) was rendered eligible for repatriation effective from Oct 1, 1994. The principal amount under the scheme will continue to be non-repatriable
(III) The Foreign Currency Ordinary Non-repatriable (FCON) scheme, introduced in June J991, under which the principal as well as interest earned were not repatriable, was suspended with effect from August 20, 1994. Interest accruing on the existing FCON-scheme from the quarter beginning Oct 1, 1994 was however made eligible for repatriation.
Major policy changes were, effected with a view to ensuring that investment flows were channelled in a manner consistent with overall Macro-economic requirements. The following policy guidelines were drawn out in this regard:
(IV) With a considerable improvement in the external payments position and the level of reserves, it was considered necessary to follow a restrictive policy towards Foreign Currency Convertible Bonds (FCCBs) as they constitute a part of the country's external debt till their conversion in to equity. As per the fresh guidelines of the government (issued on May 11. 1994 ) for Euro issues, companies were allowed to issue FCCBS only on merits as a part of the external debt restructuring programme which was intended to lengthen maturity and soften terms.
(V) Under the automatic approval scheme for foreign investments, new guidelines were issued for determining issue price of preferential shares issued 10 foreign investors to increase their stakes up to 51% in the business of any Indian company engaged in the high priority industries shown in the Annex-Ill to the statement on industrial policy of July 24, 1991.
Consequent upon the abolition of the office of the Controller of Capital Issues (CCI) and subsequent guidelines issued by the Securities and Exchange Board of India (SEBI) on June 11 and 17,1992, existing companies wishing to raise foreign equity were to make the issue at a price decided by the shareholders in a special resolution. In certain proposal received from the existing companies for enhancement of foreign equity, however, the companies were found to be issuing foreign equities at a large discount to the market price, (set out in the last year's Report). This mismatch in the price of shares for investment and disinvestment could cause distortion in the inflows and outflows of foreign exchange under the head of foreign investment.
With the objective of preventing a few shareholders from getting substantial and undue enrichment and unearned gains, to ensure higher foreign equity flows, and to make both investment and dis-investments market-related, It was decided with effect from August 4, 1994 that preferential allotment of shares by companies must be at market related price applicable to all foreign investment proposals whether approved by the RBI or by the SIA / FIPB subject to the following, guidelines:
The issue price of shares under preferential allotment (other than allotment on rights basis), would have to be at the market value of the shares determined on the basis of their average price during the immediate preceding six months at the main listing center calculated on the monthly average of the high and low rates quoted for the shares at such centres. In the absence of a market price, however, (as in the case of Unlisted companies, Listed companies, where shares are not regularly traded, etc) the RBI would be guided by the net asset value and earnings per share.
(V) Indian companies engaged in or proposing to engage in housing and real estate development, i.e. (1) development of serviced plots and construction of built-up residential premises, (2) real estate covering construction of residential and commercial premises including business centers and offices, (3) development of townships, (4) city and region level urban infrastructure facilities including roads and bridges, (5) manufacturing of building materials and (6) financing of housing development were allowed to issue shares/convertible debentures to NRIs up to 100% of the new issue on repatriation basis. Repatriation of original investment in such cases would be permitted by the RBI only after a lock in period of three years from the date of issues of shares / debentures.
The above facilities which were not available to OCBs, have now been extended to them on the same terms and conditions as applicable to NRIs
VII) NRIs / OCBs were so far permitted to invest in schemes of domestic Mutual Funds floated by public sector banks / financial institutions on non-repatriation basis. With a view to providing further incentives to NRIs / OCBs to invest in domestic Mutual Funds, they were permitted to invest on repatriation basis also. As a new policy measure, such investments were also permitted to be made through secondary market.
(VIII) Under the Oct 1993 guidelines for issue of bonds by Public Sector Undertaking (PSUs). Government have allowed PSUs to issue bonds under its public issues to NRIs / OCBs through prospectus by private placement with the facility of repatriation of both principal and interest on the bonds. No limit, however has been specified for NRI / OCB investments in such bonds.
(IX) Besides the various investment facilities extended to NRIs / OCBs on repatriation basis and under various non repatriable schemes, the NRIs / OCBs were permitted to make investment in partnership/proprietorship concern, shares, debentures of Indian companies, Indian mutual funds floated by public sector banks/financial Institutions, deposits with Indian companies, real estate, etc. Neither the investment/deposit amount nor the income/interest thereon, was eligible for repatriation. Further, the investment/deposits held in India by Indian nationals who have become non-residents on account of their going abroad on employment/immigration, as well as income/interest earned on such investment / deposits was not allowed earlier to be repatriated abroad. The income /interest on such investment / deposits are, however, now permitted to be repatriated in a phased manner over a period of three years, as indicated below:
(I) Income accruing during 1994-95 and thereafter to the extent of US Si000 per annum is remittable with immediate effect (b) income earned over and above US $1000 in a year would be allowed to be remitted as follows:- (1) One third of the annual income earned during the financial year 1994-95, (2) Two third of the annual income earned during 1995-96 and (3) the entire amount earned during 1996-97 and onwards Remittance of such income, However would be allowed only after the payments of tax as per the provision of the Income Tax Act (3).
With a view to opening more areas for investment by NRIs / OCBs RBI has decided to allow them to invest, on a repatriation basis, in all activities except agriculture and plantation activities, subject to certain conditions during 1994 -95. Accordingly, existing or new Indian companies (both private and public limited companies) engaged/proposing to engage in any activity including financial, hire purchase leasing, trading other services etc. (except agricultural/plantation activities) are allowed to issue equity shares/convertible debenture's on repatriation basis to NRIs/OCBs provided the aggregate allocation of shares/ convertible debentures qualifying for repatriation benefits to such non-residing investors does not exceed 24% of the new issue. Earlier NRIs and OCBs were permitted to invest on a repatriations basis in new issues of shares/convertible debentures made by companies engaged in industrial or manufacturing activities and also in certain other sectors such as hotels, hospitals, shipping development of computer software and oil exploration. It has also been decided to permit authorized dealers to grant loans to NRIs holding Indian passports for acquisition of a house / fiats for residential purpose against security of immovable property proposed to be acquired by them subject to certain conditions.
(II) As a process of further liberalization , general permission has been granted to NRIs/OCBs to purchase the shares on repatriation basis of Public Sector Enterprise (PSES) dis-invested by Central Government subject to the condition that (a) the holding of share by a NRI or by an OCB, at any-time, does not exceed one percent of the paid-up capital of the PSE concerned, (b) the purchase consideration/bid money is received by way of remittance from abroad through normal banking channels.
(III) NRIs resident in Nepal will be permitted hence forth to make investment in India provided the funds for the purpose are remitted in free foreign exchange through proper banking channels. Such investments will either be on repatriation or on non-repatriation basis depending on the terms and conditions applicable under the existing schemes under NRI investment.
(IV) In the context of on going economic liberalization, the policy and procedures governing approvals under the schemes for 100% Export Oriented Units (EOUS) and Export processing Zones (EPZs) were further revised. All proposals conforming to the parameters presented vide press note No 13 (1991) series dated Oct 9,1991, Department of Industrial Development, Ministry of Industry, shall receive automatic approval within two weeks from Secretariat of Industrial Approvals (SIA), Ministry of Industry (Department of Industrial Development) in the case of 100% EOUs and from the Developments Commissioners (DCs) concerned for units to be set up in EPZs. All other proposals which do not conform to the parameters for automatic approvals, shall be considered by the Board of Approvals (BOA) and disposed within 45 days from SIA
(V) Under the National Telecom Policy, 1994 which enunciates the guidelines for the entry of private sector into Basic Telecom Services, joint venture between an Indian and a foreign company is allowed subject to a maximum of 49% equity participation from the latter.
(VI) It has been decided that foreign investment up to 51% and foreign technology agreements in the cast of bulk drugs, their intermediates and formulations thereof (except those produced by the use of recombinant DNA technology) will be granted automatic approval subject to the parameter of RBI.
Since the second half of 1993-94, the Indian economy has experienced surges in capital flows which took the forms of foreign investment flows both direct and portfolio, and inflows into various deposit schemes for non-resident Indians. With current account deficits remaining modest during 1993-94 and 1994-95, the policy response to the capital flows was accommodative and this enabled on unprecedented build up of international reserves. With the consequent attenuation of monetary targets threatening the objective of inflation control, the policy stance switched to one of throwing sand in the wheels in the second half of 1994-95. Various measures put in place were progressively tightened during the first half of 1995-96 in support of the conduct of monetary policy. With the widening of the current account deficit and the onset of volatility in the foreign exchange markets in the second half of 1995-96, the restrictive stance of policy was eased and a number of measures were taken to relax controls and allow for a larger inflow of foreign capital. As in the past, these measures were related to foreign investment flows and deposits by NRIs and the policy objective of attracting capital flows has been carried forward during the first half of 1996-97.
Policy changes in 1996 - 97 were: Under the Automatic route, the ceiling for lump sum payments of technical know-how fee was, increased from Rs. I crorc to US $ 2 million, effective Nov 5,1996. With a view to liberalizing the existing facility for investments by NRIs in India, it was decided to allow investments by NRIs to establish schools and colleges in India subject to certain regulations. With a view to expanding the coverage of investment proposals considered under the Automatic Approval Route effective Jan 17,1997, the Government announced the inclusion in Annexure III of the statement of Industrial Policy 1991 (i) 3 categories of industries / items relating to mining activities for foreign equity up to 50% (II) 13 additional categories of industries/items for foreign equity up to 51% and (III) 9 categories of industries / items for foreign equity up to 74%
Foreign Direct Investment was allowed into sixteen non-banking financial services (merchant banking, underwriting, portfolio management services, investments advisory services, financial consultancy, stock broking, asset management, venture capital, custodial services, factoring, credit refinance, credit rating, leasing and finance, housing finance, forex holding and credit card services) during the year 1997 98, through the Foreign Investment Promotion Board (FIPB) subject to guidelines relating to minimum capitalization norms, schedule of capitalization and domestic equity participation. In a major drive to simplify procedures for foreign direct investment under “automatic” route, the Reserve Bank dispensed with the need for its prior approval for such proposals. In order to simplify procedures further in respect to foreign direct investment cases already approved by the Government of India (SIA/FIPB), the Reserve Bank dispensed with requirement for its “in-principle” permission before receiving overseas investment or for issuing shares to foreign investors. Indian companies satisfying the conditions stipulated in the letter of approvals issued by SIA / FIPB could issue shares / securities to foreign investors and file one copy of the application together with required documents with the concerned Regional office of Reserve Bank within 30 days from the date of issue of shares. Expanding the scope of “automatic route” for foreign direct investments, the government of India approved 13 additional categories of industries / items under services sector for foreign equity participation up to 51% of the equity, three items relating to mining activity up to 50% foreign equity participation and nine categories of industries/activities up to 74% foreign equity participation.
As a part of liberalization process, Reserve Bank of India decided to permit foreign banks operating in India to remit their profits surplus to their head offices without the approvals of the Reserve Bank. The permission is subject to the banks complying with the provisions of Banking Regulation act, 1949.
Financial turmoil in the world economy, imposition of economic sanctions and sluggishness in domestic activity had some bearings on foreign investment during the year. The Union Budget, 1999-2000 announced the establishment of Foreign Investment Implementation Authority [FIIA] in order to rationalize and simplify approval and implementation procedures of foreign1 investment proposals. With a view to further facilitating inflows of foreign direct investment, expansion of automatic list of approvals and a more dynamic role for Foreign Investment Promotion Board were also announced.
Foreign investment recovered during 1999 - 2000 reflecting the stability of the domestic currency, broad-based industrial revival, easing of economic sanctions and return of orderliness in the financial markets coupled with strong stock market performance.
A number of policy initiatives were taken during the year to further facilitate inflows of foreign investment. In August 1999, a Foreign Investment, Implementation Authority (FIIA) was established for speedy conversion of approvals to actual flows. The Insurance Regulatory and Development Act (IRDA) was passed in December 1999 permitting foreign equity participation in domestic private insurance companies up to 26% of the paid-up capital. Moreover, investments in all sectors, except for small negative list, were placed, in February 2000, under automatic route for direct investments. Indian companies v»ere allowed, subject to specified norms, to raise funds for investments through issue of ADRs / GDRs without prior government approval and up to 50% of these proceeds were allowed for acquisition of companies in overseas markets. Indian companies could acquire companies engaged in information technology and entertainment software, pharmaceuticals and bio - technology in the overseas market through stock - swap options up to $ 100 m on automatic basis or ten times the export earnings during the preceding financial year as reflected in the audited balance sheet, whichever is lower.
FDI is seen as a means to supplement domestic investment for achieving a higher level of economic growth and development. FDI benefits domestic industry as well as the Indian, consumers by providing opportunities for technological up-gradation, access to global managerial skills and practices, optimal utilization of human and natural resources, making Indian industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services. Towards this end, the FDI policy has been constantly reviewed, and necessary steps have been taken to make India a most favourable destination for FDI. The major initiative taken to attract FDI during 2000 -2001 & 2001 - 2002 are as follows:
❖ In pursuance of Government's commitment to further facilitate Indian industry to engage unhindered in various activities, Government has permitted, except for a small negative list, access to the automatic route for FDI, whereby, foreign investors only need to inform the Reserve Bank of India within 30 days of bringing in their investment, and again within 30 days of issuing any shares.
❖ Non-Banking Financial Companies (NBFCs) may hold foreign equity up to 100% if these are holding companies.
❖ Foreign investors can set up 103% operating subsidiaries (without any restriction on number of subsidiaries) without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to brining in US $50 m out of which US $ 7.5 m to be brought upfront and the balance in 24 months. Joint venture operating NBFCs that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other Non Banking Financial Company activities, subject to the subsidiaries also complying with the applicable minimum capital inflow.
❖ FDI up to 49% from all sources is permitted in the private banking sector on the automatic route subject to conformity with RBI guidelines.
❖ In the process of liberalization of FDI policy, the following policy changes have been made: i) 100% FDI permitted for B, to B e-commerce ii) Condition of dividend balancing on 22 consumer items removed forthwith iii) Removal of cap on foreign investment in the Power Sector iv) 100% FDI permitted in oil-refining.
❖ Automatic Route is available to proposals in the Information and Technology Sector, even when the applicant company has a previous joint venture or technology transfer - agreement in the same field. Automatic Route of FDI up to 100% is allowed in all manufacturing activities in Special Economic Zones (SEZs), except for the following activities: i) Arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships; ii) Atomic substances; iii) Narcotics and Psychotropic substances and hazardous chemicals; iv) Distillation and brewing of alcoholic drinks; v) Cigarettes/cigars and manufactured tobacco substitutes.
❖ FDI up to 100% is allowed with some conditions for the following activities in Telecom Sector: i) ISPs not providing gateways (both for satellite & submarine cables); ii) Infrastructure Providers providing dark fiber (IP Category I); iii) Electronic Mail; iv) Voice Mail.
❖ FDI up to 74% is permitted for the following telecom services subject to licensing and security requirements (proposals with beyond 49% shall require prior Government approval): (i) internet services providers with gateways; (ii) Radio Paging; and (iii) End-to-end bandwidth.
❖ Payment of royalty up to 2% on exports and 1% on domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. Payment of royalty up to 8% on exports and 5% on domestic sales by wholly owned subsidiaries to offshore parent companies is allowed under the automatic route without any restriction on the duration of royalty payments.
❖ Offshore Venture Capital Funds / Companies are allowed to invest in domestic venture capital undertakings as well as other companies through automatic route, subject only to SEBI regulations and sector specific caps on FDI.
❖ FDI up to 26% is eligible under Automatic Route in the Insurance sector, as prescribed in the Insurance Act, 1999, subject to their obtaining licence from Insurance Regulatory & Development Authority.
❖ FDI up to 100% is permitted in airports, with FDI above 74% requiring prior approval of the Government.
❖ FDI up to 100% is permitted with prior approval of the Government in courier services subject to existing laws and exclusion of activities relating to distribution of letters. FDI up to 100% is permitted with prior approval of the Government, for development of integrated township, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems, and manufacture of building material in all metros, including associated commercial development of real estate. Development of land and providing allied infrastructure will form an integral part of township's development.
❖ FDI up to 100% is permitted on the automatic route in hotel and tourism sector and for Mass Rapid Transit Systems in all metropolitan cities, including associated commercial development of real estate. FDI up to 100% in drugs and Pharmaceuticals (excluding those, which attract compulsory licensing or produced by recombinant DNA technology and specific cell/tissue targeted formulations) placed on the automatic route.
❖ The defence industry sector is opened up to 100 per cent for Indian private sector participation with FDI permitted up to 26 per cent, both subject to licensing.
❖ International Financial Institutions like Asian Development Bank, International Financial Corporation, Commonwealth Development Corporation, German Investment and Development Company (DEG) etc., are allowed to invest in domestic companies through the automatic route, subject to Securities and Exchange Board of India / Reserve Bank of India Guidelines and sector specific caps on FDI (10).
FDI policies for the year 1998 -1999
Financial turmoil in the world economy, imposition of economic sanctions and sluggishness in domestic activity had some bearings on foreign investment during the year. The Union Budget, 1999 - 2000 announced the establishment of Foreign Investment Implementation Authority [FIIA] in order to rationalize and simplify approval and implementation procedures of foreign investment proposals. With a view to further facilitating inflows of foreign direct investment, expansion of automatic list of approvals and a more dynamic role for Foreign Investment Promotion Board were also announced.
FDl policies for the year 1999 - 2000
Foreign investment recovered during 1999 - 2000 reflecting the stability of the domestic currency, broad-based industrial revival, easing of economic sanctions and return of orderliness in the financial markets coupled with strong stock market performance.
A number of policy initiatives were taken during the year to further facilitate inflows of foreign investment. In August 1999, a Foreign Investment Implementation Authority (FIIA) was established for speedy conversion of approvals to actual flows. The Insurance Regulatory and Development Act (IRDA) was passed in December 1999 permitting foreign equity participation in domestic private insurance companies up to 26% of the paid up capital. Moreover, investments in all sectors, except for a small negative list, were placed, in February 2000, under automatic route for direct investments. Indian companies were allowed, subject to specified norms, to raise funds for investments through issue of ADRs / GDRs without prior government approval and up to 50% of these proceeds were allowed for acquisition of companies in overseas markets. Indian companies could acquire companies engaged in information technology and entertainment software, pharmaceuticals and bio-technology in the overseas market through stock - swap options up to $ 100 m on automatic basis or ten times the export earnings during the preceding financial year as reflected in the audited, balance sheet, whichever is lower.
FDI Policies For The Year 2000 - 2001
FDI is seen as a means to supplement domestic investment for achieving a higher level of economic growth and development FDI benefits domestic industry as well as the Indian consumers by providing opportunities for technological up-gradation, access to global managerial skills and practices, optimal utilization of human and natural resources, making Indian industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services. Towards this end, the FDI policy has been constantly reviewed, and necessary steps have been taken to make India a most favourable destination for FDI. The major initiative taken to attract FDI during 2000 -2001 & 2001 - 2002 are as follows:
❖ In pursuance of Government's commitment to further facilitate Indian industry to engage unhindered in various activities, Government has permitted, except for a small negative list, access to the automatic route for FDI, whereby, foreign investors only need to inform the Reserve Bank of India within 30 days of bringing in their investment, and again within 30 days of issuing any shares.
❖ Non-Banking Financial Companies (NBFCs) may hold foreign equity up u 100% if these are holding companies.
❖ Foreign investors can set up 100% operating subsidiaries (without any restriction on number of subsidiaries) without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US $50 m out of which US $ 7.5 m to be brought upfront and the balance in 24 months. Joint venture operating NBFCs that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other Non Banking Financial: Company activities, subject to the subsidiaries also complying with the 3, applicable minimum capital inflow.
❖ FDI up to 49% from all sources is permitted in the private banking sector on the automatic route subject to conformity with RBI guidelines.
❖ In the process of liberalization of FDI policy, the following policy changes have, been made: v) 100% FDI permitted for B to B e-commerce vi) Condition of dividend balancing on 22 consumer items removed forthwith vii) Removal of cap on foreign investment in the Power Sector viii) 100% FD permitted in oil-refining.
❖ Automatic Route is available to proposals in the Information and Technology Sector, even when the applicant company has a previous joint venture or technology transfer agreement in the same field. Automatic Route of FDI up to 100% is allowed in all manufacturing activities in Special Economic Zones (SEZs), except for the following activities: vi) Arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships; vii) Atomic substances; mi viii) Narcotics and Psychotropic substances and hazardous chemicals; ix) Distillation and brewing of alcoholic drinks; x) Cigarettes/cigars and manufactured tobacco substitutes.
❖ FDI up to 100% is allowed with some conditions for the following activities in Telecom Sector: v) ISPs not providing gateways (both for satellite& submarine cables); vi) Infrastructure Providers providing dark fiber (IP Category I); vii) Electronic Mail; ix) Voice Mail.
❖ FDI up to 74% is permitted for the following telecom services subject to licensing and security requirements (proposals with beyond 49% shall require prior Government approval): (i) internet services providers with gateways; (ii) Radio Paging; and (iii) End-to-end bandwidth.
❖ Payment of royalty up to 2% on exports and 1% on domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. Payment of royalty up to 8% on exports and 5% on domestic sales by wholly owned subsidiaries lo offshore parent companies is allowed under the automatic route without any restriction on the duration of royalty payments.
❖ Offshore Venture Capital Funds / Companies are allowed to invest in domestic venture capital undertakings as well as other companies through automatic route, subject only to SEBI regulations and sector specific caps on FDI.
❖ FDI up to 26% is eligible under Automatic Route in the Insurance sector, as prescribed, in the Insurance Act, 1999, subject to their obtaining licence from Insurance Regulatory & Development Authority.
❖ FDI up to 100% is permitted in airports, with FDI above 74% requiring prior approval of the Government. ❖
❖ FDI up to 100% is permitted with prior approval of the Government in courier services subject to existing -laws and exclusion of activities relating to distribution of letters, FDI up to 100% is permitted with prior approval of the Government, for development of integrated township, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems, and manufacture of building material in all metres, including associated commercial development of real estate. Development of land and providing allied infrastructure will form an integral part of township's development.
❖ FDI up to 100% is permitted on the automatic route in hotel and tourism sector and for Mass Rapid Transit Systems in all metropolitan cities, including associated commercial development of real estate. FDI up to 100% in drugs and Pharmaceuticals (excluding those, which attract compulsory licensing or produced by recombinant DNA technology and specific cell/tissue targeted formulations) placed on the automatic route. ❖ The defence industry sector is opened up to 100 per cent for Indian private sector participation with FDI permitted up to 26 per cent, both subject to licensing. ❖ International Financial Institutions like Asian Development Bank, International Financial Corporation, Commonwealth Development Corporation, German Investment and Development Company (DEG) etc., are allowed to invest in I domestic companies through the automatic route, subject to Securities and Exchange Board of India / Reserve Bank of India Guidelines and sector specified caps on FDI.
Industrial policy resolutions of 1948,1956 and 1980.
Industrial policy comprises of the procedures, principles, rules, policies and regulations which together govern the industrial sector to guide the industrial development or the country in conformity with the objectives of five year plans and the needs of the economy. As the economy develops, the government has to closely study the process of economic development and make necessary changes and modifications in the policies so as to make the policies relevant for the situation or the environment prevailing in the country at different points of time. A Sometimes the changes in policies are so drastic that a new approach at the industrial development or the development of any other sector is arrived at. When these changes are announced the reactions from the sector concerned are studied closely by the government and necessary amendments are made to the policies already announced. In Indian scene, the situation prevailed immediately after independence was completely different from what is being witnessed today. Hence, if we study the industrial policies announced in the later 40's and early and middle ‘50’s we would get a background with which we will be able to understand and appreciate the changes that have been announced in 1991. This would also help us to understand the justifications for the drastic changes announced at periodical intervals. Hence, we would discuss now in brief, the features of 1948, 1956 and 1980 Industrial Policy Resolutions.
INDUSTRIAL POLICY 1948
Immediately after independence, the government had to give a guideline for the industries in India and so it announced its policies for industries. The political freedom attained in 1947, posed a challenge to the government, to devise its own policies. With the production at low levels, population increasing, partition impacts, rising price level, industries to be developed to accelerate economic development, etc., the 1948 Industrial policy resolution was announced. Through that the government clearly accepted its responsibility of ensuring planned development of industries of various types. The 1948 policy laid the foundation for a new experience as would be clear from the following features of the policy. The industries were classified into the following four categories:
1. The strategic industries to be completely owned by the government included manufacture of arms and ammunition, production and control of atomic energy, ownership and management of railway transport, etc. No private sector participation or existence will be permitted in this category of industries.
2. The second group included the basic and key industries. Private sector existence in this group would be tolerated for a period of 10 years after which their performance would be evaluated. New units in this category' will be established only by the government and the existing ones would be taken over by the government if their performance is found to be not satisfactory after the review. The industries included in this category include: aircraft manufacture, coal, iron and steel, ship building, radio sets and mineral oils, etc.
3. In this category government included the basic industries like salt, automobiles, tractors, prime movers, electrical engineering, heavy machinery, machine tools, heavy chemicals, fertilzsers, electro-chemical industries, non-ferrous metals, rubber manufacture, power and industrial alcohol, cotton and woollen textiles, cement, sugar, paper and newsprint, air and sea transport, minerals and industries relating to defence. Private sector will be given complete freedom to enter into this category, but the government can intervene and regulate any of them, if found necessary.
4. All the other industries formed the fourth category. Mainly left for private sector, the government pointed out that progressively it may participate but not eliminate the private sector. Both individual as well as co-operative undertakings will be permitted in this sphere.
This policy also gave importance to small scale industries and suggested that both the central and state governments should join together in solving the problems faced by the small scale industries. As these industries would offer good scope for absorbing the displaced labourers, and agricultural workers and wee also ideal for co-operative type of organisation, the government felt that they must be developed. As regards the foreign capital, the government clearly pointed out that there is need for free flow of capital as well as technology. At the same time the government also said that it should regulate; no discrimination will be made between the Indian and foreign undertakings with regard to the applications of the provisions of the policy resolutions. Profits and repatriation of capital would be permitted subject to the provisions of the -foreign exchange control. Further if any undertaking is nationalised, then fair and equitable compensation would be paid.
Evaluation:
The main aspect of this policy is that it laid the foundation for the introduction of MIXED ECONOMY in India. Under this the government will encourage coexistence of both private and public sector units in industries according to the provisions of the policy. This paved the way-for the participation of government and the corporate sector in the industrial building process of the country. This also facilitated a direct comparison between the performance of both the sectors, in terms of various indicators. Being the first policy resolution the government had made a good beginning. But this policy was criticised for being classificatory. It gave an impression that the private sector, even in spite of possessing the potential was not allowed to play its due role in the industrial development. Secondly, there was a threat of nationalisation, specifically, in the case of industries under the second category. Thirdly, the government intervention was present even in the case of third category of industries. Hence, on the whole, being the first policy, the government could not make the policy more imaginative, except, of course, introducing the principle of mixed economy.
INDUSTRIAL POLICY 1956
A new policy was necessitated after 1951, because, India adopted a socialistic pattern of society, the Constitution guaranteed Fundamental Rights and Directive Principles of State policy and the First five year plan was completed by 1956. After reviewing the developments and achievements, the government came out with the Industrial Policy Resolution of 1956. For all the later policies, this became the basis and until 1980, the provisions of this policy remained more or less in force.
The following are the important features of this Policy:
The industries were classified into three categories. This was indicated in terms of Schedule A, Schedule B and Schedule C industries. • The Schedule A industries are completely slate owned and the state is responsible for the development and growth of them.
• The Schedule B included industries which were under the control of government, especially new units. The private sector is also permitted to enter into this category, but it will be given only a supplementary role.
• The Schedule C industries included all the remaining industries, the future of which would be completely in the hands of private sector. Of course, government regulation in general would be formulated and made applicable to them as any other industries. The first classification (Schedule A) included 17 industries, the Schedule B included 12 industries and Schedule C included all the rest.
The government clearly indicated that the above classification is not very rigid, and private participation and presence even in the first category in the nature of allied units, user of by-products, etc., would be permitted, similarly the government may enters the Schedule C industries if the planning and development warrants it. The private sector is expected to work in close unison with the state. The government assured fair and free treatment to private sector units and non-discriminatory treatment was also promised. The government continued to encourage the growth and development of small scale and village industries by extending subsidies, tax concessions, protection from large and medium industries, and assisting them in modernisation to improve their competitive strength. The Resolution also aimed at reducing the regional disparities in the growth and development of industry so as to achieve balanced industrial development throughout the country. The Resolution also highlighted the need to protect and improve the conditions of industrial workers in the country. Mainly several machineries for settling industrial disputes were thought of. The government continued with its policy regarding foreign capital without much change.
Evaluation:
This resolution assigned a major role to the public sector. It created a condition in which the public sector units could be established and developed well. This was fell necessary to achieve the desired rate and pattern of development of industries in India. The government made it clear that it had no intention to wipe out the private sector, instead it wanted the private sector to emerge as the supplementary sector for the public sector and join the latter to achieve rapid industrial and economic development. After the resolution came into force, over a period it was found that the private sector developed faster by taking advantage of loopholes and exceptions in the Resolution. There were cases where licenses were issued to private sector while public sector should have been given the license. Hence, it was found that this Resolution in fact, led to the rapid growth of private sector.
INDUSTRIAL POLICY OF 1980
As already pointed out the Industrial policy of 1956 formed the basis of this policy in 1980. This new policy had the following objectives: i) to achieve the optimum utilisation of the installed edacity ii) to achieve maximum production and through that achieve higher productivity and employment generation iii) to rectify the regional imbalance by focusing on the backward areas iv) giving priority treatment for agro-based industries v) to promote inter-sectoral relationship vi) to encourage the growth of export oriented and import substitution industries vii) to speed up the growth of small scale units, etc.
With these objectives in view, the new policy laid down the following provisions:
1. After reviewing the performance of the public sector units the government has decided to introduce measures for improving the efficiency of these units so as to make them contribute more towards the economy.
2. In order to promote economic federalism, the policy provided for integration of industrial development in the private sector. The government also decided to eliminate the artificial division between small and large scale industrial units. In each district a few nucleus plants will be set up which would generate opportunities for a number of small, cottage and ancillary units. This would ultimately create the scope for faster industrial development in the industrially backward districts.
3. To provide the scope for more and more small and cottage industries, the government redefined these units as below: a. the limit of investment for tiny units was to be raised from Rs. 1 lakh to Rs.2 lakhs b. the limit of investment for small scale units was to be raised from Rs. 10 lakhs to Rs. 20 lakhs and c. increase the limit of investment for ancillaries from Rs. 15 lakhs to Rs. 25 lakhs.
4. to promote industrial growth in rural areas and also to improve the employment opportunities there and raise their percapita income, the policy provided for promoting industries in the rural areas. This was also expected to maintain the ecological balance in the country. Greater attention would be given to the growth of handlooms, handicrafts and khadi and other village industries.
5. Another important provision was that the government decided to regularise the unauthorized excess capacity with the industrial units, especially the FERA & MRTP units by allowing them automatic expansion by 25% of the existing licensed capacity on a selective basis.
6. To prevent spread of industrial sickness, the government indicated that very stringent steps would be taken against those units which are deliberately mismanaged and indulging in financial improprieties. As regards the existing sick units, arrangements would be explored to revive them or to encourage their mergers with healthy units by introducing suitable tax concessions to encourage such actions. When other methods of revival of sick units are not found feasible, then the management of such sick units would be taken over.
EVALUATION
This policy has several lapses. Its claim to eliminate the division between small scale and large scale units is something contradicting the basis of such divisions. There was a need to treat the small scale with liberal treatment so that in a labour intensive economy, these units can create employment opportunities. There is nothing wrong with such specific preferential treatment of small scale units. But this policy aimed at removing such differences. Secondly, this policy created a precedence by regularising the unauthorized excess capacity created by large units, instead of taking action against such erring big units. While the big units welcomed this move of the government, yet this has resulted in the expectation that the government would continue to have such liberal treatment in future also. This indirectly has also affected the growth prospects of new industries and the existing medium and small scale units. Though the government justified its move by stating that such a move would facilitate fuller utilisation and higher output, yet the consequence of such a move was not thought about. However, it may be pointed out that the seeds of liberalization were sown through this policy and the government's intention to select capital intensive path of development.
The features of 1991 Industrial policy
The government announced its new Industrial policy in July 1991. The new policy has outlined several changes which have together opened a new era to the growth and development of industrial sector in India, The conventional regulations and restrictions have been replaced with liberalization and reliefs. Consequent to the announcement of the new policy, there has been all round jubilation in the industrial sector. The following are the salient features of the new industrial policy.
Even by 1985-86, the government realised the need to encourage the industrial sector to stand on its own legs and towards achieving this a number of policies and procedural changes have been announced. This was expected to increase productivity, reduce costs and improve the quality with which the domestic industries are expected to face competition with strength. There was an honest attempt to release the public sector from a number of constraints and it was given a large measure of autonomy. Technological and managerial modernization programs were taking place in large scale. All these measures together contributed to the achievement of an impressive annual growth rate of 8.5% during the VII Five year plan. Having understood the effectiveness of all the policy changes in the past, the new industrial policy will continue to pursue a sound policy to encourage entrepreneurs, develop the indigenous technology through intensive research and development activities, dismantle the regulatory system, improve the capital market, etc. Small scale sector would get a special attention and the government promised to come out with a new policy towards the small scale industries. Foreign technology and investment would be welcomed to improve the domestic production base and increase the exports. The MRTP Act would be suitably modified to encourage competition. Public sector will be made to run on commercial lines and play a vital role in economic development. The essence of this new policy will be discussed under the following heads: 1. Industrial licensing, 2. Foreign investment, 3. Foreign technology agreement, 4. Public sector, 5. MRTP Act and 6. Small scale and tiny sector policy.
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90's a number of changes in the system of industrial approvals have been brought about. The domestic producers will be able to withstand the competition in the country as well as abroad only through procedural reforms. Hence, the role of government will be changed from that of exercising control to one of providing help and guidance. Changes in the policy towards public sector in the last few years have clearly indicated that private sector enterprises will be allowed to compete in many areas hitherto earmarked for public sector. Consequently, the new policy has completely reclassified the Indian industries as below:
a) Eight industries have been completely reserved for the public sector. They are: i. Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils; v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tm, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transport.
b) Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries;
i. coal and lignite, ii. petroleum other than crude and its distillation products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco substitutes, vii. Asbestos and asbestos based products, viii. plywood, decorative veneers and other wood based products such as particle board, medium density fiber board, block board, ix. raw hides and skins, leather, chamois leather and patent leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and newsprint except bagasse based units, xiii. electronic aerospace and defence equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi. drags and pharmaceutical xvii. entertainment electronics and xviii. white goods like domestic refrigerators.
As regards the provisions of the industrial licensing policy, i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector and the list of 18 industries and the areas reserved for small scale industries will continue.
ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations.
iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported, goods does not exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required.
iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in ares other than cities of more than one million population. In cities with more than one million population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas.
v) New Broad-banding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing units.
vi) The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects,
vii) A very significant step is to abolish all the existing registration schemes.
viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum.
ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system),
FOREIGN INVESTMENT
Foreign investment carries with it the benefits of technology transfer, marketing expertise, modem managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the new policy has clearly contained the following provisions related to foreign investment: i) In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed- Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments will be made in the FERA.
ii) The general policies governing the domestic units in regard to import of components, raw materials and intermediate good and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on account of dividend payment also to ensure that such payments are balanced by export earnings over a period of time.
iii) All the other foreign investments not included in the Category I slated above will require prior clearance.
iv) Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in (i) above. However, the provisions of the Export-Import policy applicable to the domestic units will also be applicable to such trading companies.
v) To encourage substantial inflow .of foreign investment, a Special empowered board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
FOREIGN TECHNOLOGY AGREEMENT
A welcome change in the outlook of the government as evidenced by the new policy is the realization that the sophisticated technology, from abroad can be brought in only through liberal and less restrictive procedure and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameter. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulations governing foreign technology agreement:
i) No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through the blanket permits.
ii) Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provision. Upto the payment of Rs.1 crore, royally will be @ 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of sales over a 10 year period from the date of agreement or 7 year period from the dale of commencement of production.
iii) In the case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does riot entail any foreign exchange payment commitment.
iv) In all the other cases, the general procedures in practice will be adhered to and such industries will require approval.
PUBLIC SECTOR
The public sector was given the predominance in the industrial development over the last four decades and the amount of investment made in this sector, though justified from the point of view of socialistic democracy, it has been struggling with so many problems like poor productivity, excess staffing, lack of continuous technological up-gradation, inadequate attention to research and development, etc. The rate of return on investment in public sector has been so low that it has prevented the automatic growth of these assets to the government. The main reason for this poor performance of the public sector has been the taking over of the sick units from the private sector and the number of units which are in the consumer goods and service sector. Hence, in the new policy the government has rightly given the emphasis to the development of public sector in the field of essential infrastructure goods and services, technology development and building of manufacturing capabilities, manufacture of products such as defence equipment. The public sector will also enter the other areas not strengthened if they generate good profits and the management will be granted more autonomy through a system of memorandum of understanding. Private sector will be invited to induce competition in these areas. In selected industries in public sector, the government would disinvest a part of the equity share holding to provide market discipline to the performance of the public sector. Based on these views the new policy has the following provisions regarding the public sector:
i) A review of the public sector portfolio investment will be made to give the emphasis on the role of public sector in the strategies, high tech and infrastructure. Public sector units will be allowed entry into areas not strictly reserved for it.
ii) The Board for Industrial and Financial Reconstruction will be approached to help the sick units to rehabilitate them. To protect the interest of workers who are likely to be affected due to rehabilitation of public sector sick units, a social security system is proposed to be devised.
iii) A significant policy aimed at raising the resources and encouraging public participation in the growth of public sector units is that the government will offer a part of its share holding in the public sector to the mutual funds financial institutions, genera! public and workers.
iv) In the direction of strengthening the management of public sector units the Board of public sector management will be made more professional and given more powers. Further to make the management of such units more autonomous and accountable a system of memorandum of understanding will be adopted. Apart from improving the expertise of the government in implementing the MOU, the government also would place in the Parliament the MOU to facilitate detailed discussion.
MRTP ACT
A major deviant of the new policy is in respect of the MRTP Act. The new policy aims at removing the unnecessary bureaucratic controls and allow the industries to breathe in an atmosphere of freedom. The efforts of the government in the past intervening in the investment decisions of the MRTP companies have been proved to be counter-productive. Hence, the newly empowered MRTP Commission will enquire into complaints received from individual consumers or classes of consumers. The following is the essence of the provisions in the new policy regarding MRTP Act:
i) The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course. ii) The need to obtain the prior approval of the central government for establishing new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed. iii) The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair trade practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices. iv) All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers of the MRTP Commission.
Industrial pattern in India on the eve of planning and growth since the I Five Year Plan
By 1950, the industrial pattern in India was completely under the shackles of the British policy. Till independence, India was used as a market for the finished goods of Briton and so nothing spectacular could be explained about the industrial pattern in India at that time. The main features of the industrial pattern on the eve of planning (1950) were:
1. There was a conspicuous lop-sided pattern of industry found by 1950. On the one side large industries owned by British businessmen was existing and the other extreme the indigenous industries of small size but in large numbers was found. There was no medium scale industries at all. Obviously the employment pattern was concentrated in these two extreme types of industries.
2. The capital intensity in Indian industries was very low compared to several other Western countries. This was because of low wage level and very small market size for the products. So there was no scope for large scale production.
3. The composition of industrial output was such that the ratio between consumer goods and capital goods was 62: 38. This amply explains the under developed nature of the capital goods sector.
On the eve of the I Plan the government studied the prevailing situation and then decided to launch the process of industrialization in India in order to achieve a higher rate of growth. For this purpose steps were taken to design the industrial development to accelerate growth. The plan-wise steps for achieving a higher rate of industrial development is given below:
I Plan: During this Plan the emphasis was more on the development of agricultural sector than the industrial sector. However, the effort was to improve the power and irrigation facilities so as to facilitate rapid industrialization. The target for the growth was to achieve 7% But in reality this called for huge investment which did not come forth. Out of the total investment planned for the industrial sector (Rs. 797 crores), Rs. 94 crores was the outlay fixed for the public sector. The Plan also aimed at fuller utilization of the existing capacity. However several important industries like Sindiri Fertilizer factory, Chittaranjan Locomotive factory, Indian Telephone industries, etc were set up during this Plan.
II Plan: The seeds of industrialization were sown during this Plan. During this Plan period several important changes took place and the most notable one being the government declared its Industrial policy resolution 1956. Heavy industries and large scale industries were to be set up. The total investment by the private and public sector was Rs. 1575 crores. The following priorities were set up to achieve a desirable pattern of industrial development during this Plan. i) To give top priority to heavy engineering and machine building industries. ii) Expanding the capacity of some of the industries producing aluminium, cement, chemical pulp, fertilizers, etc. iii) To undertake modernization and re-equipment of the major national industries like cotton textile and jute. v) To achieve fuller utilization of available capacity and vi) To expand the capacity of the consumer goods industries.
With these priorities, major iron and steel plans were set up in public sector in collaboration with other countries. Apart from these the industrial development also included the development of several other medium scale and small scale units in large scale. The combined effect of all these industrial development was during this Plan period the index of industrial production shot up to 194 in 1960-61 from a mere 139 in 1955-56.
III Plan: This Plan provided for a big leap in industrial development by raising the rate of investment to a new peak to strengthen the industry, power and transport and also to achieve a rapid rate of industrial progress. With this view, the total investment ear-marked for industrial development was Rs. 3000 crores in which public sector contribution alone amounted to Rs. 1700 crores. In fact in this Plan the public sector was given predominant role. Apart from this the village and small scale industries received a great impetus in the form of Rs. 425 crores of investment by private and public sector. Added to this was to set up 300 new industrial estates throughout the country. The target for industrial development was" fixed at 14%, though the actual achievement was only 7.6% per annum. There was overall industrial development and it was thought that the country could receive the stage of self-reliance.
IV Plan: With a good agricultural output on the eve of this Plan (which coincided with the start of Green revolution), the industrial development started picking up. This Plan had specific objectives for industrial development as indicated below:
1. To fulfill the commitments made for investments 2. To expand the production capacity as required by the future 3. To bring down the level of dependence on import for supplies 4. To exploit the existing internal development to lay the base for new industries.
With a total investment of Rs. 5300 crores by the private and public sectors, the Plan provided for the development of large, medium and small scale and village industries. But during this Plan the achievement was well below the target due to several factors. Specifically, operational problems in some of the basic industries, lack of integrated planning, deficiency in design, loss of man-days due to strikes and lock-outs, decline in demand for industrial machinery, inadequacy of investment, stagnation in the production of commercial crops, etc.
V Plan: This Plan started with the emphasis on the following with the objective of achieving self-reliance and growth with social justice: i. Rapid growth of the core sector, ii. Encourage development of industries which accelerate rapid diversification and growth of exports, iii. Increasing the production of industries which supply for mass consumption, iv. To curtail the production of non-essential commodities except for export purposes.
With this emphasis the total investment by the public private sectors worked out to Rs. 10135 crores. The Village and small scale industries received tremendous encouragement during this Plan and the government reserved production of 124 items for small scale industries. Inspite of all these, the actual achievement of industrial development was just 5.3% per annum against a target of S.1% This was mainly because of the capacity constraints in industries like cement, paper and fertilizer, lack of transport facilities, shortage of fuel, electricity, low administered price, strained industrial relations, inefficient management, etc.
VI Plan: This Plan started with a strategy to achieve structural diversification, modernization and self-reliance. Towards this, the Plan formulated policies on the following lines:
i. Enhancing the manufacturing capacity in a substantial way covering a wide range of industries, ii. Giving special attention to the capital goods industry and electronics industry in particular, iii. In order to meet the foreign exchange requirements, the exports of the engineering goods and industrial products would be stepped up, iv. Providing for a combination of the import of contemporary technology and also development of indigenous technology through intensive research and development and v. Developing a strategy for backward regions.
The Plan provided for an overall of investment of Rs. 22187 crores, though the actual expenditure was of the order of Rs. 30000 crores. However, the industrial growth did not exceed the target determined due to various reasons, the important of which are: Power shortage, poor industrial relations and continued labour unrest, poor demand conditions, lack of concern for improvement of efficiency failure to give greater emphasis on the technology up-gradation, etc.
VII Plan: This Plan provided for a total investment of Rs. 19708 crores by the Public sector and Rs. 2752 crores for the development of the village and small scale industries. Over and above this the private sector investment of a very huge size was also forthcoming. The Plan developed an industrial strategy with the following elements: i) to completely remove the infrastructural deficiencies like power shortage, by providing for more efficient use of the existing capacity and also establishing new power plants. ii) to encourage modernization of industries especially sugar and textile industries through up-gradation of technology. iii) to determine specific targets for productivity for major industries like steel fertilizer, paper, cement etc. iv) to identify the industries which possess competitive advantage and then encourage them more to improve their export by making the export production an integral part of the domestic production. v) to encourage the ‘sunrise’ industries which carry enormous potential for improving productivity and quality vi) to reduce regional disparities in industrial development and also ensure dispersal of industries by locating new industries in industrially backward states and districts, vii) to extend the coverage of pollution control system in more industries.
An encouraging note during this Plan was that the actual achievement of growth was very much better than what it was in other plans, against a target of 8.5% This better growth rate was achieved mainly because of i. better performance of infrastructural sector, changes in the area of licensing, higher import of capital goods, higher utilization of the existing capacity, extending of broadbanding policy to more industries, etc. The overall outlay during this Plan was Rs. 22148 crores.
VIII Plan: At the start of this plan, the government had taken a crucial decision to change its fiscal, monetary, trade, industrial and foreign investment policies. In one word, the liberalization policy was announced. The continued emphasis on public sector was dropped as it had provided the necessary momentum for growth and so the private sector initiatives have to be encouraged. The overall efficiency of the private sector proved that it has come off age and play a greater role in the economic development. The competitive advantage of Indian industries should be made full use of and so the private sector is vested with the responsibility for improving the efficiency and productivity. An open door policy is adopted to facilitate the growth of private sector and also to integrate the domestic production with the rest of the world. External collaboration, joint ventures, etc will all be viewed with a main focus on the flow of benefits. The overall outlay in this Plan was set at Rs. 40673 crores. The Plan has fixed 8.9% as the annual average growth rate and with the prevailing conditions, this target appears to be reasonable and achievable.
EXIM Bank and the functions of EXIM Bank The schemes of financing of the Bank
The Export-Import Bank of India (EXIM Bank) established on 1st January, 1982 is a wholly owned financial institution of the government. It was established, by an Act of Parliament, for the purpose of financing, facilitating, promoting foreign trade of India. It is a principal financial institution for co-ordinating the working of institutions engaged in financing exports and imports.
Chapter IV of the EXIM Bank Act provides: “The EXIM Bank may grant, in or outside India, loans and advances, by itself or in participation with any bank of financial institution whether in or outside India, for the purpose of export or import and shall also function as the principal institution for co-ordinating the working of institutions engaged in financing of the export in such manner as it may deem appropriate." The Chapter provides further: "The EXIM Bank may also carry on and transact all or any of the following kinds of the following business, namely:
a) granting loans and advances to a scheduled bank or any other bank or financial institution notified in. the Official Gazette by the Central Government in this behalf by way of refinance of loans and advances granted by it for purpose of export or import.
b) underwriting the issue of stocks, shares, bonds or debentures of any company engaged in export or import, the Export-Import Bank of India Act, 1981.
c) issuing bid bonds or guarantees in or outside India by itself or in participation with any government bank or financial institution in or outside India.
d) accepting, collecting, discounting, re-discounting purchasing, selling or negotiating in or outside India bills of exchange or promissory notes arising out of transactions relating to export or import and granting of loans and advances in or outside India against such bills or promissory notes.
e) granting, opening, issuing, confirming or endorsing letters of credit and negotiating or collecting bills and other document drawn there under.
f) undertaking any transaction involving a combination of government to government and commercial credit for purpose of export or import.
g) granting loans and advances outside India for any Indian joint venture.
h) granting lines of credit to the government of any foreign state or any financial institution or person outside India for purpose of export and import.
i) granting loans and advances to any person in India in connection with his equity contribution in any joint venture in any country outside India.
j) financing export or import of machinery and equipment on lease basis.
k) subscribing to or entering into such other dealings in foreign exchange, as may be necessary for the discharge of its functions.
l) subscribing to, or investing in, or purchasing of, stock, shares, bonds, or debentures of any country outside India.
m) opening of any account in any bank in or outside India or the making of any agency arrangement with, or acting as agent or correspondent of, any bank or other institution in or outside India.
n) transferring for consideration, any instrument relating to loans and advances granted by it.
o) issuing participating certificate.
p) subscribing to, or investing in, or purchasing of stock, shares, bonds, or debentures to the extent necessary for the enforcement of a line, pledge or other contractual right
q) undertaking and financing of research, surveys, techno-economic or any other study in connection with the promoting and development of international trade.
r) providing technical, administrative and financial assistance of any kind for export or import.
s) planning, promoting, developing and financing export-oriented concerns.
t) forming or conducting subsidiaries for carrying out its functions.
u) acting as agent of the Central Government, any State Government, the RBI, the Development bank or any other person as the Central Government may authorize.
v) collecting, compiling and disseminating market and credit information in respect of international trade,
w) doing any other kind of business which the Central
x) government may authorize.
y) generally doing such other acts and things as may be incidental to or consequential upon, the exercise of its powers or to discharge of its duties under this Act or any other law of the time being in force, including sale or transfer of any of its assets.
Financing schemes of the EXIM Bank:
The present focus of the Bank is on medium term and long term credits. Whenever a buyer of goods or services exported from India is allowed to defer payment, an export credit, arises. Deferred export credit is available for the sale of machinery, manufactured goods and related services. Such credit may be in the form of “Supplier's credit” or “Buyer’s credit” - Supplier's credit arises when an Indian exporter extends credit to the overseas buyer and finances himself through the EXIM Bank. Deferred export credit takes the form of Buyer's credit when the EXIM Bank extends credit directly to the buyer.
The EXIM Bank operates three broad programs of financing viz. Loans, Rediscounting and Guarantees. At present the Bank operates nine lending schemes which are briefly described below
1. Loans to Indian companies:
Direct financial assistance to export: Funds are provided, on deferred payment terms, to Indian exporters of plant, equipments and related services, which enable the exporter to extend deferred credit to the overseas buyer. This programme covers project exports, which could be turn-key projects/construction projects. Such project exports arise when an Indian company contracts either to set up on a turnkey basis any textile mill, sugar plant or contracts a construction project overseas. Financing export of eligible goods is covered under this programme.
Consultancy and technology services: Indian companies can borrow funds from EXIM Bank and provide deferred credit overseas buyers of Indian consultancy of technology services.
Overseas investment financing: The bank provides financing, where an Indian company establishes a joint venture overseas, and requires funds towards equity participation.
Pre-shipment credit: This programme is available for companies, that have won an export contract for the eligible goods and are seeking finance to produce the goods which entails a production period exceeding six months.
Loans to foreign government companies and finance institutions:
This is offered directly to foreign importers for the import of eligible Indian goods and related services with repayment terms spread over a period of years.
Lines of credit to foreign governments:
Besides Foreign Government, such lines of credit are available to foreign financial institution. Such lines provide long term finance for import of Indian capital goods related services.
Relending facility to banks overseas: Relending facility to banks overseas is made available to enable them finance to importers, for import of Indian capital goods. Banks overseas would intermediate between foreign buyer and EXIM Bank, and the latter would intermediate with the supplier.
Rediscounting facility: Under this type of assistance, specific mention may be made about the following schemes:
Export Bills Rediscounting: This lending programme is available to commercial banks, in India, who are authorized to deal in foreign exchange. Such banks can re-discount their short term usance export bills portfolio with EXIM Bank. EXIM Bank provides funds, under this programme, for a period of 90 days against export bills that have equal period to run, before realization.
Refinance of export credit: Under this programme, commercial banks, in India, who are authorized to deal in foreign exchange, can obtain from EXIM Bank 100% refinance of term loans extended for export of eligible Indian goods. Such credit enables Indian Exporters to offer credit terms to foreign Importers. For an export contract upto Rs. 10 million, commercial banks can obtain financing participation under EXIM Bank's other programme, including syndication facility.
Guaranteeing of obligation: The Guarantee programme is available in the case of construction and turnkey contracts. Construction contracts involve erection, civil works and commissioning.
In such contracts, an Indian exporter usually requires bid bond, advance payment guarantee, performance guarantee, guarantee for retention money and guarantee for borrowings abroad. EXIM Bank participates with Commercial banks in India in the issue of guarantee.
Various facilities offered by the EXIM Bank to the exporters of different categories
i) Facility to exporters of engineering goods and turnkey project exporters:
Deferred payment exports arise when the export proceeds are to be received beyond six months from the date of shipment (in case of exports to Afghanistan and Pakistan beyond three months). Turnkey projects arc those which involve rendering of services like design, civil construction, erection and commissioning of plant along with supply of equipment. Typical projects include supply, erection and commissioning of equipment for generation, transmission and distribution of power and plants for manufacture of cement, sugar, textiles, chemicals, etc.
When an Indian' exporter extends deferred credit directly to the overseas buyer, the export contract falls under the category of “Supplier’s Credit.” On the other hand, if a foreign buyer is offered credit by a financial institution or a consortium of financial institutions in India and the Indian exporter is paid the export value by the institution(s) concerned, the relative export contract falls under the category of “Buyer's credit.”
Supplier's credit: Credit is provided by the EXIM Bank on deferred payment basis, in participation with commercial banks, to Indian exporters, of engineering goods and turnkey projects to enable them to extend credit to importers overseas.
Where individual contract value is not more than Rs. 1 crore banks may provide the credit and avail 100 per cent refinance from the EXIM Bank.
Overseas buyer's credit: As an alternative to Supplier's credit availed by the exporters, credit extended by the EXIM bank to buyers abroad with a view to enable the latter to import engineering goods and projects from India, on deferred credit terms. Credit to overseas buyers is also available from the EXIM Bank in the form of Lines of Credit to overseas financial institutions, foreign governments and agencies, and relending facility to overseas banks.
Pre-shipment credit: Credit is available to eligible exporters to buy raw materials and inputs required to produce capital equipment that has to be exported. EXIM bank participates in the credit if the requirement is for a period of more than 180 days.
Foreign currency loans: Foreign currency loans can be availed of from the EXIM Bank at market rates to cover purchase/procurement of machinery from third countries.
Technology and consultancy services finance:
Credit is also available to eligible Indian exporters of technology and consultancy services to enable them to extend term credit to importers overseas.
Non-funded facilities: Exporters of engineering goods and turnkey projects abroad arc also provided the following facilities: i) issue of Bid Bonds ii) issue of advance payment guarantees, iii) issue of performance guarantees, iv) issue of guarantees for release of Retention Money's and v) issue of guarantees for raising Borrowing overseas.
ii) Facility to overseas construction project exporters:
Construction projects involve civil work, Steel structural works, as well as design, equipment supply, erection and commissioning. Typical projects include electrification and utility, power transmission, pipelines, water resource management systems, airports, roads, bridges, hotels, housing and erection of industrial plants. The EXIM Bank offers funded, non-funded and advisory services to Indian construction project exporters.
Pre-shipment credit:
The Bank finances the exports from India and the preliminary expenses in rupees relating to the execution of the project. Commercial banks also extend this facility for definite periods at confessional rates of interest.
Post-shipment rupee credit:
The EXIM Bank enables financing of exports until progress payments are received commercial banks extend this facility at confessional rates of interest.
Foreign currency loan:
The Foreign currency loan can be availed of from the EXIM Bank, at market rates, to cover purchase/procurement of machinery from third countries.
Deferred credit:
The EXIM Bank provides deferred credit facilities against security for a portion of the contract covering export of selected items and technical services from India.
Non-funded facilities:
Exporters of construction projects overseas are also provided several facilities as explained already.
iii) Consultancy and technology service finance:
Indian companies executing overseas contracts, involving consultancy and technology services, can avail of EXIM Bank's financing programme with a view to offer deferred payment terms of their clients. This enlarges the market for export of Indian consultancy services. The consultancy and technology services for this purpose include:
a) providing personnel including skilled and unskilled workmen are persons for rendering technical or other services;
b) Transfer of technology, know how expertise or other skills;
c) furnishing any information, blue prints, plans or advice; and
d) any other activity considered acceptable by the EXIM Bank.
Indian consultants, having corporate status or otherwise who-have secured a contract for export of services wherein deferred payment term need to be offered to the client, can utilize the facility.
iv) Lines of credit:
EXIM Bank extends lines of credit to overseas Government of Agencies nominated by them to enable buyers in those countries to import capital engineering goods from India on deferred payment terms. This facilities enables Indian exporters to offer deferred credit terms to customers in those countries as per terms and conditions already negotiated between the EXIM Bank and the overseas governments. The exporters can obtain payment from the EXIM bank against negotiation of shipping documents, without recourse to the exporters.
v) Facility for syndication of Export credit risks:
Commercial banks, in participation with EXIM Bank provide long term credit, at competitive rate of interest, to Indian exporter of capital goods, turnkey projects and consultancy services, thereby enabling Indian exporters to compete effectively in the international markets.
The facility for syndication of term export risks lends flexibility to. the export credit mechanism by allowing banks to assume risks, without blocking their funds -for long terms, at fixed interest rates, commercial banks can now support export proposals without impairing their liquidity.
Commercial banks seeking enhancement in their export portfolio can avail of this facility end participate in the syndication arrangement.
vi) Facilities for deemed exports: .
"Deemed export” occur in case of specified transaction within India which result in foreign exchange earnings or foreign exchange savings.
Deemed exports involving supply of capital goods and other eligible goods have access to the EXIM bank's deferred credit facility .at internationally competitive interest rates. EXIM bank extends credit through the supplier or directly to the buyer. Intermediating banks/institutions can also avail of refinance facility from the EXIM bank covering the full value .of the term credit. EXIM bank may, in addition, provide pre-shipment (working capital) facility, normally for large transactions involving long manufacturing cycle time.
Other facilities available from the EXIM bank relating to 'deemed exports' include issue of guarantees and bridge financing in foreign currency. These facilities are normally availed by project exporters. vii) Advisory services:
Through its International Merchant Banking division, the EXIM Bank offers the following advisory services: a) work closely with Indian companies in designing financing packages for joint ventures in third countries; b) advise Indian companies executing contracts abroad, on sources of favourable financing overseas; c) providing access to Euro-financing sources and global credit sources to Indian companies engaged in exports; d) advise on exchange control practices globally and e) advise and design financial packages for export oriented industries in India
These services are being added to in order that tailor-made financing packages for high value export contracts are available.
Ministry of Commerce, Government of India, determines the eligibility of transactions which are to be treated as 'deemed exports. These are published, from time to time, in the Imports and Export Policy Book.
New export-import policy 1992 - 1997.
The balance of payments position, which had reached a point of near collapse in June, 1991, slowly stabilized during the course of 1991-92. Although new policies to deal with the situation were quickly formulated by the new government and implemented within a few months the external payments situation took time to stabilize primarily because it had been allowed to deteriorate to a state o/ near bankruptcy in June 1991. Foreign currency reserves had declined to $ I.I. billion despite heavy borrowing from the IMF in 1990-91 and a substantial part of this was held in illiquid deposits which could not have been easily mobilized if needed.
International confidence had all but collapsed, commercial borrowings had dried up and even letters of credit opened by Indian banks were being generally rejected unless accompanied by confirmation by foreign banks.
The strategy for the management of the balance of payments outlined in the Budget for 1991-92 which was presented in July, 1991 relied upon a combination of macro economic stabilization and structural reforms i industrial and trade policy. It was recognized that in the medium term, the solution to the balance of payments problem would have to come from a much stronger export performance, but in the shorter run the strategy had to be underpinned by mobilization of external financing from the multilateral agencies and from bilateral donors. Restoration of access to imports through liberalization had to depend initially upon –additional financing since the export efforts would take time to show results. Since access to external commercial borrowing was constrained the only other sources of funds were the bilateral and multilateral agencies. Visible support from the multilateral agencies was important for restoring international confidence.
Accordingly, the government negotiated a standby arrangement with the IMF in October, 1991 for 5 2.3 billion over a 20-month period, a Structural Adjustment Loan with the IBRD of $ 500 million and a Hydrocarbon Sector Loan with the ADB for $ 250 million. Parallel with the effort to draw on multilateral sources, the government also launched the India Development Bonds aimed at mobilizing NRI sources of funds.
With the assurance of external support through these efforts, there was a gradual stabilization of the balance of payments position in the course of 1991-92. Foreign exchange reserves were restored to more normal levels increasing from $ 1.1 billion in June, 1991 to $ 5.6 billion at the end of March, 1992. The entire amount of drawls from the IMF in 1991-92 with the accretion from India Development Bonds together amounted to an inflow of S 2.87 billion. This was less than the increase in reserves of $ 4.51 billion from June 1991 to end March, 1992. In effect, the exceptional financing mobilized in 1991-92 was used primarily to build up reserves.
Import restrictions were gradually lifted in the course of 1991-92 as the balance of payments stabilized. By the end of 1991-92 the new Liberalized Exchange Rate Management System introduced in the Budget for 1992-93 eliminated import licensing in most capital goods, raw materials, intermediates and components and introduced a dual exchange rate system with one rate effectively floated in the market. The Budget for 1992-93 also reduced the customs duties in line with declared Government policy in order to make the Indian economy more competitive and gradually exposing Indian industry to external competitive pressure. The trade and exchange rate policy regime for 1992-93 was therefore characterized by major progress in eliminating unnecessary administrative and discretionary controls over foreign trade which were contributing to making our economy uncompetitive.
The year 1992-93 saw a revival of imports to more normal levels. The total value of imports in US $ in the period April-December 1992 increased by 16.5% over the level in the corresponding period of 1991-92. The increase appears large only in comparison with a highly depressed level prevailing in 1991-92. In fact the level of imports in 1992-93 as a whole is expected to be around $ 25 billion which is somewhat lower than the level in 1990-91.
Exports in 1992-93 performed far better than in 1991-92. Total export growth in the period April-December was 3.4% in dollar terms compared with an observed decline of 1.5% in 1991-92. The performance of total exports is depressed by the decline of more than 60% in exports to Russia and other States of the former Soviet Union in 1992-93. The growth of exports to the general currency area in the period April-December was 11.4%. The average growth rate in April-December, 1992 has been adversely affected by a decline in exports of 12.5% in December, reflecting the disturbed conditions prevailing in that month, figures for January are also likely to be depressed by the riots US $ 19 billion. But it is hoped that the export performance in subsequent months will return to the high growth rates of 15 - 16 per cent observed during September-November.
The current account deficit in 1992-93 is expected to be around $ 7 billion, reflecting the revival of imports to more normal levels. This deficit is being financed through a combination of traditional financing sources and exceptional financing.
However, there are important uncertainties in the balance of payments. The full impact of the disturbances in December, 1992 and January, 1993 on exports and imports is difficult to assess at this stage. Clearly, the receipts on account of tourism would be less than anticipated. The inflow of NRI deposits has in any case been small this year. The inflow of external assistance is also subject to some uncertainties consequent upon constraints that affect the rate of utilization. A step-up in commercial borrowings was, in any case, not envisaged. Finally, there is the uncertainty arising from leads and lags. Interest rates and exchange rate expectations do affect the timing of receipt of export proceeds and payment of import costs. However, while these uncertainties justify a measure of caution in assessing prospects, the balance of payments in 1991-92 has performed more or less as expected,
New export-import policy 1992 - 1997
On March 31, 1992, the Government announced a new export-import policy for the period J 992-1997, This policy has the following objectives: 1. To institute the required framework for globalization of the India's foreign trade. 2. To improve the export capabilities of our industry, the policy aims at promoting the productivity, modernization and competitiveness. 3. To facilitate improvement of image of our products in foreign markets, the policy encourages the attainment of high quality in the export products, 4. By allowing liberal access to raw' materials, intermediates, components, consumable and capital goods etc., in the international market, the policy wants to achieve higher exports. 5. The policy provides for deregulation to achieve self-reliance so "that (he domestic producers can improve then- efficiency and become competitive internationally. 6. The policy also lays emphasis on research and development as well as technological advancements so that the domestic producers will benefit from globalization. 7. A significant object is to simplify the procedure for exports and imports.
Subsequently, the government announced further modification to the above policy by April 1, 1993. The important features, of this modified policy are: a) The duty-free export benefit given to the Export oriented units and the units in Export Processing Zones is extended to units engaged in agriculture and allied activities provided they export 50% of their total production. b) The government removed 144 items from the negative fist of exports leaving only prohibited items, items requiring license and canalized items. c) As a step to tap the potential of farm sector, professionals, hotels, travel agents and diagnostic centers, the government extended the Export promotion capital goods scheme to them. d) For more than 2200 items, standard input-output norms is fixed to enable the issue of license under the duty exemption scheme. e) The criterion for recognizing export houses is now based on the foreign exchange earning to FOB values of physical exports. f) The procedure relating to export and import has been further simplified. g) Compensation would be given for unutilized import licenses for duty free license scheme and EXIM scrip holders.
These provisions in the latest export-import policy would certainly enable India to improve her exports and bring down imports." This has been experienced during the first half of 1994 itself.
Public Distribution
1. Meaning and objectives of Public Distribution System [PDSJ
The countries like India with more population commensurate with production of minimum needs especially food grains, are necessarily in a position to have a streamlined system of distributing the essential commodities to the population living with lesser purchasing capacity to fulfill the objectives of democratic government.
As a fundamental Constitutional right, in India the producers and traders of food grain have the right to do business freely and can earn profit as much as possible. They were given every right to influence the market by means of pricing, supply, distribution, etc. At the same time the consumers are also given rights to protect themselves from greedy traders, who are indulged in malpractices in trade. It becomes the duty of the government to protect the rights of both producers, traders and consumers. In our country the government is liable (o protect consumers and that too consumers who are living below the poverty level. Consumers who are living below the poverty line are to be provided their minimum needs. "Poverty is concerned with the relationship between the minimum needs of people and their ability to satisfy their needs. "Minimum needs" and the amount of money required to satisfy their needs" - first its minimum food budget. [Economic and Social Issues - Leftwich & Sharp]
Gradually out government took steps to safeguard the interest of the population who are under poverty line and also to improve the growth rate of productivity in agriculture and industry and trade. These steps led to the dual price mechanism in market, legislation in pricing and marketing and introduction of PDS.
PDS is at present functioning for the cause of middle income and poor income group with consumer orientation. Consumerism has been explained as follows: "Measures are intended to protect consumers from unscrupulous 'sellers who presumably charge more for goods and services. Then they are worth to buyers. The price^ controls on various items fall into this category. These consumers who can get as much at the controlled price as they would purchase at an uncontrolled price clearly gains.
The market mechanism may be able to bring about an "equilibrium" between demand and supply. Even in this sphere, but it will not be able to bring about a balance between need and supply. Planning is necessary to take care of the poor and down trodden who are for the most part, outside the market system and have little asset endowment to benefit from the natural growth of economic activity.
"The market alone cannot ensure employment and a living wage to all our rural poor" [Prime Minister's statement on 8th Plan]
TABLE: 1.1 Net availability of foodgrains in India
|Year |Population in Mn. |Net availability of foodgrain in m.t. |Per capita availability in gms |
|1956 |397 |63 |431 |
|1961 |442 |76 |469 |
|1972 |562 |96 |467 |
|1979 |659 |114 |474 |
|1984 |738 |128 |478 |
|1988 |799 |132 |448 |
|1989 |816 |147 |494 |
|1990 |833 |144 |474 |
|1991 |849 |158 |510 |
[Source: Govt. of India, Economic Survey, quoted by Ruddar Dutt & KPM Sundaram in Indian Economy, 1993)
The net availability of food production has increased from 63 m to 158 m between 1956 and 1991, whereas the population has increased from 397 m to 849 m during the same period. To be more specific the greater growth of population was in the rural areas. It also signified that the share of family consumption in total food production will increase and much less will be left over as marketable surplus. This type of deviation, indicated the government to enter into equitable distribution system of food supply.
TABLE: 1.2 The growth of population and growth of food supply
|Year |Population in .m. |Food Production in m.t. |
|1979-80 |659 |110 |
|1983-84 |738 |152 |
|1987-88 |799 |140 |
|1990-91 |833 |177 |
|1991-92 |849 |175 |
(Source: Indian Economy, Ruddar Dutt & KPM Sundaram)
During the past planning years our country has faced heavy inflationary pressure. The vulnerable section of the community was very much affected by the heavy raise in prices. During unproductive seasons the daily bread winners in urban areas and the rural agricultural landless laborers are the ones very much affected by the steep rise in prices of essential commodities.
Hence it is the duty of our government to protect the vulnerable class from this crisis. Thus the government entered into this PDS.
The crop yield in India is very low when compared to other countries. The crop yield in India is quite disproportionate to the abnormal growth rate of population needs, Even after Green revolution, which took up the food production spectacularly, the international, comparison brings a low position of India. Hence it is the sole responsibility of our government to streamline the food supply to protect the weaker sections of the society.
TABLE: 1.3 Average yield per hectare [in Qtls.]
|Commodity |Country |1951-56 |1961-66 |1987-88 |
|Rice |India |8 |10 |17 |
| |China |17 |18 |35 |
| |Japan |26 |33 |40 |
|Wheat |India |7 |8 |20 |
| |China |9 |9 |30 |
| |France |21 |29 |30 |
| |Germany |28 |33 |68 |
Source: Economic Survey 1990, P …..
The seasonal fluctuations create disparity in the quantum of production. The growing regional disparity in food production creates an artificial food scarcity. The amount of food supply and other demand are taken into consideration by the Central government to fix up the prices. So it becomes important to distribute the food grains on the basis of population, supply and demand. Hence it is inevitable on the part of the government to bring a streamlined system in food production, management for equal distribution.
Food problem and its management become complex and multifarious due to black marketing and hoarding. These practices create artificial demand for food supply and reflects as the high prices, the worst sufferers would be the poorer and middle class people. This paved the way for PDS.
Famine were frequent in the past but rare in the present. Bihar [1965-66], Maharashtra [1972-73], West Bengal [1974-75], etc., Through PDS government shall augment food supply to tackle the food crisis. There are certain other factors which affect the free open market system such as social and political revolutions. So the government is liable to lay its hand and supply food grains and other essentials at the cost of affected people.
Fluctuations in prices of food grains affect producers and consumers as well. The negative effect of price rise will be more severely felt by the weaker sections of the society. The distribution system should aim at equal and fair distribution of commodities to the general public.
Quality food is the other criteria taken into consideration by the government.
More than 75% of the Indians cannot afford to pay for quality diet which results in malnutrition. Adulteration is one of the reasons for poor quality of food grains. Mass and mushroom growth of slums in Indian cities and their belt areas also necessitated the PDS. Hence PDS is becoming an essential system in urban areas.
Over crowding and the consequent pressure of population on land hence led to subdivision and fragmentation on land, decline in per capita area, disguised unemployment and thus marginal productivity of labour is zero or negative. The unemployed or under employed gets only seasonal employment only. They are not getting any personal income. This needs effective PDS.
2. Evolution of PDS in India
Before II World War the deficiency in food production was met out by importing food grains from Burma, Japan and other countries. During this time the import of food grain was highly affected. In 1941 the Central government fixed the statutory wheat price and in 1942 statutory price was fixed for rice also. The administration of controls was vested initially in the state government. The 3rd Price control conference in 1941 led to the interference of the central government The conference held in 1942 recommended an All India Plan for distribution of wheat and rice. For further streamlining, a Food grain Policy committee was appointed in July 1943 under the Chairmanship of TN Gregory [Food Policy and Economic Development in India, Jospeh, S.C., Madras 1961]
The recommendations of the Committee to bring all major food grains under statutory price control, calling for Central supervision to supply of food grains to deficit areas, introducing rationing system in the larger cities with over one lakh population initially and extendable to other gradually, to all food grains and all sections of society. Based on the scheme, the distribution of rice was introduced first in Madras in rationing and then in Bombay.
In 1950 government of India appointed a committee to review the situation known as Food grains procurement committee. The following were recommended by that Committee: Effective co-ordination and fo\d production, distribution system of essential commodities and a good control over the distribution of the same.
In 1950 due to bad crop and steep rise in food grain prices, due to Korean war, India had to face a slump period. This was overcome by getting a loan of 2 m t of wheat from USA.
During the First five year plan the government of India had the objective of reducing the dependence on foreign food and food and was to attain self sufficiency in domestic production. The series of good harvests in the country and the consequent decline in food grain prices during I Plan period made the government to relax the control and later remove it altogether. Food prices during this period were reduced by 23%
In 1955, the problem of food shortage and rise in prices again emerged. But soon it was rapid. In 1956 the government of India entered into an agreement with USA under PL480. USA agreed to supply 3.1 m t of wheat and 0.19 m t of rice for the next three years. This gave the opportunity for the government of India to stabilize the price structure.
In 1958-59, the crisis was acute. There was severe food crisis in Bihar, Bombay, Rajasthan, Tamilnadu, Orissa, etc. In 1959, food grains prices rose to 41% in the first three years of II Plan. In 1957, the government of India appointed a Committee to review the food problem called as "Food grains Enquiry committee" The recommendations were as follows:
1. compulsory procurement of food grains from foreign countries till a successful policy is framed by the central government of India. 2. it recommended for an organized PDS through a network of fair price shops and also to maintain buffer stock.
[Dandekar committee report] - about the fair price shop during 1961 -64 the prices of domestic grains in general continued to rule considerably above the price at which the imported grains were being issued through the fair price shops. So the government has set up in 1964-65 FCI to build up buffer stock of 5 m t every year. But it has failed due to two consecutive drought years.
During 1967-68, the name of the Fair Price Shop Scheme was corrected into PDS without arty change in the system of organization. However the PDS came in full swing during 4th and 5th Plan. This Plan has recommended the following: 1. It is needed on a regular basis 2. To have an adequate buffer stock system. Moreover the requirements of the PDS should be met mostly through internal procurement. Due to shortage of stock in 1973-74, the government had to import food grains and there was a high rise in price due to this the PDS could not fulfill its objectives.
In 1975 the government of India appointed the National commission on Agriculture. The recommendations were: 1. Al! towns and cities with a population of over one lakh should have a full fledged system of PDS. 2. All chronically drought prone areas should be covered under PDS. 3. All industrial town workers covered under all India Consumer Price Index numbers should have PDS. 4. Areas affected by flood, are to be covered under PDS.
All these recommendations were at a later stage fully implemented and executed by the government of India. Fifth five year plan was with the aim of removing poverty and growth of social justice and equality and also attainment of self-sufficiency' in all areas. Since 1974, the PDS has handled efficiently the distribution of food grains with FCI. In 1974 the government created a full fledged system of civil supplies and co-operation to ensure orderly production and distribution of commodities.
The Central government has developed support organization such as National Agricultural Co-operative Marketing Federation [NAFED] and National Consumers Co-operative Federation [NCCF] to undertake wholesale trading. Sixth and Seventh Plan took steps to minimize the problems of the society to get basic amenities like education, health care, sanitation, and safe drinking water food grains. The Seventh plan pays special attention in increasing the production of food grains, edible oils, sugar, textile and other items of mass consumption.
The Eighth plan aims at the growth of diversification of agriculture to achieve self- sufficiency in food production and to generate surplus for exports. The estimated agricultural production during the Eighth Plan is given below.
TABLE: 1.4 ESTIMATED AGRICULTURAL PRODUCTION DURING 8th PLAN
| |91-92 m t |96-97 |Annual growth output |
|Rice |72.5 |88 |3.95 |
|Wheat |56 |66 |3.34 |
|Course cereal |30 |39 |5.4 |
|Pulses |14 |17 |3.96 |
|All food grains |172.3 |210 |4.01 |
|Sugar cane |235 |275 |3.19 |
| | | | |
8th Plan proposed to raise the production of rice, pulses, oilseeds. It Aimed at self sufficiency and to prevent exports of food grain. The main objective of this Plan w-£s the extension of PDS to in accessible rural, tribal areas, etc.
Evaluation of consumer co-op. Fair price shops
Before 1912, co-ops. Was started in India as Agricultural co-ops. During the I World War period, a number of consumer stores came up in few important cities and towns. In 1928-29 there were in a) 323 primary stores in India. Before H World War period there were 396 stores with 43000 members. During II World war the dimension of (he objectives of these stores changed. The acute shortage of food supply during and after the II World War forced the government to intervene into the functions of consumer co-ops. Then the co-op stores acted as agencies for the government in the distribution of controlled commodities to prevent black marketing to ensure equitable distribution. In the first five year plan the importance of consumer societies was emphasized but it was not properly implemented. The Second five year plan reiterated the scope of the development of a network of the co-op societies in urban areas also. A committee was appointed by the Government to review the functions of these societies. They have recommended a good organizational set up an" effective structural pattern of consumer co-ops, their size, viability and whole sale stores promoters, etc.
The Committee differentiated the primary, wholesale and district wholesale societies and norms specified is given below. (Co-op sector in India - Sami Uddin, Mafazur Rahman,..............
| |Share Capital |Turnover |Members |
|Primary co-op. Stores |5000 |1 lakh |250 |
|Wholesale stores |50000 |2 lakh |100 Primary stores are members |
|Wholesale stores |100000 |300 lakh |200 Primary members |
In the 3rd five year plan it was observed that 'conditions for the development of consumer co-ops are generally favourable and if the special efforts are made rapid progress can be achieved. This will be of greatest help not only on in the stabilization of retail prices but also in preventing the evils of adulteration in food stuffs.' After Chinese aggression the government of India felt the need of co-op. Consumer societies to ensure the supply of food grains at controlled rate to the home needs. Hence the government provided financial and also establishment assistance to all co-op consumer stores.
|Share Capital |Primary Stores |Apex wholesale stores |
|Contribution |Rs. 2500 |Rs. 50000 |
|Management expenses |Rs. 1800 | Rs. 6000 |
|Godown contribution | | Rs. 125000 |
|Rent subsidy | | Rs. 9000 |
| | |(Maximum) |
(Ref: S. P. Jain President Indian Chamber of Commerce and Industry, Hindustan Times, Nov. 1962, P 6)
During III Plan period the number of stores promoted were as follows:
|More than 1 lakh populated city |113 |
|In towns with more than 50000 population |137 |
|District primary stores |4000 |
During 4th 5 year plan it was extended to urban areas with population of 1 lakh and more and stores opened to cover population of over 20% of urban and to capture at least 20% of retail trade. Co-op fair price shops in rural areas were also promoted during 5th and 6th plan periods. 2.12 lakh villages with 15000 societies undertook supply of daily essential goods of life. It rose up to 80000 during 1964-65. During 1973-74 Indian economy has witnessed an unprecedented inflation of essential goods.
In 1975 the emergency was declared in India and the then Prime Minister announced the 20 point programme. As per this programme the government envisaged to provide economic and social justice to common man. Drastic financial and fiscal measures were taken up against smugglers, hoarders, black marketers, etc., by the government.
In order to manage that situation, the government of India set up two new departments of Civil supplies and co-operative section is to coordinate and harmonize the activities at various levels of the state government and ministry of the central government for an effective PDS. These new departments have evolved a broad strategy for an effective PDS.
The strategy evolved with multi dimensional approach, and the vital points are identification of essential goods for different areas, effective monitoring of function and of retail prices of consumer goods and essential goods selection of vulnerable areas for introducing the scheme of public distribution, ear marking of manufactured goods in the organized sector for distribution through cooperatives, forging closer links between co-op. Marketing and public distribution, induction of representatives of consumers, including housewives in keeping a watch on the PDS, making administrative arrangements to ensure smooth functioning of the system and a more effective enforcement of various legislative measures designed to protect the interest of the consumers.
Thus co-ops have been given an important place in the PDS. Further essential items were being supplied to students hostels, universities and colleges on preferential terms. Accordingly, it has become the policy of the state government to the possible extent, new fair price shops should be allotted to the co-ops. And the co-op. Fair price shops. In due course, the central government advised the state governments that (hey should not deal directly with the manufactured essential commodities and should use the consumer co-ops as an agency to distribute the commodities.
The 6th and 7th five year plans of government of India had followed an integrated approach and paid attention not only to production and procurement but also to storage and transportation of selected commodities. Further the plan insisted to expand PDS quickly to cover all areas of the country, particularly backward, remote and inaccessible areas. Hence the government of India instructed all state governments to extend PD points inmost difficult inaccessible areas. The government of Tamilnadu took steps to open additional fir price shops in the said areas and also took steps to develop the infrastructure needed to open fair price shops in those areas.
From 1992, an additional quantity of 830 t of rice per month were issued in these areas under special subsidy scheme. Government of India reduced the issue price by Rs. 50 per quintal to these areas. Government India also bears Rs. 25. per quintal as incidental cost for effective distribution to tribal areas.
The price per quintal charged by Tamilnadu Civil Supplies Corporation ltd., after adjusting central contribution is given below:
|Rice |Central pool price |Tamilnadu PDS price |
| |(per quintal in Rs.) | |
|Common |337 |512 |
|Fine |617 |592 |
|Super fine |648 |623 |
The price in PDS is comparatively lower than the price under central pool. Four-; Kgs. Extra quantity of rice were given to card holders in tribal area in addition to general quota prescribed in other areas. According to integrated Tribal development. Programme, the issue price of rice is as follows in Tribal areas in Tamilnadu
|Rice |Before 1.2.94 (per kg.) |After 1.2.1994 (per kg.) |
|Common |2.25 |3.25 |
|Fine and Superfine |3.50 |4.75 |
|Wheat |3.05 |3.80 |
In order to protect the weaker sections of the society the government has further reduced the issue price of food grains by Rs. 50 per quintal by July 1994. The government of Tamilnadu consequently ensures minimum availability of 20 kg. Per person per month and per family in those areas, which are predominantly tribal and remote.
According to the report of the Ministry of Civil supplies, the government of India between April, 1993, to March 1994 over 4000 tonnes were lifted by states in the revamped PDS. With an off take of 85% After 1995 April, the position improved to 100% State governments are advised to integrate the schemes such as Jawahar Rozgar Yojana employment assurance scheme, wage employment programme, etc., along with issues under PDS. This indicates that the PDS has given very little to the poor. 'The responsibility of the revamping system will be, if there is true targetting. Targetting in terms of keeping high income group away from PDS." The poorer class should be taken care of by the PDS fully. [RamManohar Reddy's article in The Hindu, 12.7.194]
Further Chief Minister of Tamil Nadu said "It is not enough to associate women in the vigilance panels alone, the shops should be made to be entirely manned by women." [The Hindu dt. 12.7.1994] She appealed to women to adopt the PDS as a people's movement since it was an essential movement.
The structure of Organization: It has the following components: Central government, FCI, State government and Tamil Nadu Civil supplies corporation ltd., Co-operative societies, Link co-operative societies, Fair price shops, Village primary co-operative societies.
After the famine in 1962 the Central government took pains to tackle the problem of food supply. Thus according to the 5 year plan, the government had proposed to streamline the ration supply of essential commodities. One of the main objective of the central government was to maintain a sufficient amount of buffer stock. With this view the government of India promoted a separate company known as food corporation. FCI is procuring food grains during heavy harvest seasons and supplies to all over the country. Later during shortage of food supply civil supplies was
The food supply was fairly maintained by the FCI though PDS. FCI is maintaining their own purchase points, hulling and processing points, etc., all over the country. The government of India has appointed a Commission for the analysis of Agricultural Prices. This commission fixes the price considering the cost of production, cost of fertilizer, labour cost, cost of seeds, cost of scientific implements, transportation cost, etc.
The role of Civil supplies and consumer protection
The government of Tamil Nadu has a separate department and a ministry of Civil supplies. If is under the control of a minister of food and civil supplies. The policies and other objectives are effectively implemented through the ministry.
Policy and aim of Civil supplies department: To ensure that food articles and essential commodities 'are supplied in adequate quantity: To ensure that essential commodities are available at fair price. To supply adequate quantity of essential goods at an affordable price to all low and middle income group people m the country and to protect them from black marketers, hoarders, etc.
Main function of civil supplies department:
Consumer education is the main aim of the Government of India. By publishing pamphlets, dialogue and visual media through TV, movies new papers, government bulletins; etc., Civil supplies department co-ordinate the activities of officials so that the essential "commodities will be available at fair price. It has taken steps to maintain uniformity in the price allover the state, equitable distribution of commodities. Procurement and distribution of commodities are entirely at their disposal. Civil supplies department is empowered to issue licenses to traders, who are dealing in commodities: They regulate their market dealings and has the right to take steps against the black marketers, hoarders, etc., thus maintaining a strong and good PDS. In TN there is a Commissioner for Civil supplies controlling al districts. Below the rank of Commissioner there is one Joint commissioner. A district is divided into several zones, which are under the control of Deputy Commissioners. There are Assist Commissioners, in the rank of Deputy collectors. These officials are controlling the issue 2nd use of family cards and supply of essential commodities through family cards.
They play the role of inspecting authorities in the free flow of public distribution. Commissioners of civil supplies in Tamil Nadu is apex enforcing authority of government policies and laws in the state regarding food supply. Out of the total 1150 shops, 318 are managed and owned by TNSC ltd., and 832 run by co-ops. In Madras
4. Problems of PDS
Problems experienced under PDS in Chennai city reported by the sample respondents are classified source-wise and presented below.
Problems at the PDS shop levei
1. The allotment order for issue of commodities from the godown is issued regularly in the case of TNCSC ltd., while it is delayed in the case of Co-operatives because the TNCSC ltd., the allotment is directly made by the Food Corporation of India while for the Co-operatives it is done through the Civil Supplies department. Allotment to Co-operatives is made only when the payment is made before the' liftment of commodities. In the absence of regular allotment and supply of essential commodities, consumers suffer and they have to make several trips to the respective: shops: to draw their requirement.
2. In the absence of sizable quantity of commodities are lost through pilferage, damage by white ants, rats, rodents, etc While TNCSC ltd., shops experienced this problem to a limited extent, the shops in the co-operative segment reported this as a serious. problem. Poor storage facilities affect the quality of commodities, which drives the public from the PDS shops. As a result the objective of the PDS is defeated.
3. One of the important problems stated at the shop level was the non-issue of the essential commodities. But the surveys revealed that 72 per cent of the non-issue was due to the failure of the card holders to draw their requirement.
4. Under weighment is one of the standing complaints against the PDS shops. But most of these complaints are not properly registered in the complaint book. This is because the consumers are illiterate and not aware of the existence of such complaint book. This is because the consumers are illiterate and not aware of the existence of such complaint book. Another reason for not registering the complaint is the consumers do not want to incur the displeasure of the shop employees and face consequences of complaining.
5. Though the rules governing the administrating of the PDS shops provided for punishment of erring staff and actions against any malpractice, in more than 80 per cent of the cases no punishment was added. This is because of the Trade union interference, political pressure, inconvenience which will be caused to the customer due to the closure of shops, corruptive practices etc. The examination of the reasons for the prevalence of such malpractice among the staff in PDS shops revealed that the salary for the staff is very low and the several of them are not regularized in their services.
6. An important problem at the shop level is the security risk faced by the shops located in slum areas and other violence prone areas. They are under, constant threat from anti-social elements.
Problems of consumers 1. As no credit facility is extend by PDS, poor people, who are the target segment never get the benefits of PDS. Illiteracy coupled with poverty make them pledge their ration cards with the pawn brokers or other shop keepers, who in turn draw essential commodities from PDS shops using these ration cards, and sell the essential commodities at open market prices.
2. A serious problem reported by the consumers is the underwieghment. Nearly 40 per cent of the consumers of TNCSC ltd., shops and 90 per cent of the consumers of shops in Cooperative segment reported this problem. This brings to light the poor performance pf the PDS shops, which has a great impact on the overall performance of the PDS.
3. Indirectly, the consumers of the PDS shops are themselves responsible for the ills of the PDS. The failure of these consumers to draw their allotted quota of essential commodities facilitate all malpractices. The consumers cite poor quality of commodities, underweighment, inconvenient location of shops, absence of credit facility and non-availability of commodities in times of need as the reasons. But this leads to several other problems like, deterioration of quality of commodities, forced diversion of commodities to unauthorized persons through duplicate cards or cards on which only sugar and kerosene alone are bought.
4. To control the malpractices at the shop level, government has provided for a complaint register in each PDS shop. But the study, revealed that more than 40 per cent of the consumers are not aware of the existence of complaint register with the PDS shops. Even though the other consumers are aware of this facility, only four per cent of the complaints are registered. The reasons stated for this are: fear of consequences like protracted disputes with the staff concerned at the PDS shops, need .to establish the basis of complaint, time taken for enquiry, etc.
Problems of Officials of PDS 1. Issuing of cards is reported as a very difficult work as it involves a multistage operation involving issue of application, receipt of application, verification through enquiry and spot inspection, preparation of cards and issue of cards. Deliberate concealment of vital information like income details, size of family, correct address, etc. pose severe hurdles in the issue of cards. Added to these, the upcoming of new residential colonies and slum area pose a challenge to the officials in the verification of genuineness of the applicants.
2. Delay in the allotment to co-operative shops cause a serious of other problems. Delay in allotment, and liftment add, to the woes of the officials of PDS. This results, in delay in distribution infuriating the consumers of these shops.
3. Malpractices at the-shop level is another serious problem reported. In the absence of registered complaints no concrete and corrective actions could be taken. Whenever such actions are initiated, the political intervention and union threats make, them inactive.
4. Funds management is another problem of the officials of PDS. The source of income for these shops is the commission earned on quantity sold. With this the salary payable to staff, improvement of facilities at the shops like storage, issue counters, security for goods, etc., have to be managed. The necessity to make advance remittance to lift the controlled commodities from the godowns add to the financial difficulties.
5. Labour problems of different types at the PDS shops are experienced. For instance, aggressive unions stand in the way of any disciplinary action against erring staff; adoption of pressure tactics to get the regularization of service of laborers, demand for higher pay and allowances, etc.
Policy options
The evaluation of PDS with reference to the objectives set for the study revealed the need for formulating policies on various aspects. These are suggested hereunder.
Suggestions for shop level problems: ' 1. One of the primary need of PDS is the objective evaluation at regular intervals by an external body. Such an evaluation would bring to light the problems crippling the PDS, and once the problems are identified, they could be eliminated at the root itself, instead of allowing them to assume unmanageable proportions. This evaluation process could be handled by a Committee consisting of representatives of all interests - card holders, shop officials, policy makers, academicians, finance professionals and lawyers: The membership 'in the Committee should be strictly based on the credentials and exposure in such tasks. The Committee shall be constituted fresh once in two years, to avoid any scope for influence or interference. The policies formulated by the Committee shall be publicized and public are implemented, the follow up action shall be called for a monthly basis.
2. One of the basic problems of the shops in the Co-operative segment is the delay in the allotment. Efforts should be taken to study the system of allotment and eliminate unnecessary bureaucratic delays. The Food Corporation; of India (FCI] could be made, to supply directly to all shops thereby avoiding the delay. The allotment to shops for a month may continue to be on the basis of closing stock of the previous month, but the closing statements from each shop should be collected within first/two days of a month and consolidated area-wise. This would facilitate pooled shifting of commodities from the FCI godowns thereby economizing on transportation and avoiding delay. As regards the verification of closing stock, staff could be deputed from shops in another area to avoid any manipulations.
3. A major hurdle in. the successful functioning of Co-operative shops is the availability, of funds. This could be solved by implementing the following suggestions: a) Shops in an area could be grouped and the shop in-charge of each shop could be made to undergo a training in funds management. This training could be on a regular basis involving Finance professionals.
b) State government may consider granting financial assistance for the shops in the Co-operative segment on concessional terms through the Regional office of these Co-operative shops. A proposal for development plans shop-wise may be obtained and evaluated by the Regional office. Then the required funds may be obtained and allotted to each shop. As regards the repayment the shops could be allowed to sell controlled items to generate revenue. Priority in this regard, should be given for improvement of; storage facilities at the shop level.
c) The advance remittance to be made for allotment of commodities by FCI could be determined in advance on the basis of three monthly average allotment, instead of waiting for the closing stock statement each month. Any excess, advance remitted may be adjusted against the subsequent remittance and any deficit may, also be collected once the amount of, deficit is intimated. This would help to avoid delay in allotment and liftment of commodities. Consequently; the diversion of commodities to generate required funds, could be reduce to large extent. Further the quality of commodities, would also be maintained as with government funding the storage facilities could be improved.
4. Wide publicity should be given among the public, especially among people dwelling in slum areas to make them conscious of their right to complaint against any malpractice at the; PDS, shops achieved by printing in, bold letters, the information on the availability of complaint book in all the PDS shops. This could very easily be achieved by printing in bold letters, the information on the availability of complaint book in all the PDS shops, on the e ration card itself.
5. A frequently reported problem at the shop level is the labour, problem. This needs an integrated effort to solve. Apart from involving the & staff union in labour related matters, the reasons for the problems should be studied seriously. This may even be entrusted to the Committee constituted for evaluation of PDS shops. As the main reason for labour problem is related to service conditions and the salary structure and other allowances, the government must recommend the salary structure making it flexible to provide for modifications as and when the need arises. At the Regional level, establishment of a separate cell to address the labour problems would go a long way to improve the working relationship.
Suggestions for card holder related problems: 1. As regards the problem of under weighment, a multi-level approach is necessary to solve this. A flying squad with necessary powers and authority may be constituted which would check the weighment at the shops periodically and submit a report to the authority concerned. Any punitive action taken on erring staff should be, strictly in accordance with the procedure laid down by the government. In the case of complaints from card holders, their identity should be kept confidential. This would encourage, the card holders to come without any apprehension, whenever any manipulative practices are noticed.
2. Any unauthorized issue of controlled commodities should be viewed very seriously. The shop level workers should be made familiar with the series of actions that would be initiated in the event of such unauthorized issues. Preferably an undertaking from the shop level staff could be obtained at the & time of recruitment itself, explicitly empowering the organization to prosecute them for any such violation of rules and regulations. Publicizing the manipulative actions resorted to by shops would also serve as a deterrent -apart from educating the customers.
Suggestion for problems of Officials of PDS 1. The effectiveness of the PDS depends on the fool proof system of issue of cards. In this regard, the existing system of verification and cross checking are found to be operating well and these could be reviewed from time to rime. It would also be better to get an undertaking from the employers to the correctness of salary details in the application for cards renewed or new cards issued.
2. Issue of new cards or renewals to applicants in new residential localities or slum areas should be strictly under the supervision of a field inspection team headed by a person at the Assistant Commissioner level.
3. Wide publicity about the malpractices at the shop level should be given to educate the public and encourage them to register complaints.
4. Recruitment of staff at every level should be structured and preferably handled by an independent government body to eliminate any favoritism in recruitment,
Other suggestions 1. It would be a healthy practice to encourage independent study of functioning of PDS in different states so as to improve the existing system in any state. Interaction with the academic bodies on this would be much rewarding to strengthen the system.
2. Publication of the functions and performance of PDS in the state would help to invite suggestions for improvement from the common public.
3. While the policies are formulated, involvement of all interests like card holders, shop level workers and officials should be called for. This would help in drafting viable policies.
4. Incentive schemes could be announced at zonal level for shops which function efficiently. The criteria for determining the performance could be generated by involving the people concerned.
5. Similarly incentives and promotion could be announced for flying squads which are effective in detection and elimination of malpractices at the shop level.
6. There is an urgent need to constitute Card holder's council in each area which would help to resolve the disputes of various nature among the public and shops in that area Disputes beyond the powers of the Card holders council could be referred to higher level authorities for disposal.
7. Professionals from different fields may be invited to function as the Honorary Consultants to improve the efficient functioning of the PDS.
8. Card holder contact week could be organized every quarter to provide a forum for ventilating their grievances and making suggestions for improvement. These meetings should be held in the presence of Deputy Commissioners and the suggestions given should be examined and implemented.
Price controls
Price control refers to the policy of the government to monitor and regulate the price changes in an economy. This is attempted by the government with the following objectives: 1. To ensure that there is social and distributive justice. The fruits of planning and development should reach all the people so that the benefits of development is equally distributed. While the rich people in a community have the wherewithal to protect themselves under any eventuality, the poor and down trodden always get exposed. To protect such people price control is essential.
2. To ensure that people get quality goods at a reasonable price. This is achieved by controlling the price as well as the quality of the commodities produced.
3. To protect the community from the exploitative tendency of the monopolies who resort to restrictive trade practices.
4. To achieve supply control and management the government should control price.
5. As the price of inputs would ultimately get reflected on the output, [here is a need to control both the input price and output price.
6. To ensure that the available resources are properly allocated and directed and also to eliminate the misuse of resources, price control is necessary.
7. Unless there is price stability, the value of money is bound to; fluctuate which in turn, affect the exchange, rate. This results serious balance of payments problems.
8. To insulate the economy from wide fluctuations, inflation and deflation - price controls are necessary.
Agricultural price policy of the government:
Terms of trade refers to the relative changes in prices in two sectors, and the I corresponding effect of these on the respective sector. For example, suppose the agricultural prices increase at a slower rate than the prices in the manufacturing sector and industrial sector. Then the agriculturists have to pay a higher price for manufactured goods and sell their own goods at a lower price. This is certainly unfavorable to the agriculturists. On the other hand suppose the agricultural prices increase at a higher rate than that of the industrial prices, then the situation is favourable to agriculturists. Usually in developing countries the terms of trade is unfavorable to agriculturists and India is not an exception to this. To change this trend, government has been announcing its agricultural price policy so as to ensure that the terms of trade does not deteriorate. Thanks to the steps taken by the government that today to some extent the terms of trade is better than what it was in the past. The logic behind the government trying to design a policy in favour of agricultural sector is that when the agricultural sector is benefited by the terms of trade, then the agriculturists get better prices and this makes their occupation profitable. This would encourage them to demand, more of industrial goods. Automatically the industrial sector will be able to develop based on this ever increasing demand and market prospects It is always said that demand is a more potential factor in accelerating growth of industrial sector than the supply. Hence, the government is formulating the agricultural price policy to make me terms of trade better and favourable for agricultural sector.
The price policy for agricultural sector in India could be discussed in two distinct phases. One before 1965 and the other after 1965. Before 1965, our agricultural price policy was more consumer based. As the percapita income was low, the government felt the prices of agricultural goods should be controlled and when they have to be distributed through fair price shops, the consumer price was very much less than the open market price. This directly affected the interest of the agriculturists. Hence, the government decided to set up in 1965 the Commission on Agricultural Costs and Prices (CACP). This CACP has the following major functions to perform:
1. To function as the advisory body to government in matter- relating to price policy for major food crops and commercial crops to formulate a balanced and integrated price structure taking due care of the producer's and consumer's interest.
2. To review periodically the price policy already determining and then make necessary adjustments and revisions to make the price policy effective.
3. To examine the existing method* of determining cost of marketing and marketing margins for different crops in different regions, so as to make suggestions for reducing marketing costs and margins to ensure that the" producers get a fair return on their investment.
4. To make regular review of the studies on agricultural prices and collect, information and data relating to agricultural prices and to suggest methods of improvement.
5. To study and advise the government on all matters relating to agricultural production and prices referred to it by the government.
With the setting up of the CACP, India is able to follow a consistent price policy, for agriculture. This has helped to narrow the gap in agricultural prices prevailing in surplus and deficit states and stabilize the price of food grains. The CACR follows a specific procedure before giving shape to the price policy for crops. First it collects the opinions and information from various State Governments, the producers organization, marketing organization and other agro-based industries, consumer organizations, research institutions and others through a detailed, questionnaire. Once the reply is received from the State governments, the CACP hold discussions with other agencies for each commodity. Then it finalises its findings and recommendations and sends its report to the government. This report, is circulated among the concerned ministries and departments as well as Planning" Commission. After getting the views of these institutions and organizations, the final report is submitted to the Parliament for its approval and final decision. The agricultural price policy has the following constituents:
1. Minimum support price:
This is the price announced by the government for various crops well in advance of the harvest. If the actual market price falls below this level, then the government has the commitment to buy the quantity available for sale irrespective of the ruling price in the market. This is basically to ensure that the fanners are not affected due to fall in price in the market. The CACP arrives at this minimum price for each crop after taking into account the cost of production, input prices, the prices for competing crops and the need to maintain the economic stability. Once the price is announced well before the harvest, the expectation is that the farmers are certain atleast to get the minimum assured by the government. But a major problem in arriving at the price is that sufficient data are not available on a continuous basis. To overcome this the data relating to cost of production and input prices are being collected regularly by the research institutions throughout the country from whom the CACP is collecting the data.
2. Procurement prices:
These are prices at which the government buys the agricultural produce from the farmers mainly for the purpose of public distribution. It is easy to understand that the procurement prices should be higher than the minimum support price, so that the government can encourage the fanners to sell the produce to the government. The CACP arrives at the procurement prices for all crops on the basis of input prices, price of related crops, inter-state disparities in prices of the produce, fair return to the farmers, etc.
3. Public distribution:
This is in fact the back bone of the pricing policy in that through this arrangement the government ensures availability of produce to the common man at a reasonable price. Through statutory rationing as well as the informal rationing the government achieves the object of stabilizing the prices of agricultural commodities. At the same time the government also allows the open market in all these commodities so that any one who can afford to pay the open market price can buy these goods and those who cannot afford can get these from the ration shops or fair price shops.
4. Minimum buffer stocks:
This is yet another important constituent of the price policy. Through this the government maintains sufficient stocks to prevent any violent price fluctuations in the market for agricultural produce. For example, suppose the price in the open market soars up, then the government would release the produce from its stock and brings down the price while when the price in the open market goes down, the government makes the purchase to add to its buffer stock, thereby prevents further fall in price.
All efforts to maintain the agricultural price have not been successful due to the following reasons:
(i) Procurement policy of the government has not been very successful and it is found that hardly 15% of the total food grain produced is covered by the procurement of the government. This shows clearly the inadequate, effectiveness of the procurement policy.
(ii) The prices fixed for the various crops do not have any link with the rising cost-of cultivation. As a result the farmers incur loss. This they avoid or minimize either by curtailing the output or switching on to some other crop.
(iii) The public distribution is found to have several loop holes. Right from the stage of procurement, storage, till the stage of sale through fair price shops' several malpractices are noticed. The result, the public distribution fails to bring the benefits expected of it.
(iv) Consumers often complain that the price they pay is much higher than the price paid to the farmers by the government. This price differential is due to various taxes and costs incurred apart from the margins claimed by the; intermediaries. As a result the government plans for price stabilization taking the price it pays to the fanners, while the actual price at which the consumers pay is much in variation. Hence, the price policy objective is not accomplished.
(v) The objective of price policy is to obtain an integrated price by taking into account various components before arriving at the final price. But such an integration is not found in practice and more frequently, the farmers use political pressure to get a higher price for the produce. This defeats the principles on which the price policy is formulated.
In order to rectify the defects in the price policy, the following suggestions are made: 1. The minimum support price fixed by the government should protect only the efficient producer and not just every producer.
2. The price policy should only help the farmers to prevent the losses and not to make profits.
3. The minimum support price should be arrived at on the basis of the cost of cultivation of efficient farmers.
4. The support price announced by the government should enable the farmers to make necessary adjustments to minimize their loss.
5. The price fixed by the government should not be inflationary in nature.
6. The price policy should help to discourage and eliminate oligopolistic practices in the market.
The government on its part, having realized the need to revise the basis of arriving at the cost of cultivation figures, set up a committee under the chairmanship of Hanumantha Rao in 1990 to suggest an alternative methodology for computing the cost of cultivation. This committee suggested the following revised methodology which was accepted by the government: I. The wages paid to the laborers included in the valuation of labour could be based on either the statutory minimum wages or actual wages whichever is higher. II. Managerial element is valued at the rate 10% of the total cost. III. The procurement price and the minimum support price announced in advance could be adjusted according to the actual in the market.
With all the above development, we are slowly coming closer to the determination of a realistic price for agricultural produce. But a very recent development is now posing a new challenge. The Dunkel's draft has suggested that the government should slowly withdrew all the subsidies extended to the agricultural sector that the farmers should be made to compete with each other and also the international farmers purely on the basis of the quality of the produce. The protection given to the agricultural sector should slowly be withdrawn that only the efficient farmers; can continue in the fold and that way the country would be benefited. Though there is some truth in this argument, yet, in our country liberalization is catching up, in the industrial sector and the agricultural sector is not matured enough to react positively to liberalization policies and there is a school of thought that the acceptance of Dunkel's draft may make the situation difficult for the Indian farmers, in spite of the government's assertions to the contrary.
Foreign exchange regulations
Foreign exchange refers to the earnings and payments made by a country on its exports and imports of goods and services over a year. The more the country earns, the better it is. There are several sources through which the foreign exchange flows into a country. Apart from the exports of goods and services, there are remittances made by the non - residents Indians living abroad, other countries making payments to their consulates and embassies, gifts and grants from other governments to Indian government, loans and advances received by Indian government, other adhoc receipts under various heads, etc. Similarly, the if outflow of foreign exchange would include the corresponding payments made by any source in India to countries abroad. Over and above all these official sources of inflows and outflows, there are several other unofficial resources, of inflows and outflows. In fact, the government can control effectively the official sources but the unofficial sources remain outside the government control and so 4-they cause havoc to the economy. There is a need to control and regulate the foreign exchange resources, as otherwise, they might have a direct impact on the exchange rate and the balance of payments position, which, in turn would affect the internal price stability. Hence after independence, the government passed a Foreign exchange regulation Act in 1947 which was subsequently modified in 1973.
The following are the objectives of regulating foreign exchange: ❖ To conserve the foreign exchange resources. ❖ To account for all inflows and outflows of foreign exchange to eliminate any negative impact on balance of payments and exchange rate. ❖ To monitor, control and channelising the utilization of foreign exchange resources and through that to accelerate the economic development
As per the regulations, RBI is the institution vested with all powers to deal with all aspects of foreign exchange. Normally, the RBI empowers travel agencies and the commercial banks to deal with foreign exchange. They are required to submit returns on a daily basis so that the extent of foreign exchange received and issued is closely monitored. The 1991 Industrial policy resolutions had specific provisions relating to foreign exchange regulations. These are briefly summed up below.
Foreign investments:
Foreign investments carry with it the benefit of technology transfer, marketing expertise, modern managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the New Industrial Policy (NIP) has clearly contained the following provisions relating to foreign investments: 1. In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed. Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments to the FERA will be made.
2. The general policies governing the domestic units in regard to import of components, raw materials and intermediate goods and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on payments are balanced by export earnings over period of time.
3. All the other foreign investments not included in the category 1 stated above will require prior clearance.
4. Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in 1 above. However, the provisions of he export-import policy applicable to the domestic units will also be applicable to such trading companies.
5. To encourage substantial inflow of foreign investment, a Special Empowered Board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
As regards foreign technology agreement, a welcome change in the outlook of the government is the realization that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedures and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameters. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced he following changes in regulation governing foreign technology agreement:
1. No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through blanket permits.
2. Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provisions. Upto the payment of Rs. 1 crore royalty will be at the rate of 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of the sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production.
3. In case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment.
4. In all the other cases, the general procedures in practice will be adhered to and such industries will require specific approval.
In 1999, some more modifications were brought in the Foreign Exchange Management Act [FEMA]. These modifications are to come into effect from May 31, 2000 and until then the Enforcement Directorate was given time to probe and investigate all cases of FERA violations. The basic difference between FERA and FEMA is stated by the RBI as ; the object of FERA was to conserve foreign exchange resources, whereas the object of FEMA is to facilitate external trade and payments and to promote orderly maintenance of foreign exchange market in India. FEMA has the following important features: ❖ FEMA substantially liberalized various provisions to make the external trade and payment very simple, which, specifically benefited .the residents traveling for business / professional reasons. ❖ The Exchange Earners' Foreign Currency account holders and the Residents' Foreign Exchange account holders are now permitted to freely use the funds held in both the categories of accounts for any permissible current account transactions. ❖ The rules relating to foreign investment have been made more transparent. ❖ FEMA provided for civil procedure in cases of violation and contained elaborate redressal machinery for total justice and fairness to the aggrieved persons. ❖ The FEMA also prohibited seven categories of current account transactions in lotteries, banned magazines, football pools, narcotics, etc,
Technology Transfer
Jawaharlal Nehru was responsible for the improvement of Science and Technology in India. Under his leadership several research institutions like The Council of Scientific and Industrial Research [CSIR], Department of Atomic Energy, The Indian Council of Agricultural Research were all established. These were followed by Department of Electronics, Department of Space Technology, the Indian Space Research organization, etc. In 1958 the Science Policy Resolution was passed with the objectives to: ❖ Foster, promote the sustain by appropriate means the cultivation in science and scientific research in all its aspects - pure, applied and educational. ❖ Ensure an adequate supply within the country of research scientists of higher quality and recognize their work as an important component of the strength of the nation. ❖ Encourage and initiate with all possible speed programs for the training of scientific and technical personnel on a scale adequate to fulfill the country's needs in regard to science and, education, agriculture, industry and defense. ❖ Ensure for the people of the country all the benefits that can accrue from the acquisition and application of scientific knowledge
Following this policy, on the agricultural front, the country witnessed Green Revolution, which made the entire world turn to India for its experience and experiments in agriculture. The success achieved was phenomenal that production and productivity increased manifold. But correspondingly the irrigation and other infrastructure facilities like storage facility, transport, communication, etc., developed slowly. For a long time, there was absence of effective linkage between the scientific laboratories and the fanners. But this was overcome by early 1970's and since then Indian agriculture has been on the forward march.
On the industry front, though there was wide talk about self-reliance, yet in reality the industries spent precious little on Science and technology. Modernization was given low priority. Research and development activity and investment was found only in a very few industrial units. Another aspect was the improvement in Science and Technology never crossed the urban frontiers. Though India ranked second in the world in terms of technical manpower, this was never utilized to our advantage. Only government organization gave some serious considerations to research and development activities. Further the attempt was to develop and apply technology to meet the requirements of the rich community in India. Whatever technology that was imported never suited our domestic requirements and attempts to adopt them for Indian environment did not succeed. After the declaration of Liberalization in 1991, the government has given very serious consideration to Technology and development. The summary of the Technology policy of 1991 is given below.
A welcome change in the outlook of the government as evidenced by the new policy is the realization that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedure and policies. The interference of the government in this regards to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameter. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India* with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulations governing foreign technology agreement:
(i) No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through the blanket permits.
(ii) Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provision. Upto the payment of Rs. I crore, royalty will be @ 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production.
(iii) In the case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment.
(iv) In all the other cases, the general procedures in practice will be adhered to and such industries will require approval.
REVIEW QUESTIONS 1. Discuss the objectives of licensing policy in India. 2. List the findings and recommendations of Dutt committee report. 3. Discuss the features of Indian licensing policy. How far the current policy is a deviation from the old ones ? 4. Explain the circumstances under which MRTP Act was brought. Why was it given up on the eve of Liberalization? 5. What do you understand by control of capital issues ? List the recommendations of Narasimham committee II in this context. 6. Discuss the forms of foreign capital. 7. Why is foreign capital required? 8. Discuss the role of foreign capital in economic development. 9. Analyze the problems of foreign capital. Discuss in this context the policy of the government towards foreign capital since independence. 10. Explain the government policy on Foreign Direct Investment. 11. Critically evaluate the Industrial policy resolutions of 1948, 1956 and 1980. 12. Explain briefly the provisions of the Industrial policy 1991 which laid the foundation for liberalization. 13. What is an EXIM bank ? What are its functions? 14. What is meant by public distribution system? Discuss the justifications for it continuance. 15. Comment on the working of public distribution system in India. 16. Critically examine the functioning of public distribution system from the view point of institutions, people and government. Suggest suitable remedies. 17. Outline the contours of agricultural price policy in India. 18. What is meant by foreign exchange? What are the justifications for regulating it? Comment on the policy of the government in relation to foreign exchange.
Discuss the need for technology transfer. Analyse the policy of the government in this regard.
CHAPTER IV
Monetary and fiscal system - Banking and credit structure in India - Financial institution - Fiscal system - theory and practice
INDIAN FINANCIAL SYSTEM AND COMMERCIAL BANKING
The shape and status of an economy to a large extent depend on the development it had achieved, which in turn depends on the strength of financial sector. A country with a strong financial sector is bound to progress faster and steadier than any other country. Financial sector refers to all the categories of financial institutions which provide as a conduit between those who are in need of funds and those who are supplying funds. Such institutions are usually referred to as financial intermediaries. While these intermediaries do function at a profit, not all of them are profit centered. In other words, the financial intermediaries can be broadly classified as organized sector institutions and unorganized sector institutions. Those in the former category function in the interest of the society and so not very much profit centered. The way in which all these institutions are integrated is understood through a study of financial system. The structural positioning of these intermediaries determine the flow of funds in an economy. That is, how these institutions mobilize funds and how they distribute or channelise the funds mobilized depend on how they are organized. For instance, in the olden days, only money lenders provided the needed funds either from their own savings or that of their close relatives. Obviously they confined their operations only to a limited locality and purposes. Depending upon the borrower and the security offered, they charged varying rate of interest and there was absolutely no regulation of their business practices. But once public institutions like commercial banks came into the scene, there was a need to organize their operations strictly in relation to the national priorities. Thus came the institutions in the organized sector, which are governed by a set of rules and regulations. Hence, if in a country the size of operation of the institutions in the organized sector is large, then the flow of funds from the savers to investors will be smooth and would contribute towards the economic development. Even the mere presence of unorganized sector institutions will countervail the contributions of the organized sector institutions.
In the Indian context, the financial system includes a number of institutions in the organized sector and unorganized sector.. Under the organized sector we could include: the State bank of India and its associates, all the nationalized commercial banks, the Regional Rural banks, private sector Indian and foreign banks, non-scheduled hanks, all the levels of co-operative banks, Government institutions like National Savings Corporation, Post office savings banks, Provident fund, all the corporations created by legislature like LIC, UTI, etc. In the unorganized sector, the institutions are of several types ranging between money lenders, chit funds, nidhis, finance companies, etc.
The constituents of Indian Financial system changed over a period of time, as the nature of demand for funds changed and so institutions had to come up to meet the specific needs of a demand segment. For instance, while the rationalized commercial banks and co-operative banks are focussed more towards the priority sector and rural segment, the chit funds and nidhis came into the scene to cater to the needs of businessmen and small firms. Finance companies entered the scene mainly to meet the funds requirements of hire purchase and leasing firms. While specialised institutions add to the maturity of the financial system, the difficulty in regulating them exposes the gullible small savers and investors to a great risk. The regular failure of finance companies, nidhis, etc., have rudely -shaken the confidence of the common public and discouraged them from investing activities.
Growth of NBFCs:
Non banking financial companies have emerged as a single most important constituent of our Financial system. These institutions have originally started functioning as hire purchase agencies, but introduced in due course a host of innovative services, that their number has swelled to nearly 50000 by 1998. They have been very popular in the Indian scene mainly because they could mobilize huge funds by offering attractive high rate of interest, adopting a simple procedure for processing and lending, improving customer relations and introducing new customer oriented funding schemes. To understand their extent of coverage, there are hire purchase finance companies, housing finance companies, investment companies, mutual benefit financial companies, etc. Though their growth was actually adding to the financial products in the market,
the operation of a number of them raised questions about their stability. and genuineness of intentions. When a number of such NBFCs failed, in response; public outcry, regulatory guidelines were brought by the RBI. A number, of committees were set up to examine the nature and content of the regulatory mechanism. Particularly, the recommendations of the Shah committee of 1992 and Khanna committee of 1996 assume significance. Their recommendations included:
➢ Abolition of categorywise classification of finance companies. ➢ Application of uniform regulation for all finance companies. ➢ Focussing regulatory attention on large size companies. ➢ Compulsory registration of all deposit accepting companies. ➢ Determining capital adequacy standards and prudential norms. ➢ Prescription of provision for bad and doubtful debts. ➢ Compulsory annual credit rating.
Following this, a number of provisions in the Regulations Act were amended and the RBI [Amendment] Act 1997 has brought forth the following regulations: ❖ NBFCs are more clearly defined and their minimum net owned funds was, fixed at Rs. 25 lakhs. ❖ Registration with RBI at the time of entry is made compulsory. ❖ Existing units were given time of three years to reach the minimum level of), net owned funds. ❖ NBFCs should transfer not less than 20% of their profits to the reserve fund every year.
In case of any violation of any of the regulations by the NBFCs, the RBI will prevent them from accepting deposits and also sell, transfer, etc. their properties.
Several other regulatory measures were announced in January, 1998 which include: ❖ NBFCs with credit rating below 'A' are not allowed to accept deposits. ❖ For any violation of norms, the repayment of deposits will be ordered by RBI. ❖ Interest rate and brokerage fixed. ❖ Regular tax returns should be filed. ❖ No lending is permitted against the own security.
But the NBFCs appealed to the RBI to relax the provisions, as otherwise their business would be at stake. Accordingly RBI some of the regulations, providing for the growth of these NBFCs at the am protecting the interest of investing public.
Housing Schemes
Housing emerged as one of the important priority sector lending schemes. This so because of both increase in the demand for houses in both the urban and rural areas. With considerable number of people settling down in urban slums, housing problem has assumed a tremendous proportion. As a sequel to this, the government has established National Housing Bank in 1988 with a number of programmes to address the housing needs of various sections of the population.
Specifically a Home Loan Account is devised to promote the savings habit among the public for acquiring houses. With a minimum periodicity of 5 years, any one can open a Home loan account with any scheduled bank. The amount deposited into the account is also exempted from income ax. The balance in the account earns interest at 10%. Once the specified period of deposit is over, the account holder is eligible for housing loan. The loan amount is determined as a multiple of accumulated savings in Housing Loan Account.
Loans granted under this category will be refinanced by the National Housing Bank. The Commercial banks are advised to provide 1.5% of their incremental deposit over the previous year for direct or indirect loans or investments. Schemes funded by HUDCO, like Nehru Rojgar Yojani have gone a large extent in easing the housing problems of the rural masses. Apart from this under Priority Sector allocations the following housing loans are provided :
A] Direct advance : Loans upto Rs. 5 lakh are granted for construction of houses and upto Rs. 50,000 towards repairs of houses for all categories of borrowers.
B] Indirect advance : Under refinancing scheme, non governmental agencies are also eligible when they lend for house construction. Advances are also given for the clearance of the slum and rehabilitation of the slum dwellers.
Subscribing to the bonds issued by the National Housing Bi.nk and HUDCQiis also extended.
As regards the margin on loans, the percentage of margin is determined based on the loan amount. As a security, mortgage of the property and Government guarantee are acceptable. Maximum repayment period is-fixed at 15 years, and the repayment holiday is also granted to the borrower. The eligibility condition for getting loan is fixed in relation to the income of the borrower. Interest rate on loan is again linked to the amount borrowed.
Through Indira Ayas Yojana scheme free dwelling units are given to the persons living below poverty line in the rural areas, belonging to SC and ST community and bonded labourers. The scheme is, also extended to families of servicemen of the armed forces and paramilitary forces killed in action irrespective of their income limit.- This scheme is implemented through the District Rural Development Agency. Beneficiaries are identified through Gram Panchayat or Block Development Officer. The beneficiary has to under take the construction of the house and the money is released in stages.
THE FUNCTIONS OF COMMERCIAL BANKS
The functions performed by the commercial banks may be listed 2.5 follows :
|1) Accepting deposits, |2) Lending loans and advances, |
|3) In vestment of funds, |4) Promote the use of cheques, |
|5) Agency functions, |6) Purchase and sale of foreign exchange, |
|7) Financing of internal and international trade, |
|8) Creation of credit, |9) Other functions and |
|10) Fulfillment of socio-economic objectives. |
1. Accepting deposits:
This is one of the primary functions of commercial banks. The commercial banks accept different types of deposits, the deposits may be broadly classified as a) demand deposits and b) time deposits. The former refer to the deposits which are repayable by the banks on demand by the depositors, while the time deposits are accepted by the banks for a fixed period of time before the expiry of which they don't return the deposit. The demand deposits include the current account deposits and savings bank account deposits. These two types of deposits earn very low rate of interest as they can be withdrawn any time. In the case of savings deposit, the depositor is not allowed to withdraw more than a fixed number of times or amount over a period of time. The time or term deposits include the fixed deposit and recurring deposits. In the former a sum is deposited for a fixed period of time determined at the time of deposit and is never allowed to be withdrawn before the expiry of period of deposit. Any such foreclosures will invite penalty apart from forfeiting the interest. Recurring deposits are the type of deposits in which a depositor agrees to deposit a fixed sum of amount every month for a number of months as determined in advance, and at the end of which the depositor will be repaid his deposit amount along with interest. Every bank will be interested in mobilising as much deposit as possible as it would improve its liquidity with which the bank can meet is liabilities and expand its business.
2. Advancing of loans :
Commercial banks accept deposits and use them for expansion of their business. The banks never keep the deposits mobilized idle. After keeping some cash reserve, they invest the funds and earn. They also lend loans and advances to the common men after satisfying themselves about the credit worthiness of the borrowers. They grant different types of loans like ordinary loans in which the banks lend money against collateral security. Cash credit is another type of loan in which the entire amount sanctioned is credited into the borrower's account and he is permitted to withdraw only a specified sum at a time. Overdraft is yet another facility under which the customer is allowed to withdraw an amount subject to the ceiling fixed, from his account and he pays interest on the amount of overdrawn. Discounting bills of exchange is another type of advance granted by the commercial banks in which a genuine trade bill is discounted by the banks and the holder of the bill is given the amount and the banks arrange to collect the due from die drawer of the bill on the date of maturity.
3. Investment of funds :
One of the main functions of the commercial banks is to invest their funds so as learn interest and returns apart from utilizing their funds in a productive manner. India as per the statutes, they must invest a part of their total investments government securities and other approved securities so as to impart liquidity. Banks apart from enabling them to earn out of their investment Banks now. days have set up mutual funds through which they mobilize funds from the people invest them in very attractive projects which is a help rendered to the investors who otherwise will not have the benefit of participating in the project. Banks administer these mutual funds through specialists and experts whose services are not available to the common men.
4. Promote use of cheques:
By the spread of banking habit, banks have achieved a remarkable successi-pil promoting and encouraging the use of cheques by people in the settlement of their-claims. Cheques are not only safe but are die cheapest medium of exchange in me place of cash, apart from being fully negotiable instrument
5. Agency functions of commercial banks :
Commercial banks function as he agent of their customers and help them several ways. For these agency services, the banks charge a nominal amount The agency services include, transfer of customer's funds, collection of funds on behalf of the customers, transactions in the shares and securities for their customers, collection of dividends on shares and interest on debentures for their customers, payments of subscriptions, dues, bills, premia on behalf of the customers, acting as the Trustees and Executor of the customers, offering financial and other consultancy services, acting as correspondents of the customers, etc.
6. Purchase and sale of foreign exchange :
The banks also undertake to help their customers in dealing or transacting in foreign exchange. Though only banks with license to deal in foreign exchange along can act on behalf of their customers, yet in India several commercial banks by virtue of their relationship help the customers in this connection.
7. Financing internal and international trade :
This is a major function of the commercial banks. The international trade depends to a large extent on the financial and other support given by the banks. Apart from encouraging bills transactions, the banks also issue letter of credit facilitating the importers to conduct their trade smoothly. The banks also process all the documents through consultancy services and reduce the botheration of the traders. They also lend on the basis of commercial bills warehouse receipts, etc., which help the traders to expand their business.
8. Creation of credit:
It is worth noting the credit created by the commercial banks. In the process of their lending operations they create credit The process involves the following mechanism: whenever the banks lend loans, they do not pay cash to the be Towers; instead they credit the accounts of the borrowers and allow them to withdraw from their accounts. This means every loan given will create a deposit for the banks. Since every deposit is equal to money, banks are said to be creating money in the form of credit As a result the volume of funds required by the trade, government and the country is met by the banks without any necessity to use actual cash.
9. Other functions:
Other functions of the commercial banks include providing safety vault facility for the customers, issuing traveller's cheques acting as referees of their customers in times of need, compiling statistics and other valuable information, underwriting the issue of shares and debentures, honouring the bills drawn on them by their customers, providing consultancy services on financial and investment matters to customers, etc.
10. Fulfillment of socio-economic objectives :
In the process of performing all the afore-mentioned services, the banks do play key role in the economic development and nation building. They help the country^ in achieving its socio-economic objectives. With the nationalization of banks, the priority sector and the needy people are provided with sufficient funds which helm them in establishing themselves. In this way the commercial banks provide a firm and durable foundation for the economic development of every country.
CREDIT CREATION BY BANKS
Commercial banks accept deposits and lend loans and advances. In this process* they create two types of deposits, namely primary deposits and derivative or deposits. The form refers to the cash deposited by a customer in a bank or deposit a cheque with the bank for collection. The banker merely accepts cash am converts it into a deposit. Hence, this is merely a passive role performed by the banks. These primary deposits do not add to the money stock in the economy From their experience and observation the banks know that not all the customs will withdraw their deposits on any single day. Hence, after providing for some reserve to meet the cash requirement of the depositors, the banks lend the balance to the borrow. The amount of reserve to be maintained by the banks is Cash Reserve Ratio which is determined by the central bank.
The derivative or active deposits refer to the deposits which are created out of the %x loans and advances granted by the banks. Suppose an individual is sanctioned loan of Rs. 10000 by a bank A. The bank does not give him cash while sanctioning the loan. Instead the bank merely opens an account in the name of individual and credits his account with Rs. 10000. He is then allowed to withdraw this amount whenever he wants. When the bank credits his account with Rs. 10000, it is treated as a new deposit received by the bank. Hence, the bank derives this new deposit from the loan given and the bank has actively created this new deposit. This is the reason why it is always said that loans create deposit'. The new deposit created in this manner will add to the money stock of the economy. Whenever the loan is returned by the borrower to the bank, then there is no further possibility of creating new deposit. This results in net decrease in money stock.
Therefore creation of credit or granting of loan adds to money supply to in the economy and the return of loan results in reduction in money supply.
It should also be noted that the banks create active deposits while they purchase assets or securities from others or discounting the bills of exchange or any other negotiable instruments. But the majority of credit is created only out of the loans given.
The multiple credit creation process can be explained with a single bank or more than one bank. The former is called single bank credit creation and the latter multiple bank credit creation model. To explain both these models, let us assume i) there are three banks A, B, and C ii) the cash reserve ratio is 10% and iii) an initial deposit (primary deposit) of Rs. 10000 is made into bank A.
When bank A receives the new deposit its balance sheet will appear as below :
BALANCE SHEET OF BANK A
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|New deposit |10000 |New Cash |10000 |
| |10000 | |10000 |
Out of this new deposit of Rs. 10000 the bank has to maintain a reserve of 10% which works out to Rs. 1000. The balance of Rs. 9000, can be lent by the banker. Suppose Bank A lends Rs. 9000 to P, a borrower, who uses this fund to pay off his creditors. On giving the loan to P, the balance sheet of Bank a will be :
BALANCE SHEET OF BANK A
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|Deposit |10000 |Cash (Reserve) Loan to Mr. P |1000 |
| | | |9000 |
| |10000 | |10000 |
The creditors of P may have an account with bank B" and so they may deposit Rs. 9000 received from P in bank B. This is the primary deposit of fresh deposit bank B. Of this the bank will maintain a reserve of Rs. 900 and it may give a loan, of Rs. 8100 to Q. Then the balance sheet of bank B will appear thus :
BALANCE SHEET OF BANK B
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|New deposit |9000 |Cash (Reserve) Loan to Mr. Q |900 |
| | | |8100 |
| |9000 | |9000 |
Suppose Q uses this loan of Rs. 8100 to pay off his creditor who has an account with Bank C. Bank C will, then, get a fresh deposit of Rs. 8100 and it would lend^ Rs. 7290 after keeping a cash reserve of Rs. 810 The balance sheet of bank appear as below :
BALANCE SHEET OF BANK C
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|New deposit |8100 |Cash (reserve) Loan to Mr. R |810 |
| | | |7290 |
| |8100 | |8100 |
R may use this loan to repay his creditor who may have an account with Bank D and it would create loan out of the new deposit received. Hence, in the above example, a fresh deposit of Rs. 10000 in Bank A has resulted in the creation of loans to the tune of Rs. 24390 (9000 + 8100 + 7290). If this process continues more amount of credit will be created.
In the above example, we have assumed that each borrower has enabled fresh deposits in different banks. Suppose the amount lent by Bank A is retained by it (because the creditors of P deposit the money in bank A itself). Hence, the example given above explain the multi-bank credit creation model and if it is altered sightly, assume the existence of bank A alone, then it becomes an example for single bank credit creation model.
It is of interest to know the total amount of credit created by the commercial banks in the above example. This could be found out that die following formula K = 1/r. In the formula K is the deposit multiplier and r is the cash reserve ratio. In the above example r = 10%, ie., 1/0.10 which is equal to 10. This means that original deposit will multiply by 10 times if the cash reserve ratio is 10% Suppose we increase the cash reserve ratio to 20% then the multiplier will be 5 and the cash reserve ratio is 5%, the multiplier will be 20. Hence a rise in cash reserve ratio will reduce the volume of credit created and a fall in cash reserve ratio will increase the volume of credit created. We find the total amount of credit created we can use the deposit multiplier calculated above multiply it with the initial deposit In otherwords,
Addition aggregate deposits - Fresh deposit x K
In the above example, fresh deposit is Rs. 10000 and the multiplier is 10. Hence the total credit created is 10000 x 10 = 100000.
So far we have explained the credit creation process by the commercial banks. We can also explain the credit contraction process which means, that whenever the depositors withdraw their deposits then the banks will be left with lesser cash to create only lesser credit. Both the credit creation and contraction are subjected to the following limitations:
1. The volume of cash in circulation determines the extent of credit created. With larger volume of cash, the primary deposits will be more thereby the credit created will also be more. Any reduction in the volume of cash will reduce primary deposits and so the credit created.
2. Cash reserve ratio, in fact, is a primary determinant of credit created. It has been already shown that higher the cash reserve ratio lesser will be credit created and lower the ratio greater will be the credit created.
3. The external drain or the extent of withdrawal of cash by the depositors also determine the volume of credit created. When there is heavy withdrawal of cash by depositors there will be reduction in credit crated and lesser withdrawal will encourage a larger volume of credit created.
4. Banking habit of the people is one of the factors influencing the credit created; If people conduct most of their businesses using cheques rather than cash, then the banks will have more cash (primary deposits) to create more credit when people use more of cash rather than cheques, bills, etc.
5. The central bank is the leader of the monetary system and its decision to follow a liberal credit policy will encourage more of credit creation and a stringent credit policy will bring down the credit created.
6. The availability of a large volume of collateral securities will facilitate larger volume of credit creation and with lesser volume of collateral securities only, lesser credit will be created.
7. The business condition prevailing in the country will be one more factor; determining the extent of credit creation activity. With prosperity and boom conditions prevailing there is greater opportunity for additional investment and': so the credit creation will take place in large scale. During the period of depression and. adversity, as the investment opportunities are very limited, there is no scope for credit creation.
PERFORMANCE OF THE COMMERCIAL BANKS IN INDIA, THEIR PROBLEMS AND SOLUTIONS TO IMPROVE THEIR FUNCTIONING
The trends in performance of commercial banks in India can be explained in terms of various indicators given below.
I. Deposit mobilization : A phenomenal success in deposit mobilization is achieved by the commercial banks since nationalization. In 1950-51 the total deposit with the commercial banks was Rs. 880.6 crores which rose Rs. 102127 crores in 1986-87. This was mainly due to raid branch expansion after nationalization, the increase in money supply in the economy, the improved banking habits among the public, etc, however, the rate of increase in deposit has not been commensurate with the rapid rate of increase in branch expansion.
This is easily understood from the low per capital deposit of Rs. 723. further even in 1986 the total deposit with the commercial banks amounted to only 34% of the national income. However, encouraging signs and indicators are being observed which may herald a sizeable increase in deposit mobilization in the years to come. The main indicators are the increasing fixed deposit and declining current deposits. With better interest on deposits, the banks should be able to improve their deposit mobilization.
2. This objective has been certainly achieved as is clearly indicated by the following facts. From a mere Rs. 546.93 crores in 1950-52 the total advances by the commercial banks stood at Rs. 57518 crores in 1986-87. This is more than 100% increase in advances compared to 1950-51. In 1950-51, the banks were lending only 62.1% of their total deposit in the form of advances which has increased to 65.7% in 1986-87. Since the nationalization, the advance to priority sector by the commercial banks has infact enabled this sector to grow without any financial constraint. In 1986-87, the advances to the priority sector out of the total bank credit rose to 43.6% achieving a significant objective of nationalization in providing the scarce resources to the priority purposes. An important feature of this sizeable advances is that the share of the public sector banks is the maximum and the commercial banks have also started concentrating on the priority sector.
3. Substantial increase in investments : One of the important reasons for maintaining: the profitability in the commercial banks is their pattern of investments. The investments by thebanks went up from about Rs. 360 crores in ,1955-56 to more than Rs. 38563 crores in 1986-87. Of this about 37.8% of the investments are in government securities.
4. Branch expansion : One of the significant achievements of the government is the rapid branch expansion achieved over these 36 years. From a few thousand branches in 1050-51, the number of branches stood at 8321 in 1969 which increased to 53567 branches by June, 1987. This was also due to the merger of smaller banks into bigger banks. The voluminous banking operations^ in the country today is mainly due to the fact that almost every third village has a branch 6f a bank. Though initially such a branch expansion activity led to competition among them, yet over a period with the measures taken by the banks, the competition among the banks have come down.
5. Sizeable increase in the advance towards the priority sector : Banks have played a commendable role in the provision of advance to the priority section Apart from the quantum of assistance, the coverage of banks in terms of assistance to various segments also increased. By December, 1979 the priority sector advances constituted 34.4% of the total bank credit as against 25.8% un June 1977. The government fixed a target of 40% which was achieved by the banks as already indicated under the advances given by the banks. The banks;" have been strictly instructed that they should extend 60% of the deposit mobilized in the rural and semi-urban areas to the priority segments in those areas. By June 1987, the commercial banks' advance was 43.6% of their total deposits which was extended to the priority sector.
6. Declining profitability of banks : A very serious matter of concern about the operation of the commercial banks in India is that their profitability is fast' declining. There are several reasons for this. Firstly, the banks have to mobilize; their deposits among the increasing competition among themselves and also, among the various schemes of savings announced by the government. As a result the banks have to bear a higher cost of deposit mobilization which directly, affect their profitability. Secondly, the interest paid on the reserves maintained by the commercial banks with the central bank is very low and this considerably reduces their profitability. Thirdly, with the expansion of branches throughout the country, the operational cost of the banks have gone-Up, thereby bringing down their profitability. Fourthly, the outgo in terms of staff salary and other allowances also take away a sizeable amount of income from the banks bringing down their profitability. Fifthly, the priority sector lending by the banks at concessional rates is yet another reason for poor profitability. Sixthly, the banks have been lending large amounts to the sick units due to the compulsion from the government. Consequently their profit is affected.
Problems of the commercial banks : 1. Commercial banks, though very large in number have not effectively mobilized the deposits in the country. This is very clear from the fact that a large number of non-banking financial institutions mobilize considerable deposits from the public.
2. The banking habits among the public is not yet at an encouraging level. Especially in the rural areas people prefer to keep their money at home at great risk man depositing with the banks.
3. Government is also responsible to some extent for the slow development of banks in India. There is no compulsion from any government institution that the funds available with the government agencies should be kept as deposits with commercial banks only.
4. Competition from foreign banks, non-banking financial intermediaries, a score of government aided institutions have also made the business of the banks difficult.
5. A sizeable amount of funds of the commercial banks are locked with the sick units. The investments in these units are made.only on the government insistence.
6. The frequent loan melas organized and disbursal of unproductive loans have also created a big problem to the banks. Further the cancellation of loans from banks, waiver of these loans for specified period, etc., also add to the problems of banks.
To overcome the above problems in an effective manner the following suggestions can be considered:
1. The competition between the commercial banks and the other non-scheduled banks as well as foreign banks should be eliminated. This is being done by various provisions relating to opening of a new branch, working hours, investment of funds, allotment of area for each bank, etc. But in terms of working it is better that the competitive spirit is maintained so that the banks will be constrained to maintain and improve their efficiency.
2. The existing banking structure should be modified to match the requirements and changes. For instance, instead of allowing the existence of a number of small banks, attempts should be made to amalgamate the small and inefficient ones with the big and efficient ones. Especially in the case of branch expansion a more critical study is called for so that establishment of uneconomic and] unviable branches can be avoided. The areas really in need of banking facilities should be carefully identified with long term perspective and then the branches! should be opened. A close monitoring of the working performance of each] such new branch should be made so as to determine the justification allowing their existence.
3. The banking functions should be thoroughly overhauled so as to introduce; modern methods of functioning. For instance, the age-old method of maintaining a large number of ledgers should be done away with and; computers should be used in large way. Apart from this, possibility, of extending banking services throughout the day (24 I/ours banking) should be; thought of. Some of the branches of foreign banks have started offering this 1 facility and Indian counterparts can also think of such methods.
4. Streamlining the banking procedure is a long felt need in India. Surprisingly, even among the nationalized banks there is no uniform procedure for several functions. Uniformity will not only help the people to understand; the procedure but also the banks to economic their operations, for instance, if there is a uniform account opening for prescribed for all the banks, then possibly large scale printing of this form will bring down the cost of printing. Like this; uniformity in every procedure wherever possible should be identified and-implemented. This will be identified an effort to economize the use of resources.
5. Periodical and stringent review of the competency and efficiency of the staff is' also a must By devising a healthy procedure for staff evaluation, every bank can attempt to maximize the output and minimize the strain. Mere-strengthening of the staff without arrangement for improving the staff performance through rigorous training, updating of knowledge, evaluation, etc., ' will only weaken the functioning efficiency of the bank.
6. Innovative methods of deposit mobilization should be thought of, apart from the conventional methods. The banks could call for opinion from the public regarding the methods of deposit mobilization and may even consider giving rewards and prizes for the best suggestions.
7. Extending the area of operation of the banks should take up new areas like leasing, hire purchase, etc., to mop up the additional deposits and also to extend the banking coverage.
8. Investment of funds should be very carefully planned and every attempt should be made to maximize the return on various types of investments. As far as possible the loan recovery should be maximized. Any attempt to waive the loans or cancel the loans will only encourage defaulters.
9. Government should also be sympathetic towards these banks by allowing their funds to flow towards the banking sector. The surplus funds available with the government could be placed at the disposal of the banks which will strengthen their operation and in fact the economy would be benefited more in terms of new loans and advances.
10. Efforts should also be made to solve the customer problems by involving them in the decision making process. The service charges imposed on various services should be rationalized and restructured and as far as possible the uniformity in this regard must be achieved. It is often seen that the private sector banks give concessions or even waive the service charges to some of the major customers, while the nationalized banks have no such provision. As a result, private sector banks are able to attract a sizeable volume of funds through deposits.
11. Educating the common public about the manipulative activities of the non-balance financial institutions like chit funds, nidhis, mutual funds, etc., so as to make them understand that the same type of services can be availed of from the banking system but with lesser risks. The regulation in this regard should be made more rigid so as to discourage any ‘blade companies’ from resorting to any shady dealing and manipulative activities.
12. Considering the pivotal position occupied by the banking sector in the country, it is high time that politicians are prevented from pressurizing the banking sector to yield to their unhealthy practices with ulterior motives. A country where banking sector is completely free from political interference alone reaps the expected benefits from that sector and encourage health banking practices.
LEAD BANK SCHEME
A milestone in the history of banking in India is the nationalization of the 14 major commercial banks in 1969. This process was undertaken with the main objective of involving the banking sector in a big way in the nation building and economic development. To help to achieve this commendable objective, two committees were set up viz., National Credit Council Study Group with D.R. Gadgil as the Chairman and the Committee of Bankers under the chairmanship of Nariman. These committees independently went into their terms of reference and recommended an 'area approach' for involving the banks in economic development. This paved the way for giving a concrete shape to the, lead bank of scheme'. As nationalization of banks took place to extend and expand the banking services to all the un-banked areas especially the rural areas, the RBI decided to implement its Lead Bank scheme through the nationalized banks. But this did not discourage the private sector banks from playing their role in economic development. Infact the Lead bank scheme involved all the nationalized banks, State bank of India and its associates and three private sector banks. Hence, the era of bank-propelled economic development started.
The Lead bank scheme has the following features : 1. All the districts in the country except the Metropolitan area were allotted among the banks selected for this purpose.
2. Each bank was expected to take all the initiative to develop the district allotted to it. The initiative includes conducting a detailed survey to identify the resources and the potential of the district concerned and then to devise suitable schemes for utilizing these resources.
3. The identification of unbanked centers is also included in this regard and such centers will be examined thoroughly to determine whether bank should be established in such places or not.
4. The districts were allotted to the different banks depending upon the size of the bank, the resources with which they operated, the ability to handle additional volume of work, regional orientation of the bank concerned, etc.
5. The district allotted to a bank should not be considered as the area wherein only the bank concerned alone should initiate or carry out the developmental works. In otherwords, the lead bank should not become a monopoly in the district allotted, but it should also invite participation from other agencies in the district. In that manner the lead bank will function as a leader of a consortium.
6. To co-ordinate all the development activities taking place in the allotted district and other potential projects for the district, the lead bank is expected to set up a district level consultative committee of banks and other financial institutions. This committee was vested with the powers to review the performance in various schemes periodically.
Working of the Lead bank scheme
To start with the 25 banks selected a, lead banks have completed the survey of the district allotted, to each of them. The district consultative committee in each district has also been formed. The lead bank scheme also designed and monitored the branch expansion activities in all the unbanked areas and with nationalization in 1969, the branch expansion took place simultaneously in about 336 district of the country. The lead banks also started co-ordinating the activities of various agencies in the rural areas like co-operative banks, commercial banks, other financial agencies and other development agencies. The lead banks also started identifying the potential of each district and studied critically the existing line of business and other activities. It also could identify the credit gap in each district. Credit gap refers to the difference between the credit needs of the rural areas and the credit supplied by all the agencies, to bridge this credit gap the lead bank took several steps. Firstly, it decided to improve the deposit mobilization in the area concerned. Secondly, the quantum of funds required for the development activities in the district was estimated. Thirdly, the various agencies in the district were, approached to participate in the scheme. Fourthly, with the district consultative committee the performance of each scheme would be reviewed periodically and corrective steps if any required, would be taken up. I this manner the lead bank scheme aimed at removing the credit gap in each district.
The lead bank scheme was expected to generate the following benefits: 1. The entire country would inherit a sound banking system. 2. there will be perfect and effective supervision and expansion of the credit facilities. 3. The various agencies connected with the developmental activities in each district would be able to achieve a high degree of co-ordination and operation. 4. The available scarce resources in each district would be mobilized and used for the development of the district concerned. 5. The banks will start playing a significant role in the economic rebuilding! and development. 6. A systematic attempt will be made to identify the credit gaps in each district' and appropriate action will be taken to fill up these gaps. 7. There is absolutely no scope for achieving development in ont- district at tile's cost of other district. In otherwords, the lead bank scheme would also." contribute in its own way towards the balanced regional development.
But the lead bank scheme failed in certain respects encouraging the critics of this scheme to argue against this scheme on the following grounds: 1. While it is true that lead bank would take up the role of initiating-the development in the district allotted, but it cannot assume the role of the Planning commission.
2. A lot of confusion prevailed among the lead banks regarding their exact function and objectives. However this confusion was removed later on when the lead banks started sharing their survey findings with other interested agencies in the district and also started opening branches themselves in the areas identified by them.
3. Critics also pointed out that a financial and commercial institution like bank cannot be best suited to analyse and solve the task of techno-economic work. r Further the banks can be taken as professional institutions in the field of finance and not in the area of development. It was pointed out that banking function is completely different from the development function. In the absence of trained and skilled staff the lead banks could not accomplish the objectives for which they were created.
4. There were several other practical difficulties in executing this scheme. For instance, the allotment of districts to the banks was not done strictly, on the basis of regional orientation of the banks. As a result the banks could not effectively attend to the initial spade work in the district allotted to them. Operational difficulties like language barrier, difficulty in controlling the work from long distance, difficulty in finding staff for the newly opened rural branches, reluctance of the staff to move to rural areas, absence of trained and skilled people, etc., together raised serious doubts about the success of this Scheme.
5. A major criticism of the scheme was that the authors of this scheme thought that once the banks are established in the rural or unbanked areas, the other problems in those areas would automatically be solved. Development of any region or area depends on the availability of infrastructural facilities, in that area. Hence, without the other facilities basically required for developmental efforts, banks alone cannot transform the area or region.
Considering these problems of the lead bank schemes, steps have been taken to improve the scheme. For instance, the Banking commission itself has recommended the regrouping of the banking system so as to make; the allocation of districts more meaningful and purposeful. A detailed training programme was charted to be implemented by every bank among the existing and the newly recruited staff. The detailed requirement of each region including finance, was assessed so as to make the appropriate agencies to come up with necessary assistance to the bank to implement the scheme. Another effort taken up was-to arrange for multi-level discussion among the participating banks the scheme so as to share the available information and other details of the scheme to find out solutions for various problems. A close co-ordination and cordial relationship was maintained with the state government concerned to strengthen the scheme.
FUNCTIONS OF CENTRAL BANK
According to De Kock, modem central bank performs six important primary functions. They are: 1. Central bank has the monopoly of note-issue. 2. Central bank acts as-the banker, agent and adviser to the government. 3. Central bank acts as bankers' bank. 4. Central bank acts as the custodian of the nation's gold and foreign exchange reserve. 5. The Central bank collects and publishes economic statements and other useful information. 6. The Central bank acts as the controller of credit.
Apart from the above functions, Central bank also performs the following two functions:
a) it is the custodian of the cash reserves of commercial banks and -
b) it acts as the bank of central clearance, settlement and transfer.
Let us now discuss each one of these eights functions in detail.
Central bank has the monopoly of note issue :
In olden days when the paper currency was introduced, each king issued his own currency or in each province a paper currency was used. When commercial banks were established, each one issued its own currency. Under both these situations, % there was lack of uniformity in the notes issued. There was also lack of recognition of the notes issued, further there was a maximum limit up to which the commercial bank could issue notes as they had been maintaining limited cash reserve and sometimes commercial banks failed to convert their notes into other forms of assets which shook the confidence of the common public. Therefore, the government itself undertook the issue of currency in its own hand. Even this was not satisfactory as it lacked elasticity and flexibility, hence, finally central bank was made in charge of issue of currency.
This centralized system of note issue has the following advantages
1. It facilitated uniformity and absolute control over the monetary system. 2. It built up public confidence on banks. 3. It offered complete flexibility to the monetary system. 4. It enabled perfect control over the credit created by the commercial banks. 5. It also helped to maintain the internal and external value of money.
Hence, in these days every country has vested the Central bank with the responsibility of issuing currency and it started with Bank of England in 1884. In India the Reserve Bank of India is issuing currencies. Every currency issued is backed up by suitable asset of value, like foreign currencies, government securities, other securities and other metallic reserves. As a result of this back up, the public confidence on the banks and the currency issued has gone up.
ii. Central bank acts as the banker, agent and adviser to the government:
As the banker of the central government, the central bank performs several functions. Some of the important functions are: 1. It keeps the account of the government and so accepts receipts to the government and payments by the government. 2. It acts as the collecting banker of the cheques, drafts, etc., payable to the government. 3. It also transfers funds from one place to another on behalf of the central government. 4. It also provides short term loans to the government to tide over the temporary crisis. 5. It also conducts all the international financial transactions on behalf of the government. Any payment for imports or receipts from exports are all accepted by it on behalf of the government. 6. It manages the public debt on behalf of the government, spent from receiving tax payments from the common public.
By virtue of the information that it possesses, the central bank functions as the adviser of the government It helps the government to monitor the economy. It formulates the monetary policy and helps in the implementation of the policy. It suggests to the government the type of foreign policy, tax policy, commercial policy, exchange rate policy, etc., depending on the economic conditions prevailing in the country. It also maintains the foreign exchange reserves of the government.
iii. Central bank acts as the bankers' bank:
This function of the central bank can be classified into two sub-functions. They are: 1. It is the custodian of the cash reserve of the commercial banks and 2. It is the lender of the last resort.
Let us discuss each one these sub-functions.
As regards the first sub-function, it is mandatory in the case of commercial banks in every country to keep a part of their total liabilities in the form of cash reserves. The quantum of cash reserves which the banks have to maintain depends on the policy of the central bank. Usually the commercial banks maintain two types of cash reserve. One type of reserve is maintained with the central bank and the other is maintained by the commercial banks with themselves. This type of centralization of reserve of commercial banks confer the following advantages : 1. It improves the public confidence. 2. It facilitates effective and fuller utilization of cash reserve of the country. 3. It enables the central bank to go to the rescue of the commercial bank which is in need of funds. 4. On the basis of the serve, the commercial banks are able to create credit. 5. It also conducts all the international financial transactions on behalf of the government Any payment for imports or receipts from exports are all accepted by it on behalf of the government. 6. It manages the public debt on behalf of the government, apart from receiving tax payments from the common public. 7. The central bank is able to exercise absolute control over the activities of the commercial banks.
We have already stated that the central bank acts as the lender of the last resort. This means whenever the commercial banks, in times of need, are not able to get financial accommodation from any other source, they can get it from the central bank. This is done in several ways. One popular way is that the commercial banks sell their securities and rediscount valid trade bills with the central bank and in turn get financial resources. The financial support by the central bank enables the commercial banks to improve their liquidity apart from carrying on their functions with limited funds. While this strengthens the public confidence, this also empowers the central bank to impose and exercise absolute control over the commercial banks. A significant merits of this function is that it has enabled the central banks over the globe to direct and regulate the flow of credit. They could ensure the availability of adequate funds for the priority sectors.
iv. The Central bank is the custodian of the nation's gold and foreign exchange reserves:
Central bank performs this very important function to protect the country from the consequences of foreign, trade. It issues the export and import permits to the traders and others. Through this, it ensures that all the international transactions are performed only through the central bank and the payments and receipts are routed through it. This prevents misuse and speculation in foreign exchange. With the centralized system, the central bank is able to maintain the exchange rate and resort to selling or buying of foreign currencies to minimize the fluctuations in the exchange rate. It is also able to encourage all the productive export oriented activities and discourage the unnecessary and wasteful import activities. It also formulates and executes exchange regulation policies, punishing and penalizing the erring individuals and institutions. It strengthens the county's trade relations with other countries.
v. The Central bank collects and publishes economic statistics and other useful information:
In every country, it is the central bank which is given the powers to collect all the economic data related to the country and publish them as authoritative information. This helps the government to understand the actual economic condition prevailing in the country and take suitable policies. For instance, through the collection and analysis of price data the government is able to understand and formulate the necessary price policies to maintain internal price stability. Similarly, credit policy, agricultural policy, industrial policy and other policies are all formulated on the basis of the economic data and useful information provided by the central bank.
vi. Central bank acts as the bank of central clearance, settlement and transfer:
With the expansion of branch of banks and increasing use of banking services, the transmission of funds from one place to another place has become essential. The volume of funds transmission has gone up by several times these days that any delay is causing irreparable damage to the economy. The transfer of funds takes place efficiently and quickly only with the help of central bank. Central bank is the /centre of clearing house operations. Every bank having an account with central bank is able to easily settle its payments receipts without any need to go through cumbersome cash movement. Further the credit base in an economy can expand only when the negotiable instruments can be freely transferred and honored with minimum delay possible. In this respect the clearing house operation of the central^' bank in every country assumes special importance. The value of this service of thereof central bank can be understood only when this service is affected in times of banker strikes. Huge amounts of cash transactions remain immobile causing immense of difficulties and paralyzing the economy. vii. Central bank acts as the controller of credit:
Of all the functions of the central bank, this function of the central bank is very important. Indiscriminate and uncontrollable creation of credit will result in serious implications. Hence, the central bank performs this function. It helps in first limiting the quantum of credit created through its quantitative credit control policies and second it also ensures that the available funds are channelized properly; so that the funds will be used productively. The central bank achieves this through its qualitative credit control policies or selective credit control policies. Through the credit control policies, the central bank strives to maintain domestic price stability, exchange rate stability, high level of employment, etc. Central bank has several weapons to discharge this function which are interlinked and help to achieve the objectives of credit control policies.
OBJECTIVES OF CREDIT CONTROL POLICY OF THE CENTRAL BANK VARIOUS INSTRUMENTS OF QUANTITATIVE CREDIT CONTROL ALONG WITH THE LIMITATIONS OF EACH ONE OF THE INSTRUMENTS.
The following are the objectives of the credit control policy of the central bank : 1. Maintaining the internal price stability. 2. Controlling the economic fluctuations, i.e., business cycle. 3. Achieving the stability in exchange rate. 4. Maintaining the stability in the money market. 5. Promotion of economic growth through well planned and coordinated efforts and 6. Preparing the country to meet any eventuality like wars.
Broadly, the various methods of credit control can be classified
i) Quantitative credit control and ii) Qualitative credit control.
The former aims at controlling the volume of credit and money supply in the economy, while the latter aims at channelising the available credit in the desired direction. The quantitative credit control policy makes use of three important methods of controlling the volume of credit and money supply in a country. The three methods are: 1. Bank rate or discount rate policy. 2. Open market operations and 3. Variable cash reserve ratio.
1. Bank rate or discount rate policy :
It is one of the earliest methods of general credit control developed by the Bank of England and it was considered an effective method till the outbreak of I World war. After the war, Bank of England developed other methods as it found the bank rate policy to be not so effective. The essence of this policy that commercial banks approach the central bank whenever they are in need of financial accommodation. They get the necessary assistance by re-discounting the eligible bills and other securities. The Central bank would re-discount these instruments at a rate which directly determines the volume of funds which the commercial banks can get through this method of financial accommodation. A revision of this re-discounting rate by the central bank will necessitate the commercial banks to change their rate of discounting of eligible bills and securities.
As a result the businessmen will be encouraged or discouraged in approaching the commercial banks to get financial accommodation. Hence, it could be understood that the re-discounting rate is very much linked with all the other market rates and; discounting rate. In order to understand the process let us take an example. Suppose a commercial bank has a discounted trade bill worth Rs. 2 lakhs at 15% and given holder of he bill Rs. 1.70 lakhs. Suppose the commercial bank is in need of funds it can approach the Central bank and get the same bill re-discounted. Suppose the re-discounting rate 10%, then the commercial bank will get after re-discounting the bill Rs. 1.8 lakhs. Now it should be noted that the rate at which the Central bank discounts the eligible bills already discounted by the commercial banks is called re-discount rate or bank rate. The discount rate refers to the rate at which the commercial bank discounts the bills of the businessmen. The bank rate or the re-discount rate and the discount rate are very closely related. Suppose there" is inflationary situation prevailing in the economy and the Central bank wants to> reduce the purchasing power. It will then raise the bank rate. Suppose the bank rate is raised from 10% to 15% correspondingly the commercial banks will also raise their discounting rate from 15% to say 22% As a result the commercial bank/ will get only Rs. 1.7 lakhs after re-discounting the bill and the businessman will get only Rs. 1.56 lakhs after discounting the bill. Since the rate of discount is very high or the cost of borrowing in the market becomes high, the business men will start borrowing less and so volume of credit will come down. This will lead to decline in economic activity and the price level will fall down. Similarly during deflationary situation, the downward revision of bank rate will bring down the discount rate and encourage more borrowing and expand the economic activity and allow the price level to go up helping the economy to recover. At a lower bank rate and discount rate the bank credit is made cheaper and borrowing is attractive-There are two interpretations available in explaining the process of the bank rate policy. One was developed by Hawtrey and the other by J.M. Kemes.
According to Hawtrey, the interest changes constitute major part of the cost of holding and that businessmen are very much sensitive to changes in interest rate. He explained that any change in bank rate will bring about corresponding changes in short term interest rates. Suppose the bank rate is raised, the short term rate of interest will go up making the bank credit costly and discouraging the business men from borrowing and investing. This will lead to shrinking of business activity affecting employment and income. When the employment goes down, the income goes down, bringing down the purchasing power, thereby the demand for goods will fall causing price to fall. Similarly a rise in bank rate will have opposite effect.
Keynes, on the other hand, was of the opinion that any change i bank rate will affect the short term interest rates and bring down the capital value of old long term securities as the new short term securities carry higher return. So there will be diversion of investment from long period to short period securities. To avoid this diversion, the long term rates should be revised upwards which will make borrowing costly. As there will be no corresponding upward revision in the marginal efficiency of capital of long term investment the businessmen will be forced to reduce their investment which will mean fall in output, employment and income. As a result the aggregate demand will fall down and the inflationary tendency will be arrested. Both these interpretations are correct as one approaches the problem of inflation through short period securities and the other through long term securities.
The effectiveness of the bank rate policy in controlling the credit depends on the following conditions: 1. The bank rate and the other interest rates should be very closely interconnected, as otherwise the desired effect through manipulation of bank rate cannot be achieved. 2. The economic structure of the country should be elastic. This means that wages, costs and' prices should be flexible so that they cart change depending upon the changes in bank rate. 3. The existence of well developed and well Organized short term funds market is the next requirement.
Limitations of the bank rate policy:
The bank rate policy in practice has not been very effective because of the following reasons: 1. The conditions for the success of the bank rate policy are rarely met in practice, making it ineffective. 2. Businessmen and industrialists are found to be less sensitive to changes in interest rate as they change their policies depending upon the business prospects and adversities. 3. Bank rate has been found to be non-effective in controlling deflation, as mere reduction in bank rate and through that making credit cheaper does not enthuse the investors to increase their investment. 4. There exists conflict between the internal and external effects of the bank r policy. For instance, when domestic borrowing becomes costly, international borrowing may become cheaper defeating the purpose changing the bank rate. 5. Commercial banks are found to be increasingly less dependent on the central bank and so any change in bank rate fails to bring the necessary effect. 6. Rank rate policy affects both the productive as well as unproductive activities in the same way; so it is not advisable. 7. The increasing importance given to the fiscal policy, especially after Keynes has made the bank rate less useful. 8. The changing pattern of business finance with over emphasis on ploughing back of profits, building up reserve funds, etc have made investors relying less on commercial bank credit and as a result bank rate policy has become ineffective. 9. The formulation of other methods of credit control has also led to the decline in importance of bank rate policy. 10. Financing through discounting of bills or other negotiable instruments has become outdated as there are other modern methods of financing and so bank; rate policy is less effective.
As far as India is concerned the bank rate policy has not been very effective because:
(i) the existence of organized banking sector and the unorganized indigenous banking sector. Any change in bank rate will affect only the former and not the latter.
(ii) there is no co-ordination between the organized and unorganized sectors.
(iii) the Indian commercial banks always keep extra cash reserve to tide over their/ financial crisis without relying on the central bank and
(iv) the bill market and the non-availability of eligible bills have made the bank rate policy ineffective.
2. Open market operations :
The open market operations as a method of quantitative credit control are interpreted in two ways. In a broad sense, it refers to the buying and selling of government securities as well as other eligible papers like bills and securities of private concerns by the central bank. In a narrow sense it means the buying and selling of only government securities by the central bank in the money market. The process of open market operations affects the volume of credit, the level of business activity and the internal price level. The process is explained below.
Suppose in an economy there is inflationary tendency and the expansion of credit is very high, and die central bank wants to control this. Then the central bank will start selling securities in the open market to both the banks as well as the private individuals. When these securities are bought, payment is made in terms of cash. This will bring down the cash reserve of the commercial bank with which they can only crease lesser credit As a result the expansion of credit will be reduced. Similarly, suppose the central bank wants to expand credit in order to revive an economy in deflationary situation. Then it will start buying securities in the open market from the commercial banks and others. This means, the central bank will pay them cash adding to their cash reserve. This will enable commercial banks to create more credit. Apart from expanding or contracting credit creation, open market operation can also influence the interest rate. For instance, when the central bank buys securities giving cash, the interest rate will fall down and when the securities are sold, the interest rate will go up.
The open market operations became very popular since the 1 World war. With the increased availability of government and other securities, it has become more useful. As the bank rate was proved to be ineffective, there was need to make increasing use of open market operations. Further it has helped to remove the shortage of money in the money market apart from helping to make the bank rate policy successful. A major contribution of the open market policy is that it is very helpful in checking the 'run on banking.' However, the success of the open market operation depends on the following conditions:
1. Existence of a well developed securities market is a must for making the policy effective. The non-fulfillment of this condition has made this policy less effective in under developed countries. 2. The maintenance of excess cash reserve by the commercial banks defeats the object of this policy easily. 3. The operations of extraneous factors like leakage of cash or injection cash into the country may affect the effectiveness of this policy. Suppose when the central bank buys securities, the injection of additional cash be used to set right the balance of payment deficit or people may ; holding more cash or the velocity of money may decline. As a result policy becomes ineffective. 4. The attitude of the borrowers may stand in the way of this policy succeeding, suppose the central bank wants to expand credit and so buys securities. The availability of credit need not induce the investors to borrow more from commercial banks. That is if the investor's attitude is not in consonance with the policy of the central bank, the open market operation^ will fail. 5. The central bank should have adequate stock of securities to effectively, participate in the open market operations. 6. The commercial banks should not have any other way of getting financial accommodation from the central bank as otherwise die open market operations will be less effective. 7. It has been found in practice that this policy is more effective in controlling^ credit creation or expansion rather than in stimulating credit expansion as the borrowers are influenced by other factors apart from the cheapness of credit.
3. Variable cash reserve ratio :
Considering the limitations of the bank rate policy and the open market operations, the need to develop a very effective method, of credit control was felt. Especially, the need was to directly control the power of the commercial banks to create credit Variable cash reserve ratio was suggested as one more method of quantitative credit control by Keynes. Further this method is considered necessary for promoting the overall liquidity and solvency of the banking system, apart from improving the public confidence on the banking system.
The process of working of this method of credit control can be easily understood with an example. Suppose in an economy there is over expansion of credit which is possible with excessive cash reserves with the commercial banks. To check this, the central bank may raise the cash reserve ratio say from 20% to 25% Then this will bring down the availability of cash reserve with the commercial banks. With lesser cash reserve they can only create lesser credit. Similarly, suppose the central bank wants to expand the credit creation by the commercial banks. Then it will bring down the cash reserve ratio say from 25% to 20% This will enable the Commercial banks to have more cash reserve with which they can create more credit. It should be noticed that the cash reserve ratio determines the credit multiplier in an economy. An increase in former will contract credit through multiplier effect and reduction in the former will expand credit through multiplier.
In India the variable cash reserve ratio is slightly altered and it is called Statutory Liquidity Ratio (SLR). SLR means that every commercial bank should maintain a certain amount of liquidity to meet its liabilities. This SLR includes, the cash reserve with the RBI, cash-with other banks-and investment in government securities, any increase in SLR will reduce the lendable funds with commercial banks and decrease in SLR will increase the lendable funds with them. SLR helps in not only credit control but it also helps in assisting the government's borrowing programs. This method is also called as the method of secondary reserves requirements.
Though the variable cash reserve ratio is considered superior to other methods of quantitative credit control, it has the following limitations: 1. Commercial banks with excess reserve are least affected by the method. 2. Commercial banks with a very strong source of foreign funds can by-pass this policy. 3. The central bank's policy of liberalizing or contracting the credit may not be commensurate with the investor's attitude. 4. This policy also affects all commercial banks uniformly i.e., banks with large cash reserve as well as small reserve. As a result the policy may harm some banks in the process protecting the economy. 5. The commercial banks will lose their freedom because of the policy, hence, they will always be cautious in maintaining additional reserve. 6. As the cash reserves maintained by the commercial bank do not fetch any interest, in a way, this policy brings down the earnings of commercial-banks. 7. As this method is very effective, it has to be very carefully applied by the central bank as otherwise it has to undo itself all that it has attempted to maintain economic stability. 8. This policy directly affects the securities market as increase in cash reserve required by the central bank will force the commercial banks to dispose of securities they have, causing depression in prices of securities resulting in heavy financial loss.
In spite of all these limitations, the variable cash reserve ratio is by and large effective method of controlling the quantum of credit in an economy this policy has to be carefully adopted as otherwise, it may result in severally, unwanted consequences on the economy.
QUALITATIVE CREDIT CONTROL OR SELECTIVE CREDIT CONTROL! POLICY AND THEIR LIMITATIONS.
Qualitative or selective credit control policy refers to the set of policies implemented by the central bank in order to channelize the available credit in-the desired direction. For example, suppose in India the agricultural and small scale industry sectors are to be encouraged, then the RBI may direct the commercial banks to be more liberal in lending to these sectors and be strict while lending to other sectors. This will help the economy to provide ample opportunities for the priority sectors to grow. In other words, in every country the government determines in advance the priorities and to ensure that the banks conform to the priorities in their lending policies, the selective credit control policies are implemented. Hence, while the quantitative credit control policies aim at controlling the volume of credit created, and the money supply in the economy, the qualitative credit control policies help in using the available funds only for the important purposes and discourage unnecessary lending by commercial banks. The objectives of the selective credit control policies are : 1. to divert available funds only to the urgent and desirable purposes, 2. to control and regulate a particular sector an economy without affecting the entire economy as a whole 3. to discourage wasteful and uneconomical consumer expenditure on non-essential items. 4. to correct the unfavorable balance of payments of a country and 5. to control and regulate even the non-banking financial houses or intermediaries.
The important methods of selective credit control policies are : 1. Margin requirements 2. Regulation of consumer credit 3. Control through directives 4. Rationing of credit 5. Moral suasion 6. Direct action and 7. Publicity.
1. Margin requirements :
It is well known that commercial banks lend against valuables and securities. These securities are the collateral for the amount lent. While accepting the securities for the loan the banks first asses the market value of the securities and then considering the amount of loan required the bank would require the margin to be paid by the borrower which on most occasions is the difference between the market value of the securities and the amount of loan required. However, the central bank has the right to determine the margin amount payable by the borrowers. This margin amount is stipulated in terms of percentage of the value of the securities offered or the amount of loan required. The central bank can vary this percentage of margin requirement from time to time to regulate the flow of credit on certain securities. In other words, central bank can also fix different percentages of margin requirements on different types of securities against which the loan is given, this method is effectively used to counter inflationary a deflationary conditions in an economy.
The major advantages of this method are: 1. it ensures use of available funds only for productive and useful purposes, 2. it discourages speculative activities, 3. it helps to control inflation by diverting the funds available to produce only goods which will help to bring down the price level and 4. it encourages sound investment projects.
However, this method has serious limitations as explained below : 1. fixation of very high percentage of margin may drive the borrowers to black: money market and 2. it may encourage collusion and corruption among the bank officials to show undue favors to certain borrowers.
Example : Suppose a person X approaches a commercial bank A for a loan of Rs. 20000 to buy a motor cycle. The banker then would ask borrower to remit, say 20% of the value of the motor cycle as margin money. Mr. X would remit Rs. 4000 and then the banker would give him a loan of Rs. 200. Suppose the central bank wants to discourage such lendings. It may increase the margin requirement from 20% to 40% Then Mr. X should remit Rs. 8000 to the banker to get a loan of Rs. 20000. This may discourage X from approaching the baker for the loan^, Suppose Mr. Y wants a loan of Rs. 50000 to start a small scale business unit. The-banker then may ask him to remit Rs. 5000 (just 10% of the amount of loan) as margin money. Suppose the central bank want to encourage such lendings it may, fix just 5% as the margin requirement for such loans and then Mr. Y would have to. pay only Rs. 25000 as margin money.
2. Regulation of Consumer credit:
According to this method of selective credit control the commercial banks are instructed to encourage borrowing for certain purposes and discourage certain, other types of borrowing. Usually consumers approach the commercial banks for loans to buy durable consumer good like T.V., refrigerators, washing machines, etc. The banks would direct the consumers to pay a part of the price of the item to be purchased and the, remaining amount is given as credit. The central bank may regulate the consumer credit in different ways. Most popular methods are :
(i) Central bank may extent or curtail the consumer loans to buy certain items during a particular time. For example, during inflationary period, the central bank may curtail the commercial banks from lending to enable consumers to buy T.V. fridge, etc. Then the demand for these luxury items will come down bringing down their price and indirectly helping to control general price level.
(ii) The central bank may alter the initial money to be deposited by the borrower and through that encourage or discourage borrowing. For example, during inflationary situation, the central bank may instruct the commercial banks to" get 40% of the value of the item to be purchased as the initial deposit payable by the consumer. Then this would discourage the consumer from borrowing. During the normal period this initial deposit requirement may be reduced to just 10%.
(iii) Changing the maturity period of the loan is one more method of consumer credit regulation., Suppose the central bank wants to encourage the consumer credit, then it may. allow maximum repayment period say 60 month's. On the other»hand, if it wants to discourage the consumer credit, it may fix the maximum repayment period as only 30 months. Accordingly the lending operations will increase or decrease.
(iv) Changing the rate of interest on consumer credit is one more usual method to regulate. Increase in rate of interest will discourage borrowing while reducing the interest will encourage borrowing.
3. Control through directives :
This method means the periodical directions, instructions, information, guidelines and warning issued by the central bank to the commercial banks to make the latter follow the credit policies of the former. The main objectives of this method are : i) to control the lending policies of the commercial banks. ii) to channelize the available credit to more productive and urgent uses from less urgent and less productive purposes. iii) to completely prohibit lending towards a particular purpose and iv) to determine the maximum amount that could be lent for certain purposes.
Every central bank is empowered to issue such directive by virtue of the statutory powers conferred on it and usually the central bank implement this policy by offering incentives like liberal refinancing facility to banks which follow the directives and restraining the erring banks by arranging for scrutiny of their lending pattern or imposing penalties for violation. In practice the commercial banks usually follow the guidelines and directives of the central bank and conflict on the ground seldom arises.
4. Rationing of credit:
It is necessary for every commercial bank to approach the central bank to improve its liquidity in times of need. Central bank can effectively use this 'dependence of commercial banks to control the credit creation or make them work according to the need t>f the time. Rationing of credit can be interpreted in two ways: i) the central bank may fix the maximum amount of financial accommodation to an commercial bank on the basis of rediscounting facilities. ii) the central bank may fix the quota for every commercial bank for financial accommodation.
The central bank may use the policy in any one of the two ways or both the ways, For instance, it may feel that a particular bank is creating excessive credit. To control this central bank may fix the maximum amount of financial accommodation that the particular commercial bank can get from central bank through re-discounting of eligible bills with central bank. This will certainly make the commercial bank to control its credit creation. But this method of credit control has certain limitations. Firstly, the central bank is suppose to be the lender of last resort for the commercial banks. But when it rations the credit to the commercial banks, it appears to be contradicting its role as a lender of the last resort. Secondly, the method is not so effective in a situation where the commercial banks have built up sufficient reserve so that they need not approach the central bank in times of need. In that case, rationing of credit has no purpose to serve. Thirdly, this method can be effective only when there is excess demand for credit over the supply of credit However, the central bank uses this policy along with the other policies in order to improve the over all effectiveness of the selective credit control policies.
5. Moral suasion:
Moral suasion refers to the persuasive approach of the central bank towards the commercial banks in making the latter follow and implements the policies of the former. Though the central bank is empowered to take direct action on the erring or violating commercial banks, yet it exercises that option only rarely. In its place, the central bank takes efforts to explain to the commercial banks the need for following certain policies. This is done either through periodical conference with commercial banks, or by appealing to the sentiments of the commercial banks. In effect this method aims at bringing to commercial banks into line through use of moral force instead of resorting to the legal powers. It should be noted that this method has no legal back up or support. It is merely applied using the conventional relationship between the commercial banks and the central bank. It has been quite successful in countries like UK, France, Holland and others. But it has not been very effective in USA under the unit banking system. In India, the RBI has found this to be very effective as there exists a very cordial relationship between the central bank and commercial banks. Of course, the success of this policy depends on the prestige, influence and leadership of the central bank Further since it has no legal back up in times of credit expansion it is not effective.
6. Direct action:
Direction action is one more method of selective credit control in which the central bank uses coercive measures against the erring commercial banks or banks violating the central bank ruling. It may vary from general instructions to the banks to special directives to the erring banks. Though this method has the legal sanction, central banks around the globe rarely apply this method. As a matter of direction action, central banks are vested with vast powers ranging from refusing credit and re-discounting facilities or imposing penal rate of interest on banks which have sought financial accommodation from central bank beyond the prescribed limit. In several countries, the central bank is empowered to formulate general credit policy or prescribe die rates of interest on different types of loans and advances or to divert the available bank credit to a particular industry etc. Though this method is very effective it is very rarely applied in isolation. It is normally combined with other methods. But this method has certain limitation like:
1. Direct action on commercial banks may make them work against the central bank at least psychologically. 2. The commercial banks are at a loss sometimes to follow the policy of central bank regarding productive and unproductive lending, essential and non-essential borrowing, etc., in the absence of clear cut definition. 3. The central bank through this method is able to regulate the functioning of commercial banks only. It cannot control directly any misuse of credit by any borrower. 4. This role of central bank contradicts its traditional function as the last resort.
7. Publicity :
Use of publicity as a method of selective credit control is a debatable question. In advanced countries this is used as an effective method of credit control while developing countries it is yet to be recognized as a measure. However the central bank can public its views, opinions, policies, guidelines, directions, observations, etc., periodically about the economic situation prevailing in the country of economic -variable's behaviour, money market, public finance, trade, industry, agriculture, etc. Such publications help to understand the changing situations and the needs of a country. The commercial banks are able to formulate their policies with the back ground information published, by the central bank, this method is very widely used in most of the advanced countries and in India the RBI publishes / various statements, returns, etc., helping the country to follow the changing.; economic situations and through that guiding the commercial banks. But the effectiveness of this method of credit control is debatable and it is usually applied along with the other methods control along with the other methods of credit control.
On the whole all the methods discussed above are not free from limitations which are explained hereunder: 1. The selective credit control policies are applicable to commercial banks; institutions in the unorganized sector and the non-banking financial intermediaries are left out of the coverage. As a result these policies may land commercial banks in a disadvantageous position. 2. In the absence of clear cut definition of productive and unproductive lendings, commercial banks cannot be effectively controlled through these policies. 3. These policies are ineffective as the commercial banks are unable to ensure the use of funds for the purpose for which they are given. 4. Commercial banks are encouraged to resort to manipulations and unhealthy practices to remain outside the effect of these policies. 5. In practice, these policies were not found to be effective in unit banking system. 6. These policies have no relevance if the businessmen, investors and other resort to different methods of raising funds than approaching the commercial banks. 7. It has to be noted that credit is one of the factors affecting the price of goods and services but control of credit-alone cannot bring about the desired changes in price level. In this respect, the selective credit control policies can be treated only as the alternative available and not the only method of achieving economic stability.
FINANCIAL INSTITUTIONS
Industrial Finance Corporation of India (I-^CI) and evaluate its working
The IFCI was set up by the Government of India in July, 1948 under a special Act with an authorized capital of Rs. 10 crores, (increased to Rs. 20 crores later) with a view to achieve speedier industrial expansion of the country. Pre-independent India could not advance industrially, since the British rulers at that time had no interest in the growth of industries in India, Indian industries needed institutional finance support to expand and modernize and this need was met by the establishment of IFCI. The shareholders of IFCI consist of IDBI, scheduled banks, insurance companies, investment trusts and co-operative banks. The repayment of capital and a minimum annual dividend are guaranteed by the Government of 1 India. The Corporation is authorized to issue bonds and debentures in the open, market, to borrow foreign currency from the World Bank and other organizations, accept deposits from the public end borrow from RBI. The important functions of the Corporation are: i) To grant loans and advances to industrial concerns and to subscribe to the debentures floated by them. ii) To guarantee loans raised by the industrial concerns in the capital market. iii) To underwrite the issue of stocks, shares, bonds and debentures of industrial concerns. iv) To directly subscribe to the shares of any concern.
The Corporation gives long and medium term finance only to companies engaged in manufacturing, mining, shipping and generation and distribution of electricity; with a ceiling of Rs. 1 crore to any single loan. The period of the loan shall not exceed 25 years. The Corporation charges lower rates of interest in case of projects in notified backward areas.
The following aspects are examined by the Corporation before a loan is granted: i) the importance of the industry to die national economy ii) the feasibility of the scheme, iii) the cost of the scheme, iv) managerial competence, v) nature of security offered, vi) adequacy of the supply of inputs like raw materials, availability of technical personnel etc. vii) the quality of the product, viii) end use of the product.
The Corporation accepts only fixed assets of the borrowing company as security and does not normally accept floating assets like raw materials and finished products as security. Personal guarantee of the Directors is also insisted upon. The Corporation exercises supervision and control over the borrower-company by appointing directors to the Board of Management and as a last resort could take over the management in case of persistent and willful default. Periodical reports from the borrowers and inspections by the-Corporation help the Corporation to watch the activities of the borrower.
The Corporation has rendered considerable service to our industries. Among the many industries which have received assistance from the Corporation, mention may be made of fertilizers, cement, power generation, paper, industrial machinery, etc.
In March, 1975, the Corporation sponsored the Risk Capital Foundation (RCF) to provide assistance to new entrepreneurs including technologists and professionals for promoting industrial projects to provide loans free of interest or at nominal rate of interest.
The Foundation was later (1988) converted into Risk Capital and Technology Corporation Ltd. (RCTC).
In addition to providing risk capital, the new Corporation provides technology finance by: i) providing substantial innovative technologies products, processes, market services, technological up-gradation, energy conservation, etc. ii) meeting the expenditure of national and international consultants, iii) financing sponsored commercial R & D programs.
In the area of priority sector, the IFCI has started new promotional schemes such as Interest Subsidy Scheme for Women Entrepreneurs, Consultancy Fee Subsidy Scheme for providing marketing assistance to small scale units, encouraging the modernization of tiny and small scale and ancillary unit and control of pollution in the small and medium scale units. Lately, the IFCI has evinced great interest in the development of backward districts.
Considering the financial facility available to the large and medium scale industries, even after 4 decades of independence, the role played by IFCI is something commendable. When the commercial banks have their own policy restrictions in lending for large and medium scale industries, the big units could not also raise funds easily through the capital market, general hesitation of the common, public (both domestic and foreign) to invest in such big units, IFCI is the only institution which has come forward to fund the large and medium scale industries. Since its formation in 1948, till March, 1992 IFCI has extended financial assistance to the tune of Rs. 14,300 crores to the industries of which nearly Rs. 9,660 crores have been disbursed.
Though the IFCI has been criticized for charging high rate of interest, delay in sanctioning of loans, insisting on personal guarantees of the Directors, etc., the Corporation has been rendering extremely credit worthy service in the industrial development of the country.
It has entered into the field of funding through underwriting debentures and shares guaranteeing of deferred payments in respect of imports from, abroad by industrial units, directly participating in the public issue of shares and debentures by the industrial concerns, etc. Hence, this institution, has certainly served the purpose for which it has been formed.
Industrial Development Bank of India (IDBI)
The IDBI was established under the Industrial Development Bank of India Act, 1964 as a wholly owned subsidiary of the RBI. It started functioning on July 1, 1964. The main objective in establishing this Bank was to provide long term finance to industries. From February, 1976 the ownership of IDBI was transferred to the Government of India, With the de-linking from RBI, the IDBI became the apex body for all industrial financing institutions in the country.
The Bank plays a special role in: i) planning, promoting and developing industries to fill the gaps in then industrial structure in the country; ii) co-ordinating the working of institutions engaged in financing, promoting or developing industries and assisting in the development of such institutions, iii) providing technical and administrative assistance for promotion, management or expansion of industry and (iv) undertaking market and investment research and surveys as also techno-economic studies in connection with development of industry.
IDBI enjoys considerable operational flexibility. The Bank can finance all types of industries irrespective of the form or size of an organization. Its activities are not crippled by restrictions on the nature and type of security which it should accept. The Bank is empowered to finance all types of industrial undertakings engaged in manufacturing, mining, processing, shipping and other transport industries and hotel industry.
The assistance rendered by the Bank can be grouped under three categories viz., i. direct assistance, ii. indirect assistance and iii, special assistance. 1. Direct assistance: This category consists of project finance, underwriting of and direct subscription to industrial securities, modernization assistance scheme for all industries, soft loans, technical refund loans and equipment finance loans. The Bank has the option to convert its loans into equity. It can guarantee loans raised by industrial concerns in the: open market from 'notified’ financial institutions. It can also accept, discount or rediscount bonafide commercial bills or promissory notes of industrial concerns. 2. Indirect assistance: This category is in the form of assistance through other institutions. It can refinance term loans given by other financial institutions like, IFCI, SFCs, etc., repayable within 3 to 25 years. It can refinance term loans repayable between 3 and 10 years given by scheduled banks/State. 3. Co-operative banks. The Bank can subscribe to stocks, shares, bonds or debentures of IFCI, the SFCs or any other 'notified' financial institutions. 4. Special assistance: The Bank has a special fund known as the Development Assistance Fund to be used for assisting those industrial concerns which are not able to secure funds in the normal course because of low rate of return. 5. The Bank also renders assistance to Backward areas by giving loans on softer terms, such as concessional rate of interest, longer grace and repayment periods.
The Bank extends assistance to small scale industries and small road transport operators indirectly through the State level institutions and commercial banks by way of refinance.
The Bank has launched a Fund called national Equity Fund Scheme in 1988 for providing support, in the nature of equity to tiny and SSI units and has set up all Voluntary Executive Corps Cell to utilize the services of experienced professionals for counseling SSI units tiny and cottage units and for providing consultancy support in specific areas.
The principal sources of funds for the Bank are its own share capital and reserves, borrowing from Government of India and RBI, market borrowing by way of X bonds, etc. The authorized capital of the Bank is Rs. 1,000 crores which can be raised further upto Rs. 2,000 crores.
The IDBI (as well as other term lending institutions) have introduced a two-tier interest rate structure for loans for industrial projects in the large, medium and small scale sector with effect from August, 1990. The first tier relates to the initial two years or the construction period of industrial projects (whichever is shorter) and the second tier applies to the period thereafter when industrial projects are expected to commence production. For the first tier, the normal interest rate would remain unchanged at 14% per annum, whereas for the second tier, the normal interest rate would be 15% per annum. To impart greater flexibility from July, 1991, the Bank has the freedom to charge interest rate above the floor rate of 15%.
According to the provisional figures available during the year 1990-91, the Bank sanctioned financial assistance to the tune of Rs. 5,604.6 crores and disbursed Rs. 3,511.5 crores. Similarly, in 1992-93 alone, the Bank had sanctioned Rs. 9,459.4 crores of financial assistance of which it disbursed Rs. 6,669 crores. Since its inception in July 1964, till the end of March, 1992 IDBI had sanctioned financial assistance of nearly Rs. 64,696 crores and disbursed nearly Rs. 47,088 crores.
Industrial Credit and Investment Corporation of India (ICICI)
ICICI was set up in 1955 under the Indian Companies Act. This was sponsored by a mission from the World bank as a result of international co-operative effort to encourage private investment in India. It started with an authorized capital of Rs. 60 crores and a subscribed capital of Rs. 22 crores. The authorized and subscribed capitals have since been increased to Rs. 100 crores and Rs. 49.5 crores respectively.
The aim of ICICI is to stimulate the promotion of new industries to assist the expansion and modernization of existing industries and to furnish technical and managerial aid so as to increase production and thus create employment opportunities. With this aim in view the Corporation provides financial assistance to enterprises as detailed below: • underwriting of direct subscription to shares, bonds, and debentures, • loans in rupees and foreign currencies • guaranteeing payments for credits given by Indian and foreign sources. • credit facilities to indigenous manufacturers who sell industrial equipment on deferred payment basis. • equipment leasing facility • merchant banking services • project counseling for non-resident Indians
Regarding sources of funds for its activities, the Capital of the Corporation is supplemented by borrowing from Government of India, the World Bank, IDBI, other foreign governments/agencies, and issue of bonds/debentures in India and foreign commercial markets.
The ICICI has promoted/sponsored the following institutions: a) Housing Development Corporation of India (HDFC) to provide long term finance to middle and lower income group of individuals, co-operatives, etc b) Credit Rating Information Services of India Limited (CRISIL) to provide credit rating services to the corporate sector; c) Technology Development and Information company of India limited (TDICI) to finance the transfer and up-gradation of technology and provide ' technology information.
The provisional figures available for 1990-91 put the Corporation's assistance at Rs. 3,857.5 crores as sanctioned and Rs. 1,936.5 crores as disbursed.
Adam Smith's canons of taxation and the principles of a sound tax system '
Adam smith's Canons of taxation : .
Adam Smith laid down four canons of taxation. They are: i) canon of ability, ii) canon of certainty, iii) canon of convenience and iv) canon of economy. i) Canon of ability : According to this principle of taxation, the people in a country should contribute towards the government expenditure. Their.:*§ contribution should be according to the ability to pay of each individual. A rich man should contribute more and the poor either should contribute less & or can be exempted. This principle of taxation will ensure that the cost of public expenditure is shared by the people in accordance with their individual ability.
ii) Canon of certainty : Adam Smith insisted that the-government should know in advance the amount of revenue that it could raise and the time when it could mobilize the revenue. On the part of individual tax payers, they must know clearly the amount of tax that they have to pay; the time when they should pay and the method of paying the tax. Adam smith felt that it is necessary that the people should be certain about their tax commitment, so that there cannot be any exploitation of the tax payers either by the government or by the tax collectors. This implies, once the people are clear about the amount of lax, they will plan their expenditure accordingly so that tax payment will not be felt a penalty.
iii) Canon of convenience : According to this canon, the tax should be such that it is levied at the time when it is convenient for the people to pay. Similarly the manner in which the tax has to be paid should also be convenient for the tax payers. For example, the sales tax paid on any commodity is included in the price and the consumer does not feel when he pays the tax. At the same time, the government is able to collect the tax effectively without any possibility of evasion or avoidance.
iv) Canon of economy : This is a very important principle stating that the cost of collection of tax should be less than the tax revenue. In other words, the purpose of imposing tax will be defeated if the government has to spend f more money to collect less tax revenue. Only when there is economy in tax collection, that the tax revenue realized can be spent usefully. For example, in the case of direct tax like income tax, the government may organize tax raids on people who evade tax. If the cost of these raids is greater than the amount of tax recoverable, then it is not wise. On this ground, indirect tax like sales tax is more economical than income tax.
Several other canons of taxation have been introduced by the modem economists. Some of these canons are : canon of simplicity, according to which the tax structure should be easily understandable to the common men so that payment of taxes will not be difficult. Another canon is canon of productivity which implies that the taxes should fetch adequate revenue to the government to meet the public expenditure. Other canons like canon of elasticity, canon of flexibility, canon of diversity and canon of neutrality have also been introduced. According to Mrs. Hicks, a sound tax system should have the following characteristics: a. It should facilitate financing of public services. b. Tax, should be levied according to the ability of the people, the index of ability being income and family circumstances and c. similarly placed persons should pay similar taxes to avoid any discrimination. From the discussion above, we may lay down the following four broad characteristics as the principles of a sound tax system.
1. Equality in tax burdens :
This principle suggests that when the taxes are levied they ensure equality in tax burdens. In other words, through taxes the government can ensure that the tax burden is spread in such a way that persons who are placed in similar positions are made to bear the same burden of taxes. This implies that people who are better-off should bear more tax burden than those who are worse-off. Though this principle is universal, yet in the implementation of this principle problem like indicators of equality, effectiveness in practice, the method of achieving this equality, etc., will all be faced.
2. Productivity:
With the ever increasing responsibility of modern welfare state, the need for financial resources is always felt. As the modern governments spend huge amounts of money on public projects to maintain high level of public welfare, they have to raise enormous funds through taxation. Unless taxes are productive, the governments will find it difficult to implement public projects. Especially in a developing country, taxes are to be highly productive so that country can achieve growth with stability. Apart from being productive, taxes should also be flexible and ensure regular inflow of funds for the government. This implies that taxes., should not only fetch regular flow of revenue, but this flow should increase on decrease depending upon the circumstances. Of course, the productivity of taxes is a relative term and it depends on several factors such as tax base, rate of tax, the exemptions and concessions granted, the efficiency of collection, the tax payers psychology, etc. Hence, the fiscal authorities should design the tax system in such a way at each tax levied is productive and flexible.
3. Recognition of the rights and problems of the tax payers:
Government should not be aiming merely at high revenue through taxes. While designing the tax system, it should take into account the various problems and difficulties of the common public so that the taxes imposed will be successfully implemented. The government should also recognize die rights of the tax paying public. The tax system should be such that the public are able to easily pay the tax with minimum inconvenience and their complaints and grievances are sympathetically heard and redressed. No tax system can bring the expected revenue unless the tax paying public understands the purpose of the tax and cooperate with the tax administrators. Hence, the government should make the tax laws simple and comprehensible and the collection procedure simple. Tax payment should be a pleasure and must not irritate the public. The tax administrators should be tactful, courteous, remain impartial and be alert all the time to avoid any evasion and avoidance. A system to enquire into the grievance of the tax paying public should also be formulated so that the public will have a way of settling their problems and difficulties in paying taxes. Only when the administrators are understanding and sympathetic, the morale of the tax payers will be high and die tax system will function smoothly.
4. Adaptability of the tax structure:
The tax system evolved should be such that it matches well with the prevailing situation, hi a developing country, the burden of tax should not be very heavy as this will directly affect the morale of the tax payers. At the same time the government should also raise adequate revenue to meet its mounting public welfare expenditure. The best tax structure is one which can be modified suitably with changes in economy.
Distinction between direct tax and indirect tax
Direct and indirect tax:
Taxes are classified as direct tax and indirect tax. But the meaning of these two types of taxes is not clear. For a long time economists interpreted these two types in different ways. For instance, one group of economists considered taxes on production as direct taxes and those on consumption as indirect taxes. Taxes imposed on income are treated as direct taxes and those on expenditure treated as indirect taxes. J.S. Mill distinguished these two types of taxes in terms of the ability to shift the tax. Any person on whom the tax is imposed, if he himself pays the tax, it is called direct tax and if he is able to shift the tax Jo somebody who ultimately pays it then it is called indirect tax. For example, income tax is paid by a person as it is levied on the income earned by him, so it is a direct tax. On the other hand the sales tax imposed on the seller is shifted to the buyer. Now-a-days the distinction between direct and indirect taxes is explained with reference to the basis of assessments and not on the point of assessment. Hence, taxes assessed on the basis of income are called direct taxes and those assessed on the basis of expenditure are called indirect taxes. However, even this classification is not free from difficulties. For instance, when one man's income is treated as another man's expenditure, tax on one man's income may become the tax on another man's expenditure. Hence, till date there has been no satisfactory distinction between direct and indirect taxes. However, in practice this distinction is retained more for the purpose of grouping the different taxes.
Merits and demerits of direct tax:
Merits:
1. Direct taxes are based on the principle of ability to pay and so they help to distribute tax burden equally. 2. As the tax is imposed on each individual, for example, based on his income, he is certain about the amount of tax payable by him. Hence, the direct tax satisfies the canon of certainty. 3. Direct taxes are also highly flexible. The revenue from them can be increased or decreased depending upon the need of the government. For example, the government can simply raise the rate of tax to get more revenue and bring down the tax rate to reduce the revenue. 4. The tax paying people are more interested in the ways in which the tax revenue is spent by the government. They feel proud of participating in the public projects by paying tax.
Demerits: 1. Direct taxes like income tax, are considered as tax on honesty of the people. Those people who can evade or avoid it are rarely prosecuted. Hence, there is no incentive to pay the tax. 2. There is no logical basis for levying or determining the tax. As a result political considerations overweigh the economic and other considerations. For example, a communist government may impose very stiff tax rate while a socialist government may not do so. Hence, there is ample scope for arbitrariness in the imposition of tax. 3. From the view point of tax collection, the cost of collection of direct taxes is very high compared to that of indirect taxes, For example, income tax has to be collected from every person who should pay tax. Hence, a very elaborate arrangement is required in the form of administrative machinery which simply increases the cost of tax collection. 4. One more difficulty is not all the tax paying individuals are aware of the provisions of income tax. The provisions are so complicated that unless an individual is clear about them he will be paying more tax. In the case of corporate tax, every effort is made to minimize the tax burden by taking advantage of the loopholes in the tax laws. 5. Another demerit of the direct taxes is that in case of any dispute, it takes a long time for the common public to secure justice and still more time to get back the excess tax paid.
The evaluation of the merits and demerits of direct taxes indicates the problems experienced are more related to administrative aspect and not the economic aspect. Efforts have been taken in India to simplify the assessment, exemptions, procedures and refund of direct taxes. This has helped to increase tax revenue from direct taxes. The tax administrators in India adopt persuasive techniques instead of coercive methods to obtain as much tax revenue as possible and minimize tax evasion and avoidance. Frequently amnesty schemes are announced to provide opportunities to the public to turn honest
Merits of Indirect tax: 1. Indirect taxes are imposed at the point of consumption and so it is very easy to collect them. 2. The cost of collection of indirect taxes is almost nil as every person will pay the tax as he buys the commodity on which the tax is imposed. 3. It is very simple and easily understandable as only a fixed percentage of the sale price is collected as tax. 4. A significant merit of indirect taxes is that it cannot be evaded or avoided as the only alternative to not paying the taxes is not to consume. 5. Like direct taxes, indirect taxes are also highly flexible. They can be altered to suit the requirement of government's need for funds. 6. Another important merit is that even the poorest in a country will contribute towards the cost of public service. 7. Indirect tax is the ideal way to discourage consumption of luxurious and unwanted goods.
Demerits: 1. The fundamental defect of this type of tax is that it does not conform to the principle of ability to pay as it affects every individual hi the same way irrespective of his economic position. 2. The revenue from indirect taxes cannot be certain. This is because a tax imposed on a commodity with highly elastic demand will bring down the demand for the commodity and along with that the taxes. On the other hand a tax on a good with inelastic demand can fetch the desired revenue. A main difficulty is that the elasticity of good is influenced by several factors and so the tax revenue may be uncertain. 3. As the indirect taxes are usually a fraction of the price paid, the tax payers never feel the payment of taxes. Hence, they evince little interest to know how the amount of tax revenue is spent. 4. Yet another problem of indirect taxes is that very stiff rates encourage black marketing, smuggling and other illegal trading practices. 5. Sometimes, the indirect tax levied on a commodity will vary from state to state causing lot of hardship for the tax administrators and encouraging the people to buy the goods in the state where the tax is less and sell the goods, in the state where the tax is high. This might affect the businessmen in the latter state. 6. Though the cost of collection of indirect taxes is less, yet, the records to be maintained and inspected are voluminous involving enormous time and energy of the lax administrators. This gives wide scope for corruption and malpractice among the officials.
Comparison of direct and indirect taxes:
Having discussed the merits and demerits of both the direct and indirect taxes, it could be understood that indirect taxes are superior to direct taxes in several respects. For example, indirect taxes can be selectively imposed on goods of harmful nature to discourage the consumption of such goods. This selectivity is not possible under direct tax. Between the two types of taxes, direct taxes directly affect the incentive to work and save severely. But indirect taxes have no such direct impact. In a developing country, to reduce income inequality increased dose of indirect taxes is better. Though this may mean taxing the poor also, yet in modern times, with overall improvement in standard of living, slowly poor people should also be subject to the tax net. Moreover, in a country where there is large scale tax evasion, tax avoidance, black marketing, smuggling, etc., indirect taxes are the best instruments to put down such evil practices. All these superiority of indirect taxes over the direct taxes need not mean that direct taxes should be abolished. A balance should be maintained between these two types of taxes so as' to discourage and avoid any attempt to evade or avoid tax. The various problems associated with each one of these two types of taxes should be seriously studied to overcome them. Especially the administrative problems can be overcome only by exposing the officials to the modem techniques of tax collection, giving them attractive incentives and rewards for honest work, encouraging them to suggest modification to improve the effectiveness of the taxes, etc.
DEFICIT FINANCING
Its purpose, effects and limits of deficit financing
Deficit financing is understood in different ways in different countries. It is understood as the excess of current expenditure over current revenue which is financed either through public borrowing or the creation of new money by the government. So the deficit budget is also called deficit financing in USA. But in India deficit financing is understood in a different way from deficit budget. While the former refers to a situation where the current expenditure exceeds current revenue of the government, the latter is taken to mean the excess of aggregate expenditure (both on current and capita! accounts) over aggregate revenue. The former is called deficit budgeting and the latter deficit financing in India. Deficit financing in Indian context refers to the meeting of budgetary deficit through the creation of new money adding to the existing money supply in the economy. Deficit financing includes any or all of the following in India:
i) the government withdrawing its cash balance with the Central bank, ii) the government borrowing funds from the Central bank, and iii) the government; resorting to printing of new currency notes with a view to cover the budget deficit
Purpose of deficit financing: :
There are several purposes for resorting to deficit financing. The following are the; purposes: 1. War finance: A country in war experiences severe shortage of financial, resources, especially the cost of modem warfare is so prohibitive that the country resorts to deficit financing. During this period the country cannot resort to taxation or public borrowing because of the situation in the economy. But it should be noted that such a method of financing the war expenditure, is very dangerous, as during the war period apart from the destruction of, the existing assets, there is no possibility of increasing the production. Further all the productive activities will be to meet war requirements. Hence, with the addition to money supply, there is no corresponding increase in the production. As a result, deficit financing during the war time should be highly inflationary in nature.
2. Economic depression: During the period of depression the purchasing now of the people is very low and the private investment will not be possible because of the gloomy picture all round. Therefore economists like Keynes suggested that public investment should be increased in large scale. The funds for such a dose of public investment can come from either taxation or public debt or deficit financing. If taxation is resorted to for raising funds for public investment, as it means only a transfer of purchasing power from the people to the government, while during depression what is required is new additional, public expenditure. Public borrowing or public debt as a source of public expenditure is also having its own limitations. For example, public borrowing only means addition to the financial burden of the government and the pubic in terms of debt servicing or payment of interest on public debt. Therefore as a third alternative deficit financing is considered. Though there are objections to this alternative stating that it is basically inflationary, Keynesian supporters argue the other way. During depression the economy is in a pit and all the resources are remaining unutilized or under utilized. In such a situation, if the government resorts to deficit financing it will only help to increase employment, output and investment. So there cannot be any inflation until the economy reaches-the lull employment level, no more deficit financing should be allowed as it then becomes highly inflationary.
3. Economic development; Alter the II World war, several countries around the world became independent. In their effort to build up the nation, these countries were in need of heavy dose of funds. This is all the more felt because some of these countries selected planning as a strategy of economic development. They had only three alternatives to raise funds for their development efforts. They are taxation, public borrowing and deficit financing. Taxation as a source of raising funds was ruled out because of the nature of war shattered economy, low purchasing power of the people and also the political reasons prevented this alternative as most of the countries turned to be democratic one. Public borrowing also could not be resorted to as people were already impoverished and there was no way of inducing them to lend more. Further the debt servicing was expected to over-weigh the government's financial burden. Then every country preferred to use* deficit financing as a method of financing their economic planning and economic development. Even India relied on deficit financing right from the I Five year plan. Of late deficit financing has become a permanent source of funding of Plan requirements.
I) Effect of deficit financing on price level:
There are two opinions regarding the effect of deficit financing on the price level especially in a developing country. According to one view, deficit financing need not be inflationary in character especially if it is used during the peace time. The advocates of this view argued that: a) In a developing economy the existence of non-monetized sector will absorb the issue of new currency and shrink in its size over a period of time. Therefore the additional money pumped into the economy will not go to affect the price level. b) Over a period of time the demand for money for transactions and liquidity purpose will increase. Therefore the additional money injected will not be spent but will only be kept by the people. Therefore, deficit financing need not be inflationary. c) A developing economy will have a large amount of unutilized resources and during peace time when the government resorts to deficit financing the additional money will be used only for resource utilization and so it need not be inflationary in nature.
However, the following arguments are leveled to claim that deficit financing is essentially inflationary in character:
i) There will be a lag in the expansion of output and the injection of additional money in the economy, such that the output will increase at a lesser rate than the money supply. Consequently, there will be inflation in the economy. This is because of certain rigidities in the effort to increase the output. Therefore, the actual output will fail short of the potential output.
ii) Developing economies follow unbalanced growth strategy and so they invest heavily on capital intensive projects which have a long gestation period. As a result the return on investment in terms of higher output will take a longer time and meanwhile increased use of deficit financing will only affect the price level causing inflation.
iii) In a developing economy majority of the people are poor and so their marginal propensity to consume is very high. Hence, when their income increases due to deficit financing, the demand for goods will outstrip the supply causing the prices to go up.
iv) Governments also resort to deficit financing for unproductive purposes, which will only fuel the inflationary pressure.
v) The developing countries have neither the necessary expertise nor the efficient administrative set up to keep the inflationary pressure caused by deficit financing under check. As a result deficit financing should lead to inflation. Considering the above arguments and also the practical experience, it is found that deficit financing is inflationary in character.
II) Effect of deficit financing on income distribution :
Deficit financing is inflationary in character and as a result it affects a section of the society favorably and the other section unfavorably. Rich people become richer and the poor turns out to be poorer because of deficit financing especially during the war period. The businessmen, traders, speculators, industrialists and other benefit by deficit financing through inflationary pressure while the workers, salaried income group, and others are affected badly. Hence, the existing inequality in a developing country will be widened more by deficit financing thereby defeating the ultimate purpose of socialism in bringing about equality. Therefore deficit financing is unjust and it not only worsens the income inequalities, it also prevents the attempt to improve the standard of living.
III) Effect of deficit financing on unemployment:
Regarding the effect of deficit financing on unemployment, we have to classify the economies as developed and developing economies. This is because the Keynesian prescription of deficit financing helps the developed countries to overcome the unemployment but it has not helped the developing countries in this respect. This is because in developed countries, when the economy faces depression, to revive the economy the government should undertake a large scale public investment. Funds for this purpose cannot be raised through taxation or public borrowing and so only deficit financing is the ideal method. Defied financing has helped the developed countries to overcome unemployment, because during depression the government increases the public investment which will increase the effective demand and thereby constitute the ground for increasing the private investment. With the operation of multiplier then the output, employment and effective demand continue to increase pulling the economy out of the pit. But such a result in a developing economy is not possible, because, i) the nature of unemployment is not cyclical but chronic and caused because of deficiency of capital ii) there exists a large scale voluntary unemployment and disguised unemployment in the developing countries. Those who are coming under the second category do not know that they are unemployed. iii) in developing economics the multiplier process takes place regularly and smoothly and so unemployment is very much reduced. .But the conditions for the successful operation of multiplier are not found in developing countries and so the unemployment persists. iv) further in developing economies because of rigidities, large scale investment in capital intensive industries, high marginal propensity to consume and high marginal propensity to import affect the possible increase in investment and employment opportunities. With every increase in money supply, only the price level goes up and not the output and employment. Hence, the use of deficit financing in developing countries to solve the unemployment problem calls for a lot of precautions and careful administration as otherwise it would create several other complications.
IV) Deficit financing and economic growth:
It has been clearly proved that deficit financing m developing countries will accelerate economic growth, provided certain precautions are taken. The positive, role played by deficit financing in developing countries is because of the following reasons:
Firstly, in developing economies, the physical and human resources are under utilized and so the /created money' will facilitate, fuller utilization of these resources.
Secondly, in developing countries, because of economic planning the national income will be increasing and along with that the money supply should also increase. This should happen, as otherwise, the prices may fall and discourage any productive investment which should be disadvantageous for the economy.
Thirdly, the developing countries are characterized by the existence of non-monetized sector. When the economy grows, the size of this sector will shrink, which in fact means, that the additional money supply is being absorbed by this sector and so there is very little scope for inflationary pressure in the economy due to deficit financing.
Fourthly, with economic growth the standard of living of the people also goes up. Then they would require more money to meet their increased demand or otherwise, their liquidity preference will go up. This can be met only with increased money supply.
In spite of all the above arguments in favour of deficit financing, care should be taken to take notice of certain points. Firstly, in developing countries the existence of idle-human power is due to the limited growth of complementary capita / resources. Therefore, the country concerned should aim at developing more labour intensive industries. Secondly, in developing countries deficit financing may be inflationary affecting the balance of payments position distorting the pattern of investment.
The diversion of resources to the production and consumption of non-essential resources cannot be ruled out. This in turn will aggravate inflation. Therefore, the countries concerned should take the following steps to avoid facing the above consequences. Firstly, the country should resort to a moderate dose of deficit financing due to the poor absorption capacity of the country. Secondly, the authorities concerned should effectively check the rising prices of essential commodities, may be by following strict rationing and public distribution policies. Thirdly, a well planned taxation policy will also help to contain the inflationary pressure. Fourthly, the financial resources mobilized through deficit financing should be used for investment in short period high yielding productive projects. That is care should be taken to identify industries with short gestation period so that with the increase in money supply there can be corresponding increase in production. Inspite of all these efforts, the country may experience inflation. But such inflation need not be taken as a serious problem, and in one way it is also required to keep the initiative of the private sector investment. In other words, it will only help in achieving a higher economic growth. Hence, deficit financing does promote economic growth, provided the inflationary pressure is held under complete control.
V) Views on limits of deficit financing:
Economists have favored deficit financing for several reasons. To them a country needs enormous resources to achieve a higher rate of growth. Especially a developing country will require huge resources for public expenditure projects. A country like India wedded to public welfare, really requires a huge quantum of funds. This can be arranged for in different ways. One way is taxation, the second. is public borrowing and the third is deficit, financing. While taxation in a developing country would bring down the effective demand, the public borrowing may add to the financial burden of the people as the cost of debt servicing and management of public debt is so prohibitive that this cannot be an ideal source of funding economic recovery. Hence, only deficit financing is left with as an alternative. If it is administered with proper care and diligence, it should in fact be growth stimulating rather than inflationary. Therefore, resorting to deficit financing need not be considered as a wrong step. It is often said that if the, government can keep the inflationary rise in price below a certain level, say 3% then deficit financing is the ideal method of financing economic growth.
However, several precautionary steps are to be taken to ensure that deficit-financing is justified and plays the role expected of it. The following are some of the suggestive measures:
Firstly, the government should note the rate of growth of real income. If the real income grow at a faster rate than the rate of money supply, then there will be very limited increase in price. On the other hand if the growth of real income is less than the rate of money supply, then the economy will experience inflation. Hence, the government should carefully monitor the growth rate of real income.
Secondly, the government should, as far as possible use the funds obtained through deficit financing in promoting short period income generating projects which are productive in nature. This will facilitate absorption of increased purchasing power by the increase in output.
Thirdly, a developing economy with the existence of a large amount of unutilized physical and human resources may realize that deficit financing is helpful in higher utilization of these resources. In that case the inflationary pressure should be very much under control.
Fourthly, though deficit financing is the easiest way of raising resources for the government, the government should use this source judiciously. This means it should be conscious of (lie efficiency of its administrative machinery and capacity.
Specially, a hard working, devoted and uncorrupted set up is required if the inflationary effect of deficit financing is to be avoided.
Fifthly, the government should not use the funds raised through deficit financing in funding long period gestation projects even if they are highly productive. The investment in such projects will yield the return only over a period of time and by that time the inflationary pressure might set in the economy.
Sixthly, the impact of deficit financing on balance of payments situation of a country should be studied closely so as to avoid any inflationary pressure affecting the economy. Usually the favourable balance of payments is inflationary in character and so the government must resist the temptation of adopting deficit financing while there is balance of payments surplus.
The extent of deficit financing in India is given in the Table below. From the table, we can understand that the deficit financing is one basic reason for the drag in our development and the inflation prevailing in the economy. The justification that in the initial stage of development every country is bound to have deficit financing is no longer reasonable in Indian case, as the time has come that our Five year plans should lead us to generate more resources from other sources instead of depending too much on deficit financing. The amount of deficit financing has increased from Rs. 330 crores during the I Five year plan to a huge amount of Rs. 20,000 crores during the VIII plan. This implies that our planners have started using deficit financing as the main source of funds for meeting our plan expenditure. It should be noticed, that over the five year plan period since I plan there has been an increasing reliance on deficit financing that the peak is found during the VII Plan With consistent efforts, the, planners are hoping to bring down this quantum of deficit financing to around Rs. 20,000 crores during the VIII Plan. Whether this is going to be achieved or not can be found out only in future.
DEFICIT FINANCING DURING FIVE YEAR PLANS
(Amount in Rs. Crores)
|PLAN |AMOUNT OF DEFICIT FINANCING |
|I |330 |
|II |650 |
|III |1,150 |
|IV |2,060 |
|V |5,830 |
|VI |5,000 |
|VII |28,457 |
|VIII |20,000 |
Objectives of fiscal policy and the role played by fiscal policy in a developing country
The following are the objectives of fiscal policy: 1. Maximization of the aggregate saving is the first objective. Tins are achieved by encouraging people to reduce the current and future consumption. Specifically' the attempt is to bring down and control the conspicuous consumption of the rich people.
2. Maximization of capital formation is the second objective. Through this objective the country can try to achieve an accelerated economic growth. This will help the country to overcome the stagnation and achieve a higher rate of economic growth.
3. The third objective is to divert the available resources from the less productive to most productive purposes. Through this it is hoped that the resources will be applied more for socially useful projects. In a country like India, where centralized planning is followed, the plan determines the priorities of the country and the fiscal policy ensures the accomplishment of these priorities through redistribution of productive resources.
4. Fiscal policy also helps in protecting the economy from inflation. Inflation in an under developed country is very dangerous, if it is not controlled in the initial stage itself. Though inflation cannot be avoided in the growth process, yet it has to be under full control as otherwise the benefits of growth will be eaten away by inflation.
5. Fiscal policy also helps in removing the sectoral imbalance in the economy in the process of growth. Usually in a developing economy, the price level may go up in certain sector in the growth process affecting that sector badly. Fiscal policy through appropriate tools can always prevent this sectoral imbalance, and help to maintain overall price stability.
6. Fiscal policy provides the necessary incentives for the industries which are capable of generating employment opportunities in large scale. For instance, the small scale industries are employment oriented and so fiscal policy can extend incentives to them.
7. A very important objective of fiscal policy is to bring down and eliminate inequalities in income and through that ensure equitable redistribution of income and wealth in society. This may be considered as the social objective of fiscal policy. But this objective is in contradiction with the growth, objective. That is, to achieve rapid economic growth, the savings in the economy should increase to facilitate rapid growth of capital formation. For this purpose, the rich should save maximum. If the fiscal policy tries to eliminate income and wealth inequality then the saving potential of the economy will come down and affect the growth prospects. Hence, the fiscal policy should neither be too much growth conscious nor attach importance to social objective. An ideal mix of these two objectives is the right fiscal policy.
Role of fiscal policy in a developing economy:
The important role played by the fiscal policy in a developing economy can be explained through : i. fiscal policy during inflation, ii. fiscal policy during depression, iii. fiscal policy and unemployment, iv. fiscal policy and income inequalities and v. fiscal policy and economic growth.
To understand the role of fiscal policy in a developing economy, first we should understand the four tools or instruments of fiscal policy. These tools are:
i. public expenditure, ii. taxation, iii. public borrowing and iv. public debt management. Now let us understand how these tools have to be used to achieve the various objectives of fiscal policy in a developing economy.
i. Fiscal policy during inflation:
Inflation is a period in which the purchasing power with, the people in the economy is high. The first step to curb inflation is to control the purchasing power with the people. This can be done using all the tools of fiscal policy. For instance, during inflation, since the private expenditure is high the government should bring down the public expenditure so that, to that extent the income generation will be, controlled. Alternatively, the government can increase the existing tax rates or impose new taxes. This will have the effect of taking away the purchasing power from the rich and well-to-do people thereby curbing the consumption expenditure. The tax revenue will then be used for public expenditure purposes which will also be low during inflation. Hence, there will be effective control of money supply in the economy. Another way in which the fiscal authorities can function is o indulge in public borrowing. The government may start borrowing from the people in large scale so that the disposable income with the people will be reduced bringing down the demand and prices. If voluntary lending is not effective, then the government may resort to involuntary lending or compulsory saving by the people. Through its debt management policy also the fiscal authorities can control inflation. The anti-inflation debt management requires the retirement or payment of bank-held securities or debts through budgetary surplus. But this is very difficult in practice as in a developing country the government cannot have budgetary surplus.
ii. Fiscal policy during depression :
Depression is a period characterized by low income, low employment and low consumption. Fiscal policy should change this situation. The government must adopt deficit budget in order to increase the income stream in the economy through increased injection of fresh purchasing power into the economy. Secondly, the government must encourage consumption and investment and for this purpose the taxation should be brought down. Liberalized corporate tax policy will also help to increase the corporate expenditure giving the necessary thrust for the revival of economic activity. Public expenditure during this period must be increased. The government can achieve this either through pump priming or compensatory spending. Pump priming refers to the initiation of investment activity by the government through its expenditure on public projects which will be followed up by the increased private investment. Compensatory spending is resorted to when the private investment is not adequate enough. Then the government also injects public investment through public projects. Public debt policy can be suitably modified to fight against depression. The government should borrow more from the rich people-and spend this amount in-large: scale on public works, and social security projects. All these steps will help to protect the economy and enable it to recover from depression.
iii. Fiscal policy and unemployment:
Fiscal policy plays a vital role in generating employment opportunities in the developing countries. In a developing economy, it should aim at solving the problem of both cyclical unemployment and disguised unemployment. While the former is of temporary nature, the latter has the snow-balling effect The latter refers to a situation in which more than the required number of people are employed in a job. In other words, by reducing the excess of labour from that job, the productivity or production will not be affected. Hence, it has been found that fiscal policy alone cannot solve this problem of unemployment in a developing economy. It has to be coupled with monetary policy. For instance, during inflationary period, the government should adopt surplus budget, along with hard money policy, while during depression, deficit budget should be combined with cheap money policy.
iv. Fiscal policy and income inequalities:
The Role of fiscal policy removing income inequalities in a developing economy cannot be exaggerated. With public expenditure and taxation, the government can very easily achieve income equality. The government should devise its public expenditure scheme by focusing on the poor and down-trodden people in the society. It may provide cheap food, cheap cloth, subsidized housing, free medical aid, free education, etc., to the poor people thereby raising their standard of living. For this purpose, the government should raise funds by imposing taxes on the rich people so as to bring down their purchasing power. It may completely or partially relieve the poor people from the tax net. This has the effect of-taking away as much as possible from the rich people and spending on poor people. It may also resort to large dose of indirect taxes so as to make the rich bear the burden as the poor will be paying such taxes only if they spend on items on which the government has imposed heavy indirect taxes. Therefore, taxation and public expenditure are the two very useful instruments of fiscal policy which can bring about the income equality in a developing economy.
v. Fiscal policy and economic growth :
Economic growth calls for the application of all the tools of fiscal policy. In developing economy, there may be no shortage of real or physical resources, but there may be a severe shortage of financial resources which are required to utilize the physical resources. The object of fiscal authorities should be to mobilize much funds as possible so as to carry out large scale public projects. A very effective method of mobilizing financial resources is taxation. The government can resort to both the direct as well as indirect taxes so as to generate as much funds as possible from all those who have the ability to pay. Different type of direct taxes and indirect taxes may be levied to cover every section of-the population. There can be specific taxes to curb certain consumption activities. Another instrument available is public debt. Apart from the voluntary lending schemes the government should also devise schemes to encourage compulsory savings. Resources mobilized in this manner should be spent in such a way that the infrastructural facilities are strengthened first. This should be followed by the expenditure on growth oriented industries and other related activities. Care should be taken to avoid creating or widening sectoral imbalance so that the benefits of growth will be shared by all the sectors in the economy. Government must use its planning machinery to identify the right priorities so that the hard mobilized funds are utilized in the best way possible. In this process now-a-days the governments also resort to deficit financing. It is considered as a means of financing economic development. But too much reliance on deficit financing will also be dangerous. However, fiscal policy can play a vital role in helping to achieve a rapid economic growth.
Public expenditure ii India and the causes for the mounting public expenditure in India
Public expenditure refers to the expenditure incurred by the government (both central and state) on various public projects. In these days, the welfare governments have to incur heavy expenditure so as to provide the minimum basic requirements to the poor and needy. Apart from this, the government should also undertake various activities like defence, transport, communication, power generation and distribution, medical, educational, etc.
All these will involve investing huge funds, which no private individual or corporate body can afford to make. Further the public expenditure is incurred mainly for the purpose of achieving economic growth and development and without any anticipation of reward or return. Hence, public expenditure incurred in large doses sometimes on wrong priorities may prove to be waste. In India the size of public expenditure incurred by the government is so huge as is clear from the table below.
EXPENDITURE OF THE CENTRAL GOVERNMENT (in Rs. crores)
|YEAR |REVENUE EXPENDITURE |CAPITAL EXPENDITURE |TOTAL EXPENDITURE |
|1950-51 |350 |180 |530 |
|1970-71 |3,180 |2,490 |5,570 |
|1980-81 |14,540 |9,630 |24,170 |
|1993-94 |1,01,840 |29,840 |1,31,320 |
|BUDGET | | | |
In the table above we have indicated only the central government expenditure and if we include the state government expenditure, then the total expenditure of the government stood at Rs. 36,850 crores in 1980-81 and went up to Rs. 1,98,16Q crores in 1993-94 (budget). From this it could be understood that the public expenditure in India has been increasing year after year.
Before we analyse the factors responsible for this huge increase in public expenditure, let us understand the components of public expenditure. Public expenditure has two major components viz. 1. Non-plan expenditure and 2. Plan expenditure. Both these are once again classified as Revenue expenditure and Capital expenditure. The Non-plan revenue expenditure includes : interest payments, defence revenue expenditure, major subsidies, debt relief to farmers pensions, postal deficit, police, social services, economic services, grants to states and Union territories, grants to foreign governments, etc.
The Non-plan capital expenditure includes: loans to public enterprises, loans, to States and Union territories and loans to foreign governments, etc.
The Plan expenditure is used to finance various Central plans like agriculture, rural development, irrigation and flood control, energy, industry and minerals, transport, communication, science and technology, environment, social services, etc. This also includes Central assistance for Plans of the States and Union territories. In the table below we have represented the Total expenditure of the government (both Central and State).
EXPENDITURE OF THE GOVERNMENT SECTOR (CENTRAL AND STATE) (IN Rs. Crores)
|PARTICULARS |1960-61 |1980-81 |1991-92 BUDGET |
|DEVELOPMENT |1,730 |24,430 |1,16,730 |
|EXPENDITURE | | | |
|NON-DEVELOPMENT |830 |12,420 |81,430 |
|TOTAL EXPENDITURE |2,560 |36,850 |1,98,160 |
Reasons for the growth in public expenditure in India :
Several reasons could be given for the ever increasing public expenditure in India. The important reasons are given below: 1. Increasing defence expenditure is one of the main reasons for the increasing public expenditure. With perennial threat in borders, India cannot but spend heavily on defence so as to keep the force with latest equipments and implements. 2. The next reason is the mounting expenditure on social welfare schemes like family planning, aids control, malaria eradication, etc,. Such schemes are very important from the national health point of view. Similarly the expenditure on noon-meal scheme by Tamilnadu and other schemes aimed at the poor and down trodden cannot be given up just because the government expenditure is on the rise. 3. The increasing expenditure on major irrigation projects and power projects is another reason for the growth in public expenditure. 4. With the objective of improving the literacy, the government is spending huge amount on education which is another reason for the rising public expenditure. 5. Various services like community development programs, police, general hospitals, public parks, roads, communication, etc., also take a huge share in public expenditure. 6. Ever increasing expenditure on wages and salaries of government employees is another basic reason for the increasing public expenditure. 7. The increasing cost of administering and managing the public sector units and public utility concerns also account for a sizeable part of public expenditure. 8. The ever growing public debt servicing is yet another reason for the heavy public expenditure in India
When we study the above reasons for increasing public expenditure in India, we will be able to understand that every developing country is going through a similar experience. After all this is inevitable in the process of growth.
INDIA'S PUBLIC DEBT
Before independence, Indian public debt was basically productive in nature as-,it borrowed mainly for the capital requirements of railway construction, irrigation; works, etc. According to an estimate, by 1939 India's public debt stood at Rs. 1,200 crores, of which nearly Rs. 925 crores was productive type. Further the total public debt included about Rs. 730 crores of internal debt and Rs. 470 crores was India's obligations in UK.
During the II World war, India's public debt shot up to Rs. 1,940 crores mainly due to war expenditure and other capital expenditure.
In the post-independence period, India's public debt during the I Plan was targeted for Rs. 520 crores while in the II Plan it was raised to Rs. 1,200 crores. Subsequently, the government fixed higher target for public debt and mainly this could be realized through government borrowing and small savings.
India's public debt consists of both internal debt and external debt. While the, former includes loans raised from open market, compensation bonds, prize bonds and 15 year annuity certificates, apart from treasury bills issued to RBI and other commercial banks, the latter mainly included borrowing from international institutions like IMF, IBRD, ADB, etc.
The public debt in India could be discussed under two sections viz. i.) public .debt of central government and ii) public debt of state governments.
i) Public debt of central government:
The Central government mainly borrowed for development schemes, though in these days it has started borrowing even to .meet its current expenditure. The central government has been increasingly relying on the external debt as is shown in the table below. The percentage of external debt in the total debt increased from a mere 1.5 in 1950-51 to nearly 18 by the year 1993-94 (budget).
Of the total external debt, India borrowed more than 30% from the USA alone. It is also interesting to note that the debt servicing has been increasing every year with increase in debt and the interest payment of the Central government alone is around Rs. 38,000 crores by 1993-94.
In the table below we have represented the debt and other obligations of the central government.
PUBLIC DEBT AND OTHER LIABILITIES OF CENTRAL GOVERNMENT
|ITEMS |1950-51 AMOUNT Rs. crores % |1993-94 AMOUNT Rs. crores % |
|Internal Debt |2,020 98.5 |2,04,690 82 |
|External Debt | 30 1.5 | 46,450 18 |
|Total Public Debt |2,050 100.0 |2,51,140 100 |
Public debt of State governments:
As regards the state governments, the public debt is incurred mainly towards* the welfare schemes and other social projects. The constituents of public debt in the case of State governments are: i.e. internal debt consisting of market loans, Ways and means advances from the RBI, and Loans from banks and other institutions ii. Loans and advances from the Central government and iii. Provident funds, etc. In the case of India, the loans and advances from the Central government alone constituted nearly 60% of the total debt till 1971 and by 1993 (budget) this component accounted for about 70% of the total debt. This is shown in the table below.
Another important aspect of state government public debt is that it was only around Rs. 3,300 crores by March, 1961, while it increased to about Rs. 1,68,780 crores as per-the budget estimate of 1993. It is said that the State governments are using the overdraft facility from the RBI without any control and this causes serious concern for the Central government. But this is so because, the Central government is able to raise loans easily from various sources and that too at a cheaper rate, but the State governments find it difficult to raise funds through public borrowing. They depend mainly on small savings and provident funds schemes. Though higher targets in small savings are achieved by the State governments, yet not every state is successful in this regard. The debt position of the States is presented in the table below:
DEBT POSITION OF THE STATE GOVERNMENTS (In Rs. crores) (Figures as end of March)
|Items |1961 |1971 |1993 (Budget) |
|1. Internal Debt (a+b+c) |590 |1,850 |25,460 |
|a) Market loans |500 |1,230 |22,060 |
|b) Ways an means advance from the RBI |40 |380 |390 |
|c) Loans from banks and other institutions |50 |240 |3,010 |
|2) Loans and advances from Central Government |2,020 |6,360 |95,630 |
|3) Provident funds, etc., |130 |540 |22,230 |
|4) Total debt (1+2+3) |2,740 |8,750 |1,43,320 |
REVIEW QUESTIONS 1. Explain the place of commercial banks in the Indian Financial System 2. Discuss the functions of commercial banks. 3. What is meant by credit creation? Explain the process of credit creation with an example. 4. Discuss the performance of commercial banks in India. What are the problems that they experience and suggest suitable measures to overcome them. 5. Explain the features of lead bank scheme. What benefits are they expected to generate and to what extent their functioning ensures this ? 6. Discuss the functions of central bank. 7. What the reasons for having both quantitative and qualitative credit control policies? 8. Discuss the instruments of quantitative credit controls along with their limitations. 9. Explain the various qualitative credit control instruments. To what extent are they effective? 10. Critically explain the functions of Industrial Finance Corporation of India. 11. Discuss the functions of IDBI and comment on its performance. 12. Explain the purposes for which ICICI was established. How far these purposes have been achieved? 13. What do you mean-by canons of taxation? Discuss Adam Smith's canons of taxation. 14. Distinguish between direct and indirect tax along with their merits and limitations. 15. With an example, explain the meaning of deficit financing. Discuss its purposes, effects and limits. 16. What is the need for fiscal policy? What are the objectives that fiscal policy is expected to accomplish? 17. Briefly outline the extent of public expenditure in India. What are the causes for mounting public expenditure in India? 18. Comment on Indian public debt.
CHAPTER V
Economic planning and development - Government and planning—India's eight Jive year plan and structural reforms - Industrial policies and promotion schemes - Government policy and 537- Interface between Government and public sector
ECONOMIC PLANNING AND DEVELOPMENT
Objectives of Indian Five Year Plans and the achievements during the earlier Five Year Plans
After attaining independence, India decided to adopt democratic socialism as its philosophy to achieve rapid development and allow the benefits of development to reach every section of the people. The setting up of a democratic socialist country could be possible only if all the sectors in the economy could be developed simultaneously. For this purpose India selected economic planning as the instrument to achieve rapid economic growth and development. The Centralized planning mechanism was adopted and since 1951, the country has gone through seven five year plans and three annual plans and we are in the course of the Eighth plan. The five year plans in India have set several objectives. But the emphasis on any objective changed from time to time. While the earlier plans emphasized economic growth of late the emphasis is on modernization. Hence, the priority among the various objectives of economic planning changed from time to time. However, all the five year plans in India have the following objectives as principal objectives :
1. Economic growth, 2. Self-reliance, 3. Full employment
4. Modernization and 5. Social justice which includes reduction in income inequalities and removal of poverty.
Each one of these objectives is discussed briefly hereunder.
1. Economic growth :
Economic growth has been considered as one of the primary objectives of economic planning as it is hoped and once a higher rate of economic growth is achieved all the other objectives laid for the plan would be automatically achieved. But the experience in other countries has been that economic growth has benefited only the rich at the cost of poor. However, India gave top priority to the achievement of economic growth because of a long period of stagnation under the British rule when India's resources had been plundered and so it could not develop fast. Hence, India adopted achievement of higher rate of economic growth as one of the principal objectives of planning.
Economic growth is measured in terms of the rate of increase in national income over a period of time. During the I five year plan India set 11% of growth in national income as the target for the five years of I Plan. India could easily achieve this target and in fact the "achievement was 18% increase in national income. Having been inspired by this remarkable achievement, India set a target of 25% increase in national income over the five years of the II Plan. The plan model suggested by Prof. P.C. Mahalanobis was adopted and priority was accorded to industrial development with emphasis on large scale industries. This led to the emergence of public sector units and along with this developmental works on transport and power were also undertaken in a very large scale. But at the end of the II Plan, the achievement was only 4% increase in national income per year on an average. Hence the target was limited to 5% growth per year in the UI Plan. But due to Chinese aggression and Pakistan invasion, only 11.2% growth in national income over the five-years could be achieved. Economists had a lot of hope on the outcome of this clan as they expected with the success achieved through this plan, the economy would enter the stage of self-sustaining growth. Further, rate of increase hi population was almost equal to that of increase in national income and so no significant addition was made to the per capita income. This made the government to give up the long term planning approach and so three annual plans were gone through. With so much experience in planning, the planners decided to set ‘growth with stability' as the objective of the IV Plan. The economists wanted to overcome the influence of uncertainties on economic performance and so they laid emphasis on building up huge buffer stocks of food grains and reducing the dependence on foreign capital. During the IV Plan the achievement was only 3.4% growth in national income per year against a target of 5.7%.
The V Plan initially laid emphasis on self-reliance and removal of poverty but subsequently the final draft accorded top priority only to economic growth. Hence, a growth rate of 5.5% per annum was determined as the target and the achievement was really commendable with 5.2% per annum. But this achievement has not been smooth but highly erratic. Further growth was not self-sustaining.
The VI Plan therefore set 5.2% per annum as the target and wanted to achieve this target by improving the efficiency of capital stock utilisation raising the investment rate, changing the investment pattern to suit growth requirements and taking up all measure; to prevent emergence of foreign exchange crisis. At the end of the plan, the target was almost achieved though this could not be viewed as a great achievement as the acceleration in growth during this period had occurred after a year of negative growth.
The VII Plan has aimed for 5% per annum of growth rate. The target of growth rate was expected to be achieved in this plan as the growth rate in major sectors of the economy was found to be around 5.5% per annum.
Encouraged by this achievement, the VIII Plan has set a target of 5.5% per annum and it remains to be seen how this is going be achieved with all round difficulties, specifically that of balance of payments.
2. Self reliance:
During the I and II Plans self-reliance was mentioned as one of the objectives, though the objective could not be clearly defined. In the HI Plan also the same position continued. Only from the IV Plan the concept of self-reliance could be clearly defined and understood. The IV Plan clearly pointed out that the dependence on foreign countries for concessional import of food grains should be reduced so that whatever way India could earn foreign exchange should, be sufficient to meet her requirements of exchange. But the failure on the agriculture front due to monsoon failure forced imports of a large quantity of food grains and the rise in prices of several essential commodities, import of essential articles worsened the balance of payments position. Therefore in the V Plan export promotion measures were given priority. Since 1977-78, India could successfully reduce the imports of food grains with increased buffer stock. Simultaneously the encouraging growth of domestic basic industries like iron and steel, machine tools, heavy engineering, etc., made India to export these items and she could acquire expertise in sophisticated technology. But a very serious obstacle to the achievement of this objective was the sharp rise in petroleum products. Hence, efforts are underway to develop alternative sources of energy as well as discover new petroleum deposits.
3. Full employment:
This objective has been included in the plan objective right from the day the planning as a methodology of development was adopted by India. But this objective has not been achieved in any of our plans. It was never accorded the priority that it richly deserves. As a result employment generation during the plans has not been significant; the main reason for this is that our planners have been linking employment with investment targets. To them if the investment increases the employment should also be generated. The ever growing unemployment since the I Plan clearly proves that the increasing investment has not been generating employment. Further with ever increasing population, there is sizeable addition to the number of people seeking employment or the labour force. Nothing spectacular has been done through the plans to increase the employment opportunities along with the increase in labour force. All the schemes relating to generation of rural employment, self-employment, etc., have not in any way solved the problem of unemployment. Every year the backlog of unemployment is swelling and unless something drastic is done the objective of achieving full employment will only remain on paper.
4. Modernization:
Modernization has been specified as one of the plan objectives only from the VI Plan. It is taken to mean only upgradation of technology. To make this objective very clear the planners defined Modernization as :
"Modernization connotes a variety of structural and institutional changes in the framework of economic activity. A shift in the sectoral composition of production, diversification of activities as advancement of technology and institutional innovations has all been part of the drive to change a feudal and colonial economy into a modem and independent entity." Inspite of this clear definition, in practice Modernization is restricted only to technological advancement. In agricultural sector the technological advancement has not been very high though certain achievements like, increase in the area under high yielding varieties^ increase in consumption of chemical fertilizers, increase in the area under irrigation, etc., have been recorded. Several other areas like Modernization of canal system, irrigation and water management, use of new sources of energy, etc., are still to reach any commendable position. As regards the industrial sector, though, Modernization has taken place to a large extent, yet the productivity remains at a low level. While in other countries, a high degree of advancement in technology has been achieved; in India progress has been slow and tardy in this regard. The VII and VIII Plans have aimed at improving the situation by giving top priority to the development and use of modern techniques in the existing as well as new industrial units. A major stumbling block in this task is the funds required. While import of foreign technology is resisted, development of domestic technology is taking place at a very slow pace. It is hoped that the New Industrial Policy announced by the government in July, 1991 can create the necessary atmosphere for updating our technology.
5. Social justice:
This objective of Indian planning implies:
a) Reduction in income inequalities and
b) Removal of poverty.
a) Reduction in income inequalities :
In the initial stages of planning it was expected that with economic growth, the fruits of growth will trickle down to the lower strata of the economy. But this did not happen. Therefore reducing inequalities in income has to be spelt out as an objective planning from the IV Plan onwards. India is an example of a complex nature of income inequalities. In the rural areas the aftermath of feudal system has created a very wide disparity in income and in the urban centres the rapid industrialization has brought about a very serious and wide income disparity. The root causes for income inequalities in India are capital gains receipts, entrepreneurial and speculative profits and astronomical salaries and perquisites for the business executives. The Planning Commission itself has pointed out that such serious inequalities in income could be set right only through restrictive measures and fiscal efforts. But a very important set back is the lack of reliable data about the magnitude of income inequalities. In the absence of this, any measure to check this problem cannot be effective. In the case of taxation, it is found to be regressive in nature, that only the middle income group is severely affected while the high and very high income groups continue to remain unaffected. Hence, a fresh look into this problem is urgently required that social justice can be ensured.
b) Removal of poverty :
Removal of poverty as an objective of planning was introduced only from the VI Plan. Till the VI Plan, the benefits of growth did not percolate to the poor and downtrodden. Therefore the VI Plan determined to combat poverty. For this purpose the Planning Commission decided to introduce specific programs aimed at the poor. These policy programs should aim at apart from influencing the content of food for mass, more regional and class distribution of output. The VI Plan defined poverty in terms of calorie intake and this has helped to measure the poverty in the VII Plan. According to VII Plan the poverty has come down from 50% to 37.4% during the first four years of the VI Plan. The Plan attributed this to the success of IRDP and NREP programs. But these two programs have not been very successful as they are implemented with least efficiency. Economists like Raj Krishna, K. Sundaram and Tendulkar have pointed out that the achievements under these schemes are exaggerated. However, the VII Plan expected to bring down the poverty from 37% to 26% by the end of the Plan. The VIII Plan continues to lay emphasis on rural development schemes to solve the problems of employment, poverty and income inequalities.
Based on the detailed discussion about the objectives of economic planning in India, it can be understood that planning is a method of growth strategy. But in India planning failed in the initial stages mainly because of uncertainties but from the W Plan, planning efforts are more efficient, thanks to the application of latest techniques of planning. The emphasis in Indian planning has been on achieving a higher level of growth, though some deviations were made during the IV, V, VI and VII Plans. But these deviations in effect only underline the need for accelerating economic growth. Hence, achieving economic growth has been in the back ground of Indian plan objective since 1951. This is also clear if we look into the way the objectives like poverty alleviation, equitable distribution of income and wealth and employment generation are all given up whenever they are found to; be conflicting with the objective of higher economic growth. But our experience over these four decades of planning has been that even a higher rate of economic growth cannot benefit the entire society, particularly the poor people. Fortunately the economic policies announced by the government in mid-91 have taken this fact into consideration that measures have been introduced to make our industries and producers face the international competition, to give a boost to our export, to reduce the extent of reliance on imports, to increase the productivity of labour, to modernize the industries, etc. The effect of such liberalization on the economy has to be seen only in due course of time.
Mixed economy
Evolution of the concept of Mixed economy:
There was no reference to the mixed economic system in Economic literature in the past. Economists were mainly familiar and advocated the Laissez faire or free enterprise system, as several countries could develop fastly following the free enterprise system, in which there was no or little government intervention. The entire economic system operated with the price mechanism at its center point. The producers produced what the consumers wanted and this provided very little scope for the government to intervene in the system. The Classical economists and their ardent supporters believed that the invisible hand will direct the economy and with private initiative and enterprise, every country should be able to record a faster growth as proved in the case of UK, USA, Europe, Australia, and other countries. But over a period under the leadership of Karl Marx, a new economic system was developed called socialism, in which there is no scope for any private enterprise as everything is owned and controlled by the government. The government decided the type of developmental activities and the requirements of the society and used the available resources in the provision of these requirements. Several countries like USSR, Communist China, Vietnam, Cuba and others preferred this socialist system In which government is made the custodian of the society. The main reason for the emergence of this new economic system was the failure of capitalism during the 1929 depression to revive every economy from depression.
Keynes himself thought that capitalism without some of its evils could certainly help economic recovery. Hence, a time came when economists felt that per cent free enterprise or cent per cent government governed economic development cannot work satisfactorily. A compromise between these extremes was thought of as an ideal economic system. The new system called ‘mixed economic system’ contained the merits of both the capitalism and socialism and appeared to be full of promise. This mixed economic system is adopted by India as indicated by the First Industrial Policy Resolution 1948.
Characteristics of mixed economy:
i. Co-existence of public and private sectors:
In a mixed economy, one will find the existence of both the private and public sectors. In such a system, the government will undertake the responsibility to build and develop certain sectoral activities and leave the other activities for the private initiative. In India, the government announced the adoption of the mixed economy system through its 1948 Industrial Policy Resolution. The government clearly earmarked the industries to be completely under the state control, the industries which are to owned and controlled by the state as well as the private sector and industries which are completely left for the private sector. In this way the Resolution provided for the simultaneous existence of both private and public sectors.
ii. State participation in economic development:
This is the second feature of mixed economy, according to which the state reserves its right to design and decide the type of development to be achieved. In such a set up, die government strives to promote the welfare of the country by ensuring social order, social justice and establishing all the necessary institutions which are required to achieve the desired pattern of growth and development.
iii. Distribution of ownership and control of resources:
This is the next feature of mixed economy. In this system, the government itself enters the field of production so that the available resources are fully utilized. This will also help to avoid concentration of wealth in the hands of a few and enable distribution of ownership and control of productive activities. As a result there is no scope for exploitation of any group, say labour, by any other group. In this way the weaker section of the community is well protected and taken care of. Only the mixed economy will enable the government to attain the objectives of the Directive Principles of the Indian Constitution. –
iv. Directing the investment in socially desirable projects and channels :
Mixed economy facilitates the flow of investment into channels which confers the society with several benefits. For example, the Indian government has invested huge amount in several projects to develop the infrastructural facilities. This forms the basis for the development of other sectors. The investment in this infrastructural area will not come forth from the private sector as the return is nil. Hence, the government in a mixed economic set up provides the thrust by developing the necessary background and strength which will encourage the private sector to invest in profitable opportunities. In this way the government plays a key role in a mixed economic system.
v. Scope for achieving balanced economic development:
Left to itself, the private sector would establish its enterprises only in urban or sub urban areas and that too in already well developed states. This will mean other areas will have no scope for development. But in a mixed economy, the government will itself undertake the initiative to set up industries in backward-areas and encourage the private initiative to set up industries in such areas by offering several concessions and exemptions. In the absence of mixed economy, several states in India would have remained industrially backward.
vi. Ultimate control and regulation in the hands of government:
This feature of mixed economy clearly spells out that in every activity affecting the economy, the government will be the ultimate authority. Though the private sector is assigned its role to perform, the government will still monitor and control the way in which the private initiative is performing its role. Infact, according to the 1948 Industrial Policy Resolution, the government made it clear that the industries already established by the private sector belonging to that category in which new industries will be established by the government alone, the government would undertake the review of the working of these industries in private sector after a period of ten years and if found not satisfactory, they would be taken over by the government. Though this was criticized as a threat of nationalization, yet through such a provision the government underlines its authority. Similarly in the banking and insurance sectors, the government nationalized banks emphasizing its powers to control and regulate any sector.
vii. Co-operation in the field of economic development:
According to this feature of mixed economy, the government formulates the design for development and invites the private sector to participate in the development. It clearly spells out the guidelines which would govern such co-operative efforts and the limits of freedom granted to the private sector. In Indian case, the government prepares the plans for development and spells out the areas left for the private initiative and the areas that will be under state control. Hence, there is scope for the development of private sector, though only according to the design developed by the government
Planning process under mixed economy:
As has been already stated, in a mixed economy there is a need to achieve a compromise between self-interest and social interest. This is a very difficult task as the government has to carefully foresee the type of development it wants to achieve and closely monitor the activities of the private sector to ensure that the social interest is never at stake. Obviously, planning is a very difficult exercise in a mixed, economy set up. The success of planning will depend upon: i) the extent to which the public sector is able to rise to achieve the social gains aimed for, ii) the success of the state in guiding and regulating the private sector activities towards social goals and iii) the extent to which the state is able to check the distortions taking place in investment by private sector affecting the interest of the public sector. Hence in the planning process the state has taken up the following steps to ensure the accomplishment of the objectives of the mixed economy.
a) By holding complete ownership of defence and heavy industries, the, government has provided an industrial base with which the private sector is expected to plan its investment activities. b) The state also has made huge investments in economic infrastructures so as to help the extension of market for goods, raising the productivity in agricultural; and industrial sectors, encouragement of further productive investment. c) The government has complete control of the financial institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the state. The government could also realize the expected gains by encouraging the priority activities in every sector. The economic institutions are made to support the weaker sections of the community. d) Through powerful legislations like MRTP Act, FERA, etc., the government, could ensure that there is no scope for exploitation of the common people by; the private enterprise. Such a legal framework lays down the rules of the, game and ensure fair play in a mixed economic set up. e) As a method of protecting the weaker and downtrodden' people, the government has policies like rationing, price controls, etc. Such regulations are built in the planning mechanism itself so that the private sector cannot exploit the community. f) Towards the improvement of welfare in the economy, the state has undertaken several specific programs aimed at specific target groups. For example schemes aimed at the backward and schedule tribe providing them reservation in educational, employment and other opportunities, rural oriented schemes" for the rural folks, health for all schemes, provision of free educational and medical facilities upto a certain level, etc. All these schemes aim at improving the social welfare. In all these activities the private sector is also welcome to play its role. g) The government makes effective use of the tools of fiscal policy viz. taxation and public expenditure, so as to achieve the objectives of economic planning.
Distortions in the planning process:
We have explained above that the fundamental objective of the mixed economy is to subordinate the self-interest for the national-interest. Whether this has been achieved in Indian situation is a moot question. Inspite of various types of regulations and controls, the fruits of mixed economy have not appeared to have reached the common men. Even after four decades after the adoption of mixed economy principle, we come across glaring distortions which go to prove that mixed economy in practice has not been very effective. This is mainly because of the influence exercised by the private enterprise through political influence, corruptive activities, dishonest bureaucrats, powerful national and international lobbying, etc. The extent of distortions could be understood if we study the following points: 1. One of the basic objectives of Indian planning is to eradicate poverty, but five decades after the adoption of planning strategy, the proportion of population below the poverty line has not significantly changed. 2. The planning mechanism has failed to check the rise in price level. Inflation has come to stay in India with no policy being effective. When double digit inflation is controlled and results in single digit inflation, the country boasts of having achieved something very great. 3. The emergence and existence of black money is yet another yardstick to prove the failure of the mixed economy. The high level of taxation has only resulted in effective tax evasion and tax avoidance. As a result the distance between the rich and the poor remains wide. 4. Till date there has been no effective method to prevent the concentration economic power in the hands of a few. The rich becomes richer and the poor, the poorer. 5. Inspite of five decades of planning, unemployment is very much on the ^ increase and the backlog in every plan is assuming dangerous proportions. This is mainly because of the failure to control the growth of population and the adoption of capital intensive production techniques. 6. The failure to achieve re-distribution of income is yet another glaring distortion. AH the efforts to bridge the gap between the wages of rural and urban workers or increase the real wage of the working class has not succeeded.
When we study the above points, it is clear, that mixed economy has not carried us in the desired direction. This is mainly because of the inability of the government as it is frequently yielding lo the pressure exerted by the vested interests. Even the recent liberalization measure could be viewed from this angle. But a country cannot remain independent of the international pressures, especially when India is depending upon the IMF and IBRD, all its internal policies are indirectly governed by these lending agencies. Whether this is right or wrong is a question that could be answered only after we evaluate the gains of liberalization policy. But on the whole, the expected benefits of mixed economy have not been realized as, is clearly proved by the distortions discussed above.
Sources of finance for Indian Five Year Plans
Financial resources for the five year plans in India are mobilized from various sources. These sources could be broadly classified as i) internal sources and ii) external sources. The government is mobilizing funds through both these sources and over a period we find that some of the sources have become permanent as in (he case of deficit financing. Before we study the pattern of financing the Five year plans, let us understand the components of the sources of finance. It may be noted that sources of finance refer to only the sources of finance for public sector.
Internal sources of finance include the following: a) surplus from current revenues, i.e., excess of current revenues over current expenditure, b) contribution of public enterprises, c) mobilization of internal private savings through market borrowing, small savings, provident funds, etc., d) additional resource mobilization in the form of additional taxes and additional revenue from public enterprises. e) deficit financing
External sources of finance mainly includes :
a) loans and grants from foreign countries,
b) loans from international institutions like IMF, IBRD,IDA, etc.,
Pattern of financing of Five year plans:
In the table below we have shown the various sources of finance for the Indian five year plans upto VI Plan. It may be noted that the total amount available from the domestic source has gone up from Rs. 1,440 crores in the 1 Plan to Rs. 86,610 crores in the VI Plan. In percentage terms we find that the domestic source of funding constituted nearly 73 during the I Plan and which increased to 78 by the VI Plan. Similarly the external assistance which was Rs. 190 crores (10%) in the I Plan, went up in absolute terms to Rs. 8,530 crores, though in percentage term it has declined to 8% of the total. It could also be noticed that the amount of deficit financing has consistently increased from Rs. 330 crores during the I Plan to a whopping Rs. 15,680 crores during the VI Plan. This could be used to understand the unhealthy practice which the government is following. It is well known that such a huge amount of deficit financing would only be inflationary, if [he production does not correspondingly increase. It may be observed that the inflationary rise in price in India is namely due to this huge size of deficit financing of Indian Five Year Plans.
SOURCES OF PLAN FINANCE : I TO VI PLAN (Amount in Rs. Crores)
|PLAN |DOMESTIC BUDGETARY RESOURCES |EXTERNAL ASSISTANCE |DEFICIT FINANCING |TOTAL |
|I |1,440 |190 |330 |1,960 |
|II |2,560 |1,090 |950 |4,600 |
|III |5,090 |2,390 |1,150 |8,630 |
|IV |12,010 |2,090 |2,060 |16,160 |
|V |32,120 |5,830 |5,830 |43,780 |
|VI |86,610 |8,530 |15,680 |1,10,820 |
As regards the VII plan, the Domestic resources fetched Rs. 35,988 crores, the Capital receipts (net) accounted for Rs. 1,03,232 crores, the external assistance was to the tune Rs. 15,139 crores and deficit financing was Rs. 28,457 crores. All these sources of funds augmented totally Rs. 1,82,816 crores for the Plan.
In the VIII Plan, it has been estimated that the Domestic resources would total to Rs. 2,83,915 crores, the Net capital inflow from abroad would be Rs. 28,7QO crores, and the Deficit financing would be limited to Rs. 20,000 crores. The total-finance resource for the VIII Plan is fixed at Rs. 3,32,615 crores.
Among the domestic budgetary resources, the surplus from the current reserves has not been very significant as in almost all die plans we had only deficit in this account. The contribution from public enterprises was quite insignificant atleast up to the VI Plan as the percentage of contribution hardly exceeded 10% even during the VII Plan the contribution on this account was only about 7%. Having realized that the contribution from the public sector has not been commensurate with the investment made in this sector, several measures are taken during the VIII Plan that, it is estimated that the public sector contribution during this Plan would be not less than 34%.
The inflow from domestic private savings and additional resource mobilization during the I to VI Plans have been quite significant. It is interesting to observe that domestic saving in India has been quite consistently high around 30% during the I to VI Plans. Subsequently also this domestic saving has been high, but the conversion of savings into productive investment is not coming forth. Once that is achieved, the financial resource from this side will assume significant proportion. On the whole we find that the pattern of financial resources for the implementation of our Five year plans has remained almost the same, though-there is some change in the contribution from each source in absolute terms over the plan period.
Government and public sector
Since 1948, the public sector in India has been playing a significant role in every sphere along with the private sector. These two sectors have been functioning as complementary to each other, though the government policies have been usually more favourable to public sector than to the private sector. Inspite of this, the private sector has also emerged victorious in several fields and since the announcement of Liberalization polices in 1991, we can reasonably expect the private sector to reach its potential and the public sector would also strive its best to withstand the domestic and international competition. Hence, the future offers excellent scope for both the sectors, but it is clear that only the most efficient sector can survive, so how the private and public sectors are going to react to this challenge will be known in due course. However; jet us now discuss the role of public and private sector in India in detail.
1. Role of public sector;
First of all it is necessary to understand that the public sector includes the autonomous corporations, the departmental enterprises owned and controlled by both the State and Central Governments. The role of public sector would be discussed with reference to various indicators like employment, investment, output, national income contribution, savings, capital formation, capital stock, etc.
a) Public sector and employment generation:
One of the important contributions of public sector to the Indian economy is that it has generated huge employment opportunities and this has reduced the problem of unemployment to a large extent The employment opportunities in public sector includes government administration, defence, health, education, research and development, enterprise owned by Central and State governments. It offered employment for 107 lakhs of people in 1971 which slowly increased to 154.8 lakhs in 1981 and it has touched 190 lakhs in March, 1991. This constituted nearly 71 % of the total employment generated in the economy, in 1991. As regards the sector-wise employment opportunities created by the public sector, in 1989 public sector accounted for 47.8% of the total employment generated by it through employment in government administration, community, social and personal services, followed closely by transport, storage and communications with 16.1% and manufacturing 10.1%.
Hence, it is clear that with the growth of public sector, the country is benefited with more and more employment opportunities.
b) Public sector and income of the public sector:
The share of public sector income in the net domestic product has been increasing consistently from 7.5% in 1950-51 to about 25% in 1987-88. In a matter of about 35 years the public sector contribution to net domestic product has risen appreciably and constitutes one fourth of the total net domestic product. This is mainly because of the rapid expansion of the public sector since 1951. This 25% of contribution in net domestic product, is certainly better than 9.6% ,of contribution by the public administration. However, the private sector income constituted 75.1% of the total net domestic product. It should be noted that the public sector units are run on service motive and very little commercial motive.
c) Public sector and saving and capital formation:
This is yet another crucial yardstick to evaluate the contribution of public sector. The percentage share of public sector in total domestic savings increased from. 1,7, to 2.3 of Gross national product at market prices. But in absolute terms it increased from Rs. 169 crores in I Plan period to Rs. 7815 crores in VII Plan. When we consider the percentage share in total savings, the contribution of public sector has actually gone down from 17 in I Plan period to 11 in the VII Plan.
However, the contribution of public sector in capital formation (gross domestic) is really commendable. It increased from a modest figure of 3.5% of Gross national product at market prices in I Plan period to 10.7% in VII Plan. As a result the ratio of percentage contribution by public sector and private sector in total domestic, capital formation changed from 33 : 67 in the I Plan to 47 : 53 in the VII Plan; From this it is clear that the contribution by the private sector during the same period has declined from 67% to 53%
d) Public sector and capital stock :
Capital-stock refers to the total stock of plant and machinery, equipment and tools and other capital goods available at a point of time for further production. Based on the data available up to 1979-80, it was found that the percentage share of public sector in total capital stock between 1960-61 and 1979-80 increased from 26 to 37 while that of private sector declined from 74 to 63 during the same period. In absolute terms, the capital stock increased from Rs. 16,377 crores in 1960-61 to Rs. 68,478 crores in 1979-80 in public sector (i.e., an increase by over Rs. 52fOOO crores) but in the private sector the increase was from Rs. 46,583 crores to Rs. 1,16,089 crores (i.e., an increase by over Rs. 65,000 crores). The increase is less, pronounced in public sector because of the following reasons:
1. Public sector investments are mostly in economic infrastructure which do not contribute any output. 2. Public sector is mostly concerned with high capital intensity projects like railways, iron and steel, power, irrigation, etc. 3. The gestation period of public sector projects are very long. 4. The-capacity utilization is very much less in public sector units. 5. Most of the projects of public sector are having higher capital-output ratio.
e) Public sector and infrastructure:
The economic development of a country depends on the development and maintenance of infrastructural facilities. The essential requirement is provided by public sector. The industrialization is accelerated only through infrastructural development. Investment in power, roads, bridges, irrigation, etc., is non-income yielding, long gestation period oriented, and heavy investment projects. Hence these are not attractive for private sector. But without them the country cannot develop faster. Therefore it is apt to state that the public sector units are responsible for the creation of infrastructures which constitute the backbone of economic development and industrialization.
f) Public sector and industrial base:
There is no denying the fact that public sector has provided a strong base for our industrialization. Our industrial policy has clearly assigned a significant role for public sector, till the end of the third five year plan; industrialization was taking place at a slower pace because only the important public sector units were established till then. Since the private sector could not really rise up to meet the task, since the IV Plan the establishment of public sector units started on a brisk rate and the industrialization has been accelerated to a commendable level. Further private sector with its commercial objectives could not undertake several of the projects and investment requirement of these projects was also beyond the potential of the private sector. Hence, if at all India today is having a strong industrial base," it is mainly due to the contribution of the public sector.
g) Public sector and export promotion:
Public sector has responded well to the needs of the nation by taking up the task of exporting our products and finding market for them in other countries. In this respect the contribution of State Trading Corporation.
Minerals and Metal Trading Corporation, Hindustan Steel Limited, Hindustan Machine Tools, etc., are worth noting. Infact, these units are primarily responsible for exploiting the captive market for our goods abroad. The foreign exchange earnings of the public sector has gone up from a modest figure of Rs. 35 crores in 1965-66 to Rs. 170 crores in 1969-70, to Rs. 5,831 crores in 1984-85 and then to Rs. 9,198 crores in 1991-92. The increase has been more than 300 times comparing 1965-66 figures with that of 1991-92. Though there may be criticisms about the performance of the public sector units, yet there can be no dispute about the export achievements of public sector units within a period of 25 years.
h) Public sector and saving of foreign exchange through import substitution:
India's balance of payments has been a cause for worry since Independence, the main reason being increasing imports. This trend had to be reversed and the government rightly selected public sector to establish units to produce domestically the goods imported so as to conserve the foreign exchange and also utilize more the-domestic resources. Units like Hindustan Antibiotics Limited and Indian Drugs and Pharmaceutical Limited, have together effectively checked the inroads attempted by the multinational corporations in the field of drugs and pharmaceutical. Similarly Indian Oil Corporation Limited and Oil and Natural Gas Commission have succeeded in bringing down our dependence on other countries for crude to some extent. They are very active in identifying oil deposits and natural gas. Their efforts are supplemented by research and development to invent methods of using the natural gas and reduce the imports of crude. In this respect the public sector works towards achieving self sufficiency. With concerted efforts it should be possible for India to achieve self-sufficiency in the near future. However, the poor performance of the public sector is causing concern, as unless steps are taken to improve their performance, the achievement of self-sufficiency may be delayed.
i) Public sector and generation:
A close scrutiny of the public sector performance will certainly make one to note the contribution towards internal resources made by the public sector. For example, the internal resources generated by the public sector during V Five year plan was Rs. 3,439 crores, during VI Five year plan Rs. 11,721 crores and during the period 1985-86 to 1989-90, the generation was Rs. 37,678 crores. In 1990-91 and 1991-92 also the public sector undertakings together generated Rs. 24,376 crores. This indicates that the public sector units have turned the comer and with die measures taken up already to spruce up their working we should be able to realize still greater generation of internal resources.
j) Public sector and contribution to exchequer:
Public sector contribution to the Central Exchequer is, in terms of dividend, corporate tax, excise duty, customs and other forms. These contributions add to the mobilization of resources for our planned development. It is interesting to note that the contributions totaled Rs. 27,570 crores in the VI Plan period, Rs, 70,893 crores during the VII Plan and Rs. 19,520 crores in 1990-91 and Rs. 20,366 crores in 1991-92. It may be noticed that the annual contributions during the VIII Plan period is nearly 75% of the contributions during VI Plan. Among the different forms in which these contributions are made, Excise duty and Customs alone constituted more than 82% of the total in the VI Plan period, while this 76% during the VII Plan. Subsequently, in 1990-91 these two accounted for 82% of the total contributions and in 1991-92 it was almost 81% indicating that public sector units do make a valuable contribution to the Exchequer. Since the performance of the public sector is poor, their contribution in terms of dividend is very insignificant and this has Co be changed at the earliest so as to make them contribute sizably even in this form.
k) Public sector and growth of ancillary units :
Public sector also makes a valuable contribution by helping the growth of ancillary units and small scale units. The Bureau of Public Enterprises have undertaken the study to find out the public sector units which could transfer their production and other facilities to small scale sector. Under this scheme about 1800 units were set up till 1986. The public sector also enters into regular contracts for purchasing the entire production or 50% of the production of small scale and ancillary units. Such purchases from ancillary units amounted to Rs. 451 crores in 1985-86.
I) Public sector and development of states and backward regions :
One of the objectives in establishing public sector units is to facilitate the states and the backward region to develop faster. In this connection, public sector has certainly creditable performance. Public sector contributes to the State government's resources in terms of sales tax and other state level taxes. Public sector investments are directed towards the projects in the backward regions and industrially poor districts. In this way the public sector works in its own way to : eliminate the industrial imbalance in states and districts.
So far we have explained in detail the contributions made by the public sector towards Indian economic development. It is often said, that even when their performance is poor, the public sector contributions have been so much, and by improving their performance, we should be able to make them contribute their full potential to achieve a higher rate of economic development. It is satisfactory to note that efforts in this direction to improve the public sector performance have been initiated and by the turn of the century public sector will emerge as the main contributor to our economic development.
Industrial policy resolutions of 1948,1956 and 1980
Industrial policy comprises of the procedures, principles, rules, policies and regulations which together govern the industrial sector to guide the industrial development or the country in conformity with the objectives of five year plans and the needs of the economy. As the economy develops, the government has to closely study the process of economic development and make necessary changes and modifications in the policies so as to make the policies relevant for the situation or the environment prevailing in the country at different points of time. Sometimes the changes in policies are so drastic that a new approach at the industrial development or the development of any other sector is arrived at. When these changes are announced the reactions from the sector concerned are studied closely by the government and necessary amendments are made to the policies already announced. In Indian scene, the situation prevailed immediately after independence was completely different from what is being witnessed today. Hence, if we study the industrial policies announced in the later 40's and early and middle '50's we would get a background with which we will be able to understand and appreciate the changes that have been announced in 1991. This would also help us to understand the justifications for the drastic changes announced at periodical intervals. Hence, we would discuss low in brief, the features of 1942, 1956 and 1950 Industrial Policy Resolutions.
INDUSTRIAL POLICY 1948
Immediately after independence, the government had to give a guideline for the industries in India and so it announced its policies for industries. The political freedom attained in 1947, posed a challenge to the government 10 devise its own policies. With the production at low levels, population increasing partition impacts, rising price level, industries to be developed to accelerant economic development, etc., the 1948 Industrial policy resolution was announced. Through that the government clearly- accepted its responsibility of ensuring planned development of industries of various types. The 1948 policy laid the foundation for anew experience as would be clear from the following features of the policy. The industries were classified into the following four categories:
1. The strategic industries to be completely owned by the government included manufacture of arms and ammunition, production and control of atomic energy, ownership and management of railway transport, etc. No private sector participation or existence will be permitted in Ibis category of industries. 2. The second group included the basic and key industries. Private sector existence in this group would be tolerated for a period of 10 years after which their performance would be evaluated. New units in this category will be established only by the government and the existing ones would be taken over by the government if their performance is found in he no: satisfactory after the review. The industries include in this category include: aircraft manufacture, coal, iron and steel, ship building radio and mineral oils, etc. 3. In this category government included the basic industries like salt, automobiles, tractors, prime movers, electrical engineering, heavy machinery, machine tools, heavy chemicals, fertilizers, electro-chemical industries, non-ferrous metals, rubber manufacture, power and industrial alcohol, cotton and woolen textiles, cement, sugar, paper and newsprint, air and sea transport, minerals and industries relating to defence. Private sector will be given complete freedom to enter into this category, but the government can intervene and regulate any of them, if found necessary. 4. All the other industries formed the fourth category. Mainly left for private sector, the government pointed out that progressively it may participate but not eliminate the private sector. Both individual as well as co-operative undertakings will be permitted in this sphere.
This policy also gave importance to small scale industries and suggested that both the central and state governments should join together in solving the problems freed by the small scale industries. As these industries would offer good scope for absorbing the displaced laborers and agricultural workers and wee also ideal for co-operative type of organization, the government felt that they must be developed. As regards the foreign capital, the government clearly pointed out that there is need for free flow of capital as well as technology. At the same time the government also said that it should regulate; no discrimination will be made between the Indian and foreign undertakings with regard to the applications of the provisions of the policy resolutions. Profits and repatriation of capital would be permitted subject to the provisions of the foreign exchange control. Further if any undertaking is nationalized, then air and equitable compensation would be paid.
Evaluation:
The main aspect of this policy is that it laid the foundation for the introduction of MIXED ECONOMY in India. Under this the government will encourage coexistence of both private and public sector units in industries according to the provisions of the policy. This paved the way for the participation of government aid die corporate sector in the industrial building process of the country. This also facilitated a direct comparison between the performances, of both the sectors, in terms of various indicators. Being the first policy resolution the government had made a good beginning. But this policy was criticized for being classificatory. It gave an impression that the private sector, even in spite of possessing the potential was not allowed to play its due role in the industrial development. Secondly, there was a threat of nationalization, specifically, in the case of industries under the second category. Thirdly, the government intervention was present even in the case of third category of industries. Hence, on the whole, being the first policy, the government could not make the policy more imaginative, except, of course, introducing the principle of mixed economy.
INDUSTRIAL POLICY 1956
A new policy was necessitated after 1951, because, India adopted a socialistic pattern of society, the Constitution guaranteed Fundamental Rights and Directive Principles of State policy and the First five year plan was completed by 1956. After reviewing the developments and achievements, the government came out with the Industrial Policy Resolution of 1956. For all the later policies, this became the basis and until 1980, the provisions of this policy remained more or less in force.
The following are the important features of this Policy:
The industries were classified into three categories. This was indicated in terms of Schedule A, Schedule B and Schedule C industries. The Schedule A industries are completely slate owned and the state is responsible for the development and growth of them.
The Schedule B included industries which were under the control of government, especially new units. The private sector is also permitted to enter into this category, but it will be given only a supplementary role.
The Schedule C industries included all the remaining industries, the future of which would be completely in the hands of private sector. Of course, government regulation in general would be formulated and made applicable to them as any other industries. The first classification (Schedule A) included 17 industries, the Schedule B included 12 industries and Schedule C included all the rest.
The government clearly indicated that the above classification is not very rigid, and private participation and presence even in the first category in the nature of allied units, user of by-products, etc., would be permitted, similarly the government may enter the Schedule C industries if the planning and development warrants it. The private sector is expected to work in close unison with the state. The government assured fair and free treatment to private sector units and non-discriminator}' treatment was also promised. The government continued to encourage the growth and development of small scale and village industries by extending subsidies, tax concessions, protection from large and medium industries, and assisting them in Modernization to improve their competitive strength. The Resolution also aimed at reducing the regional disparities in the growth and development of industry so as to achieve balanced industrial development throughout the country. The Resolution also highlighted the need to protect and improve the conditions of industrial workers in the country. Mainly several machineries for settling industrial disputes were thought of. The government continued with its policy regarding foreign capital without much change.
Evaluation :
This resolution assigned a major role to the public sector. It created a condition in which the public sector units could be established and developed well. This was felt necessary to achieve the desired rate and pattern of development of industries in India. The government made it clear that it had no intention to wipe out the private sector, instead it wanted the private sector to emerge as the supplementary sector for the public sector and join the latter to achieve rapid industrial and economic development. After the resolution came into force, over a period it was found that the private sector developed faster by taking advantage of loopholes and exceptions in the Resolution. There were cases where licenses were issued to private sector while public sector should have been given the license. Hence, it was found that this Resolution in fact, led to the rapid growth of private sector.
INDUSTRIAL POLICY OF 1980
As already pointed out the Industrial policy of 1956 formed the basis of this policy in 1980. This new policy had the following objectives: h) to achieve the optimum utilization of the installed capacity. i) to achieve maximum production and through that achieve higher productivity and employment generation. j) to rectify the regional imbalance by focusing on the backward areas. k) giving priority treatment for agro-based industries. l) to promote inter-sectoral relationship. m) to encourage the growth of export oriented and import substitute industries. n) to speed up the growth of small scale units, etc.
With these objectives in view, the new policy laid down the following provisions: 1. After reviewing the performance of the public sector units the government has decided to introduce measures.
2. for improving the efficiency of these units so as.to make them contribute more towards the economy.
3. In order to promote economic federalism, the policy provided for integration of industrial development in the private sector. The government also decided to eliminate the artificial division between small and large scale industrial units. In each district a few nucleus plants will be set up which would generate opportunities for a number of small, cottage and ancillary units. This would ultimately create the scope for faster industrial development in the industrially backward districts.
4. To provide the scope for more and more small and cottage industries, the government redefined these units as below: a. the limit of investment for tiny units was to be raised from Rs. 1 lakh to Rs. 2 lakhs b. the limit of investment for small scale units was to be raised from re. 10 lakhs to Rs. 20 lakhs and c. increase the limit of investment for ancillaries from Rs. 15 lakhs to Rs. 25 lakhs.
5. To promote industrial growth in rural areas and also to improve the employment opportunities there and raise their percapita income, the policy provided for promoting industries in the rural areas. This was also expected to maintain the ecological balance in the country. Greater attention would be given to the growth of handlooms, handicrafts and khadi and other village industries. 6. Another important provision was that the government decided to regularize the unauthorized excess capacity with the industrial units, especially the FERA & MRTP units by allowing them automatic expansion by 25% of the existing licensed capacity on a selective basis. 7. To prevent spread of industrial sickness, the government indicated that very stringent steps would be taken against those units which are deliberately mismanaged and indulging in financial improprieties. As regards the existing sick units, arrangements would be explored to revive them or to encourage their mergers with healthy units by introducing suitable tax concessions to encourage such actions. When other methods of revival of sick units are not found feasible, then the management of such sick units would be taken over.
EVALUATION
This policy has several lapses. Its claim to eliminate the division between small scale and large scale units is something contradicting the basis of such divisions. There was a need to treat the small scale with liberal treatment so that in a labour intensive economy, these units can create employment opportunities. There is nothing wrong with such specific preferential treatment of small scale units. But this policy aimed at removing such differences. Secondly, this policy created a precedence by regularizing the unauthorized excess capacity created by large units, instead of taking action against such erring big units. While the big units welcomed this move of the government, yet this has resulted in the expectation that the government would continue to have such liberal treatment in future also. This indirectly has also affected the growth prospects of new industries and the existing medium and small scale units. Though the government justified its move by stating that such a move would facilitate fuller utilization and higher output, yet the consequence of such a move was not thought about. However, it may be pointed out that the seeds of liberalization were sown through this policy and the government's intention to select capital intensive path of development.
The features of 1991 Industrial policy
The government announced its new Industrial policy in July 1991. The new policy has outlined several changes which have together opened a new era to the growth and development of industrial sector in India, The conventional regulations and restrictions have been replaced with liberalization and relief. Consequent to the announcement of the new policy, there has been all round jubilation in the industrial sector. The following are the salient features of the new industrial policy.
Even by 1985-86, the government realized the need to encourage the industrial sector to stand on its own legs and towards achieving this a number of policies and procedural changes have been announced. This was expected to increase productivity, reduce costs and improve the quality with which the domestic industries are expected to face competition with strength. There was an honest attempt to release the public sector from a number of constraints and it was given a large measure of autonomy. Technological and managerial Modernization programs were taking place in large scale. All these measures together contributed to the achievement of an impressive annual growth rate of 8.5% during the VII Five year plan. Having understood the effectiveness of all the policy changes in the past, the new industrial policy will continue to pursue a sound policy to encourage entrepreneurs, develop the indigenous technology through intensive research and development activities, dismantle the regulatory system, improve the capital market, etc. Small scale sector would get a special attention and the government promised to come out with a new policy towards he small scale industries. Foreign technology and investment would be welcomed to improve the domestic production base and increase the exports. The MRTP Act would be suitably modified to encourage competition. Public sector will be made to run on commercial lines and play a vital role in economic development.
The essence of this new policy will be discussed under the following heads:
1. Industrial licensing, 2. Foreign investment, 3. Foreign technology agreement, 4. Public sector, 5. MRTP Act and 6. Small scale and tiny sector policy.
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90's a number of changes in the system of industrial approvals have been brought about. The domestic producers will be able to withstand the competition in he country as well as abroad only through procedural reforms. Hence, the role of government will be changed from that of exercising control to one of providing help and guidance. Changes in the policy towards public sector in the last few years have clearly indicated that private sector enterprises will be allowed to compete in many areas hitherto earmarked for public sector. Consequently, the new policy has completely reclassified the Indian industries as below:
Eight industries have been completely reserved for the public sector. They are: a) Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils; v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tm, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transport. b) Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries:
i. coal and lignite, ii. petroleum other than crude and its distillation products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco substitutes, vii. asbestos and asbestos based products, viii. plywood, decorative veneers and other wood based products such as particle board, medium density fiber board, block board, ix. raw hides and skins, leather, chamois leather and patent leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and newsprint except bagasse based units, xiii. electronic aerospace and defence equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi. drags and pharmaceutical xvii. entertainment electronics and xviii. white goods like domestic refrigerators.
As regards the provisions of the industrial licensing policy, i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector and the list of 18 industries and the areas reserved for small scale industries will continue. ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations. iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported, goods does not exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required. iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in areas other than cities of more than one million population. In cities with more than one million population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas. v) New Broadbanding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing units. vi) The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects. vii) A very significant step is to abolish all the existing registration schemes. viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum. ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system),
FOREIGN INVESTMENT
Foreign investment carries with it the benefits of technology transfer, marketing expertise, modem managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the new policy has clearly contained the following provisions related to foreign investment: i) In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed- Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments will be made in the FERA. ii) The general policies governing (he domestic units in regard to import of components, raw materials and in intermediate good and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on account of dividend payment also to ensure that such payments are balanced by export earnings over a period of time. iii) All the other foreign investments not included in the Category I slated above will require prior clearance. iv) Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in (i) above. However, the provisions of the Export-Import policy applicable to the domestic units will also be applicable to such trading companies. v) To encourage substantial inflow .of foreign investment, a Special empowered board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
FOREIGN TECHNOLOGY AGREEMENT
A welcome change in the outlook of the government as evidenced by the new policy is the realization that the sophisticated technology, from abroad can be brought in only through liberal and less restrictive procedure and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameter. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulations governing foreign technology agreement: i) No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through the blanket permits. ii) Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provision. Upto the payment of Rs. 1 crore, royally will be @ 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of sales over a 10 year period from the date of agreement or 7 year period from the dale of commencement of production. iii) In the case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does riot entail any foreign exchange payment commitment. iv) In all the other cases, the general procedures in practice will be adhered to and such industries will require approval.
PUBLIC SECTOR
The public sector was given the predominance in the industrial development over the last four decades and the amount of investment made in this sector, though justified from the point of view of socialistic democracy, it has been struggling with so many problems like poor productivity, excess staffing, lack of continuous technological up-gradation, inadequate attention to research and development, etc. The rate of return on investment in public sector has been so low that it has prevented the automatic growth of these assets to the government. The main reason for this poor performance of the public sector has been the taking over of the sick units from the private sector and the number of units which are in the consumer goods and service sector. Hence, in the new policy the government has rightly given the emphasis to the development of public sector in the field of essential infrastructure goods and services, technology development and building of manufacturing capabilities, manufacture of products such as defence equipment. The public sector will also enter the other areas not strengthened if they generate good profits and the management will be granted more autonomy through a system of memorandum of understanding. Private sector will be invited to induce competition in these areas. In selected industries in public sector, the government would disinvest a part of the equity share holding to provide market discipline to the performance of the public sector. Based on these views the new policy has the following provisions regarding the public sector: i) A review of the public sector portfolio investment will be made to give the emphasis on the role of public sector in the strategies, high tech and infrastructure. Public sector units will be allowed entry into areas not strictly reserved for it. ii) The Board for Industrial and Financial Reconstruction will be approached to help the sick units to rehabilitate them. To protect the interest of workers who are likely to be affected due to rehabilitation of public sector sick units, a social security system is proposed to be devised. iii) A significant policy aimed at raising the resources and encouraging public participation in the growth of public sector units is that the government will offer a part of its share holding in the public sector to the mutual funds financial institutions, general public and workers. iv) In the direction of strengthening the management of public sector units the Board of public sector management will be made more professional and given more powers. Further to make (he management of such units more autonomous and accountable a system of memorandum of understanding will be adopted. Apart from improving the expertise of the government in implementing the MOU, the government also would place in the Parliament the MOU to facilitate detailed discussion.
MRTP ACT
A major deviant of the new policy is in respect of the MRTP Act. The new policy aims at removing the unnecessary bureaucratic controls and allows the industries to breathe in an atmosphere of freedom. The efforts of the government in the past intervening in the investment decisions of the MRTP companies have been proved to be counter-productive. Hence, the newly empowered MRTP Commission will enquire into complaints received from individual consumers or classes of consumers. The following is the essence of the provisions in the new policy regarding MRTP Act: i) The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course. ii) The need to obtain the prior approval of the central government for establishing/new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed. iii) The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair trade practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices. iv) All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers: the MRTP Commission unemployment, small scale industries should be established and encouraged to grow with government assistance in every way possible. Since then, the government has shown a priority for the development of small scale industries and this concern has yielded the fruits that today the small scale sector has emerged as an important segment of Indian industrial sector. The investment of the small scale and ancillary industries has been raised periodically and as per the Industrial policy of 1990, the investment limit for small scale industry is raised from Rs. 35 lakhs to Rs. 60 lakhs and units which export 30% of output by the third year, will have a higher investment limit of Rs. 75 lakhs. In the case of ancillary units the investment limit has been raised from Rs. 45 lakhs to Rs. 75 lakhs. Small scale units today include both the traditional and modern units. While the former is basically labour intensive, capital light, using simple indigenous technology, and the modern units are capital intensive using up-to-date technology.
Role of small scale industry (SSI) 1. SSI and production: SSIs have significantly added to their level of total production, which simply means that they make a sizeable addition to national income. The production level increased in value from Rs. 7,200 crores in 1973-74 to Rs. 1.78,700 crores in 1991-92, an increase by mere than 20 times within a span of two decades. 2. SSI and employment: One of the important reasons for establishing SSI is to generate employment opportunities, especially in the rural areas. This objective has been certainly achieved as could be seen from the figure, SSI provided employment for 39.7 lakhs of people in 1973-74 and in 1991-92 this has touched 128.8 lakhs people, a three fold increase. This implies that with more encouragement and solutions to the problems, SSIs can play a vital role in rural and urban employment generation. 3. SSI and export earnings: A significant contribution of SSIs is in the field of exports. Over the period, our products have consistent demand in the world market, as it proved by the exports figures. From a modest earnings of Rs. 393 crores in 1973-74 this sector has earned Rs. 12,568 crores in 1991-92 roughly 30 times increase. This constituted 28.7% of the total exports in 1991-92. A very important point to be observed is that our exports consists of mostly non-traditional items. 4. SSIs and dispersal of industries : One best way of industrializing the rural areas is to establish SSI. This would relieve the urban centers from the industrial congestions and other problems associated with it and help the rural areas to get industries. With SSI in the rural areas, the seasonal unemployment is eliminated, unskilled laborers are used, farmers are able to supplement their agricultural income, etc. However, in India the regional dispersal of SSI is mostly concentrated in six states: Maharashtra, Tamilnadu, West Bengal, U.P., the Punjab and Gujarat and these states alone account for 59% of the total SSIs in India. But this concentration was mostly due to specialization by particular districts. 5. SSIs and industrial disputes : Unlike the large and medium industries, SSIs do not have serious industrial disputes and even if there are any, they do not affect all the units like the large and medium segments. Since in most units there is direct contact between the proprietor and the workers, the possibility of disputes is very much minimized. The loss of man-days due to disputes is very high in medium and large scale industries than in SSIs. This implies that thee industries ensure regularity in production, supply, etc. 6. Inter-relationship between SSIs and large scale and medium scale industries: This is very important aspect. SSIs today forms the backbone of the large and medium industries in that they supply the components, implements, etc., required by the large and medium scale industries and also function as the user of industrial waste to produce by-products. There are several products flowing from the large and medium scale industries which actually are the output from small scale units under sub-contracting provisions. 7. SSIs and utilization of resources: SSIs in India also make a valuable contribution to the economy. Economic development can be accelerated and consolidated only when the available resources are fully utilized. In this respect, SSIs make use of physical, human and financial resources available in the rural areas. In the absence of SSIs, vast physical and human resources will remain unutilized and to that extent the national income will be low and employment will be less. At the same time, the SSIs have also facilitated the growth of entrepreneurship in our country. Persons with requisite qualities come forward to set up SSIs and once they succeed, slowly his encourages the others and in this manner the entrepreneurship skill develops and spreads.
Having discussed the role of SSIs in Indian economic development, we now turn to understand their problems. It was pointed out earlier that the SSIs are best suited for our country and they have contributed in so many ways to the economy but the country is yet to realize the full potential of this sector. This is because this sector is crippled by several problems. An understanding of these problems will help us to assess the policy prescriptions of the government and to suggest the necessary changes in them.
1. Funds requirement : SSIs like any other industrial unit, require both fixed capital and working capital. Though the fixed capital requirement of SSIs is low, yet the small entrepreneurs who come forward to start these units do not have sufficient fund of their own. This being the situation, for their working capital, these SSIs need some source. As most of the SSIs are located in the rural areas they approach for funds with several agencies ranging between the friends and relatives of entrepreneurs, money lenders, and other specialized financial agencies. A major obstacle in their way of getting funds is that being small their credit worthiness is never accepted as satisfactory by the lenders. It is estimated that more than 50% of the Sols seek financial assistance of some sort or other. Government has established several institutional agencies to meet the requirements of (he SSIs. But these agencies have their own rules and regulations insisting on securities, furnishing technical and other details at periodical intervals, project funding pattern, justification for the project and the repayment: capacity, marketing arrangements, other legal formalities to be fulfilled, etc. The small entrepreneurs not being professional are unable to cope with these rigidities of these specialized institutional agencies. The application form for loans and the procedure for filling it and getting the loan are all lengthy, that the SSIs struggle for funds.
2. Shortage of raw materials: This is another basic problem of SSIs. When these units are started, they estimate the availability of raw materials and then make arrangement for purchasing them from the source. But there are several inputs like chemicals which are always in perennial shortage. As a result these units have to compete with other medium and large scale units to get these raw materials. Since these raw materials are in scarcity, the demand being high, the cost of them is high. The SSIs do not have any professional assistance who can liaise with the government or other agencies to get the raw materials supply. Therefore, they are unable lo compete with the large and medium scale industries. Though the government shows some priority in supply of these raw , materials to the SSIs, the claimants are in large number and so the raw materials are bought at high cost The market variation in price is such that the medium anpVlarge units buy in bulk and maintain stock which the SSIs cannot afford to do as this would lock up their capital. As a result of these, the SSIs incur higher cost of production which eats away a large part of their profits.
3. Shortage of power : Most of the modem SSIs depend on power for their working. As they are mostly located in semi-urban and rural areas, the supply of power is not regular. This directly affects their level of production. Even when power is available it is supplied only for restricted hours. Hence, when these units are started, they assume the availability of regular power and estimate their production level. But in reality when they are unable to achieve that production level, they lose heavily. They cannot also afford to make alternative arrangements for power supply as is found with medium and large scale units with generators and other captive power plants. This results in under utilization of capacity having impact on their profitability.
4. Problem of marketing: Yet another important problem for the small scale units is marketing their products. With their rural bias in location, these units have to either sell in the rural areas or identify customers in the nearby towns or cities. Never can they hope to market their products in distant places. With local demand at a low level and the selling in distant places becoming difficult, they cannot avoid stockpiling which means they run short of working capital Except in the case of ancillary units which may have a permanent tie-up with large or medium units, the other SSIs always have the problem in marketing their products. Neither can they indulge in aggressive advertising or sales promotion nor can they adopt modern methods of selling. Though some of the units are 100% export oriented, yet not all of them can afford to approach the distant markets. Even if the government assists them through policies like Stores purchase policy under which certain items required by the government organizations are to be purchased only from the SSIs, yet selling through this channel means waiting for a long time to get the bills cleared by the government. Hence, these SSIs neither can market their products efficiently themselves or through other agencies. As a result, most of the units indulge in reducing their production level, which affects their economies of scale. So in every way the marketing problems are experienced by the SSIs.
5. Procedural wrangles with the government: It is often said that the government offers several concessions, subsidies, priorities, etc., to the SSIs. True, but what is offered by the government is very much less than what is needed by this sector. As a result several claimants for these limited assistance force it on the officials to determine certain norms for allocation or extension of these facilities. In other words, whatever the government can offer is rationed among the SSIs. At this stage, the general concessions offered to the industrial sector make the situation worse. The SSIs have to compete with the other medium and large units to get their share. At this stage deliberate discrimination, official apathy, red tapism, corruption among officials, etc., are all becoming rules rather than exceptions. Further the procedures involved in obtaining the government assistance are so cumbersome that the SSIs do not have the professional talent to complete them.
6. Problems relating to exports: Small scale units in India have made a significant deviation from the export of traditional items. Today these units produce a number of products like electronic components, spectacle names, leather goods, handlooms, chemicals, dyes, cosmetics, etc. These goods have great demand in other countries. Our Indian products are comparable in quality with the products from other countries, but prices of our products are higher than those from other countries. This is because of various reasons: lack of knowledge about the market for different products, market information relating to consumer preference, selling terms, exchange rate regulations, packing and forwarding procedures, remittance, facilities, absence of bank guarantees, payment of various duties, etc. In each one of these areas, the SSIs lack experience and guidance. Hence inspite of producing good quality products our units are unable to succeed in marketing them abroad. The various agencies and boards established for this purpose are unable to really assist the SSIs. There is complete lack of co-ordination among various agencies and producers. As result this sector, which can fetch considerable foreign exchange resources, is unable to realise it.
7. Labour problems : SSIs are encouraged mainly because the are labour intensive. But over the years, these units have started losing considerable mandays due to labour problems. There are several statutory regulations like Provident Fund contributions, Employee State Insurance, etc., which the SSIs have to comply with. Whenever there is any violation, the labour problems erupt and affect the smooth functioning leading to accumulating loss.
8. Lack of Modernization: SSIs by nature depend on indigenous technology. But whenever there is scope for improving the technology by importing if from abroad, the requirement of funds emerge s a hurdle. Hence, with old technology production becomes costlier, and these units are unable to find market for their products and compete with other rivals.
9. Difficulty in location of units : SSIs are encouraged to move towards the rural areas and backward regions. But the facilities in these places are very limited or under developed, that even though units are established in these locations, their operations are severely hampered by the limited availability of the facilities. Of late there is objection from the rural folks on the ground of environmental pollution. For instance, a tannery will not be allowed nearby the villages as it is feared that there will be water pollution. Similarly there is objection to the location of chemical units, meat producing units, etc., and this leads to competition for the place where the facilities are available and where there is not much of social resistance.
10. High rate of industrial sickness : The industrial sickness is found afflicting this sector very much. Among the industries which are declared sick, maximum number of units is found only in the small scale sector. The reasons for this are the problems so far explained. Whenever the SSIs fall sick, the effort to revive them is not at all on the lines found with the medium and large scale units. As a result the sickness is prevalent more among SSIs and the funds required for reviving them rim to several crores. Government with its financial stringency cannot also come forward to bale out this sector from industrial sickness. By 1991, 2,21,472 small scale units were found to be sick resulting in the lock up of total bank credit to the tune of Rs. 2,792 crores. Of these units, 2,02,998 units were declared non-viable units involving an outstanding baiik credit of Rs. 1997 crores. The magnitude of industrial sickness among SSIs has been a main concern of the government in these days. Efforts taken to solve the occurrence of sickness among the SSIs are not found to be effective for one reason or the other.
Having discussed the problems of the SSIs, let us now study the measures required and policies taken by the government to solve these problems.
1. Institutional agencies: The government has taken a keen interest in the development of SSIs. Having identified the basic problems of this sector, the government has introduced an institutional structure to look after various aspects of this sector. The Small Industries Development Organization has been established by the Central government mainly to co-ordinate, monitor and formulate policies for SSJs. It has Small Industries Service Institutes, branch institutes extension centers and regional testing centers and production and training centers. The National Small Industries Corporation (NSIC) has been established to provide them" raw materials and capital equipment and assist them in marketing of goods, etc. such corporations are also established at the state level. To attend to the developmental functions of the SSIs, the Small Industries Corporations have been set up at the slate level. Apart from these, several specialized Boards for each segment of the small scale sector have also been established like Coir Board, Central Silk Board, Coffee Board, etc.
2. Technical assistance: One of the important areas where the SSIs need assistance is in technical matters. Right from the stage of production down to packing and forwarding, they require guidance. Though initially they are started with the internal technical expertise, over a period, they have to be guided properly for updating their technology so as to maintain their cost of production and profitability. The installation and maintenance of machines and equipments, servicing them etc., are also areas where the SSIs need help. To extend this assistance, several agencies like Small Industries Service Institute, Small Scale Industries Development Corporation and such others are established which take care of the technical assistance to SSIs. The various Boards set up for different SSIs also extend their help in this regard. Apart from guiding the SSIs, these institutions^ are also engaged in research and development and their research findings are also disseminated to benefit the SSIs.
3. Industrial estates: Though SSIs can be easily formed, it is very difficult to get a location in these days where all the infrastructural facilities are available at a reasonable price. For this purpose the government has started establishing industrial estates. Industrial estates are areas where all the basic infrastructural facilities are provided by the government. Facilities like water, work sheds, transport, communication, roads, power, etc., are made available in the industrial estates. Individuals who want to locate their SSIs in such estates should apply to the government and get the work sheds allotted. They will make the necessary payments to the governments in lump sum or installment as the case may be. The government locates these industrial estates in backward regions and rural and semi-urban areas so that when SSIs are started, these regions slowly develop. The government has also set up the SIDBI mainly to extend assistance for supporting the activities of the State governments, and their agencies in connection with the development of SSIs. Special concessions are also granted to these agencies when they plan for locating the industrial estates in the rural areas.
4. District Industries Centres (DICs) : DICs are institutional agencies which have links with the Development blocks on the one hand and the special agencies on the other. They provide guidance to entrepreneurs and SSI owners in almost every stage since the formation and also in pre-formation and post-formation, marketing, finance, credit guarantee, raw materials, training, etc. They also guide the unemployed candidates with all the necessary details regarding the starting of SSIs. By March, 1993, there were 433 DICs covering 431 districts in India.
5. Financial assistance: One of the basic problems of the SSIs is the lack of funds. To overcome this, several steps have been taken since 1960. Briefly we may refer to the following steps :
a) Under the control of RBI, the government introduced a Credit Guarantee Scheme for the supply of institutional credit to SSIs. b) IDBI is extending refinancing facilities to the State Governments Commercial banks, and State finance corporations. c) The State governments provide seed capital and margin money to the entrepreneurs of SSIs to enable them to get assistance from the Commercial Banks and State Finance Corporations. d) Small industries development fund was set up by the IDBI in May, 1992 mainly to increase the refinance facility to the banks and other institutional agencies to enable them to participate in a greater way in extending assistance to the SSIs. e) A significant development was the establishment of Small Industries Development Bank of India with the main purpose of functioning as the principal financing institution. It would concentrate on Modernization and technological up-gradation, promotion of employment oriented industries, improving the marketing facilities, etc. f) Arrangement for die supply of raw materials : Raw material shortage has been crippling the SSIs for a long time. This problem is being solved by the government through the State Small Scale Industries Corporations. These corporations are made in charge of distributing the scarce raw materials among the SSIs so that every unit will be able to get its quota. Government is also exploring a scheme for maintaining a buffer stock of raw materials, especially those which are in heavy demand, so that the SSIs will not have any difficulty in getting their supply from the authorized agencies. g) Marketing assistance : In order to provide marketing assistance to the SSIs, the government has come out with several schemes like : a) Stores purchase policy under which the government has earmarked items which should be purchased by the government organisations and departments only from SSIs. b) Price preference to the products purchased from the SSIs by the public sector units. c) To improve the competitiveness of the SSI products, the government has provided quality control and testing facilities at various places. d) Organization of exhibitions, sales emporia, etc., at various places to enable the SSIs to market their products.
8. Fiscal incentives: The government also has extended several fiscal concessions and incentives to SSIs to encourage them to grow. These incentives include, tax holidays for new units, investment allowance, exemption from taxation, offering capital subsidies to units located in backward regions, exemption from excise duty, etc.
Apart from the above steps and measures taken, the government also allots huge amounts of money for establishing and developing SSIs. The table below has the details regarding the total expenditure incurred by the government plan wise. It could be noted from the table that the expenditure on SSIs has been increasing from the I Plan and by the VIII Plan it has gone up nearly 130 times.
GOVERNMENT EXPENDITURE ON SSIs. (Amount in Rs. crores)
|PLAN |TOTAL EXPENDITURE |
|I |48 |
|II |187 |
|III |248 |
|IV |242 |
|V |592 |
|VI |1,945 |
|VII |3,249 |
|VIII |6,334 |
In the Industrial Policy 1991 the SSI sector has been given special emphasis. The following are the important provisions:
(i) To facilitate SSIs to have access to capital market, equity participation in them is allowed for other industrial undertakings not exceeding 34% of the total share holding, this is expected to provide funds for Modernization, improving the technology, etc.
(ii) To liberalize the flow of funds through commercial banks by involving them in financing and also to extend the Single window scheme as well as the Equity Fund scheme.
(iii) To invoke the provisions of the Partnership Act to limit the liability of the new entrepreneurs in the event of failure of SSI.
(iv) To improve the effectiveness of collection of dues,
v) factoring services may be extended to SSIs. vi) Involving the public sector units, co-operatives and other professional agencies to improve the marketing of the products of SSIs.
vii) Allocating the raw materials to the SSIs and tiny industries on priority basis.
viii) To achieve co-ordination in the production programs of large, medium and small scale units.
ix) To establish and extend quality control and testing facilities,
x) To encourage location of SSIs in the rural and backward regions.
xi) To make the Small Industries Development Organization as nodal agency for SSIs mainly in export promotion.
With (lie above steps already taken, the government has clearly shown its interest in the development of SSI sector. But a main problem is yet to be solved and that is the extent of industrial sickness in the small scale sector. The number of units afflicted is on the increase year after year and unless some positive and preventive steps are immediately taken, the SSI sector will not be able to reach its potentials and make the invaluable contributions to the Indian economy.
REVIEW QUESTIONS 1. Explain the objectives of Indian five year plans and to what extent they have been accomplished? 2. Trace the evolution of mixed economic principle in Indian economy. What are the characteristics of mixed economy? 3. Explain the planning process under mixed economic set up? What distortions that can take place in the course of such a planning process? 4. Comment on the sources of finance for Indian five year plans. 5. How would you justify the existence of public sector in India ? What role does public sector play in Indian economy? 6. Critically evaluate Industrial policy resolutions of 1948, 1956 and 1980? 7. Discuss in detail the Industrial policy of 991 which set the liberalization process on? 8. Explain the role of small scale industries in India. To what extent the government policy has been supportive of the small scale industries?
Discuss the problems of small scale industries and suggest suitable measures to overcome them?
CHAPTER VI
New Economic Policy Environment in India - Privatisation - Liberalisation and Globalisation - Experiences and issues - Environmental assessment and evaluation.
PRIVATISATION
Since the time the government in several countries undertaken the economic development as the basic function, several developmental efforts have been made and a number of them failed to yield the expected results. This is the experience of government both in developed countries as well as developing countries. When such efforts of government failed, it is felt that such efforts could be left for private initiative. In this context privatisation assumed very great importance. Privatisation in general means the reduction in the involvement of the State or public sector in economic activities of a country. This may be in different forms as explained below. 1. Denationalisation - those units which were nationalised in the past, to enable the government to have, management and control over them, are handed*over to (he private sector for continued operation.- For example, suppose a commercial was nationalised by taking it over from a private management, under privatisation, the government voluntarily reducer its hold in the bank by disposing of its ownership equities to the private sector.
2. Another form of privatisation is allowing the entry of private sector in the areas hitherto reserved or meant only for government or public sector. In other words, areas which are exclusively for public sector are opened up inviting the private sector to enter. The exclusive state monopolies cease to be so once the private sector is encouraged to enter. For example, the electricity generation and distribution was hitherto completely under the government, but this areas is being opened up for private sector.
3. One more way in which privatisation is made is by transferring the management and control of certain public sector undertakings or departmental type of organisation to the private sector. This usually takes place in any one of the following ways :
a. Franchising - the government may provide the technical know-how and the name and brand name may be provided by the private sector. For example, the millions of STD/ISTD telephone booths are owned by the private parties and the telephone link is provided to them by the government. In this case the private parties are franchistd to use the telecommunication links provided by the government. Before (his, the Postal and telegraph departments were completely providing this service. b. Government may contract out its service and make the service available to the common public through private bodies. For example, railways or airways may contract the catering service to an outside hostel or restaurant for a fixed period. c. Leasing of facilities provided by the government is yet another form of privatisation. For example, a shopping complex built by the government may be leased out to private parties for a specified period against the, payment of lease rentals. d. Allowing the private sector to participate in the equity of government held company or public sector unit is one more form of privatisation. In this case the government widely announces its intention of selling the equities of a public sector unit inviting the private sector to buy these , equities and become partner in the ownership, management and control of the unit.
4. By limiting the scope of public sector, the government may encourage private entry into a particular industry. This, is another way in which privatising take place. The best example is the recent announcement by the government about the sale of LPG by the private sector units apart from the existing public sector units.
Hence, privatisation may mean any of the above mentioned activities resulting in the entry of the private sector in the area completely reserved for the public sector.
Now let us go through the arguments which favoured privatisation in India.
1. The large number of public sector units existing in India, is accounting for a sizeable budgetary deficit year after year. That is these public sector units are run inspite of incurring loss, by meeting the funds requirement by them through deficit financing. This has a direct impact on price level and inhibit the development of the economy. Hence, privatisation is opted for.
2. With the mounting non-development and non-plan government expenditure, the government faced with serious resource constraint. This further widened by the dismal performance by the public sector. Hence, privatisation is resorted to.
3. The poor performance of the heavily invested public sector accounts for increasing capital output ratio in the economy. This can be checked only through privatisation.
4. There has been a very low rate return on investment in public sector units. Against an investment of more than Rs. 1,00,000 crores, the return is a mere Rs. 2,730 crores in 1990-91. This clearly shows the worst performance of the public sector. Most of them are running on loss for year. This is a serious drain of economic resources. The alternative rectify the situation lies in privatisation.
5. The large scale loss of man days through strikes and lock outs in public sector units has already denied the economy what is due. Continued public sector existence will only worsen the situation. Hence, privatisation is a must.
6. Over staffing and low productivity are associated with public sector units leading to repeated loss. One way of overcoming this is privatising the public sector.
7. With the liberalisation policy announced, there is a need for every unit to gear up itself to face the extern; competition. The umbrella protection is removed and the potential of each unit has to reach its peak to survive the competition in the field. Public sector units cannot withstand this external competition, unless they are run on efficient lines. The option therefore is to privatise.
The arguments given above may not be taken as final to mean that privatisation is the panacea for all evils in the industrial sector of India or the ills of public sector. Even private sector is subjected to a number of criticisms. Before we conclude whether privatisation is a wiser move or not, let us consider the arguments against privatisation.
1. In every developing economy, there exists a serious economic and social imbalance. This is widened by the private sector. The basic objective of the public sector is to ensure that the material progress in the society is shared by every sector of the society. Only for this purpose planning and the public sector are made indispensable. By privatising, the material progress will be reaped only by a minor segment of the society and the economic and social imbalance will only widen.
2. Privatisation does not ensure any rising level or income or standardisation. Especially when the need of the hour is to rise the standard of living, privatisation cannot help to achieve this by itself. Further privatisation cannot be the alternative in several areas of bad performance. Instead of resorting to this alternative, efforts could be made to identify the reasons for bad performance and rectify the situation.
3. Being governed by profit maximisation objective, the private sector always attempts to minimise its costs in every way possible. Sometime this is achieved by using the obsolete technology. This means that the private sector is fully responsible for under utilising the available resources.
4. It could be easily understood that in India private sector is highly subsidised by the government. The government invests heavily on infrastructural development like transport, electricity, water, etc., and the private sector just gets its share of the cake and enjoy the profit at the cost of the nation. Public sector also invests heavily on research and development .areas and the know-how developed is used by the private sector for its profit maximisation.
5. There are several areas in which the public sector is providing the market for the products from private sector. For example, the number of sodium vapour bulbs, tube bulbs, etc., required by the government for various purpose is supplied only by the private sector. In this way the public sector is directly working for the profits of private sector.
6. The important reason for the slow tardy economic growth of our country is the weak public sector. Instead of strengthening the public sector units to accelerate economic growth, privatisation is not the right step.
7. One of the inevitable result of privatisation is the emergence of private monopolies and restrictive practices against the interest of the country. Just because the public monopoly failed, private monopoly cannot be encouraged. Private monopolists do more damage than any good. Hence, privatisation should be objected with all force.
8. As regards the fuller utilisation of resources, a study on this in private sector and public sector will certainly reveal that the under utilisation is more in private sector than public sector. This in turn mean deliberate under production and creation of artificial scarcity. Hence, by privatisation we will only encourage the tendency to under utilise whereas the expectation is to achieve fuller utilisation.
9. The efficiency, being a relative term, has to be objectively measured. The rate of return on investment in public sector cannot be compared with that of private sector. The private sector uses a different norms of estimating return on investment. Further mere financial performance cannot be taken as the basis for good overall performance. Hence, one will be surprised to find that the public sector in several areas perform better than the private sector.
10. Private sector by nature is interested only in short term quick profit yielding propositions and not on long gestation ones. Hence, several basic and key industries cannot be and will not be started by private sector. But without these industries the economy cannot move forward. Hence, public sector units have to be continued.
11. Public sector units function under loss, mainly because they are made to work under various regulations and controls. These are not in any way deterring the private sector and so they have complete freedom to determine their policies. Suppose the public sector is also liberated from such oppressive controls and regulations, we also find it functioning with profit and may even do better than the private sector. Hence, privatisation is only an attempt to allow the public sector function freely. Such a policy could be only help to underline die superior performance of the public sector.
The move towards privatisation in India has already started with the disinvestment of public sector undertaking. To start with 20% of the interest in public sector undertaking is to be disinvested. There has been a good response from the market for such a move. It is said that the resources mobilised through such disinvestment will be used for paying off the dues to employees opting for voluntary retirement, retrain the labourers and also for restructuring the unit. With the disinvestment of 20% shares of public sector undertakings, their managerial complexion will undergo a change and they may become commercially successive. But as pointed out by the Rangarajan Committee in June, 1993, such disinvestment will exclude the strategically important areas like defence and atomic energy. The privatising effort is being carried on with the hope that the public sector units will start operating on commercial lines and justify their existence.
Globalisation
There has been a tremendous change in the global environment in the 90V Several developments throughout the world have resulted in a new challenges forcing every country to gear up to face these challenges. The important changes like unification of Germany, resurgence of the Far East countries like Singapore, Taiwan, Korea and Hongkong, the fall of communist regime in Eastern Europe and the disintegration of USSR, as well China slowly becoming an open economy, etc., have resulted in a new wave of optimism and growing opportunities around the globe. Every country is trying to seize these opportunities by throwing open their economy and embarking on global marketing strategies to win over the world. In otherwords, such an approach has made it clear that economic inter-dependence is on the increase and no country can remain a closed economy for ever. The best example is that of communist China, that when it has decided to open to receive the Western countries, especially in the trade sector, a sea change has taken place in China. The Western countries are now competing among themselves to invest heavily in China to reap the fruits of hitherto unaccessible market.
Globalisation in this environment is a policy involving the following aspects: Exports sector forms the nucleus of an economy as through this sector every country tries to maximise its external earnings. It is obvious that when export sector becomes a significant macro economic aggregate, the industrial sector completely depends on its for its own growth. Automatically the banking, insurance and other related sectors are also integrated well with the export sector. All these mean, that the growth of and economy is inextricably linked up with the growth of its trading partners. Hence, by opening up the market a country also enters into the markets of other countries and it becomes essential for the countries in the world, to change their production and marketing orientation towards global market. In other words, competing and succeeding in the international market becomes the objective rather than confining to internal market. In this process of globalisation, the country concerned has to liberalise all its trade restrictions and barriers paving the way for the entry of international giants and throwing open challenges to the internal producing and exporting sector. Hence, globalisation in a way is the back door entry of FREE TRADE philosophy of the earlier days.
Globalisation has been the result of various forces in the international markets such as: i) Over the period countries are found to have attained similarities in terms of the infrastructural facilities, channels of distribution and the marketing strategies. Hence, such of those countries with these similarities find it beneficial to strengthen their trade ties.
ii) There has been a huge flow of funds from country to country which has resulted in the opening up of the domestic capital market. As a result several major corporate giants raise funds through international capital market thereby facilitating flow of huge funds from country to country in hitherto unknown volume.
iii) Technology revolution has led to the emergence of cheap technique of production and improved the quality of the products which together remain a force to reckon with in the international market.
iv) As a consequence of all the above development, marketing strategies have become more complicated as in the global market consumers of various countries are to be satisfied. The best way to win over the consumers in the international scene i\ through best technology and quality.
With the globalisation becoming a reality, producers in the world over have started adopting a strategy to maximise their gains. No longer they have constraints in the form of geographical territories. They are able to produce at a cheaper cost of production by taking advantage of cheap labour cost in developing countries, apart from entering into alliance with even their traditional rivals as has happened in the case of IBM and Microsoft or General Motors and Toyota. All these efforts help the producers to achieve maximum efficiency, which in turn inspires them to move forward to conquer new peaks.
As regards the developing countries, the globalisation policy is opening up a new unlimited opportunities for them to achieve a higher level of economic growth. Hitherto they were bound by protectionist rule, discriminatory policies, compulsory technology transfer, etc. All these have denied the opportunities for them to enter the global market which would have sharpened their abilities and helped them to realise their potentials. The practice used to be bilateral and multilateral agreements thereby satisfying the policy of mutual help and mutual growth. But with globalisation there is no such necessity as country with the right set of policies should be able to stand shoulder to shoulder with even developed countries on the strength of their technology and product quality. In this connection the General Agreement on Tariff and Trade (GATT) has provided for the growth of multilateral trade based on negotiations at different points of time among the trading partners. In the latest negotiations at Uruguay Round has touched upon certain new areas like trade in services and trade related aspects of investment and intellectual property rights. This has created a new challenge for the developing countries.
The trend in globalisation has also led to the growth of trading blocks at the regional level like European Economic Community, Asia Pacific Economic cooperation, USA-Canada-Mexico Free Trade Agreement, etc. At the same time there has been a big challenge for developing countries viz. international debt. To overcome this problem the developing countries should have some preferential treatment so that they would be able to increase their exports and tide over the international debt problem. Interestingly, countries like South Korea, Singapore, Taiwan and Hong Kong have improved their export performance and have been immensely benefitted through globalisation. Other countries like India have entered the race late and over a period they should also be successful.
For this new challenge thrown open, India has responded well and its policies indicate that India is slowly heading forward. Thanks to the 1991 policies announced by the government, that India now has initiated reforms in the field of trade, industrial policy, fiscal policy, etc. There has been greater reliance on foreign technology to improve the competitive efficiency of the Indian industries. The days of industrial licenses and controls have gone and are replaced by an atmosphere of liberalisation. This is done to integrate the Indian economy with the international market and global economy. However, over these three years, India has not made any significant achievement like South Korea or the other South East Asian countries, inspite of having unlimited resources, broad based industrial infrastructure, trained manpower, abundant supply of cheap labour, etc. But certainly she is lacking in competitive efficiency which is very much required for achieving success in the international scene. Globalisation certainly offers India great opportunities which must be seized. Especially on the following areas India has to seriously think and devise plans :
a) India best suited for large scale production at cheaper cost especially in agro-based industries. We have the necessary skill and trained manpower in this sector. What is called for is the ability to enter into alliance with the partners overseas. This should be followed by a National policy for each sector. Once this is done, there is no reason why we cannot also emerge as the South East Asian countries.
b) India should develop on its strength i.e., areas where it has the talent and potential like knowledge-led sectors, agricultural and fashion-led industrial products. Once we identify this strength, our corporate sector engaged in these areas of production, should be encouraged to enter into global market to become Indian multinationals abroad with production facility in various part of the globe.
c) There is a basic necessity for India to attract foreign investment in substantial quantum. This called for: i) to obtain the funds required for large scale production and ii) to create awareness among the investors abroad about the investment opportunities in India and also to make our producers understand the reality that unless they improve they cannot withstand the global competition.
As on date, India is unable to attract foreign investment because of the competition from China, Far East Asian countries, Latin American countries, etc., India must come up with the necessary policies to out-beat these competition soon.
Constraints :
While moving towards the global market, India has to be conscious of certain serious constraints and prepare herself to overcome them.
Firstly, India should be aware of the consequences of getting integrated with developing economies. The interdependence is more unfavourable to the developing countries in the sense that when there is economic fluctuations in the developed countries, that is bound to affect the developing countries. India should device methods to insulate itself from such external shocks and destabilisers.
Secondly, the export based economic reforms will certainly lead to inflow of funds But what this results in, has to be carefully observed. Once the export earnings go up, the income increases and the tendency will be to import heavily which will rob the benefits realised. Hence, efforts should be taken up now itself to channelise the export earnings towards export boosting efforts and activities', and discourage the tendency to import
Thirdly, there is an increasing danger in the form of the emerging regional trade blocks. Countries in different regions have completely removed the trade blocks among themselves, thereby they fight against any foreign invasion in the global market. Further such regional blocks have the tendency to create cartel like barriers in the market and how such a combined onslaught can be managed by India is another constraint for which an answer or a strategy should be found.
Fourthly, historically free-trade has not benefitted every participant and so there is no guarantee that by globalisation policy India would be certainly reap the prospects of higher growth.
With the knowledge of these constraints, the globalisation policy should provide for achieving technological excellence in the manufacturing sector. The competitiveness of the Indian industries must be improved through higher productivity and best quality output. Efforts, should be made to enter into alliance with the partners abroad to get the best out of globalisation. The Indian corporate sector should learn to operate in an unregulated environment by strengthening themselves in every way possible. Having opened up, there is a compulsion that India has to prepare itself on the above lines if at all it should succeed in this globalisaticn efforts.
ENVIRONMENT ASSESSMENT AND EVALUATION
The necessary inputs for assessing environment has been already dealt with. While any one can compile information on environment, not every one can succeed linking this information and come out with meaningful understanding of inputs. This being a specialist job, different methods are followed at different places for assessing the environment. Broadly these methods could be categorized under: i. verbal and written communication, ii. Searching and scanning iii. Spying and iv. Forecasting. Each method has its own merits and demerits. But all of them depend on the ability to cull out information. The first method involves collection of oral and written information from different sources. The second one refers to the serious search for information at different places apart from using the internet websites for scanning for information. Spying as a method involves, compiling information in a secret manner from competitors and others so as to suitably position an organization. Forecasting is an exSearching and scanning iii. Spying and iv. Forecasting. Each method has its own merits and demerits. But all of them depend on the ability to cull out information. The first method involves collection of oral and written information from different sources. The second one refers to the serious search for information at different places apart from using the internet websites for scanning for information. Spying as a method involves, compiling information in a secret manner from competitors and others so as to suitably position an organization. Forecasting is an exercise in which based on the understanding of the past and present the future is predicted.
In all the methods determination of information required is the first step. This is followed by identification of sources of the required information. Thirdly, the collection of information followed by processing of information. Fourthly, the processed data is subjected to analyses. The results of the analysis are then interpreted with which the necessary action plan is devised. To explain this process, let us consider the SWOT Analysis. Each letter in the word 'SWOT' stands for: S - Strength, W - Weaknesses O - Opportunities and T - Threats. All the information compiled is grouped under these four aspects and based on the outcome, a suitable strategy is developed. This is explained with an example about the Leather industry. Suppose we confine to two segments in the leather industry, viz., footwear segment and leather segment. How to assess their environment is explained below.
SWOT analysis - Example of Leather - footwear segment and leather goods segment
The SWOT analysis is undertaken for these two segments viz., footwear segment and leather goods
ij SWOT analysis of footwear segment:
Strengths: a) Finished leather is 15 per cent to 20 per cent cheaper in India compared to other competitors in the world. b) India has the largest cattle population in the world which ensures continuous availability of raw material. c) The cost of labour is relatively cheap in this industry in India compared to other manufacturing countries. d) The cost of effluent treatment is considerably lesser in India. e) There are specialised institutions like CLRI which facilitate access to inputs in manpower training, shoe design, quality control, etc. f) Overall cost-competitiveness in India compared to European manufacturers is very high. The cost difference works out to be 25 per cent to 50 per cent in different processes.
Weaknesses : a] Weight of carcass of Indian cattle is less and so only small hides are available for tanning. b) Advanced machineries required by the industry are mostly imported. c) Use of untrained manpower has a significant impact on quality of the output apart from loss of production due to frequent labour strikes. d) Huge losses are incurred due to wastage of hides and skins. e) Shoe components are largely imported by India. f) Existence of poor infrastructure viz. non availability of power, poor transport, etc. g) The industry is dominated by the small scale units, which frequently become sick. The reservation policy is responsible for this status.
Opportunities : a] The removal of import barriers in advanced country markets opened the markets in these countries. b) Over the period the flow of output from the organised sector has been increasing. c) CLRI has initiated action on a three level tannery modernisation programme which should improve the recovery of fallen hides, chrome recovery and effluent treatment, etc. d) The Rs. 220 m leather technology mode mission project launched by the Council of Scientific and Industrial Research to improve the tannery sector has opened opportunities. e) Quick response manufacturing techniques - wherein, instead of assembly line - enable workers to do a number of different operations, covering for each other as dictated by flow of work gives higher throughput and quality, fewer rejects.
Threats : a] Delivery delays cause loss of margins. b) The lack of income tax benefits and excise duty relief are the main barriers to the development of the organised sector. c) There is a constant threat of regulations governing this industry being changed in the importing countries.
ii] SWOT analysis for leather goods
Strengths : a) Availability of large-raw material base. b) Abundant availability of cheap labour. c) Long tradition of processing leather and manufactured goods. d) Strong entrepreneurial culture. e) Significant presence in the global markets. f) Existence of developed and supportive engineering and chemical industries. g) Improving infrastructural facilities in the form of transport, telecommunication. h) Exporter friendly policy framework. i) Institutions like CLRI, CLE, etc., serve as the voice of the industry and also promote design and market development.
Weaknesses :
Inspite of the above strengths, India's share in world leather trade is abysmally low. The following are the reasons for this : a] Nearly 85 per cent of the leather units in India are in the private sector, and are basically small sized and semi - mechanised production units. b) Poor quality raw material in the form of hides, skins and semi processed leather is a major problem. c) Low value additions and inefficiency in the industry. d) Lack of focus in marketing our leather products. e) Weak fashion consciousness. f) Excessive dependence on a few markets. g) Dearth of skilled and trained personnel. h) Slow paced modernisation, upgradation due to insufficient resources.
Opportunities: a) Mobility of manufacturing units to low cost countries like India, due to rising wage level in developed countries. b) Existence of growing middle class which provide large domestic market apart from reflecting international fashions which would ensure that the industry is in line with the latest global fashion trends. c) Increasing establishment of joint ventures in India by several global companies. d) Reduction in import duty on chemicals, liberal import of machineries for processing leather
Threats : a) A number of countries like China pose a threat to India's advantage in terms of cheap labour. b) Supply of high quality end-products and strong design infrastructure in spite of high wage levels, with competing countries like Italy. c) China is strengthened by the integration of Hong Kong with China. d) China's membership in APEC implies that the US market will be much harder to tap. e) Eco - labelling is gaining global acceptance. Exporters will have to suitably adapt their product manufacturing processes immediately to even retain current market access.
Having identified the SWOT of both the segments, one should decide about the policies required to exploit the opportunities, avoid the threats, build up the strengths and eliminate the weaknesses. When the assessment is made about the national market all the other relevant inputs like cultural preferences, religious beliefs, demographic aspects, etc., should all be considered. But assessment of the international scenario is very complicated job, as all information relating to the export markets should be available on a day to day basis. However, these days, it is possible to get hourly information from every comer of the globe, thanks to the internet websites.
REVIEW QUESTIONS 1. What do you understand by privatization ? What are the different forms of it? 2. Discuss the arguments for and against privatization in India. 3. With an example, discuss the meaning of globalization. Why globalization has become a reality ? 4. In the context of globalization, what are the areas that India should focus and why ? Discuss the constraints in this context. 5. Outline the need for environment assessment. What are the different methodologies available for this purpose ? Give an example for SWOT analysis.
SYLLABUS
CHAPTER I
Business environment- Dynamic factors of environment- Importance of scanning the environment-Fundamental issues-Economics environment of business - Sock) - cultural environment- Political/ Legal environment -Cultural environment.
CHAPTER II
Political economy - Government and business -.Public control, of business -Trends and structure of Indian economy - Socio - economic problems of India
CHAPTER III
Government controls and regulations -, Regulating economic and industrial activities - Industrial Licensing policy - Control of monopolies -, Capital issues control - Government control over FDI and collaboration - Distribution and price control - New EXIM policy - Foreign exchange flow regulation -Technology transfer.
CHAPTER IV
Monetary and fiscal system - Banking and credit structure in India – Financial institution - Fiscal system - theory and practice.
CHAPTER V
Economic planning and development - Government and planning - India's eight five year plan and structural reforms - Industrial policies and promotion schemes - Government policy and SSI - Interface between Government and public sector.
CHAPTER VI
New Economic Policy Environment in India - Privatization - Liberalization and Globalization - Experiences and issues - Environmental assessment and evaluation.
REFERENCES : Mohinder Kumar Shartna - Business Environment in India Adhikary M, Economic environment of business Amarchand, D. Government and Business Francis Cheunilam : Business and Government Maheswari & Gupta : Government, Business and Society Kuchal, S.C : Industrial economy of India Fredrick Davis : Business and society.
Business environment
|1 |Environment - Introduction | |
|2 |Business Environment & Economy | |
|3 |Control of Business Environment | |
|4 |Monetary & Fiscal System | |
|5 |Planning & Development | |
|6 |Liberalization & Globalization | |
CHAPTER I
Business environment - Dynamic factors of environment - Importance of scanning the environment - Fundamental issues - Economic environment of business - Socio - cultural environment - Political / Legal environment -Cultural environment
This chapter focuses on the following aspects of Business environment: Definition of business, meaning of business environment, the classification of business environment, need to study environment in business decisions, the methods of scanning the business environment, issues that are to be addressed while scanning the environment, various types of factors that influence business environment, non-economic environment and its impact on business decisions.
To highlight the importance of the Business environment, three case studies have been appended at the end of this lesson.
Definition of business
The term business is understood and explained in different ways by different people. For some, business is an activity, for some it is a method of transacting, for sonic others, it is a method of money making and some people argue that business is an organized activity to achieve certain pre-determined goals or objectives. Dictionary meaning of business is: the act of buying and selling of goods and services, commerce and trade. Based on all these meanings of justness, we may define business as: gainful activity through which various elements of society conduct exchanges of the desirable things.
In the olden days, the people engaged in different activities in a society were classified into four groups : Brahmnas, Shatriyas, Vysyas and Sudras, Of these our fold classification of social activities, the activities of vysyas included basically, facilitating exchange. Hence, business as an exchange activity remained since the days of exchange started. It could also be recalled that business as a social activity became popular only when the wants of different people in a society were to be met with the available resources. In other words, whenever there was a scope for producing something, which is wanted, then business activity automatically emerged.
But now a days, business is viewed more as a profession or occupation. From the days of family owned business, we have reached a stage of professionals and experts starting and running business. It could also be noted that business administration and business management have emerged as the most prospective field of study and occupation. Persons with educational background in business, enter business or join business organizations to make them successfully function. Unlike the olden days, a number of interests are involved in business today, viz. owners, investors in business, suppliers, customers, employees, government, stake holders, administrators, managers, strategists, executives, and so many others. Hence, every business activity has to meet the goals or aims or objectives of these various groups of people. That in fact, has made business a most complicated activity.
Modern business has a number of features. Understanding of these would help to appreciate and organize business activities in a highly professional way.
1. Business is an economic activity :
Business involves organizing activities to satisfy human plants. These activities may result in the manufacture or production of a commodity or extension of a service. When a good or service is produced, resources are involved. Resources like human resources, physical resources and financial resources are all required to realize output to meet human needs. These resources are limited in supply, and so business involves identification of resources, evaluation of resource qualities, buying these resources and utilizing these resources. These resources being scarce in relation to their demand, the resources carry some value [i.e., price]. They cannot be procured at any cost to produce anything to meet human wants. So automatically selection among various resources come up which is made on the basis of requirement and cost. Once they are procured, then they are used in a very judicious manner so that there is no waste. That is optimal utilization-of resources is to be achieved. In this context, several decisions like resource selection, resource procurement, resource mix, resource utilization, etc. are all involved. As in all these stages, choice among alternatives is involved, every business activity is to be treated as economic in nature. Depending upon the business activity, the approach to selection among alternatives would differ. For example, in a manufacturing business, the choice is about input selection to supply quality output, in a service organization the choice is about-inputs and delivery process, in a government organization it is about production and equitable distribution of output, in an institution like bank, provision of various investment opportunities of short term and long term to the public, etc.
2. A business organization is an economic unit
Every business organization is engaged in transforming inputs into output to meet the requirements of the people. The selection of input and size of procurement will depend upon, the size of the organization. This would also depend upon the nature or product or service extended/by the business unit. All these are attended with the objective of making profit or surplus. Only when there is surplus achieved, can the business units grow. Hence creation of surplus in a business becomes the focal point and this is best achieved through optimal utilization of resources. That way, all business units have to achieve the maximum output with minimum inputs which in other words is the effort to achieve economic efficiency. Only economic efficiency can enable firms to be efficient in every other sense. Therefore, business organizations are only economic units in nature.
3. Business decisions making is essentially an economic process
All business decisions involve selection from alternatives. In other words, the rational choice of inputs is implied in every business decision. Hence, to be rational, a business unit goes through the process of : determining objectives, identifying opportunities, generating alternatives, classifying these alternatives as feasible and infeasible alternatives, then rank the feasible alternatives on some criteria and then select those alternatives fulfilling the constraints. For example, if the objective of a business unit is to maximize profits, then this would call for minimizing cost and maximizing revenue. On the cost side, the business unit have to identify, procure and utilize resources in the optimal way and on the revenue side, the business unit should determine the price which would facilitate maximization of revenue. Price determination again would depend on various factors like demand, supply, competitive scenario, government interference, statutory compulsions, conflicting interests of the stake holders of the business, etc. Therefore, every decision made in a business would automatically depend on the economic process.
Changing concept of business
It has been stated already that the concept of business has undergone a vast change. From a producer driven stage business has become consumer centered and driven stage. While the earliest concept was * sell what is produced' the modern concept is 'produce what is wanted' So every business depends on consumers and their ever changing needs. Any business unit which has successfully understood its customers and offer the product or service meeting their requirements alone is successful. But in this process, business units have to manage pressures from its owners and other stake holders. It should take into account the requirements of the workers and the trade unions. It should abide by the rules and regulations of a number of government agencies and institutions. It should meet the challenges and threats from competitors. Most important, it has to fulfill its social obligations. To survive every business unit has to also consider: the revolutionary changes in technology, market expansion, information explosion, competitor strategies. These are days when the consumers are better informed and so no business unit can afford to ignore consumer awareness and preferences. Technological development has brought with it the compulsion to use modern methods and techniques. Social obligations have made business units to meet pollution norms, etc. Trade union pressures have made them to design satisfactory service conditions for the work force. Then there is compulsion to provide for development of human resources in the organization to achieve organizational development. All these have made modern business ‘tight rope walking.’
BUSINESS ENVIRONMENT
Business involves activities, which links an organization with outside world. Within an organization, a business is governed by the behaviour of its employees, management or decision makers. But externally a business is influenced by a score of factors, which range from customers to competitors and government. Therefore, a business cannot be independent of (he influence of these external factors. It should also be noted that a business has absolute control over all the internal factors, it has no control over the external factors. So often it becomes necessary for business houses to modify their internal decisions and policies, on the basis of the pressure from external factors This highlights the need to be ever- cognizant of changes and influences of external factors so as to conduct business on healthy lines. It is in this context that business environment assumes all significance. Business environment therefore refers to the influences and pressures exerted by external factors on the business. The following Figure would help to understand the various factors which constitute the business environment.
From the Figure: 1, it would be clear that business organizations function in an environment subject to the influence of various constituents. Earh one of the constituents have in turn a number of factors influencing them. For example, economic environment has micro and macro environmental factors affecting it. To develop a right perspective about business environment, let us discuss briefly about each one of the external environment constituents.
1. Demographic environment : This refers to the size and behaviour of population in a country. Suppose a country has a huge size of population, then, the country would provide extensive business or marketing opportunities for all types of business organizations. On the other hand, a country with low size of population would force the business organizations to seek external market for their products or services. Similarly, if the population in a country is well - tuned to 'use and throw concept’ [like most of the Western countries] then there would be limited scope for repair shops and employment scope in that segment would be almost nil. But alternatively this would give wide marketing opportunities for manufacturing organizations. On the other hand, if the population is averse to 'use and throw' concept, then the business opportunities would be limited for manufacturing organizations but the repair shops, self-employed technical persons and spares manufacturers, would have roaring business. Hence, the size and quality of population emerges as a vital factor influencing business environment.
2. Economic environment: Economic environment refers to the overall economic factors like economic philosophy of the country, economic structure, planning, economic policies, controls and regulations, etc. All these have a serious impact on the functioning of business organizations in a country. For example, in a Capitalistic economic system, business organizations would be subjected to limited government regulations and controls. They would be more governed by market forces [demand and supply] rather than by other factors. On the other hand, in a Socialist system, the government would determine everything on behalf of the country. In a Communist set up, the government has absolute control over every aspect over production that private enterprises may not exist at all. In a Mixed economic system, government would be selective in allowing die presence of private enterprises in certain activities, reserving some spheres completely for governmental operations. Hence, the economic philosophy of the country directly determines the scope and functions of business organizations in that country.
3. Geographical and ecological environment: Geographical environment refers to climatic conditions and natural resources, which determines flu manufacturing scope and the nature of the products that could be marketed. For example, a country like Kenya has to manufacture more of products based on forest resources, while the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc., Countries in the tropical region would have organizations specializing in products from geographical resources available in abundant in that region, while organizations in Mediterranean countries have a Different business scope, Scandinavian countries have scope for dairy product manufacturing, etc. Similarly ecological imbalance is taking place at an alarming rate in the world today, that deforestation and hunting of rare species of animals for food are all prohibited now. Hence, while identifying the business opportunities, business organizations have to be conscious of the limitations posed by the geographical and ecological considerations.
4. Legal environment: It is well known that every country has a number of legal regulations to ensure that the interests of business organizations do not run counter to national interests. Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of customer complaints, payment of tax to government, manufacturing practices, human resources development to pricing of products and services, a number of legal regulations have to be fulfilled. For example, in USA and several western countries, consumer protection is very active, that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services. In India and other countries, very rigorous legal provisions arc in place to prevent hunting of rare species, that any organization, which manufactures products based on such species, have lo get legal sanctions. In case of failure to honor cheques issued, organizations are now a days made to pay hefty compensations. Hence, the deterrence in terms of legal provisions has become the order of the day. All organizations have to first of all address these provisions become coming in to steam.
5. Technological environment: This is a very significant external factor determining the destiny of business organizations. Supported by computerize operations, modem business organizations have succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time and place, etc. While communications use to take unduly long time in those days, business communications are instantaneous these days, thanks to modem satellite technology. Modern organizations have recognized that research and development alone can ensure organizational growth and stability. They have become more and more pro-active and remain as change agents of the economy. Governments have also become more technology conscious that right from police controls to registration of title deeds, computerizations has been adopted. Customer servicing through call centers is the latest necessity of organizations. Manufacturing activities have become more and more technically sophisticated. Therefore business environment has become highly dynamic.
6. Social environment: Social environment today has brought compulsions on business organizations to adhere to certain business ethics and morals. Social responsibility of business is an important force that modern business organizations cannot wriggle out of their duties and responsibilities towards the society. For example, every leather manufacturing or process unit is made to install pollution prevention system. Similarly, the expectations of various interests in the society have undergone a sea of change. The shareholders, promoters and owners expect a reasonable return on their investments. The workers expect security of service, terminal benefits, accident relief and various other compensations from the organizations. Government expects the business units to pay tax regularly and participate in social improvement. The distributors and agents expect the organizations to ensure smooth delivery process and demand more commission and compensation. Suppliers expect the organizations to give them continuous business and prompt payment of bills. Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all these groups remains successful and grows.
7. Educational and cultural environment: Educational environment in a country determines the quality of population. A country with very high illiterate population would always experience political and economic instability. Similarly, lack of education may also give scope for the existence of superstitious beliefs, fatalistic attitude, etc. People's choice of goods and services would be more governed, by their religious faiths and beliefs. For instance, in the colonial days, the Indian population was a victim of the Britisher's divide and rule tactics. The economic development of a country completely depends on the literacy level which alone can pave the way for improvement in science and technology, modernization, industrialization, etc. In such a country, the business opportunities are plenty.
Cultural environment refers to the values, norms, customs, ethics, goals and other accepted behaviour pattern of people in a country. In olden days, religion was the basis of all activities in a society. The religious leaders and institutions determined what business should do and what people must consume. In India, the existence of caste system has done more damage than any good. Caste based politics has become the order of the day. Under the pretext of working for backward and downtrodden people, several persons have amassed fortune. This is worsened by political support and policies. A modern organization does not have the liberty to recruit people on merit but it has to follow strictly die reservation policy of the government. Another serious aspect of the cultural environment is the attitude and behaviour of the people in urban and rural areas. The urban - rural divide has created enormous problems for administrators and specifically business organizations prefer urban educated person to persons from rural areas.
8. Political environment: Political stability is one important factor winch determines the business growth or downfall. A country with relative political stability would witness inflow of foreign capital and collaboration. By political stability we mean that the policies of government remaining consistent. As the business decisions arc based on government policies, frequent changes in these policies would force business organizations to change their policies too which, makes functioning very difficult. Sometimes, when the policies determined by a party in power are reversed by the succeeding party forming the government, there would be far reaching changes in business environment For example, India was following a policy of protectionism till late" 1908's. Hence, the industrial development and economic development could not take place at a rapid rate. In the absence of competition, the business organizations, made people to accept inferior quality goods and services. Once, the liberalization policy is adopted, the scene has completely changed. Today, no business can survive unless it provides quality goods or services on par with the multinational corporations. Another aspect of political environment is the political ideology with which a party is wedded to, would make the government tow the lines of countries with similar ideologies. Until the disintegration of USSR, India was simply following USSR's lines, but after the disintegration, India has to literally fend for itself. With the pressures mounted by the Western countries, India had to accept various trade and monetary policies. This has brought about a complete change in business environment.
NEED TO SCAN ENVIRONMENT
Having discussed very briefly the features of each one of the constituents of business environment, let us discuss why the environment should be analyzed by the business organizations.
It is well known that business enterprises cannot remain independent of the society and the institutions. So whatever decision they take as to be in tune with the requirements of society and the dictums of the institutions. A business organization has to continuously monitor the environment so as to identify the business opportunities and threats. By exploring its strengths and minimizing its weaknesses, if the organizations can capitalize these opportunities and effectively thwart the threats, then it would be able to grow. Let us elaborate this with an example.
Suppose an organization wants to introduce a new consumer durable product in the market. Then it would study whether there would be demand for this product and the product would be accepted by the society. At the outset, the organization would examine whether the product would suit the culture in the society. Suppose the product is 'use and throw' type. Then people would certainly be influenced by this feature of the product while evaluating the price of the product. In India, such a product would never be accepted as the culture here is to lengthen the life of every product by repairing it. Similarly suppose the product requires some critical component from abroad. Then unless the government policy is favourable the component has to be imported at a very high cost, which in turn would drive the price up. .Suppose the product is only one of its types, the organization would then emerge as a monopoly supplying the product. This may not be tolerated by the government. Suppose the manufacturing of the product involves advanced technology, then the type of human resources required would be well educated and trained. Obviously this will rule out the job 'opportunities for persons educated in rural areas. Further, if the manufacturing process involves scope for pollution, then the organization has to address it in relation to the provisions of the pollution control norms. Hence, in every decision of the organization, the external environment has an important role to play. Any future plans of expansion and forecasting of demand will depend upon the changes in the business environment. These changes may include both the current and expected changes. Unless these changes are also foreseen, decisions taken would turn out to be suicidal. In the case of organizations which have been pro-active, the changes in the environment do not affect them much. But those which fail to understand from their own experience or that of the other changes would remain challenges for ever.
Among the various constituents of business environment discussed above briefly, we will focus on the following constituents and discuss them in greater detail. The constituents now elaborated are: Economic environment, political environment and cultural environment.
1. Economic environment
The economic environment is composed of various set of economic policies, economic system, strategy of economic growth and development, resource endowment, size of market and status of infrastructural facilities in a country. All these affect the business environment one way or the other. To understand the impact of these on business environment, let us discuss each one of these components in detail.
Economic policies: Economic policies include fiscal policy, monetary policy, foreign trade policy, licensing policy, technology policy, price policy, etc. These policies lay the framework within which every organization has to function.
A] By fiscal policy we mean, the government's tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them. For example, suppose there is inflation in a country. Inflation implies that the people have high purchasing power and so they demand goods. To curb this, the government may raise the personal tax and also the corporate tax. Consequently, individuals will be left with lesser disposable income and to minimize tax, they may start saving through various tax -saving schemes. As far as the corporate are concerned, they have to part with more by way of tax to the government and this would bring down the rate of profit and dividend declared. As a result the corporate would resort to upward price revision, which might lead to further fall in demand for their products and services. During deflationary period, the government would reduce the tax so as to encourage more spending and investment. Even in tax policy, the government can be selective in taxing more of rich and exempting the poor completely. This would facilitate income re-distribution and improve the conditions of poor.
Similarly, by altering its expenditure on various public projects, the government would be able to influence the prevailing economic condition. Government expenditures are incurred on infrastructural development, public utility services like hospitals, new industrial units of very huge size, etc. For instance, suppose there is inflation in a country. The government would reduce its level of expenditure, thereby reducing the income of the people. With lesser income, the demand would, go down and so the price. At the time of deflation, the government would expand its public expenditure by investing in a number of public projects, so that there will be income generation find demand generation which will revive the economy.
Public borrowing is one more instrument in the hands of the government to influence the economic condition in a country. This involves government issuing bonds and encouraging common public and other institutions to buy them. By this, the government would be able to bring down the level of purchasing power in the economy and control the inflation. During deflation, the government would redeem the bonds and so with more purchasing power, the economy would be able to revive.
B] Monetary policy refers to the set of policies determined and implemented by the central bank of a country to control the economic condition. The central bank of a country has the basic responsibility to maintain the price level and money supply in a country. This is possible only when the central bank has certain instruments. These instruments available with the central bank to control the money supply and price level are called monetary policy instruments. They are called Credit control policy. Credit controls can be of two types: Quantitative credit controls and Qualitative credit controls. The former aims at limiting the money supply, while the latter is used to channelize the available credit in the country.
Quantitative credit control policy includes three tools: bank rate, open market operations and variable reserve ratio. Bank rate refers to the rate at which the central bank would re-discount the eligible bills already discounted by the commercial- banks. By revising the bank rate upwards, the central bank would be able to make the discounting by business organizations with commercial banks costly. This would discourage discounting and thereby money supply in the economy, would come down. Alternatively, by lowering the bank rate, the central bank makes credit available at a cheaper rate, and so the business organizations would go for a larger discounting of eligible bills with commercial banks. This liberal credit policy would have expansionary effects on the economy. Similarly, using open market operations, the central bank would buy or sell the securities in the open market and through that increase or contract money supply in the economy. For example, suppose there is inflation in an economy. To bring down the money supply, the central bank would sell the securities it has which will be bought by the commercial banks and other institutions. In this process the excess money with these institutions would be siphoned off, there by they have to restrict credit. Alternatively when there is deflation, the central bank would buy the securities and the money equivalent transferred to the banking system would facilitate adoption of liberal credit. Variable reserve ratio refers to the increase or decrease in the quantum of Statutory liquidity ratio and the Cash reserve ratio which the commercial banks have to maintain as a proportion of their total deposits. By increasing the ratios, the commercial banks would be left with lesser volume of funds and so they can lend less. By reducing the ratio, the commercial banks would be left with more funds with which they can make lending liberal. All these policies would have a direct impact on the business organizations and their operations.
Through qualitative credit controls, the central bank can : regulate consumer credit, alter the margin requirements, resort to persuasive efforts, take direct action on erring commercial banks, etc. Through these policies, the central bank would be able to regulate and direct the available credit to the priority sector and discourage credit for less priority or no priority sector. Hence, business organizations, which fall under priority sector, would be able to expand their business with cheap funds and assistance
C] Foreign trade policy: The foreign trade policy determines the scope for trade between countries. It would directly affect the business prospects of the business organizations. A liberal policy would extend the scope for exports and imports, while a restrictive policy would narrow the scope. Similarly, if protectionism is favored, then the business organizations will have lesser market threats from multinational corporations. Alternatively if liberalization is the policy, then every domestic business organization has to tune itself to every type of challenge posed by the business giants from abroad. Foreign trade policy also includes the exchange rate policy and exchange controls and customs duties. All these are fundamental to the growth of a business organization. For example, suppose there is full" convertibility, then the business organizations would be able to export and import and make payments with lesser restrictions. On the other hand, if there is only partial convertibility, the scope for trade is correspondingly less and the business organizations have to go through a sickening process of getting licenses for export or import and route all their payments through proper channel. Customs duties also play a vital role in determining the volume of external trade. A rise in customs duties would discourage domestic demand because the price of imported goods and services would go up find remain at a high level compared to the domestically produced goods and services, A reduction in customs duties would encourage imports and be favourable to the domestic manufacturers.
Government frequently changes the foreign trade policy, keeping in view the requirements of the country and the economic condition. To tide over the Glance of payments difficulties, government may resort to various policy measures like devaluation, exchange clearing agreements, tariffs and duties, exchange control regulations, etc. These tools would be suitably modified to achieve the desired goals. For example, to encourage exports and discourage imports, the government may devalue the currency, by which the imports of Indian goods abroad become cheaper and the imports of foreign goods in India become costlier. Hence the business organizations have to continuously monitor the changes in the trade policies so as to position themselves accordingly.
D] Licensing policy: In the pre-liberalization days, India adopted licensing policy in regulate the growth of industries in India. Since the days of independence, India adopted licensing policy, which in effect made the government control the growth of independence in accordance with the national priorities. For example, in India, till 1985, the industries in India were classified into four categories: industries completely owned by public sector, industries where both public and private sector participation was permitted, small scale industries and collage industries. Except the first category in all the other categories, private sector presence was permitted through licensing. This was resulted in several adverse effects, which were all explained in detail by the Dutt committee report. But till 1985, liberalization was never accepted as a part of growth strategy. But after 1985, the situation slowly changed that by 1991 India adopted a policy of liberalization. Consequently, the business scope and prospects of the Indian business organization changed since 1991. As has been already pointed out they were exposed to market competition and threats after liberalization. Performance has become a necessity for survival. By about the end of 20th century, the government also proceeded to disinvest several public sector units thereby opening up the challenges all the more for Indian industries. Therefore, the licensing policy and its direction have a lot of impact on the business organizations.
E] Technology policy: One of the most important economic policies is the technology policy. Improvement in technology is a condition for growth and survival in any organization. From a stage of man-dependent environment, the business organizations are all fast becoming machine-dependent [computer dependent]. Right from the stage of enquiries down up to planning the logistics, computers are widely used. Only from the mid -1990's the government started adopting a favourable technology policy. Apart from permitting free imports of computers and components as well as telecommunication equipments, the government has devised a number of schemes like Software Technology Park, to give a Phillip to the technology in India. Computerization has come to stay in telecommunication, railways, roadways, postal services, educational services, medical services, engineering, financial services, etc. This liberal technology policy has resulted in the growth of new industrial segment, viz., and information technology. Millions of youngsters get trained and are gainfully employed. Indian software engineers are considered as the best in the world and several of the multinational corporations depend on Indian supply of trained software and hardware professionals. The business environment has completely transformed over the past five to six years that unless organizations also accordingly change themselves, their survival will become a serious question.
F] Price policy: This refers to the controls that government has on the price in a country. This is necessary, because, unless price is controlled, there is bound to be inflation and then economic instability. Further in Indian context, nearly 35% of the population is living below the poverty line. They do not have any permanent employment. Especially the rural poverty is very serious. To overcome this situation, the government resorts to price control policy. All the essential and basic necessary goods are subjected to price control. While the poor and downtrodden are provided the essential goods at a controlled and subsidized rate through public distribution, the others are expected to meet their requirements through open market. Through demand and supply management, the government makes all the efforts to keep the prices under--control. For instance, by building up buffer stocks, the government overcomes the shortage of food commodities during adverse period. Similarly, specific concessions are given to industrial units located in backward regions and rural areas. This helps them to run on sound basis. As regards the manufactured products, the government adopts the administered price mechanism to control the prices. For example, the cooking gas is supplied to the public at one price, to the commercial establishments at a different price. This helps to minimize the strain of the population using LPG as cooking media. Similarly till April, 2002, petrol and diesel were subjected to administered price controls. Sugar, cement, etc., are also subjected to administered price. Hence, through price policy the government protects the interests of the people and this policy has a direct impact on the functioning of the business organization in our country.
2. Political environment
It is well known that the business environment in a country is very much interlinked with the political environment. The political environment simply means the political ideology which is adopted by the government. In a democratic country like India, this political ideology changes as and when there is a change in the party ruling the country at the Centre and the State level. A number of examples could be cited to prove how the political ideology has influenced the business environment of the country.
Before independence, under the guidance of Mahatma Gandhi, India was wedded to the policy of ‘Swadeshi’. That is, Gandhi advocated the use of only Indian made goods and to completely abstain from imported goods, specifically British goods. As a result immediately after independence, Indian government followed a restrictive, trade policy imposing very heavy customs duty on imported goods. This was thought that such a policy would help to achieve both the political commitment as well as protection of domestic producers from the invasion of foreign-manufacture-s and traders. A deeper look into such a policy would reveal that India never wanted to entertain a policy of allowing foreign trading activities on Indian soil as this would lead to colonization. After all the British East India Company entered the Indian shores under the pretext of trading with India in 1600 AD and the country had to pay a heavy price for the next 350 years being a colony. Hence, a restrictive trade policy was very much favored by every one and in such an environment the business environment was such the domestic producers could operate under the umbrella protection of the government.
This is also evident from the Industrial policy of the government in 1948, which clearly posed a threat to foreign interests in India. At the same time, the Indian government was very much influenced by the Russian type of planning. Being a declared democratic socialist country, India adopted planning as the strategy of economic development. The First Five Year plan was formulated and implemented without relying much on industrial development, when at the end of the I Plan it was realized that growth is impossible without industrial development, a shift focus was necessitated that the government gave emphasis on industrial development. But here again, the government approached the issue with caution. It felt that a controlled and guided industrial development would yield better results than a free unrestricted industrial development. The consequence was the Licensing policy. Though imports were permitted, industrial development through collaborative efforts with entrepreneurs abroad was subjected to a very critical scrutiny. When the Licensing policy led only to concentration of economic power in the hands of a few private sector units like TATA, Birla, and others, the government brought in the Monopolies Restrictive Trade Practices Act, in 1970. This has on the one hand put a check on growth of monopolies in India, on the other hand the industrial development was not taking place at a desired pace. The seeds for liberalization were sown in 1985, when the government felt that India could achieve miraculous growth through this liberalization course, it proceeded in that direction. This culminated in the introduction of Liberalization policy in l99l. This resulted in a peculiar scenario in –which ‘democratic socialism with capitalistic ideologies’ existed. Throughout the four decades after independence, India's policies were more governed by the political factors rather than economic necessities or compulsions. Hence, at the beginning Indian government adopted a purely socialistic pattern of development strategy while by 1990’s development by subscribing to capitalistic pattern has become the reality. This shift has a great impact on the business environment that domestic business today has to realign itself to survive and grow, in a competitive atmosphere.
Having discussed the effect of political environment on business environment let us examine how far the economic system is an important factor influencing business environment. Economic system refers to the organizations and institutions created for the purpose of satisfying the wants of human beings. In a country, available resources have to be utilized to manufacture and distribute goods and services, which would meet the needs of the people so that they are satisfied. These institutions and organizations function with their own rules and regulations. The economic system has certain broad characteristic.
1. The economic system always functions with scarcity of resources. How the system effectively and efficiently uses the resources will determine the extent to which the needs of the people are met.
2. An economic system comprises people. That is, a society of human beings alone can constitute economic system.
3. A set of institutions are created and used for the purpose of smooth functioning of an economic system. For example, banks, money, technology, government, price mechanism, planning etc., are all institutions through which the systems operate.
4. The basic objective with which an economic system functions is to satisfy the wants of the people. Unless there is want for a commodity or service, nothing can be produced. Hence, the economic system allocates the resources in such a way that the wants of the people are satisfied.
5. On the basis of the above characteristics of an economic system, it should be clear that the economic system is very dynamic in nature. That is, the economic system undergoes changes with every change in the institutions, though the rate of change would differ from institution to institution.
The economic system functions to answer three vital questions: a] what to produce b]how to produce and c] for whom to produce.
Answering these questions assumes enormous significance as that would determine every activity within a country.
The first question 'What to produce' depends on what is wanted. The economic system would throw signals through which the requirements of the people could be understood. But not all wants could be satisfied. This is because; a country may not be gifted with all the necessary resources to produce all the goods. Hence, depending upon the resource endowment a country would decide what it could produce. Then there is a problem of prioritizing the available resources among the goods to be produced. Resources should not be used for the production of unwarranted goods. The production of goods, which are harmful to human beings, like narcotic drugs, should be prevented. Hence, considering the availability of resources, the economic system should opt to produce only goods that would satisfy the wants of human beings. In this context it is also necessary to weigh the individual requirements and the national requirements for goods. The latter should be given preference over the former.
The second question ‘How to produce’ addresses basically, issues relating to selection of right strategy, technology and investment. For example, a country like India, with very huge population should not prefer capital -intensive technology, as that would lead to more unemployment of human resources. Similarly, while selecting the technology, a country should weigh a number of considerations like relevance of technology, cost of technology, support in case of failures, consequences of the technology used, etc. Another vital aspect is the investment that a country has to make while selecting the strategy and the technology. A very important question is whether the available funds should be invested in sophisticated research and development or meeting the basic needs of the people. Hence, the second question would ultimately determine the efficiency with the available resources are utilized.
‘For whom to produce’ implies that based on the resource utilization, the country as a whole should benefit and not a few segments. Hence, having produced the goods and services, how they could be equitably distributed is an important aspect. The distribution of national product would differ from country to country depending upon the economic system in vogue.
It has been already pointed out that the way in which the above three questions are answered depends on the economic system which functions in a country. To understand how these answers differ among the economic systems, we should understand the different types of economic systems. In the next section, the details of different types of economic systems are discussed.
Types of Economic system
Economic systems may broadly be classified into three categories: Capitalism, Socialism and Mixed economy. A number of other types also emerged but all of them came close to any one of the above three types of systems. Such systems include: communism and Marxism Let us now discuss the features, strengths and weaknesses of each one of these systems.
1. Capitalism
Capitalism is an economic system based on the principle of free enterprise. Individual ownership of resources is an important feature. With control and command over resources, individuals can conduct any type of business. The object in such a system is to maximize private gains. Any type of enterprise or production of any commodity or service is permitted, so long it is wanted by the society. In such a system the market forces determine the resource allocation and price. That is, the demand and supply forces together determine what to produce, how to produce and for whom to produce. Price mechanism is the nucleus of the capitalistic society. The price mechanism clearly reflects the wants of the people. Once this is known, the producers would allocate the resources to manufacture and sell the products in great demand. While doing so, there is no control or regulation over production. In other words, oligopoly environment prevails. But each producer differentiates his product that he would be able to stay in the market. Technology and innovation ensure the stability and growth of organizations. As a result only efficient organization would survive. The resources would be fully utilized. The system is so flexible that it can adjust itself for any economic condition. The workers get equal opportunities and those with skills would be able to command better wages and salaries. On the whole capitalism offers scope for growth of efficient individuals and organizations.
But capitalism has a number of weaknesses. The important ones are discussed below.
1. Economic inequality is invariably found in capitalistic societies. Individuals and organizations with ownership of resources and hold over the market for (heir product or service, would be able to maximize their gains. Those who have no such property would remain poor and become poorer. So it is said that under capitalism, rich becomes richer and poor becomes poorer. The inequality in wealth and income widens over a period under capitalism.
2. The scope for the emergence of monopolies in capitalistic societies is very high. Organizations by virtue of their economic power would be able to easily eliminate rivals and competitors in the market. There is also possibility of such monopolies influencing the government in policy making and intervention.
3. Though it is said that capitalism would always lead to ideal allocation of resources and fuller utilization of resources, in reality the experience is that resources are held by individuals and organizations and under utilization is the result. Sometimes, products which are not really national priority are produced and forced on the public, through advertisements and sales promotion techniques.
4. Though it is expected that in capitalistic societies the output would increase to optimal level, in. practice this is never found. Producers always restrict output to maintain a high price and also maximize profit. So excess capacity would exist in many industries.
5. In a capitalistic society the divide between the haves and have-nots widen that over a period. Existence of poverty among the sophisticated sections of people is also seen. This results in built up of frustration in the society. Over a period this might lead to revolution and social upheaval.
2. Socialism Socialism refers to an economic system ir which the following features predominant:
The resources are owned by the State or state owned institutions. Production takes place in the interest of the society and not for maximizing profits of individuals or organizations. Government decides the type of productive efforts to be permitted. In other words, in a socialist country, government can adopt licensing system and other types of regulations to prevent the emergence of monopolist and exploitative tendencies. Maximization of Community welfare is the objective than profit maximization. Another very important feature is the government ensures equitable distribution of national product. Public distribution system assumes enormous significance in such an economic system. On the whole, the socialistic society differs from capitalist society in every sense. In the broad spectrum of economic systems, socialism and capitalism occupy two extremes. In the world today, pure capitalistic society is not seen in any country. Even in USA, government interference in various economic activities is found. For example, in the field of national defense, atomic energy, space technology, social security, etc., the presence of government is almost complete. Government also retains the right to interfere in the market system, whenever there is deliberate and intentional attempt to monopolize the resource ownership or the market. Similarly, in the erstwhile Soviet Union, socialistic principles were followed. But even here, there were instances of private ownership of property, enterprises, etc., were reported. • That is why it is very difficult to come across pure capitalistic or socialistic societies.
The merits of socialism includes: 1. Collective ownership eliminate emergence and existence of monopolies. 2, Resources utilization is planned and achieved in the interest of the society. 3. Government with its control over the resources is able to use resources fully utilized and avoid wastage and production of unnecessary goods. 4. As equality in distribution is the fundamental feature of socialism, there is no scope for widening inequalities rind the government takes steps to narrow the gap between the rich and the poor through various measures.
However, socialistic states suffer from the following limitations: 1. Excessive dependence on government decisions often result in delay in offering any public service. 2. Bureaucratic control becomes an integral part of the socialistic principles. As a result the benefits and its direction of flow is determined by the bureaucrats. 3. Government by undertaking excessive responsibility on its shoulders, abets inefficiency and corruption in the society. 4. No incentive and motivation for individual excellence or achievements is possible in such a society and so innovations and inventions do not really lake place in large scale in such a society. 5. With governmental presence in every walk of life, efficiency and productivity suffer. 6. Lack of support for individual liberty kills initiative.
3. Mixed economy
Evolution of the concept of Mixed economy:
There was no reference to the mixed economic system in Economic literature in the past. Economists were mainly familiar and advocated the Laissez faire or free enterprise system, as several countries could develop fast following the free enterprise system, in which there was no or little government intervention. The entire economic system operated with the price mechanism at its center point. The producers produced what the consumers wanted and this provided very little scope for the government to intervene in the system. The Classical economists and their ardent supporters believed that the invisible hand will direct the economy and with private initiative and enterprise, every country should be able to record a faster growth as proved in the case of UK, USA, Europe, Australia, and other countries.
But over a period under the leadership of Karl Marx, a new economic system was developed called socialism, in which there is no scope for any private enterprise as everything owned and controlled by the government. The government decided the type of developmental activities and me requirements of the society and used the available resources in the provision of these requirements. Several countries like USSR, Communist China, Vietnam, Cuba and others preferred this socialist system in which government is made the custodian of the society. The main reason for Die emergence of this new economic system was the failure of capitalism during the 1929 depression to revive every economy from depression. Keynes himself thought that capitalism without some of its evils could certainly help economic recovery. Hence, a time came when economists felt that cent per cent free enterprise or cent per cent government governed economic development cannot work satisfactorily. A compromise between these extremes was thought of as an ideal economic system. The new system called 'mixed economic system' contained the merits of both the capitalism and socialism and appeared to be full of promise. This mixed economic system is adopted by India as indicated by the First Industrial Policy Resolution 1948.
Characteristics of mixed economy:
i. Co-existence of public and private sectors:
In a mixed economy, one will find the existence of both the private and public sectors. In such a system, the government will undertake the responsibility to build and develop certain sector activities and leave the other activities for the private initiative. In India, the government announced the adoption of the mixed economy system through its 1948 Industrial Policy Resolution. The government clearly earmarked the industries to be completely under the state control, the industries which are to owned and controlled by the state as well as the private sector and industries which are completely left for the private sector. In this way the Resolution provided for the simultaneous existence of both private and public sectors.
ii. State participation in economic development:
This is the second feature of mixed economy, according, to which the state reserves its right to design and decide the type of development to be achieved. In such a set up, the government strives to promote the welfare of the country by ensuring social order, social justice and establishing all the necessary institutions which are required to achieve the desired pattern of growth and development.
iii. Distribution of ownership and control of resources:
This is the next feature of mixed economy. In this system, the government itself enters the field of production so that the available resources are fully utilized. This will also help to avoid concentration of wealth in the hands of a few and enable distribution of ownership and control of productive activities. As a result there is no scope for exploitation of any group, say labor, by any other group. In this way the weaker section of the community is well protected and taken care of. Only the mixed economy will enable the government to attain the objectives of the Directive Principles of the Indian Constitution.
iv. Directing the investment in socially desirable projects and channels:
Mixed economy facilitates the flow of investment into channels which confers the society with several benefits. For example, the Indian government has invested huge amount in several projects to develop the infrastructural facilities. This forms the basis for the development of other sectors. The investment in these infrastructural areas will not come forth from the private sector as the return is nil. Hence, the government in a mixed economic set up provides the thrust by developing the necessary background and strength which will encourage the private sector to invest in profitable opportunities. In this way the government plays a key role in a mixed economic system.
v. Scope for achieving balanced economic development:
I Left to itself, the private sector would establish its enterprises only in urban or sub-urban areas and that too in already well developed states. This will mean other areas will have no scope for development. But in a mixed economy, the government will itself undertake the initiative to set up industries in backward areas and encourage the private initiative to set up industries in such areas by offering several concessions and exemptions. In the absence of nixed economy, several states in India would have remained industrially backward.
vi. Ultimate control and regulation in the hands of government:
This feature of mixed economy clearly spells out that in every activity affecting the economy, the government will be the ultimate authority. Though the private sector is assigned its role to perform, the government will still monitor and control the way in which the private initiative is performing its role. Infact, according to the 1948 Industrial Policy Resolution, the government made it clear that the industries already established by the private sector belonging to that category in which new industries will be established by the government alone, the government would undertake the review of the working of these industries in private sector after a period of ten years and if found not satisfactory, they would be taken over by the government. Though this was criticized as a threat of nationalization, yet through such a provision the government underlines its authority. Similarly in the banking and insurance sectors, the government nationalized banks emphasizing its powers to control and regulate any sector.
vii. Co-operation in the field of economic development:
According to this feature of mixed economy, the government formulates the design for development and invites the private sector to participate in the development. It clearly spells out the guidelines which would govern such cooperative efforts and the limits of freedom granted to the private sector. In Indian case, the government prepares the plans for development and spells out the areas left for the private initiative and the areas that will be under state control. Hence, there is scope for the development of private sector, though only according to the design developed by the government.
Planning process under mixed economy:
As has been already stated, in a mixed economy there is a need to achieve a compromise between self-interest and social interest This is a very difficult task as the government has to carefully foresee the type of development it wants to achieve and closely monitor the activities of the private sector to ensure that the social interest is never at stake. Obviously, planning is a very difficult exercise in a mixed economy set up. The success of planning will depend upon; i) the extent to which the public sector is able to rise to achieve the social gains aimed for, ii) the success of the state in guiding and regulating the private sector activities towards social goals and iii) the extent lo which (lie state is able (o check the distortions taking place in investment by private sector affecting (he interest of the public sector. Hence in the planning process the state has taken up the following steps to ensure the accomplishment of the objectives of the mixed economy, a. By holding complete ownership of defense and heavy industries, the government has provided an industrial base with which the private sector is expected to plan its investment activities.
b. The state also has made huge investments in economic infrastructures so as to help the extension of market for goods, raising the productivity in agricultural and industrial sectors, encouragement of further productive investment
c. The government has complete control of the financial institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the state. The government could also realize the expected gains by encouraging the priority activities in every sector. The economic institutions are made to support the weaker sections of the community.
d. Through powerful legislations like MRTP Act, FERA, etc., the government could ensure that there is no scope for exploitation of the common people by the private enterprise. Such a legal framework lays down the rules of the game and ensures fair play in a mixed economic set up.
e. As a method of protecting the weaker and downtrodden people, the government has policies like rationing, price controls, etc. Such regulations are built in the planning mechanism itself, so that the private sector cannot exploit the community.
f. Towards the improvement of welfare in the economy, the state has undertaken several specific programs aimed at specific target groups. For example schemes aimed at the backward and schedule tribe providing them reservation in educational, employment and other opportunities, rural oriented schemes for the rural folks, health for all schemes, provision of free educational and medical facilities up to a certain level, etc. All these schemes aim at improving the social welfare. In all these activities the private sector is also welcome to play its role.
g. The government makes effective use of the tools of fiscal policy viz. taxation and public expenditure, so as to achieve the objectives of economic planning.
Distortions in the planning process :
We have explained above that the fundamental objective of the mixed economy is to subordinate the self-interest for the national-interest whether this has been achieved in Indian situation is a moot question. In spite of various types of regulations and controls, the fruits of mixed economy have not appeared to have reached the common men. Even after four decades after the adoption of mixed economy principle, we come across glaring distortions which go to prove that mixed economy in practice has not been very effective. This is mainly because of the influence exercised by the private enterprise through political influence, corruptive activities, dishonest bureaucrats, powerful national and international lobbying, etc. The extent of distortions could be understood if we study the following points: 1. One of the basic objectives of Indian planning is to eradicate poverty, but five decades after the adoption of planning strategy, the proportion of population below the poverty line has not significantly changed.
2. The planning mechanism has failed to check the rise in price level. Inflation has come to stay in India with no policy being effective. When double digit inflation is controlled and results in single digit inflation, the country boasts of having achieved something very great.
3. The emergence and existence of black money is yet another yardstick to prove the failure of the mixed economy. The high level of taxation has only resulted in effective tax evasion and tax avoidance. As a result the distance between the rich and the poor remains wide.
4. Till date there has been no effective method to prevent the concentration of economic power in the hands of a few. The rich becomes richer and the poor, the poorer.
5. In spite of five decades of planning, unemployment is very much on the increase and the backlog in every plan is assuming dangerous proportions. This is mainly because of the failure to control fee growth of population and the adoption of capital intensive production techniques.
6. The failure to achieve re-distribution of income is yet another glaring distortion. All the efforts to bridge the gap between the wages of rural and urban workers or increase the real wage of the working class has not succeeded.
When we study the above points, it is clear, that mixed economy has not carried us in the desired direction. This is mainly because of the inability of the government as it is frequently yielding to the pressure exerted by the vested interests. Even the recent liberalization measure could be viewed from this angle. But a country cannot remain independent of the international pressures, especially when India is depending upon the IMF and EBRD, all its internal policies are indirectly governed by these lending agencies: Whether this is right or wrong is a question that could be answered only after we evaluate the gains of liberalization policy. But on the whole, the expected benefits of mixed economy have not been realized as is clearly proved by the distortions discussed above.
4. Marxism
Marxism is essentially socialism in different garb. The pure socialism is proved to be impractical and it made role of government the center point. Most of the government could not fit in this role effectively. Further capitalism with its explicit goals threatened the success of socialism. It was at this juncture that Karl Marx came up with his ideology, which led to the evolution of Marxian socialism. Marx succeeded through his logical reasoning that economics dominates every activity of a society. This leads to class struggle. When one struggle is tackled another one crop up. The continued onslaught of the capitalist on the society would result in the creation of haves and have-nots. This division of the society would widen with the continuance of capitalism, which ultimately will result in class struggle. Marx explained through his theory of value that every product should be valued in accordance with the value of labor contained in it. But the laborers are rewarded at a very much lesser rate than what they create. That is,, every laborer contribute more by way of his work to produce the product but he is paid a very low wages. The difference is the gain realized by the capitalists. The capitalists would accumulate profits this way at the cost of worsening labor condition. Over a period the divide between the proprietary class and the labor class would widen that much, that there would be social upheaval. Karl Marx predicted class war and argued that unless the capitalist class realizes this, there would be severe impact on production and economic condition of a country. His argument came true in the case of France that the French revolution broke out in 1789. There were similar problems in different parts of the globe, like in erstwhile USSR [Scissor's crisis], and China. China, especially remained a closed economy till early I990's. But in China, the Marxism led to the emergence of communism. This is discussed in detail below.
Though Marxism held sway over a number of countries for some time, yet it has inherent defects. Firstly, Marx's view that all activities in all countries are basically economic in nature is not true. Secondly, his argument that class struggle continuously takes place in every country did not hold water. A number of other reasons of economic, social and cultural nature led to the struggle and not the way Marx predicted. Thirdly, the theory of surplus value could not be applied in practice in service industry. Fourthly, Marx never took into the interference that a government could make in case of exploitation of society by the capitalists.
5. Communism
Communism is Marx's prediction at the fall of capitalism. Marx argued that the widening inequalities in a society coupled with class struggle should ultimately sound the death knell of capitalism. He is of the view that when capitalism falls, the communism will emerge in which, the laborers will lead the country. The government will own all the resources and determine the needs of the society. It will also decide various other issues of macro and micro importance. Government will turn out to be the custodian of the society and in a pure communistic society; people will lead a life where basic necessities are provided by the government. Unemployment will be very low as every one is occupied in some avocation or other.
But the way in which communism was practiced in China created an impression that the government would be oppressive in its approach that the people will lead a life of slavery. One has to work to earn his bread. Military type of regimentation was enforced that common people were subjected to absolute control and regulation by government. The economy remained closed without any international relations, both economic and social. There were no two party systems that the nominated representatives of the Communist party attended to all the governmental responsibilities. Market mechanism is completely absent in such a system, as government determined everything on behalf of the country.
As has been already pointed out depending upon the economic system, the business environment will change. In a capitalist system, the environment provides opportunities for every one who wants to maximize gains. In a socialist system, the government undertakes the responsibility of providing everything to the citizens. In a Marxist economy, it is ultimately the laborers who will hold the reins. In a Communist economy, it is the group of administrators who run the economy in the interest of the economy.
4. Cultural environment
Culture refers to the behaviour, attitude, way of living, belief, faith, law and custom of people in a country. It; could be immediately understood that these aspects would differ from country to country and also in different regions of the same country. It is always said mat the culture determines the people's preferences, which directly determines the success or failure of business. Hence, cultural, environment has a direct impact on business. A number of examples could be cited to prove this.
In olden days, eating in hotels was considered unhygienic and majority of the people never used to accept food from outside. But today, even the orthodox/ people freely take their requirements from fast food restaurant. This change has come about, because of the changing culture in the society. For instance, with the presence of a large of multi national corporations, the executives working in such organizations are very well paid that they rarely find time to spend on food. Such executives prefer working lunch rather than lunch. So provision of such working lunch should not take time and if food is made available readily without any time loss, then the executives would be able to save their time. Further when executives leave home very early, it is impossible for them to prepare some food and get for their lunch. So when their working lunch requirement is met nearby by their work Spot in am ambient atmosphere it would be welcome. This has given a fillip to the growth of Fast food restaurants. In this manner, certain new cultural practices are transmitted to the society. Similarly, regarding the requirement of clothes, people are slowly switching on to ready made garments of different varieties and design. Sensing this, several international brands in ready garments are entering the market. This is how the business adapts itself to the cultural environment in a country. Business also conducts research continuously for the purpose of innovating and inventing new products and uses for the existing products. It is through this process that several consumer durable products like wet grinder, mixer, washing machine, geysers, etc., have been introduced in the market. Having created them, the business impress upon the people to use them as time saving devices.
Hence, cultural environment can create business opportunities. Any organization which is able to sense the business opportunity and capitalize it, would be able to succeed and grow. But it should be noted that changes in culture do not affect every part of the country or people in the same way or at the same time. It is possible to observe certain^ regions/people lag in adopting a particular culture. This is what is referred to as ‘cultural lag.’ For example, even to day in rural areas, certain practices like untouchability is found, though it is a crime. Such cultural lag is found mainly because of illiteracy, ignorance, conservatism, sentimental factors, political factors and vested interests. Business should be aware of this while addressing the requirements of people in different regions and nations. One more aspect of cultural is the change. While some of the changes are accepted very fast the others are resisted. While in some families divorce is accepted as a common feature, in others, divorce is viewed very seriously and extreme efforts are taken to pacify the parties in conflict. Another important example is the women's employment. While in olden days women were destined to domestic works, today women entrepreneur lead several fields. Attitude towards work is yet another area when Indian culture lags much behind the Western and Japanese culture.
In the light of the above discussion, the following case studies would make sense and prove how business environment can either give a boost to an organization or cause a doom.
CASE STUDY: 1
WILLIAM HENRY GATES, III AND THE MICROSOFT
MONEY MACHINE
Several years ago, when his fortune was a mere several hundred million dollars, a weekly magazine labeled Bill Gates as ‘America’s richest nerd.' In 1992, at age 36, he had passed Donald Trump, Ross Perot and others to be listed as America's wealthiest person by Forbes magazine; the value of his holdings had grown to an estimated $ 6.3 billion. How did the free enterprise system help him to attain such phenomenal wealth?
After graduating from high school in Seattle in 1973, Gates went to Harvard. While there, he learned that the personal computer [PC] was in the development stage. He dropped out of school and threw himself completely into designing an operating system [the program that coordinates the hardware and software of the computer] for the PC. His system, [S - DOS the Microsoft Disk Opening System] was so good that IBM agreed to use it in their line of, personal computers. With IBM setting the industry standard, other computer manufacturers quickly adopted MS DOS as well. Today it is estimated that more than 80 per cent of all personal computers in the world use this system: Gate's firm, Microsoft, Inc., makes money on every computer sold with MS-DOS as the operating system.' In the 1992, the firm recorded $2.8 billion in revenue and $ 708 million in net profit. It ranks third in size in the industry, behind IBM and Hewlett - Packard. Gate's personal holdings of some 90 million shares of common stock represent about 33 per cent ownership share of the company.
Microsoft also produces programs for word processing, spreadsheets, and a variety of other applications. One of Gate's latest ventures has been to purchase the electronic reproduction rights to thousands of art and photographic works from museums and libraries around the world. These will be used as a part of his plan for interactive home entertainment systems.
With extremely hard work, a creative mind, and a willingness to take risks, Gates has demonstrated how the market rewards the successful entrepreneur. He was able to produce what consumers wanted at a price they were willing to pay the result was that both and they are better off ! This is the essence of free market economic system.
From the above case study, it would be clear how a pro-active, imaginative and innovative entrepreneur can, carry the business with him. Though a school drop out. Gates has climbed the pinnacle of business world, merely by his ability to anticipate the changes, in the personal computer industry.
Failure to read the business environment and initiate appropriate steps to protect the business, can lead to a serious threat to existence itself. This would-be clsar from the following case on Maruti Udyog of India and Doordarshan.
Case study : 2
MARUTI UDYOG LTD.,
When Indian car market was opened for new private players, Maruti Udyog limited, which had till then enjoyed an enviable position in the market, suddenly faced severe market erosion. Even though Maruti is the market leader and has the largest range of products, cheaper cars, good service network and better cost structures, it has been steadily losing its market share for the last three years and the valuation of the company has halved in 4 years time from Rs. 80 bn in 1996 to Rs. 40 bn in 2000.
A Marjti udyog rival: What MUL did to Premier Automobiles and Hindustan motors is now being done lo it.
Empire under siege
Jagdish Khattar, MD MUL was a man in trouble. He was facing what was the biggest setback ever for the company. With all strategies backfiring, he seemed to be fighting a losing battle.
Problems were aplenty - the Maruti 800 segment was facing demand - erosion, Zen and its arch-rival Santro were very close in terms of volumes, Esteem was losing ground, Baleno, Wagon R and Alto were yet to prove themselves, while Gypsy was snugly ensconced in its niche. [Gypsy was not generating many volumes needed for MUL]
Despite the fact the fact that MUL had the biggest range of products, the cheapest cars in the market and a service network and cost structures that were better than anyone else, it had steadily lost market share - down from 82.62 percent in 1998 to 52 per cent in 2000. With the impending disinvestments, [Government's. policy of disinvestments in Public sector units includes MUEL also along with other profit making PSUs.] MD was facing flak from the government as well. With market share declining, MUL’s valuation had also come down drastically. While it was valued at Rs. 80 bn in 1996, by December, 2000, the figure had touched Rs. 40 bn.
The building blocks
MUL was the largest car manufacturer in India with a market share of over 52 per cent. It was a joint sector corporation set up by the government of India and Suzuki Motor Corporation, Japan. MUL was incorporated in 1981 to take over the assets of the erstwhile MUL set up in June 1971 and wound up by a High Court order in 1978. The assets of MUL were then acquired buy the Government under MUL Acquisition and Transfer of Undertakings Act, 1980. In 1982, the Government signed a joint venture agreement with Suzuki of Japan. Suzuki's stake increased from 26 to 40% in 1987, and to 50.25% in 1992. The company was a significant exporter with exports to over 50 countries.
The company manufactured passenger cars at its factor in Gurgaon, Haryana, with an installed capacity of 350,000 vehicles. The first product, Maruti 800 was launched in 1984, followed by the all-terrain vehicle Gypsy in 1985. Over the years, MUL expanded its portfolio with the launch of the Maruti 1000 [1990]; the Zen and the Esteem [1993]; Zen Diesel [1998]p Baleno, Wagon R and the Alto [2000].
MUL was known for its ‘value for money pricing’ strategy, which had been made possible due to the high levels of indigenization of its vehicles. While the Maruti 800, Zen, Esteem, and Omni were indigenized to the extent of over 90%, the Gypsy was indigenized to the extent of 82% and the Alto to the extent of 76%. The company had a network of about 375 vendors and had several joint ventures with some of them to source its raw material requirements It's sales [comprising 112 dealers and sales outlets in 86. locations] and service [comprising 1010 service workshops covering 412 locations] network was one of the largest in the country.
The Stumbling blocks
Till October 1998, MUL enjoyed a market share of 83.6% reacting to the increasing number, of players, its-MD commented, “Obviously, our market share will decline with the entry of new manufacturers and models in percentage terms, but not in actual volumes.”
With cars ranging from Rs. 0.21 mn to s. 0.67 mn, problems associated with an ever-expanding product portfolio ‘constantly plagued MUL. Besides the declining market share, cannibalization was another issue the company could ill-afford to ignore. Forced to take stock of what went wrong, MUL realized that it was dependent to a large extent on a single product - the Maruti 800.
The 800, along with the Omrii [build on the same platform accounted for 75% of units sales in the car. market in 1998; it had always been the 'breadwinner' for MUL. One of the biggest success sagas in Indian automobile history, the 800 started losing its sheen in the 1990’s as newer players emerged in the market. The entry-level segment ceased to be the center of action as easy car finance availability and the lure of new cars made the Rs. 0.3 inn to Rs. 0.4 mn segment the most attractive one. The fact that MUL made only minor changes in the models over the years led to the perception that MUL was selling old models.
To tackle these problems, MUL adopted a two-pronged strategy. One, to introduce new models; two, it decided to increase the number of variants rapidly, offering a new model with every increase of Rs. 25000. MUL also revamped its engines and took the 800 to semi-urban and rural areas, to compensate for the declining urban sales. The company was aiming to move entry-level prices up without losing out on volumes by launching cars in the segment just above the 800. As part of this, Baleno, Wagon R and Alto were launched in quick succession. [Alto was launched in the same league as the 800. Industry observers contended that Alto's launch in the 800-cc category signaled the beginning of a gradual phasing out of the 800. However, MUL sources were quick to deny this- and-asserted that the 800 would be retained:] However, despite favourable reviews, these cars did not go on to become the saviors of MUL was hoping for.
The engine-revamp exercise for the 800 had pushed its price close the base model of rival Daewoo's Matiz, eroding the price advantage on which the model survived. As a final resort, MUL decided to play what it thought was its trump card - price reduction. The move was also justified on the gorunds that the company was following Product Pyramid Profit model. [The Product Pyramid incorporated the distinct customer segments and their varied purchase -behaviour in terms of style, colour, feature and price preferences. The base of the Pyramid was occupied by low price, high volume product s. like the 800, where the margins were slim. The apex of the Pyramid was occupied by high-price, low volume products such as the Maruti Esteem VX. Although -profits were concentrated near the top, the base played a crucial role as it created an entry-barrier for competitors, and insulated the profitable area near the top from competition. In the specific case of cars, the most common model was the new product profits model. Thus, the profits associated with a car followed the "s" curve of its life cycle, and declined as the product neared the end of the maturity. phase. MUL's decision to drop the prices of all the versions of the Maruti 800 came at this stage].
MUL reduced the prices of Maruti 800 and Zen by about Rs. 24000 and Rs. 51000 respectively in December, 1998, This resulted in a drop of Rs. 3 bn in net profit for the year 1998-99. The MD justified die price cuts, saying that MUL wanted to make up for the increase in the 800’s price due to higher sales tax figures for the period. The move was described as an attempt to "redefine the price-value equation." MUL sources claimed that they expected lower prices to bring an incremental growth of 25% over the next 12 months. However, despite the price cuts, by March 1999, the company's market share decreased to 54.57%
In early 2000, MUL announced that it would pass on the cost of installing Euro-II compliant engines with Multi-point fuel Injection [MPFI] to its customers. There was a rush in the market for the 800. as many first-time consumers who did not want to bear the hike, hastened their purchase. MUL had to increase the price of the 800 from. Rs. 0,18 mn to Rs. 0.22 mn. Around the same time, MUL decided to meet the competition head-on by having a model or variant with every increase of Rs. 25000. The idea was to give the customer the widest choice possible. By mid-2000, the company offered 43 models in a market, which had only 127 models.
In June 2000, sales of the 800 stood at 5296 cars compared to the 11000 plus cars it had been selling per month for the previous few years. MUL had no option but to again slash prices of various models by Rs. 25000 to Rs. 30000, to bring back the sales to normal levels. Other changes initiated by the'-company included a transformation in its customer - interface and a revamped branding strategy with the new cars [Wagon R and Baleno] coming with the Suzuki prefix. The price cuts, however, only added to the declining bottom line problem. MUL reported a loss of Rs. 6792. II on every car sold between April and October 2000. MUL sources, however, attributed this to the fact that MUL had not passed on the cost of up-gradation to meet the Euro;I and Euro II emission norms to its customers. '
The industry strikes back
The Indian car market of the early 21s1 century was a burgeoning one with over 127 models on the roads, and many more in the pipeline. Increased competition had radically transformed the market, manifested clearly in carmaker's pricing strategy overhaul. Manufacturers were breaking the conventional rules of auto pricing by moving from cost-based to value-based pricing and the market soon, became a buyer's market.
When the new players entered the market, there were no doubts that the main artillery for the companies in the car-wars would be the pricing strategies. It was not just a case of competition forcing a downward revision; the players were even ready to forego profits in the short run. Brand building and technology / feature driven campaign were to be add-ons to the above plan. Industry observers were quick to point out that MUL would have to get entangled in the price reducing game.
A Business India report pointed : No one is better equipped to fight a price war than Maruti. Its phenomenal profitability, cash reserves and efficiency in manufacturing will allow it to slash prices on all its models without feeling the pinch as much as others.
However, Hyundai was the first company to introduce what came to be known as, pricing based on customer's value perceptions. It introduced the base model of Santro at Rs. 0.29 mn, while two other versions were priced at Rs. 0.34 and Rs. 0.37 mn. The basic version was targeted at buyers of the 800, and the other at the Zen. Thereafter, hunches in the Rs. 0.2 mn to Rs. 0.6 mn segment by Ford and Hyundai showed highly innovative pricing strategies being adopted. Soon after, Ind Auto dropped the price of the Fiat Uno Diesel by Rs. 64867 and Premier Automobiles Ltd lowered the prices of the four versions of the Premier Padmini by Rs. 5000 to make it Rs. 53000.
MUL had adopted a skimming strategy for Esteem. Launched in 1993, it was positioned as a luxury car. This continued till the arrival of Daewoo's Cielo in 1996, which started eating into Esteem's share. In 1999, the segment saw the arrival of Fiat Siena, Opc-1 Corsa, Ford lko.n and the Hyundai Accent. MUL resorted to price slashing and brought the prices down. While the top end version's price was reduced to Rs. 0.52 mn, from Rs. 0.59 mn, the basic version was brought down to Rs. 0.44 mn from 0.46 mn. However, this was possible only because it enjoyed substantial margins over costs, being the first mover in the market.
MUL also followed the- same modus operandi for Zen, albeit in a different manner. The company increased the number of Zen variants to 10, with prices ranging hom Rs. 0.3 mn to Rs. 0.43 mn. The price stood reduced for the Rs. 0.3 mn variant in terms of stripping down the model’s features.
The competition responded with similar moves. Daewoo offered price-variants for Matiz, Ind Auto offered seven variants of Fiat Uno, ranging from Rs. 0.27 mn to Rs. 0.41 mn. Hyundai's Santro offered six variants between Rs. 0.29 mn and Rs. 0.37 mn; Telco's Indica came in the range of Rs. 0.25 mn to Rs. 0.38 mn with four models. NK Goila, VF Honda - Sicl cars, aptly summed up the situation : It is important to be present with grade - variation and a range to cover the range of potential customers being targeted. The price - points in the car market were replaced by price — bands. The width of a price band was a function of the size of the segment being targeted besides the intensity of competition. The thumb rule being, the higher the intensity, the wider the price-band.
Ford’s research, before the launch of the Ikon, a car made for the/Indian market, revealed that over the previous two three years, the 800 segment had graduated to the next level of Zen, Santro, Matiz, Uno and Indica. Ford's research on the existing market segments and the consumer response to new cars revealed that beyond the Zen segment, the choice of the consumer was limited. Models like the Esteem and Cielo had had a long innings outside the country and were not exactly contemporary. The other options were Escort, Lancer and Honda, which were priced above Rs. 0.7 mn Between them and the Rs. 0.45 - 0.5 run range of the Esteem and Cielo, thee was a vacuum. The gap was identified by General Motors' Corsa and Fiat's Siena as well. All three competitors plugged the gap by offering several versions at various price points. Ford first launched Ikon 1.6 but later came up with a lower engine capacity Ikon I.3CLXI at a lower price. GM and Fiat also followed the same approach.
About price reduction
The fact that 82% of the Indian market was accounted for cars priced below Rs. 0.43 mn, proved how strongly price influenced volumes. Moreover, with domestic car sales dropping by 15.01% in November 1998 over November, 1997 manufacturers had to turn towards price to resuscitate demand.
In the prevailing conditions, the 'Second P of aulo marketing' price reduction, seemed to be (he only factor able to rejuvenate the stagnant demand.
However, not every player had the financial-muscle to play the price card. Instead of cutting the price of Matiz, Daewoo Motors introduced an enhanced version with product features like power steering, and product-plus features like better service and customer-care. Players like Hyundai and Telco did not opt for price reduction, as they simply did not have the economies of scale to profit from such moves. Such strategies worked best for companies with offering in several segments of the market. Higher volumes from the combined sales of products across segments enabled them to drive harder bargains with their suppliers; unit marketing and distribution costs decreased; and the higher margins on products positioned near the top compensated for the pared margins on the basic product.
The players who chose to stay out of the race to cut prices had to convince their customers that the higher prices they charged were justified by the greater value they offered. A product and promotional mix had to be specifically designed to convey the above message. Most manufacturers of mid-size cars, including General Motors, Ford, Honda-Siel, adopted this strategy rather than cut costs to increase sales. They argued that because of the 'snob-value' of a costlier car, buyers in this segment were not that susceptible to be swayed by price cuts.
They cited the Cielo price reduction fiasco as an example. When sales of Daewoo's Cielo went down from a peak of 2260 cars in September 1956 to 314 in December 1997, the company slashed the price of its base model Rs. 0.13 inn in January, 1998. Daewoo also introduced zero-interet finance schemes and its dealers gave unofficial discounts ranging from Rs. 0.08 mn to Rs. 0.10 mn, Sales increased by 300% to 906 and 1102 by March, 1998. However, this was far below the company's capacity of 6000 ears per month. Daewoo launched an upper end version, Cielo Executive and an upgraded versions, Nexia at higher price points. However, the market had discounted Daewoo by then and sales did not pick up further, falling to a low of 148 by February, 1999.
Companies realized that only when competing brands were perceived to be equal in all other aspects, would price be a deciding issue. As the target segment became more affluent, upgrades as well as first time buyers did not necessarily start at the lowest price level. Applied as a brand level strategy, price helped the auto marketers win over only the entry level customer.
The biggest price a manufacturer would have to pay for playing the price game continuously was undoubtedly the loss of customer loyalty. The world over, automobile brands succeed on the basis of their relationship with fiercely loyal customer communities, built around sharp brand images and unique value proportions. By choosing to shift the focus to price, MUL risked the loss of damaging its customer relations and brand valuation, as it ended up antagonizing the buyers who had bought MUL cars just before the price reduction. This led to a feeling of betrayal among MUL loyalist. When these customers replaced their cars, it was doubtful whether they would turn back to MUL or go in for a rival car with a vengeance.
Much ado about nothing ?
As the Indian automobile market moved from monopoly to free competition, market share comparisons from the old era seemed to have lost relevance. The alarm over MUL's declining market share somehow did not seem fully justified. In its heyday, huge waiting lists for its products ensured that Maruti’s market share was directly linked to the supply side of the equation. In other words, if MUL had an 80% share of the market, that was also its share of the total industry capacity. By the late 1990’s, things changed radically with over 12 car manufacturers having a presence in the country, with a total capacity of about 1,250,000 cars, of which MUL produced about 400,000 [33%]. Khattar commented tell me, if we have market share of 50% out of a capacity that is 33% [of the industry], are we doing badly? Why don't you ask the others who together have a capacity of 800,000, but cannot match our sales? All said and done, MUL was still the leader in early -2001. It still had its early mover advantages. Provided Khattar plays his cards right, MUL can still rule the roost for years to come. Whether this will happen for real, is a question too early to be answered.
Case study: 1.3
DOORDARHSAN: BROADCASTING BLUES
[DD India's national television network is one of the world's largest broadcasting organizations with respect to the infrastructure it possesses. It present telecasts programs on 19 channels. Over the years, DD has been losing its advertising revenues to its competitors [private channels]. The continuously falling Television Viewers Rating added to the problem. DD has also been facing many problems regarding its managements, right from the time when Prasar Bharati was created. In mid-90's, cable television reached many Indian homes and several private channels, were launched. All of a sudden DD had to content with a host of channels whose programs were better produced. Poor quality of transmission and program content prompted viewers, to switch to private channels. The case provides an overview of the problems faced by DD due to mismanagement and competition from private channels.] "DD needs an owner" - CEO, Carat Media Services India.
IS DD DEAD?
After years of falling revenues, in 1999-2000 DD had a revenue growth of 50%. In 1999-2000, DD earned revenues of Rs, 6.1 bn compared to Rs. 3.99 bn in 1998-99. DD showed signs of revival with the launch of DD Worlds [a channel for NRIs] and had a certain measure of success with some of its regional channels [Table-1 DD Channels: A snapshot]. However, by the end of 2000-01, DD's revenues were projected to grow at 6 - 15 % while private channels such as Zee T V, Star and Sony had a projected 40 -50 % revenue growth.
According to some analysts, DD's sagging revenues were only the tip of the iceberg. DD was plagued by several problems. By the late 1990's, most private producers and advertisers and a good part of the audience had deserted DD. Not even one car company advertised on DD and even two wheeler manufacturers kept away. Advertisements of Pepsi and Coca - Cola were found only during sports telecasts. Only FMCG companies stuck to DD, because its terrestrial network would help them to reach the rural and semi urban audience. Despite having over 21000 employees, DD outsourced 50 % of its programs from private producers.
In the late I990's, DD faced allegations of large scale scams and irregularities. Under-utilized infrastructure, improper investments and poor financial management adversely affected DD's performance. In 1992, when the Government opened the airwaves to private players, HD had to face competition from private satellite channels. In Cable and Satellite [C & S] homes it was found that DD programs had hardly any viewers. The depleting Television Viewer Ratings [TVRs] of the DD programs was also a cause of concern as advertisers deserted due to its low viewer ratings.
According to analysts, DD would need a budgetary support of Rs. 5 bn during fiscal 2000-01 to sustain itself, as its revenues would not cover its expenditure. Many analysts felt that privatization would be the only solution.
DD : THE INSIDE STORY
DD was launched in 1959 as the National Television Network with a modest 21 community sets in Delhi. In the year 1982, with the introduction of regular satellite link between Delhi and different transmitters, DD began the transmission of national programs. In the same year, DD switched to colour transmission. Soon it had penetrated every nook and corner of the country, cutting across demographic and geographic barriers.
DD had a three-tier program service - national, regional and local. The national programs focused on the national culture and included news, programs on current affairs, and science, cultural magazines, serials, music and dance recitals, plays and feature films. At the regional level the programs were similar to the ones broadcast at the national level, the only difference being that they were broadcast in the regional language.
In 1984, DD introduced a second channel [DD2] in cities like Delhi, Mumbai, Kolkata and Chennai. DD2 was targeted at urban viewers, particularly the young viewers.
In 1995, DD launched DD - India, its international channel to cater to the NRI population. This service covered SAARC countries.. Gulf countries, West Asia, Central Asia, North Africa and Europe. In the same year, DD entered into an agreement with the Cable News Network [CNN] and launched a 24 - hours news and current affairs channel : DD News. In 1999, DD launched a separate channel for sports.
In the early 1990s, about 479 mn people in Indian homes viewed DD and an additional 1.5 mn watched DD on community sets. DD was ahead of the private channels in terms of viewership with a 90% reach. However, in the late 1990s, it could not maintain the lead and phase channels were catching up in terms of revenue even though they lagged behind in viewership and reach.
Cable onslaught
In 19S4, cable television entered India. For local entrepreneurs, cable television provided a good business opportunity, as investments required to install a cable network were low. In the early 1990s, many-private television channels were launched. Zee TV launched in 1992 led the pack. During 1992-94, there was rapid increase in the number of cable connection in Western and Northern India. In Tamil Nadu and Andhra Pradesh, a number of Tamil and Telugu channels came up in the mid-1990’s.
Though by 2000, DD had an incredible reach of 70 mn homes, in comparison to C & S’s reach of only 30 mn homes. It could not turn this network into an advantage [Table II for growth of cable and satellite penetration in India]. In urban households, DD programs had hardly any viewers. DD was also behind the private channels in terms of ad revenues, as its TVRs were very low compared to the TVRs of programs on private channels.
Falling Revenues
During 1996-99, the TV advertisement market grew by 76%, but DD's revenue from advertisement registered a negative growth [Table III for fall in revenues of DD]. Though DD continued to be number one in overall audience share, it lost out on viewership segments that had the highest purchasing power.
In 1998-99, DD's revenue from advertisements was Rs. 4 bn [25.8% of the market], Zee TV was close with Rs. 3.85 bn, Sony had Rs. 2.53 bn and Star channels grossed Rs. 2 bn. But the ad revenues of private channels have grown significantly, when compared to those of DD. During the period 1996-99, Zee registered a growth of 122% in ad revenues, Sony 299% and Star channels 206%. During the same period, DD's ad revenues went down by 70.17 %. DD's falling TVRs were a matter of concern for clients like Hindustan Lever - DD's largest advertiser. Said Ashutosh Srivastava, VP, HTA-Fulcrum, the media-buying arm of HLL, “Our only source of reaching 40% of this country is going down.” Till 1998-99, 70% of HLL’s ad spend went to DD but by 2000-01, due to tailing TVRs HLL's ad spend to DD had gone down to 50%.
During 1999-2000, producers and distributors stopped giving films to DD when it began to demand a minimum guarantee of Rs. 10 mn to broadcast a film. This forced DD to repeat the same old films that it had aired several times, and the RVRs went down further.
According to some analysts, DD's revenues were going down because advertisers considered it a down market channel, which catered only to the lowest socio-economic groups, whose purchasing power was limited. The revenues earned by DD showed a negative growth during 1997-99. In 1999-2000, DD saw its revenue grow by 52.8%, but in 2000-01, it was projected to grow only at 6% [Table III]
Identity Crisis
DD's problems were largely attributed to what Kiran Karnik, former CEO, Discovery Communications; India called 'its loss of identity. Said Karnik, The channel has lost its identity, What is Doordharshan : Is it a public broadcaster or a commercial entity? Initially, DD officials had envisaged that the national channel would play the role of public broadcaster, while DD Metro would be the commercial channel. Private producers and advertisers pointed out that this attitude increased the confusion. They argued that no other network had two channels competing against each other.
With the launch of the Star News Channel, [the first independent news channel] in 1998, DD News lost its viewers to Star news. The in-depth analysis of news items»by Star News caught the imagination of the viewers [Table IV Comparative study of different news channel]. DD's image of being the propaganda machinery of the Government also went against it.
Some analysts said politica1 interference and corruption were another reason for DD's poor performance. In 1997, The Indian Broadcasting Bill was introduced in Parliament. The Bill was not passed, but it was enforced through an ordinance nearly a decade after it was enacted. DD was brought under a holding company called the Prasar Bharati. In 1998, the Government sacked Prasar Bharali CEO SS Gill and the Government made DD answerable to a parliamentary committee. Political interference at the top level made matters worse for DD.
There were allegations that members of the Central Commissioning Unit of DD look bribes from producers to air their programs. In 1998, the CBI arrested two DD officials for taking bribes from a serial producer. This, incident focused attention on the rampant corruption in the organization and forced management to issue guidelines regarding acceptance of gifts by employees.
DD had a poor track record in both payments to and collections-from private players. Over 50 companies owed Rs. 18.2 mn to DD, 45 on July 2001, Amitabh Bachchan Corporation Limited was DD's highest debtor with outstanding dues of Rs. 330 mn.
Another allegation that DD faced was that it had allowed International Cricket Council's [ICC] ex-chief Jagmohan Dalmiya and World Tel's Mark Mascarenhas to defraud it of Rs. 160 mn over the telecast of 1998 tournament in Dhaka.
The exorbitant prices that DD charged for advertisements slots also contributed to its poor performance. DD charged the producers around Rs. 1 lakh for 10 seconds, while some of the highest rated soaps on private channels charged half that price.
DD did not have a marketing team, which could market the advertisements slots as a package. Private channels like ZEE and Star had their own marketing teams/ which provided the advertisers with a package of advertisement slots on their programs. But DD had 5o different producers with 56 different half-hour programs slots for four hours of prime time each week. Each producer sold commercial time separately, to the advertisers. But advertisers preferred package deals, which, would give them airtime across the programs for a whole week.
Breathing fresh life into DD
After SS Gill was sacked in 1998, Rajeeva Ratna Shah was appointed as new CEO of Prasar Bharti. Shah began overhauling the programs of the two DD channels and weeding out corruption in the network. He stopped commissioning programs on DD1 and DD2. He decided to auction programming hours to the private players who produced the programs for DD and market them. Shah also announced the setting up of a board comprising eminent film-makers, actors, poets, writers and people from different walk of life. This board was to be entrusted the task of revamping DD.
In 2000, the government appointed a committed headed by Shunu Sen [CEO, Quadra Advisory, a strategic marketing Consultancy], NR Narayana Murthy [CEO, Infosys] and Kiran Karnik to work out a program for reviving DD. The committee considered three options. : Privatizing of DD, continuing to run it as a Public Service .Broadcaster [PSB], and running DD on both PSB and commercially viable lines. Of the three options, the committee recommended the third option. The committee felt that there was no need to privatize DD, but recommended drastic steps for reviving it.
Some of the important steps suggested by the committee were : • Downsizing 25 % of DD's 21000 strong staff • Getting into new media • Setting up its own marketing department • Developing a sharper programming focus.
One of the recommendations was to improve the quality of broadcast. DD sought the help of BBC to digitize its channels. Modi Entertainment Network began distributing the five DD channels via satellite. DD went in for a revenue sharing deal with B4U for showing movies, arid auctioned the 7:10 pm slot on DD Metro to the HFCL - Nine networks. In addition to Rs. 1.21 bn that DD got from this deal, the move helped DD to penetrate urban homes as well as C & S homes to some extent. DD also entered into an agreement with Direct to Home platforms like Echostar and Astra to distribute DD - World in 79 countries. DD employed Accenture to advise it on how to go about revamping its financial, management and administrative systems. The National Institute of Design was employed to redesign the logo.
In 2000, DD announced that it would start its own people meter project through a separate corporate entity in partnership with a few private channels and some advertisers. DD felt that its programs were not getting enough viewership ratings because the viewer samples used by the two firms doing the ratings -IMRB - AC Nielsen and ORG MARG were largely from C & S homes. Their ratings did not accurately reflect the viewing habits of the Indian populace.
According to most, these steps were bound to have a positive effect on revenue. However, for real growth DD had to be freed from political interference.
TABLE I :DD CHANNELS : A SNAPSHOT
|DD 1 |Primary channel with national, regional, local and educational programs on a time |
| |sharing basis |
|DD2 |Metro entertainment channel targeted at urban viewers, particularly the young|
| |viewers. Programs relayed by the terrestrial transmitters in 47 cities |
|DD4 to DD 13 |Ten separate regional language channels : Malayalam, Tamil, Oriya, Bengali, |
| |Telugu, Kannada, Marathi, Gujarati, Kashmiri and Assamese |
|DD 14 to DD 17 |Networking of the regional services of the four Hindi speaking states : UP, Bihar, MP and|
| |Himachal Pradesh |
|DD18 |Punjabi Regional Service |
|DD India |International channels |
|[DD World] | |
|DD Sports |Sports channel |
|DD News |24 hours news channel |
TABLE : II ; CABLE TV GROWTH IN URBAN INDIA
|YEAR |NUMBER OF HOUSEHOLDS WITH CABLE TV [IN MILLION] |
|1992 |1.20 |
|1993 |3.30 |
|1994 |11.80 |
|1995 |15.00 |
|1996 |18.00 |
|2000 |22.00 |
|2001 |30.00 |
TABLE III: FALL IN REVENUES OF DD
|YEAR |REVENUE |GROWTH OVER PREVIOUS UYEAR [%] |
| |[RS. BN.] | |
|1995-96 |4.30 |8.10 |
|1&96-97 |5.72 |33.20 |
|1997-98 |4.90 | - 14.30 |
|1998-99 |3.99 |- 18.50 |
|1999-00 |6.10 |52.80 |
|2000-01 [Estimate] |6.50 |6.00 |
TABLE: IV COMPARISON OF THE NEWS CHANNELS
|STAR NEWS |ZEE NEWS |DD NEWS |
|Channel encrypted |Channel not encrypted |Channel not encrypted |
|Decoders are required |Can be freely aired |Can be freely aired |
|Content caters to the premium segment |Content caters to the mass market |Content caters to the mass market |
|English predominant language |Hindi predominant language |Hindi predominant language |
|Only premium brand's ad taken. Very |All brands accepted. Not selective |No ads. Only social messages were |
|selective regarding ads |regarding ads. |broadcast |
REVIEW QUESTIONS :
1. Discuss the features of modern business 2. What is business environment ? What are the constituents of business environment ? 3. Write a short note on : a] political environment b] social and cultural environment c] economic environment d] religious environment 4. Why should the environment be scanned? What purposes would it serve? 5. Explain in detail (he features and elements of economic environment. 6. What is an economic system? Discuss various economic systems with their merits and limitations. 7. What are the features of mixed economic system ? Explain in detail the working of mixe-1 economy in India. 8. What type of distortions could take place in planning in a mixed economic system? 9. Analyse the strengths and weaknesses of capitalism and socialism. 10. Distinguish between Marxism and communism. Trace their evolution.
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Chapter - II
Political economy- Government and business - Public control of business - Trends and structure of Indian economy - Socio - economic problems of India
Political economy —Government and business
The question of government interference in economic activities has been debated for a very long time by the economists. While the early economists considered economics as a handmaid of politics, the modem view is that politics is the handmaid of economics. With the growing importance of the role of government in economic welfare, the modem economists firmly believe that the sphere of government in economic development has no boundary. However, there is no unanimity among the economists about the extent and mode of state intervention in the economic sphere. Hence, we can identify the following political ideologies regarding the government intervention in an economy.
i. The earliest opinion was that the government has nothing to do in an economy as the society will regulate itself. This opinion also stated that the government will wither away over a period of time. These ideologists are called ANARCHISTS.
ii. Opposing the anarchists’ view is the COMMUNISTS’ view. According to them, the individuals cannot do anything on their own and there is a need for government to supervise and regulate individuals. The state will own everything and it is the fundamental duty of the government to organize and direct all economic activities. Hence, government becomes the custodian of the society and it has a very wide role to perform.
In between the above two views, there are two more views about the extent of government intervention in an economy. While one view highlights the individuals, the other lays emphasis on the need for the government. According to the individualists view, the government a necessary evil. Even Adam Smith advocated very limited functions for the State and to him the government should confine to the maintenance of law and order. This view was holding good in the case of Western countries while in most of the under developed countries the economists themselves argued for larger intervention of the state. Individualism was found to be exploitative and against the welfare of the society. Hence, another ideology that emerged was COLLECTIVISM. According to collectivism, interest of the society is more important than the individuals. They considered that state has a very useful and desirable role to play in an economy. So they assigned unlimited powers on the State and argued that the state intervention is necessary to promote social welfare. The State should therefore, play a very vital role in economic development. These two limits about the role of government are often referred to as CAPITALISM and SOCIALISM. The modern view is that state must play a significant role in an economy that all the essential services should be State owned and controlled. According to the modern view the role of government includes maintenance of law and order, achieving equality and social justice, protecting the weak from the economically strong, fighting against poverty, etc. The areas of government intervention in modern state may be broadly discussed under the following heads :
1. PROTECTIVE FUNCTIONS :
By performing these functions, the modem government creates the necessary atmosphere for performing productive activities. Protection from external attacks and maintenance of internal peace are necessary so that economic activities will be performed to maximize the welfare of the society. Some people argue that this function of the government is unproductive, but without this function, no economy can ensure performance of productive activities.
2. ADMINISTRATIVE FUNCTIONS
Government activities include a host of administrative works. All these works are performed through various departments and so the government maintains a large number of officials and agencies who implement the government policies. Works of routine nature are performed by these officials and the efficiency in the administration is a must for rapid economic growth.
3. PROVISION OF SOCIAL SECURITY
This is a major function of the modern government as it is concerned with the improvement in public welfare. Maintenance of public health, provision of unemployment insurance, free medical and educational facilities, granting old-age pensions, provision of decent housing facilities, maintenance of public perks, libraries, museums, etc., have become part of the government functions. Though these functions are not in any way productive, yet they are necessary to encourage and promote productive activities.
4. ECONOMIC FUNCTIONS
One of the basic economic functions of the modern government is to ensure optimal utilization of the available resources. This involves both identification and proper use of the resources. Especially these days every country needs to put the available resources to the best use so that the society gets the maximum benefits. Further if the resources utilization is left in the hands of the private enterprise, they will under utilize the resources as they have only profit maximization as their objective. There are also possibilities of the emergence of monopolist tendencies, concentration of wealth in the hands of a few, etc. hence, every modern state should interfere in resources utilization. Another important function of the government is to maintain economic stability. This means protecting the economy from the influence of business cycles. In the process of growth, boom and depression are inevitable. But they must be under check, as otherwise, there will be uncertainty affecting the business prosperity and through that industrial development. Hence, the modern governments control and regulate the working of the economic forces so as to achieve economic growth with stability.
Another very important economic function of the government is price control and rationing. This measure aims at preventing escalation in prices of essential commodities and controls the price of other commodities. By resorting to retail and wholesale price maintenance policies, the government can strive to bring down the price level. This calls for buffer stock operations as well as efficient demand and supply management of commodities which the country is badly in need of. This is achieved by introducing rationing of essential commodities through well designed public distribution mechanism. All these mean, enormous efforts are required on the part of the government apart from the willing cooperation from the traders and businessmen. In practice it is found that price control and rationing are very difficult to be implemented during inflationary period due to the exploitative and monopolistic attitude of the businessmen and traders.
Yet another area where government intervention is needed is the removal of inequality in a country. This inequality arises because of the mal-distribution of the economic wealth and prosperity. Though national income increases, the rich becomes richer and the poor the poorer. This tendency should be changed through legal and political steps. For this purpose government in several countries have enacted legislations and announced concessions in favour of poor people. Implementation of these legislations and concessions involve a lot of difficulties and they have to be periodically revised. The object of the government in this connection must be to prevent concentration of economic power and wealth in the hands of a few. Another important economic function of the modem government is to achieve economic growth. For this purpose the government has to plan for economic development and in this task the government part from deciding the targets, planning process, resources identification and allocation, etc., It should also arrange for financing the plans. It should be noted that planning has become important in both developed countries as well as under developed countries. In the developed countries planning is used to achieve stability in development, while in under developed and developing countries it is used for accelerating economic development.
The government intervention in an economy is a must for the following reasons: 1. In developing economies the vicious circle of poverty impedes the economy from developing faster. This vicious circle can be broken only with the government intervention. In the absence of it, any amount of planning will fail to bring about the necessary impetus to growth in such economies.
2. In the process of economic development, instability should be avoided at any cost. Even in developed countries, such instabilities are avoided with government intervention. In developing countries, therefore, the government should plan for proper allocation and utilization of resources as well as economic stability. Allowing the market forces to operate has certainly some advantages. But in under developed countries market forces do not operate smoothly because of external rigidities and structure bottle-necks. To overcome these forces pinning down economic development, government intervention is needed.
3. The basic requirement for rapid economic development is the economic and social infrastructure. The investment requirement for the provision of such infrastructural facilities runs to crores of rupees. This can be provided only the government and not the private sector. Further such investments are not income or profit yielding and so private enterprises may not come forth to undertake such investments. So government has a concrete role to play in inventing on such social and economic infrastructures.
4. Investment in social overheads is undertaken by the government by mobilizing financial resources from various sources. These sources of government include taxation, public borrowing and deficit financing and these sources cannot be resorted to by the private enterprises. It is also well known that private enterprises lack comprehensive approach to economic development.
5. Government intervention is indispensable in under developed economies because in such economies, there are several obstacles to economic development which can be overcome only by the government. As Mir and Baldwin observed every under developed economy needs a critical minimum of government intervention to reduce indivisibilities and discontinuities in the economy, to overcome diseconomies of scale and offset certain other forces that arise to depress development, once development begins.
Public control of business
In a mixed economic set up like India, the government retains control over strategic and key industries and operations. This is done through the creation of public sector units. The role of public sector units is explained below.
Discuss the role of Public Sector in India
Since 1948, the public sector in India has been playing a significant role in every sphere along with the private sector. These two sectors have been functioning as complementary to each other, though the government policies have been usually more favourable to public sector than to the private sector. Inspite of this, the private sector has also emerged victorious in several fields and since the announcement of Liberalization polices in 1991, we can reasonably expect the private sector to reach its potential and the public sector would also strive its best to withstand .he domestic and international competition. Hence, the future offers excellent scope for both the sectors, but it is clear that only the most efficient sector can survive, so how the private and public sectors are going to react to this challenge will be known in due course. However, let us now discuss the role of public and private sector in India in detail.
1. Role of public sector:
First of all it is necessary to understand that the public sector includes the autonomous corporations, the departmental enterprises owned and controlled by both the State and Central Governments. The role of public sector would be discussed with reference to various indicators like employment, investment, output, national income contribution, savings, coital formation, capital stock, etc.
a) Public sector and employment generation:
One of the important contributions of public sector to the Indian economy is that it has generated huge employment opportunities and this has reduced the problem of unemployment to a large extent. The employment opportunities in public sector includes government administration, defence, health, education, research and development, enterprise owned by Central and State governments. It offered employment for 107 lakhs of people in 1971 which slowly increased to 154.8 lakhs in 1981 and it has touched 190 lakhs in March, 1991. This constituted nearly 71% of the total employment generated in the economy, in 1991. As regards the sector-wise employment opportunities created by the public sector, in 1989 public sector accounted for 47,8% of the total employment generated by it through employment in government administration, community, social and personal services, followed closely by transport, storage and communications with 16.1% and manufacturing 10.1%
Hence, it is clear that with the growth of public sector, the country is benefited with more and more employment opportunities.
b) Public sector and income of the public sector:
The share of public sector income in the net domestic product has been increasing consistently from 7.5% in 1950-51 to about 25% in 1987-88. In a matter of about 35 years the public sector contribution to net domestic product has risen appreciably and constitutes one fourth of the total net domestic product This is mainly because of the rapid expansion of the public sector since 1951. This 25% of contribution in net domestic product is certainly better than 9.6% of contribution by the public administration. However, the private sector income constituted 75.1% of the total net domestic product. It should be noted that the public sector units are run on service motive and very little commercial motive.
c) Public sector and saving and capital formation :
This is yet another crucial yardstick to evaluate the contribution of public sector. The percentage share of public sector in total domestic savings increased from 1.7 to 2.3 of Gross national product at market prices. But in absolute terms it increased from Rs. 169 crores in I Plan period to Rs. 7815 crores in VII Plan. When we consider the percentage share in total sayings, the contribution of public sector has actually gone down from 17 in I Plan period to 11 in the VII Plan. However, the contribution of public sector in capital formation (gross domestic) is really commendable. It increased from a modest figure of 3.5% of Gross national product at market prices in I Plan period to 10.7% in VII Plan. As a result the ratio of percentage contribution by public sector and private sector in total domestic capital formation changed from 33 : 67 in the I Plan to 47 : 53 in the VII Plan. From this it is clear that the contribution by the private sector during the same period has declined from 67% to 53%
d) Public sector and capital stock:
Capital stock refers to the total stock of plant and machinery, equipment and tools and other capital goods available at a point of time for further production. Based on the data available up to 1979-80, it was found that the percentage share of public sector in total capital stock between 1960-61 and 1979-80 increased from 26 to 37 while that of private sector declined from 74 to 63 during the same period. In absolute terms, the capital stock increased from Rs. 16,377 crores in 1960-61 to Rs. 68,478 crores in 1979-80 in public sector (i.e., an increase by over Rs. 52,000 crores) but in the private sector the increase was from Rs. 46,583 crores to Rs. 1,16,089. crores (i.e., an increase by over Rs. 65,000 crores). The increase is less pronounced in public sector because of the following reasons:
1. Public sector investments are mostly in economic infrastructure which does not contribute any output. 2. Public sector is mostly concerned with high capital intensity projects like railways, iron and steel, power, irrigation, etc. 3. The gestation period of public sector projects are very long. 4. The capacity utilization is very much less in public sector units. 5. Most of the projects of public sector are having higher capital-output ratio.
e) Public sector and infrastructure:
The economic development of a country depends on the development and maintenance of infrastructural facilities. The essential requirement is provided by public sector. The industrialization is accelerated only through infrastructural development. Investment in power, roads, bridges, irrigation, etc., is non-income yielding, long gestation period oriented, and heavy investment projects. Hence these are not attractive for private sector. But without them the country cannot develop faster. Therefore it is apt to state that the public sector units are responsible for the creation of infrastructures which constitute the backbone of economic development and industrialization.
f) Public sector and industrial base:
There is no denying the fact that public sector has provided a strong base for our industrialization. Our industrial policy has clearly assigned a significant role for public sector, till the end of the third five year plan; industrialization was taking place at a slower pace because only the important public sector units were established till then. Since the private sector could not really rise up to meet the task, since the IV Plan the establishment of public sector units started on a brisk rate and the industrialization has been accelerated to a commendable level. Further private sector with its commercial objectives could not undertake several of the projects and investment requirement of these projects was also beyond the potential of the private sector. Hence, if at all India today is having a strong industrial base; it is mainly due to the contribution of the public sector.
g) Public sector and export promotion:
Public sector has responded well to the needs of the nation by taking up the task of exporting our products and finding market for them in other countries. In this respect the contribution of State Trading Corporation, Minerals and Metal Trading Corporation, Hindustan Steel Limited, Hindustan Machine Tools, etc., are worth noting. Infact, these units are primarily responsible for exploiting the captive market for our goods abroad. The foreign exchange earnings of the public sector has gone up from a modest figure of Rs. 35 crores in 1965-66 to Rs. 170 crores in 1969-70, to Rs. 5,831 crores in 1984-85 and then to Rs. 9,198 crores in 1991-92. The increase has been more than 300 times comparing 1965-66 figures with that of 1991-92. Though there may be criticisms about the performance of the public sector units, yet there can be no dispute about the export achievements of public sector units within a period of 25 years.
h) Public sector and saving of foreign exchange through import substitution:
India's balance of payments has been a cause for worry since Independence, the main reason being increasing imports. This trend had to be reversed and the government rightly selected public sector to establish units to produce domestically the goods imported so as to conserve the foreign exchange and also utilize more the domestic resources. Units like Hindustan Antibiotics Limited and Indian Drugs and Pharmaceutical Limited, have together effectively checked the inroads attempted by the multinational corporations in the field of drugs and pharmaceutical. Similarly Indian Oil Corporation Limited and Oil and Natural Gas Commission have succeeded in bringing down our dependence on other countries for crude to some extent. They are very active in identifying oil deposits and natural gas. Their efforts are supplemented by research and development to invent methods of using the natural gas and reduce the imports of crude. In this respect the public sector works towards achieving self sufficiency. With concerted efforts it should be possible for India to achieve self-sufficiency in the near future. However, the poor performance of the public sector is causing concern, as unless steps are taken to improve their performance, the achievement of self-sufficiency' may be delayed.
i) Public sector and generation of internal resources :
A close scrutiny of the public sector performance will certainly make one to note the contribution towards internal resources made by the public sector. For example, the internal resources generated by the public sector during V Five year plan was Rs. 3,439 crores, during VI Five year plan Rs. 11,721 crores and during the period 1985-86 to 1989-90, the generation was Rs. 37,678 crores. In 1990-91 and 1991-92 also the public sector undertakings together generated Rs. 24,376 crores. This indicates that the public sector units have turned the corner and with the measures taken up already to spruce up their working we should be able to realize still greater generation of internal resources.
j) Public sector and contribution to exchequer:
Public sector contribution to the Central Exchequer is, in terms of dividend, corporate tax, excise duty, customs and other forms. These contributions add to the mobilization of resources for our planned development. It is interesting to note that the contributions totaled Rs. 27,570 crores in the VI Plan period, Rs. 70,893 crores during the VII Plan and Rs. 19,520 crores in 1990-91 and Rs. 20,366 crores in 1991-92. It may be noticed that the annual contributions during the VII Plan period is nearly 75% of the contributions during VI Plan. Among the different forms in which these contributions are made, Excise duty and Customs alone constituted more than 82% of the total in the VI Plan period, while this was 76% during the VII Plan. Subsequently, in 1990-91 these two accounted for 82% of the total contributions and in 1991-92 it was almost 83% indicating that public sector units do make a valuable contribution to the Exchequer. Since the performance of the public sector is poor, their contribution in terms of dividend is very insignificant and this has to be changed at the earliest so as to make them contribute sizably even in this form.
k) Public sector and growth of ancillary units:
Public sector also makes a valuable contribution by helping the growth of ancillary units and small scale units. The Bureau of Public Enterprises have undertaken the study to find out the public sector units which could transfer their production and other facilities to small scale sector. Under this scheme about 1800 units were set up till 1986. The public sector also enters into regular contracts for purchasing the entire production or 50% of the production of small scale and ancillary units. Such purchases from ancillary units amounted to Rs. 451 crores in 1985-86.
I) Public sector and development of states and backward regions:
One of the objectives in establishing public sector units is to facilitate the states and the backward region to develop faster. In this connection, public sector has certainly creditable performance. Public sector contributes to the State government's resources in terms of sales tax and other state level taxes. Public sector investments are directed towards the projects in the backward regions and industrially poor districts. In this way the public sector works in its own way to eliminate the industrial imbalance in states and districts.
So far we have explained in detail the contributions made by the public sector towards Indian economic development. It is often said, that even when their performance is poor, the public sector contributions have been so much, and by improving their performance, we should be able to make them contribute their full potential to achieve a higher rate of economic development. It is satisfactory to note that efforts in this direction to improve the public sector performance have been initiated and by the turn of the century public sector will emerge as the main contributor to our economic development.
TRENDS AND STRUCTURE OF INDIAN ECONOMY Features of India as an under developed country
To classify a country as developed or under developed, one should study the features of an under developed country. There are several indicators of under development. Let us discuss each one of them with reference to India to ultimately answer the question whether India is a developed or under developed country.
1. Existence of low per capita income:
It is customary to compare the per capita income of a country with other countries to determine whether the country in question could be categorized as under developed or developed. The IBID is also adopting this method and it has classified the countries as i. low income countries, ii. Middle income countries and iii. high income countries. According to the World Development Report, 1993, the annual per capita income of these three types of countries is estimated as under: Low income countries $ 350 Middle income countries $ 2480 High income countries $ 21050
It is clear from the above figure that any country with just 1.5% of the percapita of the high income countries can be categorized as low income country and as under developed country. In these under developed countries, the per capita income is very low because i. net national income is very low or ii. Population is very high or iii. the national income is very low and the population is very high. Though this used to be the basis for categorizing the countries, "recently the IMF has measured the value of each country's national income in terms of the purchasing power of its own currency at home, instead of the currency's value on international exchanges. Following this India's per capita income in 1991 was assessed as $ 1150 as against $ 330 calculated following the old basis. Hence, on the basis of the new methodology India can no longer be considered as an under developed economy.
2. Existence of very heavy population:
The size of population is one more index of development status. It is found that a country with low population is developed and that with a small size of population is under developed. It should be noted that in the case of former the annual growth rate of population is very low, compared to the growth rate in the later. According to the World Development Review, 1993, the annual growth rate of population in the low income countries was 2.0 between 1980 and 1991 while in middle income countries it was 1.8 and in the high income countries the rate was 0.6 during the same period. Hence, it is clear that with a higher rate of growth, the low income countries will experience population explosion over a period of time. This population explosion will have serious impact on the economy and impede every effort to achieve higher rate of development. For example, the population explosion will result in increased poverty, high rate of unemployment, scarcity for essential goods, etc.
3. Predominance of agricultural sector;
This is another important characteristic of the under developed economy. In such economies, the percentage of population depending upon agriculture for livelihood will easily be 70%. The contribution of agricultural sector to national income will be high and it is estimated to be over 35%. The nature of exports will be mainly primary goods like agricultural raw materials. In the case of India nearly 70% of the population depends on agriculture sector (both directly and indirectly) whereas in a developed country this used to be only about 20% The contribution by agricultural sector to national income will be around 4 to 5% in developed countries and the composition of exports will be mostly manufactured goods and high-tech products. It may also be noted that in under developed economies, the productivity in agriculture will be abysmally low due to the use of out-dated technology, conventional method of cultivation, poor quality seeds and fertilizers, illiteracy of farmers, very high rural indebtedness, etc. The result is agricultural production will be low and so the contribution to national income will also be low. Added to this, the sector depends on the success of monsoon and failure of monsoon directly affects the economic growth and development.
4. Existence of large scale unemployment:
In under developed country there exists very large scale unemployment due to various factors. Further the unemployment will continue to increase over a period of time. The unemployment is due to factors like, huge population, low level of economic activity, poor technology, lack of investment, large illiteracy, etc. Even those who are employed may not add anything significant to production. That is there will be disguised unemployment too. The problem is worsened by the existence of under employment, which means the available labour power is not fully utilized. The overall effect of all these is that the labour productivity will be very poor. The efforts to improve the productivity may rot succeed due to resistance by labour unions and organizations. The economy will remain under developed so long as the unemployment remains high.
5. Existence of widespread poverty:
Poverty exists in every country. But the difference is that in developed countries, poverty exists only in certain pockets, while in under developed countries, poverty is widespread - almost 3/4 of the country lives below the poverty line. In under developed countries, the preponderance of agricultural sector, large scale unemployment, income disparities, high illiteracy, etc., account for widespread poverty. Added to these, the lack of investment opportunities, low productivity, primitive technology, etc., also result in poverty as any amount of production will not generate income. The wage level is so low that the people have very low saving. Any amount of efforts to alleviate poverty does not bear fruit due to maladministration, corruption, etc.
6. Primitive production condition:
The excessive population pressure leads to heavy demand for land. The available land is not put to productive use. There is very high capital deficiency, one because of low saving and second the conspicuous consumption is very high. In other words, the little saving is used in unproductive ways. With poor capital formation, the government would invest heavily in capital intensive projects as well as welfare projects. The return is very poor and prolonged. The technology is so backward and primitive that the input output ratio is very high. The obsolete technology also results in poor return and low productivity. Another major weakness is that there is lack of entrepreneurial ability. Hence, investment opportunities are not easily identified and risky ventures are never undertaken. The size of market is small, the market information is absent, market intelligence is very poor, the administrative ability is at lowest level and there is lack of investment opportunities. All these culminate in poor utilization of the available entrepreneurial ability and talent
7. Foreign trade composition:
The composition of foreign trade in under developed country is very much influenced by its historical relations with other countries. Most of the under developed countries were colonies in the recent past and naturally their foreign trade composition clearly reflects this. They export unfinished, agricultural raw materials and import heavy capital goods. Obviously, their terms of trade will be unfavorable. Further there exists heavy geographic concentration in their trade. Any failure of agricultural sector worsens the foreign trade position. With heavy reliance on the imported machineries, these countries lack latest production technology. The poor balance of trade and balance of payments deficits force them to borrow heavily from the developed countries and international financial institutions. They are caught up in the debt trap and outgo of interest on international debt is so heavy that the county will struggle to maintain the exchange rate. The increases reliance on other countries for manufactured goods will subject the countries to economic and political subjugation of the exporting countries.
8. Existence of wide disparity in income and poor standard of living:
These countries are also noted for very high income disparities because of concentration of productive factors in the urban areas, very low mobility of labour from rural to urban, low rate of employment in the rural areas in relation to urban areas, high wage rate in the urban and poor wage rate in the rural areas, etc. The income disparity is further widened by deteriorating terms of trade between agricultural and industrial sectors. As a consequence, the standard of living will be very poor in the rural areas than in the urban areas. Even in urban centers, there will be growth of urban slums. As already pointed out in these countries the population depending on agriculture is very high and so the employment opportunities as well as income generation is very low compared to that in the industrial sector. As in the initial stage of development the industrial growth will be confined to urban centers, the standard of living will be on the whole very poor.
9. Existence of dualistic economy:
Dualism refers to the existence of a developed sector side by side with an under developed or undeveloped sector. We will come across the co-existence of sophistication and primitive characteristics in every walk of life. For example, in the urban areas, one will find the use of modem technology in the production field as well as households, while in the rural areas, the age old, antiquated techniques will be used in the production as well as in households. This dualism retards economic growth. That is, the subsistence sector in the rural areas will pull down whatever little economic progress is achieved with the developed and modem sector. Further in the urban areas, one can come across the existence of dualism, in every activity. For instance there will be modern, technologically sophisticated industries existing side by side with industries with labour intensive and poor technology. There will be high wage executives existing with poorly paid slum dwellers. Firms with international collaboration producing ultra modem products will be found along with the domestic firms using inferior technology. In the rural areas also the dualism can be found. We can find the co-existence of farms with vast expansive areas using modern production technology along with small farms where such technologies can never even be dreamt of. The bigger farms will be using trained and skilled laborers whereas the small farms will mostly be depending on the family labour and untrained, semi-skilled labour. While the capital investment by the big farms will be several times higher than those of the small farms, the rural indebtedness will be found more with the small farms than the large farms. The marketing strength, holding power, storage facilities, processing facilities, bargaining power, etc., will all be very much different between large farms and small farms. From the above explanation, it could be understood that every effort to develop the economy should be designed so as to make it applicable to both the modern sector as well as the undeveloped one. Hence, the overall growth will be more determined by the contributions of the undeveloped sector.
10. Existence of weak and inefficient administration:
Under developed countries always evince this feature. The political and social factors influence to a large extent the efficiency of administration. In these countries, the administrative system is noted for lethargy, red tapism, bureaucratic interference, delay in decision making, partiality, political influence in decision making process, bending the laws for favourable people, etc. The result of this is inefficiency. An efficient employee never gets his due as the rules and regulations do not permit this. The accountability at the higher levels is very much less. The responsiveness of the administration in a critical situation is more rules ridden or ritualistic rather than realistic. There is lack of managerial and administrative talents in these countries. The lack of know how, the resistance to change, lack of motivation, etc., are responsible for this administrative inefficiency.
SOCIO ECONOMIC PROBLEMS OF INDIA
1. Discuss the features of Indian Population
The Demographic features of India can be discussed in terms of the following ideas: i. Trend in population ii. Growth rate of population iii. Life expectancy iv. Infant mortality rate v. Density of population vi. Age and sex composition vii. Rural-urban distribution and viii. Literacy and levels of development.
Let us now discuss each one of these features in detail.
i. Trend in population:
As the country with second largest population .in the world, India has been handicapped with very large population found in a small area. It is said that India has 16% of the total land area of the world. This situation has been remaining for decades as shown by the Table 1 below. It could be seen from the table below that till about 1931, the size of population was not increasing at an alarming rate. Specifically between 1911 and 1921, the population size almost-remained stagnant. There was a slight increase in the size between 1921 and 1931. The decade 1931 to 1921 probably was the only period when Indian population almost remained the same. This probably was due to the epidemics, wars, etc., which took a heavy toll during the decade. After 1941 we find a consistent increase in our population cruising ail concern. More specifically the increase in population was by : about 4 crores between '41 anc. '51, 11 crores between '61 and '71, about 15 crores between '71 and '81 and about 16 crores between '81 and '91.
Hence, after the decade 1921-1931, we find the increase in population remained almost the same during the decade '71 -'81 and '81-'9l. In the past nine decades, i.e., since 1901 the addition to our population has been by about 60 crores. But with the slowing down of the population growth since 1981, we may expect the population to grow at a slower rate in the corning decade.
TABLE 1 : SIZE OF POPULATION (in crores)
|YEAR |POPULATION |
|1901 |23.8 |
|1911 |25.2 |
|1921 |25.1 |
|1931 |27.9 |
|1941 |31.9 |
|1951 |36.1 |
|1961 |43.9 |
|1971 |54.8 |
|1981 |68.3 |
|1991 |84.6 |
In 1993, India’s population was estimated to be 88.5 crores.
ii. Growth rate of population:
The growth rate in population is measured as the difference between the Crude birth rate and Crude death rate. Of course, the migration and population should also be taken into account. But in Indian experience, the migration as a percentage of the total population is very insignificant. Hence, ignoring migration, we should lake the difference between the crude birth rate and crude death rate as the normal growth rate in our population. The Table 2 below gives the normal growth rate in our population.
TABLE : 2 NORMAL GROWTH RATE OF INDIAN POPULATION
|PERIOD |CRUDE |CRUDE |NORMAL GROWTH RATE |
| |BIRTH RATE |DEATH RATE | |
|1901-1911 |49.20 |42.60 |6.60 |
|1911-1921 |48.10 |48.60 |0.50 |
|1921-1931 |46.40 |36.30 |10.10 |
|1931-1941 |45.20 |31.20 |14.00 |
|1041-1951 |39.90 |27.40 |12.50 |
|1951-1961 |41.70 |22.80 |18.90 |
|1961-1971 |41.20 |19.00 |22.20 |
|1971-1981 |37.20 |15.00 |22.20 |
|1981-1991 |35.20 |11.40 |21.10 |
From the Table:2 above, it could be observed that the normal growth rate of population was very low from 1901 to 1921 mainly because both the crude birth rate arid crude death rate were high. But ever since 1921, there has been quite notable decline in crude death rate but not such a pronounced decline in birth rate. As a result the: normal growth rate of population has remained high and Infact has been increasing. One sign of consolation is that during 1981-1991, the crude birth rate has declined by 2.00 points and the normal growth rate has also declined by about 1.00 point. This trend, if continued, by the turn of this century India may have lesser addition to population which is a good sign. It is estimated that our birth rate would fall down to 27.5 during 1991-1996 and the death rate would go down to 9.4 during the same period thereby the normal growth rate would be 18.1 for this period. Based on this the projection for the period 1996-2000, birth rate will be 24.9, death rate will be 8.4 and the normal growth rate will be 16.5.
iii. Life expectancy:
Life expectancy is usually used as a measure of gauging the health condition of population of a country. A country with a high death rate and with death occurring at early age, the life expectancy will be low and a country with a low death rate and with death occurring at an advanced age, the life expectancy will be high. Hence, a high life expectancy is a yardstick for health condition of the population of a country. In Indian case, there has been a significant fall in death rate since 1951 and so our life expectancy which was just 23 years during 1901-1911 increased to 46.4 years during 1961-71 and further to 58.2 years during 1991. However, this is very much low compared to some of the countries like Sri Lanka and Thailand, another interesting feature is that in India the average life expectancy is more for female population than for the males. The reason for this could be that the number of male deaths at early stage is more than that of the females. The increase in life expectancy is certainly ^ welcome sign, but i; carries with it some social problems like, the increase in number of joint families, multi-generation families, unemployment due to extension of service for those who retire lead to unemployment for youngsters, increase in dependents per family, etc.
iv. Infant mortality rate:
This refers to the number of child death, from birth before reaching the first birth day. This is measured as number of children that die before completing first year after birth per 1000 children born. The infant mortality rate was very high in India during the early part of this century and it was 204. But thanks to the development in science and concerted efforts taken by the government, the mortality rate has come down to about 80 per 1000 in the 90's. However, there is a variation between urban and rural areas. As on date the mortality rate is about 50 per 1000 in urban areas and 86 per 1000 in rural areas. It is also found that there is variation among the states in mortality rate. As for example, in Kerala it is only 17 per 1000 while it .is 122 in Orissa. Comparing other countries, the mortality rate is very high in India. For example, in Srilanka it is only 32, in Philippines it is 49 and in Thailand it is 44. With improvement in science and extension of medical facilities to rural areas, the infant mortality rate is coming down rapidly in India, but there is much to achieve in this direction.
v. Density of population:
This measure helps to determine the extent of burden on land area in a country. It is measured as the ratio of number of persons per square kilometer of land area. India's density is one of the highest among the countries in the world with 267. This is very high compared to countries like Canada. Though density is high, Japan has a very high per capita income of $ 25430. It is well established that there is no relationship between density of population and the economic development. Countries like Canada with very low density of 2.5 persons/sq. km. has very high per capita income of $ 20470 and as already indicated Japan with very high density has also a very high per capita income. Among the Indian states also we come across wide variation in density as for example the Union Territory of Delhi has 6319 as density against Arunachal Pradesh with just 10 persons/sq.km. It is said that countries which are industrially advanced will have higher density and wherever the climatic conditions, rainfall, etc., are good the density will automatically be high.
vi. Age and sex composition :
This information helps to determine and answer certain questions relating to employment, dependents, birth rate, etc. Age composition in India is such that (he young persons (0 - 40 years of age) constitute more than 65% of our total population. Hence, even if the birth rate declines, yet the addition to our population because of the predominance of younger aged persons will be more for some more years to come. The immediate implication of this feature is that the dependency ratio will be very high. On an average it works out to be 50%. But when the birth rate declines, this would also decline and the proportion of working population would go up leading to increase in claimants for employment.
As regards sex composition, in India it has come down over the decades from 962 females per 1000 males in 1901 to 930/3000 in 1971 and then to 929/1000 by the turn of this century. It is found that this sex ratio is one of the lowest among the countries in the world. The reasons for this lowest sex ratio is the deliberate termination of pregnancy of female child, legislation on abortion, increasing infanticides of female children, lesser care for female children resulting in their early death, etc. But with the spread of literacy, improvement in medical facilities, change in social attitude, etc., the sex ratio is likely to increase. Even now in some of the states like Kerala, and Tamilnadu the sex ratio is high.
vii. Rural-urban distribution:
This is yet another feature of population which clearly indicates the extent of change in the concentration of population in rural and urban areas. In the past, the rural concentration was very high and slowly this is changing that the urban concentration is increasing. While this is a good sign of development, yet increasing urbanization has led to several social problems like urban poverty, increasing number of urban slums, congestion, lack of social amenities, artificial demand for important facilities like transport, health, education, entertainment, etc. The proportion of population in urban areas has consistently increased from 14.1% in 1941 to about 26% 1991. It is likely to touch 32% by 2000. The rural-urban distribution is not even among the states. While in advanced states, the urban concentration is high, in less developed states the rural concentration is still continuing to be high.
viii. Literacy level:
Literacy level refers to the number of people in the population who can read, write and understand arithmetic. The literacy rate determines the economic development. Any country with low literacy rate is bound to be less developed than countries with high level of literacy. In India the literacy level was very poor before independence and since then with all the positive steps taken the literacy rate has gone up. This could be understood when we compare the literacy rate of males and females in 1951 and 1991. In 1951 the literacy rate of males was 25% and that of females was just 8% and in 1991, the literacy rate of males increased to 52.6% and that of females 32.38%.
The substantial increase in literacy level is due to schemes like compulsory free education for children upto 14 years of age, noon meal scheme, increasing opportunities for educated in employment, especially among women, increasing self-employment opportunities for women, etc. It is also to be noted that the literacy level is high in both males and females in urban areas than in rural areas. This is obvious because in the urban centers the facilities are more than in die rural areas. It is also a good signal that over the period the gap between literacy rate in males and females is narrowing down. In 1991 the female literate formed about 61.56% of male literate as against just 33% in 1951. As in the case of other features discussed so far, literacy rate is not uniform in all the states. Economically developed states report a higher percentage of literacy among males and females than the less developed states. With the increase in allocation of fund for education with a thrust to primary education, establishment of more and more correspondence course institutes, formal arid non-formal education spread, etc., the literacy level is bound to pick up still before 2000 A.D.
Nature of population problem in India and the effects of population growth on Indian economic development
The population problem in India is a basic problem faced by the economy. The population explosion is due to various factors. We will discuss these causes for population explosion first and then understand how this affects our economic development.
Causes:
It is convenient for us to classify the causes for population explosion by identifying the causes for high birth rate and the causes for declining death rate.
1. Causes for high birth rate:
It has been already discussed that birth rate in India has not shown any significant decline over the decades. This slow fall in birth rate is one reason why the country has population explosion. The following are the reasons for high birth rate in India :
i) Climatic factors:
Unlike the other countries, India has a climatic condition which affects the maturity age of girls. An Indian girl matures at an early age of 13 years which means the reproductive span or the child bearing span is very high. In Western countries the climate is cool that the maturity age is not so low. Obviously the reproductive span is much shorter.
ii) Social institutions:
a) Marriage is a social compulsion in India. That is, once a girl matures, the social opinion is that she should get married at the earliest after maturity. The age of maturity being 13 years, the number of women in the reproductive age group is very large. This means females in the age group of 15 to 49 years can bear child. Once the marriage takes place at the age of 13, every woman can bear child, at least theoretically for 30 to 34 years. This age group constitutes 47% of the total female population in India. It is also found that the percentage of women in this reproductive age group is very high i.e., 81.44% in 1981. However, this proportion is slowly falling over the period. One more reason for high population is the practice of child marriage. Though this practice incoming down, yet the average age of marriage among females was below 19 years even by 1987-88.
b) The prevalence of JOINT FAMILY SYSTEM is another reason for high population growth in the country. The main belief in a joint family system is that the married couple should have babies. People who do not have babies are looked down and there is a social stigma attached in such cases. Further there is a specific preference for male babies. So until a couple gets a male baby they tend to encourage child bearing. This preference for male baby is due to various reasons like old age security, labour value of male child, laws of inheritance, social customs like death rituals, getting dowry, etc. However, with the spread of education and increased employment of women in various occupations in the society, the tendency is to have lesser and lesser babies and the specific preference for male babies is also on the decline. The Joint family system is slowly disintegrating and giving place to independent small family due to increasing cost of living, preference for remaining independent, increasing employment after retirement, encouraging use of contraceptives replacing the conventional techniques of birth control, etc.
iii) Economic factors:
The most important factor under this category is poverty. The poor people prefer to have a large number of children Inspite of poverty due to the following reasons:
i) Whether the family size is small or big, poverty is all pervasive, hence, an average family prefers to have more children than a few. ii) Children are treated as an asset in poor families as more children can help the family in work, even at very young age, thereby raising the income earning capacity of the family. iii) As the condition in the poor families is very poor, the infant mortality rate is very high. To neutralize this every family prefers to. have more children as this iv) Would be in a way an insurance against high infant mortality rate. v) A large number of children in a family can look after the aged better with large earnings and so the preference for more children, vi) The failure of family planning programme to convince the poor people, as the consider the number of children as the best way to get more income through odd jobs. vii) Indirect government support and subsidies for poor families like ration quantity based on the size of family, etc viii) Possibility of getting pecuniary benefits on occasions like election, philanthropic functions, free distribution of basic necessaries, etc., from the political parties is yet another reason for a big family size.
On die whole the economic factors indicate that Inspite of being poor, there are several reasons for maintaining a large family size than small ones.
Let us now discuss the impact of population explosion on economic development of India.
1. The size of population has a direct impact on the size of national income of a country. In Indian experience, the net national product at factor cost went up by 215% between 1961 and 1991 but since the population increased at a rate of 92% during the same period, the percapita income increased only by 58% during the period. As the population increases, the increase in national income, even if it is substantial, will be spread over a larger number of persons thereby the percapita income is low. With lower percapita income all the other dependent variables of income, viz., saving, consumption, investment, etc., will also be lower.
2. The most important effect of population growth is on the food supply. In the - past, Malthus has explained this in terms of his geometrical ratio and arithmetical ratio. He pointed out that the population increases at a slow arithmetical ratio. Consequently over a period of time the rate of growth of population will exceed that of food production. This leads to food problem. In the case of India, Inspite of a spectacular achievement on the food front, the scarcity for food continues as explained below. The net availability of food grains between 1956 and 1992 increased by 140% but the population during the same period recorded an increase of 118% and so the percapita availability of food grains increased only by 10% . With ever increasing population, there is a need for the government to maintain the public distribution system with all its malpractices at a phenomenal cost to the exchequer.
3. Another vital aspect of impact of population on economic development is that with rising population, the percentage of dependents also increases apart from the increase in non-working population deteriorated between 1961 and 1981. In 1961 the number of unproductive consumers was 256 million but it increased to 464 million by 1981, which in percentage terms is 57% and 62% respectively. The unproductive consumers are those who do not contribute anything to national income. Hence, with every addition to population the absolute number of unproductive consumers increases who make no contribution to national income, but claim a substantial share of national income. As a result the economy is impoverished. It should also be noted that with 40% of our population in the age group of 0 to 14 years of age and 6% belonging to aged group of above 60 years of age, there is increase in dependency with every addition to population. This is clearly a drain of savings of every household and the society is denied of precious savings and the capital formation.
4. A very significant effect of population growth is on employment. It is very simple idea to understand. With increase in population there is sizeable addition to the labour force, but when the employment generated is less than the addition to the labour force, the result is unemployment and underemployment. For instance during the VI plan period the number of unemployed was 20.7 million accounting for 7.74% of the labour force, while by 1990 this has increased to nearly 23 million. Inspite of eight five year plans and generation of employment, it is proved that the number of employment generated is clearly less than the addition made to the population. This means that a valuable resource is unutilized or under utilized. This is a national waste. If we consider among the unemployment, the educated unemployed, then the gravity of the situation will be easily understood.
5. The increase in population makes a heavy demand on the community facilities like education, health, housing, etc. In the case of education, in India primary education is made free of cost and the expenditure incurred by the government on this account alone is Rs. 2,246 crores. Since the number of children in the age group of 6 to 14 years is about 156 million and expenditure at the rate of Rs. 144 per year per child will mean a heavy drain on the financial resources. In the case of medical facilities the number of people depending on public hospitals and other medical facilities is increasing day after day causing a heavy drain on resources for the government. Apart from the availability of education and medical facilities being threatened by the growing population, the quality of service rendered is also found to be very poor. The rising population has made housing a major problem. The result is up coming of slums in every part of the country. Leading a life of abject poverty, the poor people neither have access to education, medical or housing facilities. Added to these is the expenditure of the government on populist welfare schemes like noon meal scheme, free books and note books, free chappals, etc. All these political compulsions have denied the economy the crucial financial resources for developmental purposes.
6. Rapid population growth affects capital formation in a country. With rising population, it is already pointed out that the national income is shared by a larger number of people and so the per capita income is low. Consequently, the saving potential of the people is also low. In order to achieve rapid economic growth, there is. a need to at least maintain the growth in national income. But India with 2.2% growth rate (annual) of population, national income must rise at the same rate so that the per capita income remains the same. For this purpose capital investment should take place at least in the order of about 12% whereas in India the capital investment growth is poor because of poor saving.-Even though it is said that our annual saving rate is about 23%, majority of saving is used for unproductive purposes like marriage, on jewels, etc. Hence, the capital formation is very poor and the population growth eats away whatever increase in national income is possible.
7. Population growth has impact on environment. This was explained by Anne Ehrlich in terms of a formula I = PAT, where I refers to environmental impact, P stands for population, A refers to per capita consumption and T refers to environmentally harmful technology that supplies A. The three factors PAT have multiplicative relationship and so their combined effect is very serious. Further with every significant addition to population, there is misuse of resources like water, electricity, land, etc. The result of this misuse is that a huge quantity of waste is generated in different forms which directly affect the environment. For example, the demand for fuel will go up with increasing.
8. Population, then people will start cutting trees to get the cheapest fuel available. Slowly this leads to denudation of forests leading to ecological imbalance affecting the environment. Substitutes used also affect the environmental purity as in the case of atomic power or plastics, etc.
9. Population explosion carries with it severe social problems. When the population increases, we will find migration of workers from, rural to urban centers seeking employment which directly means additional pressure on the urban facilities. Apart from mushrooming of urban slums, several problems like communal riots, thefts and other such anti-social activities are committed. The crime rate goes up disturbing the peace and mental strain, causes a change in attitude and social values get eroded. People become more and more self-centered and such an environment is not good for shaping the future generation.
10. There is a direct impact on quality of population due to population explosion. By quality of population we mean the work potential, mental make up, work culture, etc. With ever increasing population, every individual family is unable to maintain the standard of living and this affects the health and mental conditions of people. Automatically these would affect the productivity of workers. The work force is so weak physically and mentally. With pressure of family, the workmen demand for more wages and salaries. They try to earn maximum by carrying out inferior quality work or working in more places with lesser efficiency. The work culture is tampered that every person wants to minimize work and maximize leisure. The effect of all these is the productivity is very low and the country loses.
11. In an agricultural oriented country like India, the increasing population exerts a heavy pressure on limited land resources. With millions depending on agricultural sector, the pressure would be more and this leads to sub-division and fragmentation of land holdings making them unfit for adopting modem methods of cultivation. This affects the productivity of land. Though this is neutralized through scientific methods like using high yielding variety of seeds, application of fertilizers and pesticides, multiple cropping, etc. All these depend on availability of water. With environmental degradation, the monsoon fails and the increasing demand for drinking water, etc., will result in scarcity of water for multiple cropping: Further more frequent use of the same land even with application of fertilizers, would result only in the operation of law of diminishing returns.
Therefore, without controlling population growth it is not possible for any country to achieve rapid economic growth, and maintain it if achieved. For this a suitable population policy is very much needed.
Population policy of government since independence
During the first five year plans, the government was not sufficiently concentrating on a sound population policy. It was merely allotting funds through every five year plan for family planning. From a modest sum of Rs. 65 lakhs during the I Plan, the amount increased to Rs. 5 crores in II Plan, Rs. 25 crores in III Plan, Rs. 277 crores in the IV Plan. With such a serious problem on hand viz., control of population, the amount allocated till the IV Plan was sufficient enough to sustain the family planning programs but not for extending it to the rural areas in a big way. During the V Plan the allocation touched Rs. 409 crores which was increased to Rs. 1,448 crores in the VI Plan, hence, only V Plan onwards, was there any concrete attempt to control the population. Till the IV Plan the government was focusing on the following lines of action to control population: 1. Spreading knowledge of family planning technique. 2. Supply of contraceptives to all in the rural and urban areas. 3. Financial incentives for people who undergo family planning operations. 4. Conducting a large number of camps for sterilization operation for both males and females.
After the lifting of emergency the government seriously considered the following for controlling population: ii) raising the minimum marriageable age of males and females through legislative provisions iii) raising the level of education among the females iv) raising the monetary compensation for sterilization operation especially in the rural areas v) making sterilization operation compulsory for couples with two children etc.
But such coercive tactics failed to yield the fruit, as in most of the cases, the officials were more concerned about the target fixed for them than the public sentiments and reaction.
The VI Plan fixed the target for net reproduction late as one to be achieved by 1996 against the present level of 1.67. The target for sterilization operation, IUD insert ion and CC usage, could not be reached due to the following reasons: absence of infrastructural facilities, political compulsions, cultural values, religious sentiments, high infant mortality rate, etc.
During the VII Plan certain basic understandings about our population as given below made the government to approach the problem from a different angle. i) It was understood that the majority of Indian population is living below the poverty line and it is this group which has a very high birth rate. ii) In a democratic set up it is necessary to set the minimum age for marriage and also the prescription of sterilization operation through legislation. iii) To increase the acceptance of sterilization operation, the infant mortality rate should be brought down. iv) Using other incentive like priority in housing, increase in salary, preference in employment, adult ration for child, etc., as followed by China, which could successfully bring down its birth rate significantly in a decade.
The VU Flan accordingly fixed the following targets :
(Current level given in brackets) i. Population growth rate 1.2% (2.03%) ii. Crude birth rate21/1000 (30.6/1000) iii. Crude death rate 9/1000 (10.3/1000) iv. Infant mortality rate 60/1000 (91/1000)
With these targets, the Plan formulated the Family planning and maternity and child health strategies. Through this the Plan also aimed at reducing the maternal mortality rate. .The family planning programs were re-oriented to make them family welfare programs, thereby giving emphasis on every aspect of the family than on'/ the birth rate and reproduction rate. However, mere was a heed for orientation of everybody concerned in order to achieve that target set. The government on its part made a hefty contribution through plan allocations.
Population policy in the VU Plan :
With the findings of the Census conducted in 1991, the government has decided lo formulate an Action plan on following lines : i. To extend the family welfare services to more areas and improving the quality of service.
ii. To give more autonomy for States to manage these programs so as to avoid the target focused action.
iii. To introduce innovative programs for achieving higher level of family welfare especially among the urban slums.
iv. To identify the districts with birth rate above 39/1000 and develop special programs for these districts.
v. To invite and appreciate the involvement of voluntary and nongovernmental agencies to these programs.
vi. Relating the grants to the village panchayats and the State government for rural development with the achievement in bringing down the birth rate.
vii. To encourage small family concept.
viii. To dispel the son-preference attitude.
ix. Devising schemes for post-retirement period so as to discourage unnecessary issue of children.
x. To improve the political will in implementing all these programs.
With these policy options, one may expect that during the VIII Plan, the rate of growth of population would slow down so as to bring down the net reproduction rate to 1 as targeted already.
Balance of payments position since 1991 and critical evaluation of the New export-import policy 1992 - 1997.
The balance of payments position, which had reached a point of near collapse in June, 1991, slowly stabilized during the course of 1991-92. Although new policies to deal with the situation were quickly formulated by the new government and implemented within a few months the external payments situation took time to stabilize primarily because it had been allowed, to deteriorate to a state of near bankruptcy in June 1991. Foreign currency reserves had declined to $ 1.1. billion despite heavy borrowing from the IMF in 1990-91 and a substantial part of this was held in illiquid deposits which could not have been easily mobilized if needed. International confidence had all but collapsed, commercial borrowings had dried up-and even letters of credit opened by Indian banks were being generally rejected unless accompanied by confirmation by foreign banks.
The strategy for the management of the balance of payments outlined in the Budget for 1991-92 which was presented in July, 1991 relied upon a combination of macro economic stabilization and structural reforms industrial and trade policy. It was recognized that in the medium term, the solution to the balance of payments problem would have to come from a much stronger export performance, but in the shorter run the strategy had to be underpinned by mobilization of external financing from the multilateral agencies and from bilateral donors. Restoration of access to imports through liberalization had to depend initially upon additional financing since the export efforts would take time to show results. Since access to external commercial borrowing was constrained the only other sources of funds were the bilateral and multilateral agencies. Visible support from the multilateral agencies was important for restoring international confidence.
Accordingly, the government negotiated a standby arrangement with the IMF in October, 1991 for $ 2.3 billion over a 20-month period, a Structural Adjustment Loan with the IBRD of S 500 million and a Hydrocarbon Sector Loan with the ADB for $ 250 million. Parallel with the effort to draw on multilateral sources, the government also launched the India Development Bonds aimed at mobilizing NRI sources of funds.
With the assurance of external support through these efforts, there was a gradual stabilization of the balance of payments position in the course of 1991-92. Foreign exchange reserves were restored to more normal levels increasing from $ 1.1 billion in June, 1991 to $ 5.6 billion at the end of March, 1992, The entire amount of drawls from the IMF in 1991-92 with the accretion from India Development Bonds together amounted to an inflow of $ 2.87 billion. This was less than the increase in reserves of $ 4.51 billion from June 1991 to end March, 1992. In effect, the exceptional financing mobilized in 1991-92 was used primarily to build up reserves.
Import restrictions were gradually lifted in the course of 1991-92 as the balance of payments stabilized. By the end of 1991-92 the new Liberalized Exchange Rate Management System introduced in the Budget for 1992-93 eliminated import licensing in most capital goods, raw materials, intermediates and components and introduced a dual exchange rate system with one rate effectively floated in the market. The Budget for 1992-93 also reduced the customs duties in line with declared Government policy in order to make the Indian economy more competitive and gradually exposing Indian industry to external competitive pressure. The trade and exchange rate policy regime for 1992-93 was therefore characterized by major progress in eliminating unnecessary administrative and discretionary controls over foreign trade which were contributing to making our economy uncompetitive.
The year 1992-93 saw a revival of imports to more normal levels. The total value of imports in US $ in the period April-December 1992 increased by 16.5% over the level in the corresponding period of 1991-92. The increase appears large only in comparison with a highly depressed level prevailing in 1991-92. In fact the level of imports in 1992-93 as a whole is expected to be around $ 25 billion which is somewhat lower than the level in 1990-91.
Exports in 1992-93 performed far better than in 1991-92. Total export growth in the period April-December was 3.4% in dollar terms compared with an observed decline of 1.5% in 1991-92, The performance of total exports is depressed by the decline of more than 60% in exports to Russia and other States of the former Soviet Union in 1992-93. The growth of exports to the general currency area in the period April-December was 11.4%. The average growth rate in April-December, 1992 has been adversely affected by a decline in exports of I2.5%! in December, reflecting the disturbed conditions prevailing in that month, figures for January are also likely to be depressed by the riots US $ 19 billion. But it is hoped that the export performance in subsequent months will return to the high growth rates of 15 - 16 per cent observed during September-November.
The current account deficit in 1992-93 is expected to be around $ 7 billion, reflecting the revival of imports to more normal levels. This deficit is being financed through a combination of traditional financing sources and exceptional financing.
However, there are important uncertainties in the balance of payments. The full impact of the disturbances in December, 1992 and January, 1993 on exports and-imports is difficult to assess at this stage. Clearly, the receipts on account of tourism would be less than anticipated. The inflow of NRI deposits has in any case been small this year. The inflow of external assistance is also subject to some uncertainties consequent upon constraints that affect the rate of utilization. A step up in commercial borrowings was, in any case, not envisaged. Finally, there is the uncertainty arising from leads and lags. Interest rates and, exchange rate expectations do affect the timing of receipt of export proceeds and payment of import costs. However, while these uncertainties justify a measure of caution in assessing prospects, the balance of payments in 1991-92 has performed more or less as expected.
New export-import policy 1992 -1997 :
On March 31, 1992, the Government announced a new export-import policy for the period 1992-1997. This policy has the following objectives:
1. To institute the required framework for globalization of the India's foreign trade. 2. To improve the export capabilities of our industry, the policy aims at promoting the productivity, modernization and competitiveness. 3. To facilitate improvement of image of our products in foreign markets, the policy encourages the attainment of high quality in the export products. 4. By allowing liberal access to raw materials, intermediates, components, consumable and capital goods etc., in the international market, the policy wants to achieve higher exports. 5. The policy provides for deregulation to achieve self-reliance so that the domestic producers can improve their efficiency and become competitive internationally. 6. The policy also lays emphasis on research and development as well as technological advancements so that the domestic producers will benefit from globalization. 7. A significant object is to simplify the procedure for exports and imports.
Subsequently, the government announced further modification to the above policy by April 1, 1993. The important features of this modified policy are:
i) The duty-free export benefit given to the Export oriented units and the units in Export Processing Zones is extended to units engaged in agriculture and allied activities provided they export 50% of their total production. ii) The government removed 144 items from the negative list of exports leaving only prohibited items, items requiring license and canalized items. iii) As a step to tap the potential of farm sector, professionals, hotels, travel agents and diagnostic centers, the government extended the Export promotion capital goods scheme to them. iv) For more than 2200 items, standard input-output norms are fixed to enable the issue of license under the duty exemption scheme. v) The criterion for recognizing export houses is now based on the foreign exchange earning to FOB values of physical exports. vi) The procedure relating to export and import has been further simplified. vii) Compensation would be given for unutilized import licenses for duty free license scheme and exam scrip holders.
These provisions in the latest export-import policy would certainly enable India to improve her exports and bring down imports. This has been experienced during the first half of 1994 itself.
Structural composition of national income in India. The limitations of National income estimation in India.
According to the First report of the National Income Committee, "National income estimate measures the volume of commodities and services turned out during a given period, counted without duplication." This means the total volume of goods and services produced in a year in a country is valued in monetary terms to obtain the National income of the country concerned.
Regarding the measurement of National income, it could be done in three different ways depending upon the interpretation of concept of national income. If National income is considered as a flow of goods and services, then the method used is called Product method. If National income is treated as a flow of income then the relevant method of measuring it is called Income method. Alternatively, if National income is treated as a flow of expenditure, the method used is called the Expenditure method. Apart from these traditional methods of measuring National income, one more method is evolved and it is called the Value added method. Let us now look into the contents of each of these methods.
i) Product method: In this method, the value of goods and services produced in an economy during a year is found at the market prices, to obtain the gross national product at market prices. By subtracting indirect taxes and adding subsidies, we obtain the Gross national Product at factor cost. By deducting from Gross national product the depreciation, we obtain the Net national product.
ii) Income method: When we aggregate the income received by various factor services, like rent, wages/salaries, interest and profit we obtain the National income at a factor cost. By deducting depreciation from this we obtain the Net National income at factor cost.
iii) Expenditure method: By classifying expenditure as consumption expenditure and investment expenditure, and then adding them will get is the National income. This could be calculated at market prices or at factor cost as in the other methods.
iv) Value added method : .In all the above methods, there is a possibility of double counting and to avoid this the best method is to sum up only the value added to the product or services at every stage. In that manner only the net accretion in value of a product or service will be taken into account to arrive at the final value of all goods and services produced in a year. This method is by far considered as the best though it bristles with certain problems and-difficulties.
In India we adopt a combination of the product method and income method for measuring National income.
Trend in National income since 1951 :
The growth of National income in India since 1951 can be understood from the Table given below.
RATE OF GROWTH OF NATIONAL PRODUCT-IN INDIA
(Figures in percentage)
|PLAN |ACTUAL |TARGET |
|FIR5T |3.6 |2.1 |
|SECOND |4.0 |4.5 |
|THIRD |2.4 |5.6 |
|FOURTH |3.3 |5.7 |
|FIFTH |5.0 |4.4 |
|SIXTH |5.4 |5.2 |
|SEVENTH |5.7 |5.0 |
|EIGHTH |--- |5.6 |
Analysis of the National income in India has yielded the following trends :
1. There has not been a consistent increase in our National income as revealed by the growth figure given in the table above. Our real national income was going up at an annual average rate of 3.9% while the population was also increasing at an average annual rate of 2.13% Consequently the per capita income increased at an annual rate of only 1.8%
2. It could be observed that the rate of growth declined over the decades. While it was around 3.8% during 50's, it came down to 3.5% during 60's and then further to 3.1% during 70's. I980's witnessed a reversal of the trend by recording 5% per annum. But again in the first three years of 90's the rate came down to 3.5% , A similar movement was also observed in the per capital income.
3. Changes and fluctuations in the growth rate of National income was very nigh between years. The main reason for this is that we continue to depend on uncertain monsoon to succeed every year. A successful monsoj3fi boosts up the rate of growth while an adverse monsoon brings down the rate. In Indian experience, the failure of monsoon is a regular feature and so the growth rate in National income has been declining over the decades.
4. As years rolled, it was observed that the fluctuations in growth of national income also widened. For instance during the first decade the fluctuation was between - 1.7257 and + 8.1568 while it widened in the second decade lying between - 4.7565 and + 9.2071. Fortunately there was negative growth rate in the eighties and the fluctuations were ranging between + 2.2 to + 11.2 but early nineties repeat the earlier performance with the growth rate varying between + 1.5 and + 5.8. The fluctuations widening over the decades clearly indicate that our planned efforts are not really bearing fruits and that we still depend on uncertain monsoon.
5. An interesting observation is that this overall fluctuations over the period is quite consistent with the fluctuations recorded by the primary, secondary and tertiary sectors. In other words, these basic sectors were not free from fluctuations and in a way the fluctuations in them cause the over all fluctuations. Among the sectors, the primary sector understandably recorded wide fluctuations followed by the secondary and then the tertiary sectors. This observation is more confirmed when we study the sectoral contribution.
6. Composition of Net Domestic Product (NDP): The contribution by different sectors to the NDP will vary from country to country and even for a country from time to time depending upon the stage of economic development. It is usual that in the initial stage of development the contribution by primary sector will be very much higher than in the other sectors and over a period this would change. In Indian case also this has become true. For example in the table given below the; contribution of the three sectors underwent a change over a period of four decades.
It would be clear from the table below that the contribution by the tertiary sector is on the increase over the period followed by the secondary sector and then the primary sector. This is because the rate of growth of the tertiary and secondary sectors has been more than double that of the primary sector. The secondary sector which accounted for a higher growth rate till the end of the II Plan started receding and the tertiary sector has retained the lead in growth rate.
1. COMPOSITION OF NET DOMESTIC PRODUCT (In percentage)
|SECTOR |1952-53 to 1955-56 |1985-86 to 1989-90 |1991-92 |
|PRIMARY |56.06 |34.58 |27.00 |
|SECONDARY |15.63 |26.57 |29.00 |
|TERTIARY |28.31 |38.95 |41.30 |
2. When we study the compound growth rate of commodity and non-commodity sectors, we find that the rate of growth is higher in the case of latter. This tendency is welcome because the primary and secondary sectors can only generate limited employment opportunities while the service sector or the tertiary sector or the non-commodity sector has greater potential in respect of employment. With economic development, the share of transport, communication, energy, banking and insurance to the national product would automatically increase as is experienced in India.
3. The study of per capita distribution of GDP in agricultural and non-agricultural sectors indicates that over four decades the per capita distribution is more in the case of non-agricultural sector than the agricultural sector. The reasons for this are that:
a) the growth rate is high in the non-agricultural sector than in the agricultural sector and b) as the population increases, there is no significant shift taking place from the agricultural to non-agricultural sector.
This is clear from the table given below:
PER CAPITA DISTRIBUTION OF GDP
(Amount in Rs.)
|SECTOR |1950-51 |1960-61 |1970-71 |1980-81 |1990-91 |
|AGRICULTURAL |860.83 |956.17 |955.60 |940.48 |1143 |
|NON-AGRICULTURAL |1886.52 |2573.32 |3302.69 |3506.47 |5189 |
4. Share of the rural and urban sector to NDP is also used to understand the composition of NDP. In Indian case, the contribution by the urban sector to NDP is very much higher than that of the rural sector. Similarly the per capita income in the rural and urban sectors in terms of ratio shows that the per capita income was high in the urban sector and low in rural sector. The ratio increased from 1: 208 in 1951 to 1 : 241 in 1970-71. But subsequently it declined because with the increase in population, the size of urban population increased and that of rural population declined. Hence, in 1980-81 the ratio was 1 : 232 and 1 : 246 in 1989-90.
5. The analysis of the share of organized and unorganized sectors in the NDP in terms of the factor income revealed that the share of factor income in the organized sector increased consistently over the last three decades, but that of the unorganized sector remained dormant even in 1990. This is because the size of unorganized sector consisting of agricultural sector, corporate sector and service sector. The share of factor income in the organized and unorganized sector is given in the table below.
SHARE OF ORGANIZED AND UNORGANIZED SECTORS IN NDP (In percentage)
|SECTOR |1960-61 |1970-71 |1979-80 |1989-90 |
|UN-ORGANIZED |74.40 |72.28 |64.81 |63.35 |
|ORGANIZED |25.60 |27.82 |35.15 |36.65 |
6. To study the share of public and private sectors in-the GDP let us look into the table below:
|SECTORS |1960-61 |1970-71 |1980-83 |1990-91 |
|PUBLIC |10.56 |14.49 |19.80 |26.40 |
|PRIVATE |39.34 |85.51 |80.20 |73.60 |
The table above clearly indicates that the share of private sector in GDP remains high and constitutes nearly 75% of GDP even in 1990-91. But the share of private sector has declined from about 90% to about 74% between 1960-61 and 1990-91. On the other hand, with the emphasis on public sector, its share in GDP has shown a consistent increase in the past three decades and it is constituting more than 25% by 1990-91. The reason for the low share of public sector in GDP is mainly because that it started developing late, and that the agricultural sector is mostly in private sector.
Based on the above indicators we may come to a conclusion that over the past four decades, the secondary and tertiary sectors have emerged as important sectors with the tertiary sector occupying the top position. The urban sector is continuing to hold a more important place than the rural sector. The unorganized sector still remains in the predominant position and the public sector is yet to make a significant leap in contribution to GDP.
Limitation of national income estimation in India :
The conceptual confusions associated with national income estimation have not been cleared satisfactorily and so the estimation process is subjected to various interpretations. Apart from these the following limitations are also found in the estimation:
1. The existence of non-monetized sector and the output flowing from it has remained outside the computation of national income. In Indian case, in the agricultural sector the barter system still continues that a sizeable quantity of produce does not enter into the market system at all. For example, the wages paid in kind itself is substantial quantity and it is not included in the valuation process.
2. Lack of data relating to the income of small producers and household enterprises is yet another serious limitation. Most of the households engage in alternative occupation and the income earned through that is never accounted for. For example, the services of cook, household preparations of edible items, etc., are valuable but the income earned through such occupations is never known, similarly in the rural areas, the small producers never maintain details of income, expenditure and other data relating to their production. It is reasonable to expect that the income generated through these sources is substantial and when it is not included in national income the estimate of national income is very much less.
3. Difficulty in differentiating (he economic functions performed is yet another limitation in. the estimation of national income. For example, an agricultural peasant during the season may work in his own field, and also in the farm yard of the neighbour, during the off-season he may work at a match factory, or just rear cattle of others, etc. Then how to classify his income? The usual practice is to classify the income earned under industry origin. but with a sizeable section of the people depending on agricultural sector where the occupation is seasonal, it is very difficult to estimate the income earned from various occupations. 4. Existence of black money and unaccounted money is another major hurdle in the estimation of national income. Of course this problem is experienced by every country. In India the National Institute of Public Finance and Policy h:ts estimated in 1983-84, the size of beck money to be around 18 to 21% of the total income. With every possible increase in this category of income over the period, the estimation of national income is bound to be very much less.
5. The compilation of data for national income estimation is taking place in a very loose manner. Usually the data at the village level are compiled by the village head man who may not collect these data in the scientific way in which it should be collected. Obviously the aggregation of these data will involve lot of inaccuracies. Further there is more than one official agency supplying the data which rarely tally. Another bad practice is to round off the data in an unscientific manner. All these have serious implications on the data base for national income estimation.
On the whole, the national income estimation is subjected to the above limitations. Efforts are being taken at every stage to improve the estimation process, computerization of data, has been started only recently and with tins a reasonable j level of accuracy in the data can be expected. Further centers like Center for Monitoring the Indian Economy have been established and their work is integrated. With these, national income estimation should become satisfactory in future.
PROBLEM OF POVERTY
1. Distinction between absolute and relative poverty. Poverty line in Indian context. The causes for poverty in India and evaluate the various poverty eradication programme.
Absolute poverty is a state in which a person lacks resources even to meet or his family's biological needs,-lives in a condition of isolation with a high degree of insecurity. This condition is likely to be hereditary.
Further the person may neither be educated nor have anyone to care for him and may live in poor or inadequate housing and work in inhuman conditions. Basically such persons may not be able to meet the fundamental costs of living.
Relative poverty is a state in which the position of a person or a family can be f expressed in relation to others in the society, especially in terms of the living and f working conditions. This clearly picturises the inequalities in the society. The poverty of a person or a family is always explained and understood with reference to the average level of the society. Those people who are found to live with low income, less remunerative employment, poor living conditions, etc compared to the average determined for the society are said to be living under poverty.
In Indian context, we examine absolute poverty to understand the extent of poverty and also the causes as well as the eradication programs undertaken by the f government. In order to estimate the poverty and the number of poor people in the country, the concept of poverty line' is used. In defining the poverty line usually three important factors are considered viz., i) minimum nutritional level for subsistence, ii) cost of this minimum diet and iii) per capita consumption expenditure. .While using these factors, care is taken while making inter-year comparison of poverty by using appropriate deflators to neutralize the effect of inflation. Most of the studies on poverty have used the data supplied by the National Sample Survey. But all these studies have been able to make only a rough measure of Indian poverty. Hence, for our purpose we will consider the measure adopted by the Planning commission.
The Planning commission has used the nutritional requirement as the basis for computing the poverty line. According to the Commission, there is a need to define poverty line for rural areas and urban areas separately. Accordingly, interms of calorie requirement per person per day, the Commission fixed 2400 calories for rural areas and 2100 calories for urban areas. In terms of monetary unit, it works out to be Rs. 10,890 for rural areas and Rs. 12,570 for urban areas (at 1991-92 prices).
On this basis the Economic survey 1992-93 estimated the percentage population below the poverty line as shown in the table below :
|AREA |1987-88 |1989-90 |
|RURAL |33.40 |28.20 |
|URBAN |20.10 |19.30 |
|ALL INDIA |29.90 |25.80 |
The estimate of poverty given in the above table by the Planning Commission is contradicted by various studies undertaken by research scholars. For example, while the Planning Commission estimated about 22% points fall in poverty between 1972-73 and 1987-88, Prof. Minhas and others have pointed out that the decline during the above period was only by 12% points.
Another aspect of the poverty estimate is that there is a significant regional difference as well as inter-state difference. For example, in 1988, the percentage population living below the poverty line in different regions is as given below:
|REGION |1970 |1983 |1988 |
|SOUTH |61.0 |46.2 |43.2 |
|EAST |61.8 |57.3 |51.3 |
|CENTRAL |46.9 |40.2 |37.2 |
|WEST |46.1 |38.2 |34.9 |
|NORTH |12.6 |9.8 |8.3 |
Based on the above tables, it could be understood that "the poverty has declined over a period and significantly during the 80's. This is attributed to the following reasons : i. The GNP increased by 5J% during the 80's compared to about 3.5% increase till the 70’s. ii. The poverty eradication programs undertaken by the government has started yielding the fruits. iii. The increasing urbanization has resulted in the increase in income, especially the urban migrants remit sizeable amount of money to their relatives in the rural areas resulting in improved standard of living in rural areas. iv. The spread of education and impact of education together have contributed to the reduction of poverty. v. The development of non-farm activities in the rural areas has also helped to improve the status of the rural poor.
Causes of poverty 1. The ever increasing population: This is one of the basic reasons for poverty, especially the rural poverty. It is well known that the annual addition to population was more than the rate of economic growth. The quality of our population, especially the productivity and health condition, is so poor that population growth merely adds only the size of claimant to the available resources without making any significant contribution to the output.
2. The large scale unemployment is the next factor which is both a cause for poverty as well as the effect of poverty. It is a cause in the sense that when millions of people remain without employment, their contribution to output is nil but they claim a share in the output. When the claimants to the limited output is high, then the per capita availability -is so low which causes poverty. Unemployment is the result of poverty in the sense that when the poor people, mostly unskilled, want employment, they do not get employment Even if they manage to get the employment is purely seasonal and temporary.
3. Another important reason is the under utilization of the available resources. Inspite of technological advancement, scientific improvements, etc., the utilizationis very much far from satisfactory. As a result the total output is less whereas the claimant is more which causes poverty.
4. The growth strategy adopted by the country through Five year plans has not yielded the desired or the targeted results. Most of the schemes of poverty
5. Eradication has touched only a small segment of the population. The agricultural sector is still remaining in the same position that it is unable to contribute significantly through increased production and productivity to our national income.
6. The existence of inequalities in income is yet another reason for poverty. The inequalities are mainly due to the concentration of wealth and property in the hands of a few. As a result the percapita income is very low resulting in poverty.
7. Ecological degradation and deforestation are also causing poverty. The urban poor reed forest based resources mainly wood for fuel purposes. This they obtain by indulging in indiscriminate felling of trees and denudation of forests. This directly affects the earning scope for the rural poor, as they depend mostly on the forest resources and agricultural lands for their livelihood. With the fast denudation of forests, the rural poor become poorer.
8. The distribution of resources in the country is not even and this is evident from the inequalities existing among the states. For example, even in the 90's Orissa remains a backward state while Maharashtra is in the forefront like Punjab, Haryana, Uttar Pradesh, etc. This is one of the reasons for the prevalence of poverty in certain states.
Measures to alleviate poverty 1. The first step towards eradication of poverty is to achieve fast economic growth. It is realized that poverty in India is more due to institutional factors and so there is a need to attack directly poverty through programs aimed at particular group of people. That is why programs like Integrated Rural Development Programme, Jawaharlal Rojgar Yojana, etc have been introduced.
2. The large scale producers have to be oriented towards v/elfare of the community and the small scale industries should be Moro employment generating and help in the removal of unemployment, especial in the rural areas.
3. At the national level, the country should improve the rate of surplus generation by increasing resources mobilization. But this will be difficult when the propensity to save and invest is very low among people and the tax rates are very stiff. This could be achieved by achieving better utilization of resources, using better techniques, improving the technology, etc. All these will help to generate the income in the economy and the percapita income will also go up.
4. With the application of improved technology, use of high yielding variety .seeds, fertilizers and insecticides, it should be possible to increase the production and productivity in the agricultural sector which directly will increase the income of the farmers. This in turn means higher per capita income for the rural folks thereby reducing poverty in the rural areas.
5. It is well known that nearly 70%, of Indian population is depending on agricultural sector and the agricultural sector is completely depending on monsoon, Monsoon is most uncertain that the famous saying is “Indian agricultural is gamble with monsoon.” There is a need to improve the irrigation facility .and relieve the dependence on monsoon so that the agriculturists will have good production and achieve a higher level of productivity with which they can be relieved from poverty.
6. Several other measures like a forestation, massive rural employment generation, improving soil conservation, adopting latest technology in production process, improving the allied occupation to provide alternative employment opportunities for the farmers during the off-season, etc., can certainly bring down the level of rural poverty.
7. As recommended by the World Bank, the rural employment schemes should be more oriented towards women as it is found that in nearly 35% of the rural family women’s’ share in the family income is quite significant. Special schemes could be devised to improve the employment opportunities for women so as to supplement the income of the family with women’s’ earnings.
8. The rural credit system needs review, especially after nearly 25 years after nationalization of banks. The banks should be involved more in the rural schemes and new employment oriented schemes have to be identified and liberal financial assistance should be provided for such schemes so as to help remove poverty in the rural areas.
9. Efforts should be made to discourage conspicuous consumption among the people and encourage them to make productive investment. This, calls for a change in life style of the people and their consumption behaviour. Though it would fake a long time to achieve this, yet steps should be initiated at the earliest in this direction.
10. Encouraging co-operative efforts in various fields, improving and spreading educational opportunities, creating the awareness among the people that the poverty is only a stage and it could be overcome with consistent efforts, devising new schemes targeting specific group and its peculiarities, rigorous implementation of land reform policies, etc are all other measures which would bring down poverty in India.
All the schemes were in operation for quite some time and an evaluation of these schemes has brought out certain deficiencies of them. Efforts have to be taken up to overcome these deficiencies so that these schemes would help to eradicate poverty in India.
i) The first deficiency is that these schemes are weakly integrated with other plans for area development. ii) The community assets created through various schemes has not been employment generating in nature. iii) The welt to do farmers and people in the rural areas are found to be the beneficiaries of the schemes aimed at eradicating poverty. iv) The delay in the implementation of the schemes and the allotment as well as release of funds for these schemes is robbing the expected benefits of these schemes. v) Politicians interfere in the process of identification of the beneficiaries that the fruits of these schemes do not reach the targeted group of people. vi) Failure to provide adequate training to the persons: in-charge of implementing various schemes is also another reason for the schemes not being effective. vii) Poor flow of communication and details about the various schemes to the rural folks is one more reason for the deficiency of these schemes. There is a need to strengthen the publicity for these schemes so that the needy will be benefited.
As has been already stated, the government has introduced various schemes aimed at eradicating poverty, especially in the rural areas, but the above mentioned deficiencies should be viewed seriously so that the efforts to eradicate poverty will start bearing fruits.
Problem of unemployment in India
Unemployment is of different types. Every type of unemployment is found in India. Before we analyse the nature of unemployment, we should understand the types of unemployment
1. Structural unemployment: This is a type of unemployment caused 'mainly by the change in the development strategy adopted by an economy. For example, suppose a country basically agricultural in nature, plans to adopt industrialization as a strategy. This will result in displacement of labour in agriculture and not all of them can be accommodated in the industries. This type of unemployment caused is called Structural unemployment.
2. Cyclical unemployment: Every economy goes through the ups and downs in the process of development. This type of economic fluctuations is studied through the behaviour of business cycles. Hence, during the period of inflation, the unemployment will be less and during the period of depression unemployment will be more. Such type of unemployment is caused mainly because of the deficiency of effective demand. Keynes has discussed this type of unemployment in his theory. Such unemployment is caused due to the economic fluctuations and every country will experience this type of unemployment.
3. Frictional unemployment: This is another type of unemployment which is caused by shift in the productive effort. For example, during war time, workers are absorbed in war-time industries. Once the war is over, these workers are rendered unemployed as the war-time industries and production do not continue. Such an unemployment is called factional unemployment. An economy which is flexible can quickly solve this type of unemployment.
4. Seasonal unemployment: This type of unemployment is very closely linked with the seasonality in production in any sector. For example, in the agricultural sector, during the harvest season, there is heavy demand for labour. All unemployed laborers will get work. But once the harvest season is over, these laborers remain unemployed.
5. Under-employment or disguised unemployment: This is the type of unemployment which is never practically seen, but only experienced. Suppose a job which can be performed by just 10 worker, has in reality has 20 workers, then the excess 10 workers who are not actually required are said lo be under employed or disguised unemployed. In other words, the surplus labour do not make any addition to the output. Technically, their marginal product is zero. Such a situation is called wider-employment or disguised unemployment. In India this is the type of unemployment which is found in large scale in agricultural sector and public sector. Alternatively, when a Post-graduate qualified person is employed as a peon, then he is said to be under employed as his true potential is not really put into use.
6. Educated unemployment: This type of unemployment is found among the educated persons. Though there are different levels of education, at any level, if a qualified person is unemployed, then he adds to the number of educated unemployment.
7. Rural and urban unemployment: Depending upon where there is unemployment, we may classify unemployment as rural an.1 urban unemployment.
TREND IN EMPLOYMENT IN INDIA
When we analyse the growth rate of employment by sex and residence we observe the following trend:
1. The employment on the whole has been growing at the rate of 2.21 per annum during the 15 year period (1972-73 to 1987-88).
2. The rate of growth in urban employment was found to be more than that of the rural employment, the respective rate being 4 per cent and 1.75 per cent. As a result, the share of employment in the total employment had gone from 16% to 22% during the 15 year period studied.
3. It is of interest to note mat unemployment among male and female increased more or less at the same rate and their share in total employment also remained the same over the 15 year period.
4. However, the rate of growth of employment had been declining when we divide the 15 years into three 5 year period. 5. As regards the growth rate of employment in organized and unorganized sectors, it was found that in both the rate of employment was on the decline, though the rate of employment in the unorganized sector was greater than that of the organized sector during the 15 years studied.
6. Among the sub-sectors in the organized sector, the rate of employment was more in public sector than in private sector. While in public sector the rate of employment was growing at the rate of 3% per annum the employment in private sector increased at a lower rate of 0.5% per annum.
7. The study of growth rate of employment in major sectors of our economy indicated that in terms of growth rate of employment the sectors could be listed in the following order: Construction, Electricity, gas and water supply. Mining, Transport, storage and Communication, Manufacturing, Services and Agriculture.
NATURE OF UNEMPLOYMENT IN INDIA
Even before we discuss the extent of unemployment in India, it should be noticed no accurate estimate of the problem is available. This is mainly because of various types of unemployment and lack of data base on unemployment even agencies like Directorate General of Employment and Training or Census or National Sample Survey or the Employment exchanges can give accurate information on unemployment. However, the available estimates could be used to understand the magnitude of this problem.
Looking into the Plan documents one can get the information about the backlog of unemployment at the beginning of each Plan. This is given in the Table below.
BACKLOG OF UNEMPLOYMENT DURING FIVE YEAR PLANS
|PLANS |I |II |III |Annl |VI |VII |
|Back log - at the start of the Plan |3.3 |5.3 |7.3 |9.6 |11.3 |7.8 |
|Addition to the labour force during the |9.0 |11.8 |17.0 |14.0 |32.1 |36.3 |
|Plan | | | | | | |
|Total (1+2) |12.3 |17.1 |24.1 |23.6 |43.4 |44.1 |
|Additional employment |7.0 |10.0 |14.5 |11.0 |35.6 |40.4 |
|generated | | | | | | |
|Back log - at the end of the Plan |5.3 |7.1 |9.6 |12.6 |7.8 |3.7 |
From the Table it could be seen, that the unemployment at the end of every Plan has gone up to the Annual Plans and after that the Backlog had come down during the VI and VII Plans, This implies that efforts taken to generate employment have yielded the desired result, though the entire backlog could not be erased completely.
It may be noticed that this reduction in backlog need not be taken as an indicator of the problem being solved.
It is necessary to study the unemployment sex-wise, and residence status-wise to understand the problem in right perspective. This are being studied below.
The analysis of unemployment rates sex-wise and residence status-wise indicated that:
i) The current daily status unemployment rates was found to decline both in urban and rural areas for both males and females ii) A current weekly status unemployment rate was found to increase for males whereas among the urban females this rate was almost constant while in the case of rural females it was found decline. iii) The usual status of unemployment was found increasing among males and females in both the rural and urban areas.
CAUSES FOR UNEMPLOYMENT
The problem of unemployment in India is caused by various causes. Let us now discuss the main causes for this problem:
1. The first cause for unemployment is the steady increase in population. The rate of population growth is around 2.2% per annum while the rate of employment growth is hardly matching with it. Hence, the unemployment situation worsens with every addition to population.
2. The rate of labour absorption in the organized sector in India is very limited as most of the segments in this sector are already full with labour force. Hence, the best way to absorb the surplus labour is by expanding the small scale units which are highly labour intensive.
3. The low productivity in agricultural sector is another reason for unemployment. With a large scale under-employment and disguised unemployment in the rural sector, there is limited addition to the output. As a result majority of the rural folks remain unemployed and they cannot also be absorbed by the industrial or other sectors as they do not have training.
4. The indiscriminate increases in the number of graduates coming out of the universities and the lack of link between the curriculum and the actual requirement by the industries are the next set of reasons for large scale unemployment among the educated persons.
5. The mushrooming of technical institutions throughout the country is yet another reason for the unemployment among the technicians.
6. The large scale failure and sickness among the small scale units in the country is another reason for unemployment.
7. The failure of several schemes for generating employment is itself a reason for the existence of large unemployment.
8. The lack of co-ordination among various agencies engaged in generating employment also results in unemployment prevailing.
9. The delay in identifying the potential sectors for generating employment has resulted in the building tip of huge backlog of unemployment.
10. The lack of training facilities and the lacunae between the training institutions and employing agencies is another reason for unemployment among the trained persons.
11. The inherent resistance to mobility among the laborers itself is a reason for unemployment For example; laborers do not prefer to go to places where jobs are available even if it amounts to remaining unemployment otherwise.
Solutions to solve the problem of unemployment:
The unemployment problem needs solution at different levels. The solution for this problem at the urban level is different from those at the rural level. Hence, steps are to be taken at both the levels to bring this problem under control. We discuss below the solutions for this problem under urban level and rural level separately.
Suggestions for solving urban unemployment:
1. The foremost step is to make education relevant to the society. Instead of continuing with the purely academic orientation, efforts should be made to spread vocational education.
2. Industries with low capital intensity should be started in large scale so that they can generate more employment. Though the small scale units have come into existence in large scale, yet the failure rate among them is very high. Steps should be taken to minimize this sickness among small scale units so that they can generate employment in large scale and help to solve this decades old problem.
3. The import of technology should be discouraged and the domestic technology should be updated so that it can generate more employment.
4. Industrial units with short gestation period should be encouraged in large scale.
5. Decentralization of units and incentives for location outside the urban limits to industries, would help to relieve the urban unemployment to a large extent.
6. Financial assistance to self-employed persons should be made more liberal that such types of employment will help to minimize the intensity of the unemployment problem.
7. Considering the potential of the service sector, organized and co-coordinated efforts are required to encourage establishment of units in the service sector which can take the load to a large extent.
8. Productivity in industrial sector should be improved that more opportunities arc automatically created.
Solutions for rural unemployment includes the following points : 1. Establishment of small scale units to utilize the locally available resources is one important step. 2. Providing training facilities for the rural folks in various areas will help them to improve their skills so that they can get employment in various sectors. 3. Extension of rural oriented jobs will also help to solve the problem. 4. Large irrigation schemes with excellent capacity to generate large scale employment should be started 5. Community development projects should be initiated with guidance to effectively tap the rural man power. 6. Several agricultural oriented small units like dairy farm, poultry farm, beekeeping, etc., should be set up in large scale so as to provide off-season employment and also supplement agricultural income. 7. Spreading vocational education among the rural folks will also help them to improve their skills with which they can get employment. 8. Liberal financial assistance, managerial and technical guidance will go a long way to minimize rural unemployment. 9. Effectively monitoring the rural employment schemes to prevent malpractice and wrong diversion of funds will, help in realizing the objectives of these rural employment schemes arid projects. 10. Establishing links with the urban market to ensure ready market for the products from the rural areas will help to ease the unemployment among the self-employed rural folks,
The problem of rural unemployment Measures to solve this problem
The agricultural sector offers livelihood for millions of people in India. One segment of these dependents is the agricultural laborers. There is no parallel to the sufferings of these agricultural laborers. This is a unique group of laborers with certain peculiar characteristics. Infact it is because of these peculiarities of agricultural laborers that they remain always in object poverty.
One of the peculiarities is that these agricultural laborers remain unorganized. Unlike the laborers in industrial sector, the agricultural laborers have no opportunity to come together. They remain independent that once a laborer gets the work on a day he does not bother about others. When he remains unemployed no other laborer takes any interest or shows any concern. Being illiterate these laborers have not understood the importance of collective bargaining.
Another peculiarity of the agricultural laborers is that they mostly remain unskilled. This is because of their nature of occupation, which is seasonal and mostly temporary. Further there is no specific work that any laborer concentrates and every laborer is prepared to do any type of work connected with cultivation. Hence, no specialization or skill is acquired by them. The extent of illiteracy among them also stands in their way of improving their skill through training.
The agricultural laborers are highly migratory in nature unlike the industrial workers who are more stable in their jobs. This is a peculiarity that could be found only with agricultural laborers. The nature of their occupation is such, that these agricultural laborers get temporary job wherever they go. Being unskilled they go in search of job and accept any offered to them. Further, unlike the industrial workers who do more specialized and specific work, the agricultural laborers have several, odd jobs that they need not stick on to a particular job or employer for ever. It is because of this migratory nature of their work, that they are unable to command any remunerative reward for their work and get organized.
A very important peculiarity of the agricultural laborers is that their employers in most of the circumstances also are poor and so they do not offer remunerative wages. Further the employer and his family members also involve themselves in every work along with the hired workers. This results in very close contact between the agricultural laborers and their employers. Till very recently, there is no codified rule or regulation for protecting the interest of the agricultural laborers. In the case of industrial workers, several legislation are enacted at various points of time to protect their interest. In the absence of such well defined rules and regulations, agricultural laborers are subjected to various types of exploitations and they are denied of their dues. Further these workers have no appellate authorities to appeal and get their grievances redressed. Mostly, the disputes relating to agricultural laborers are settled at the village level where the money power is found to be final. In other words, the rich farmers and landlords always decide cases against the interest of the workers and the latter also do not react to such one-sided judgments, lest they should remain unemployed for ever.
With all the above peculiarities explained it is not a surprise that the agricultural laborers lead a .life of misery. This is clearer when we study their economic condition.
i) Majority of the agricultural laborers do not own any land. Even those owning land, the average size of landholding is just 1.33 acre.
ii) The employment that the laborers get is temporary and purely seasonal. It is well known that on an average an agricultural worker gets employment only for about 4 months per year and this too not at one stretch. Obviously, the laborers borrow heavily and remain in debts forever.
iii) With no fixed hours of work and regular wages, these laborers lead a life of penury and they are never able to balance their income and expenditure. It is estimated that more than 52% of the agricultural workers are in debts which range between Rs. 244 in West Bengal and Rs. 1808 in Rajasthan. Inspite of the minimum wages legislation, the wages of the laborers remain abysmally low as in most of the places the legislation has no relevance. Further, the agricultural wages do not go up on par with the industrial wages due to the absence of collective bargaining, exploitation by landlords, illiteracy of laborer, etc.
iv) A very significant feature of the agricultural laborers is that most of them come under ‘bonded laborers.’ This means, when a laborer is unable lo meet his family expenditure with his meager income, he borrows from the money lenders or landlords at very high rate of interest. The repayment does not arise with his income level. Hence, the entire family is indebted to the money lender or the landlord, who uses these laborers through generation for cultivation and other purposes. This if, how the agricultural laborers families become bonded laborers.
v) With very poor economic back ground, the agricultural laborers lead a life of misery. Naturally, their productivity is very low. This affects not only their ability to command better wages, but also the country with lesser productivity in the sector.
So far we have discussed the peculiarities and the economic conditions of agricultural laborers. What are the reasons for this? The causes; for the poor position of the agricultural workers are as follows:
1. The excessive growth of population is the basic reason for this condition of agricultural laborers. With sizeable addition every year, the dependence on agricultural sector increases which in turn increases the unemployment. As a result the laborers arc prepared to work even for very low wages. The employment that they get is not permanent and purely seasonal. They migrate from place to place in search of good employment but not permanent employment. With large scale unemployment, they lead a poor life and they have very little strength to be productive. Another outcome of this dependence on land is indebtedness.
2. It is well known that the agricultural laborers are paid poor wages and the wages are paid even today in kind. This affects the purchasing power or the capacity of the workers. Immediately after the harvest, when the laborers are paid their wages in terms of the crop, these laborers try to dispose of this in the market, or the village shops and they realize lesser money value much less than what they would get if they are paid in cash. Hence even if the agricultural laborers get their wages", their purchasing power is relatively low.
3. The tenure of employment is highly uncertain in the case of agricultural workers. In the absence of any rule or regulation the employment of laborers is subjected only to the personal likes and dislikes of the employer. They are exploited to the maximum extent by the land lords. There is no bargaining power in the absence of any organization to protect their interest. This in turn has encouraged bonded laborer system. The laborer? Always live in poverty and in the absence of alternative occupation work under suppressing conditions. This affects their productivity as well as initiative to get organized. They remain unskilled being satisfied with what they get.
4. One more important reason for the pathetic condition of the agricultural laborers is that they do not get any protection from the government also. Whatever legislation are there, they all only help the powerful landlords who are able to circumvent the legislation finding loopholes. Further, State is a silent spectator to the exploitations of the laborers, as without the aggrieved protesting, there is no scope for the government to intervene. The poor laborers also do not have any other alternative source of income. Another problem is even if the government is able to relieve the bonded laborers from their bondage; the expenditure on their rehabilitation is very huge that States hesitate to accept this burden. Once the laborers are free to work, they do not get job as they mostly are unskilled. There is also no scope for accommodating, them in any other productive sector as they do not possess any other skill. Assuming that the government is able to allot them land so that they can cultivate it and survive, these laborers do not have the wherewithal to use the land and survive. In several cases, these laborers who are given land, are found to pledge the land with the money lenders and once again remain agricultural laborers.
Hence, when we consider the above explanation, we find that the agricultural laborers have no scope for leading a normal life. However, we may suggest the following ideas with which their problems may be solved at least to some extent. The National Commission on Rural Labour has also made certain recommendations to improve the position of these laborers. Let us now discuss these in detail.
1. On its part the government has passed the Minimum Wages Act to ensure that the agricultural laborers are not exploited. While the Act has provisions to pay minimum wages, it has no teeth. In other words, though the Act has been passed, it remains ineffective, in the sense that the government is not able to enforce this Act. The main reason for this is that agricultural laborers are highly unorganized unlike the industrial workers. In the absence of unions, the provisions of this Act are not effectively implemented. Further the laborers are in debts and in certain cases these debts have been incurred in the past by their forefathers. They do not come forward to rise against their employers for fear of losing their occupation. Hence, mere passing of Minimum Wages Act would not help the workers, unless the government follows it up with measures for effective implementation.
2. In order to protect the interests of agricultural workers, the government has launched several special programs like Small Farmers Development Agency, and Marginal Farmers and Agricultural Laborers Development Agency. These are specific programs to protect a particular group of laborers falling in small farmers, marginal farmers and agricultural laborers category. These programs are implemented to start with in certain areas so that slowly they could be extended to other areas. In the past the government launched community development programs to protect the weaker sections in the agricultural sector. With such programs, the benefits ma^ flow to the target group, but there is a need to extend these programs to others in other areas and also to come up with corrective steps wherever these programs do not reach the targeted group.
3. Another important step taken to mitigate the condition of the agricultural workers is land reclamation and settlement. The government as well as service organizations are engaged in the process of reclaiming lands from the big farmers .and rich land lords. These land are pooled and then* redistributed among the agricultural- workers and landless peasants. Bhoodan movement was started by Vinoba Bhave mainly to encourage philanthropic land lords to donate voluntarily lands which were redistributed among the landless peasants and workers. These efforts met with very little success and the lands mobilized in this way either were found to be not fit for cultivation or in litigation. Further there were several problems in the redistribution process. For instance, proving die identity and domiciles bf agricultural laborers were main problems. In several cases after the lands were redistributed, the laborers either retained the lands uncultivated for want of funds for cultivation or pledged them for raising funds for running their families. Hence, there is an urgent need to attend to this problem of reclamation and resettlement and eliminate all the obstacles and hurdles in the process.
4. Several new rural employment programs have been launched by the government-at different points of time. Certainly these programs have helped to bring down the problem of unemployment in the rural areas and divert the surplus manpower in the agricultural field to the of her closely related occupations. These programs range from laying of roads to minor irrigation, canal construction, soil conservation, social forestry, etc. As lakhs of people are involved in these programs, to some extent there is scope for using the idle manpower in the rural areas. However, these schemes themselves cannot eradicate poverty or unemployment in the run areas. Apart from the shortage of funds for implementing such schemes the government has to monitor several such schemes at the same time which adds to the administrative burden of the government. Possibility of making the local rural agencies responsible for the administration and operation of these schemes would help to make the benefits flowing from such schemes to reach the targeted group.
5. A very significant improvement in this connection is the passing of The Bonded Labour System (Abolition) Act, 1976. This Act has completely liberated all the bonded laborers at one stroke. But the effectiveness of this Act is still in doubt, because laborers themselves have preferred to stay with the landlords or their employers for fear of losing their livelihood and the difficulty for the government to find them alternative employment. Hence, Inspite of this Act, the bonded labour system is still found in several parts of the country. The government should now seriously think of implementing this legislation and simultaneously create agencies which will arrange for the rehabilitation of the released bonded laborers. The contribution of the voluntary organizations can also be invited as government alone cannot attend to this task. As a step towards rehabilitation these agencies can train the displaced bonded laborers in simple works like printing press, book binding, stitching, carpentry, etc., so that the released laborers can start with a new occupation instead of once again coming into the fold of agricultural occupations.
6. Another positive step in this direction has been the Central government coming out with the insurance scheme for ails-the agricultural laborers. The premium of Rs. 10 per year is paid by the government and the insurance cover is for Rs. 1000. Every head of a family is insured, and this is a small beginning. This scheme should be slowly extended so that the family of agricultural laborers will have some tort of protection after the death of bread winner.
7. With the establishment of the National Backward Classes Finance and Development Corporation recently, the government has shown its determination to attend to the problems of the poor and downtrodden agricultural laborers. This Corporation will help to generate self-employment' opportunities, provide concession in finance and assist to improve the technical skill of laborers belonging to Backward Class.
8. A major development in alleviating the problems of agricultural laborers is the setting up of the National Commission on Rural Labour by the government, which submitted its report in July, 1991. The Commission has gone into the depth of the conditions of the small fanners, marginal farmers and the agricultural laborers and made a number of .recommendations. Basically the Commission felt that the level of living of the agricultural laborers should be improved and they should be involved in the development process.
In this connection the following are the recommendations made by the Commission: i) Free and compulsory education for all children in the rural areas upto the age of 14. ii) Prohibition of child labour in every form in any industry. iii) To provide collateral - free loans to women, a separate National Credit Fund has to be set up from which loans could be given to women. iv) Fixation of minimum wages as Rs. 20 per day with a provision to change it by linking the wages with Consumer Price Index. v) Provision of liberalized credit to laborers through co-operative banks. These suggestions are being examined by the State governments and the Central government and when they are accepted, then we may expect the condition of the agricultural laborers to improve.
THE INFLATIONARY TREND IN INDIA AND THE STEPS TAKEN BY THE GOVERNMENT OF INDIA TO CONTROL INFLATION IN INDIA.
Immediately after independence, the inflationary pressure was controlled by the government by taking the following measures:
1. The government imposed new taxes and increased the rate of old taxes to absorb the surplus purchasing power in the hands of the people. 2. The government also simultaneously reduced the money supply. 3. The public expenditure was also reduced to some extent. 4. The government announcement of increase in bank rate from 3 to 31/2 per cent in November, 1951 had a good impact. 5. Government also simultaneously took several steps to increase the volume of production. In spite of these efforts during the period five year plans the inflationary pressure continued.
During the I Plan period in spite of the increase in agricultural and industrial output, the inflation set in mainly because of the failure of monsoon in 1955 and a heavy dose of deficit finance to the tune of Rs. 420 crores. In the II Plan, the increases in prices of ail commodities continued to be experienced. There was very limited success on the control inflation. However, the government could resort to a lower level of deficit finance to the tune of Rs. 948 crores against a target of Rs. 1200 crores. The III Plan witnessed further spiraling up of prices. During this plan several factors contributed towards the inflationary pressure. Specifically the Chinese aggression, increased money supply, increase in government expenditure and acute shortage of foreign exchange fuelled the inflation. The actual deficit finance was Rs. 1133 crores much above the provision of Rs. 550 crores. The reliance on deficit financing continued during the annual plans the government resorted to nearly Rs. 682 crores of deficit financing. The IV Plan period witnessed some efforts on the part of the government to bring down the inflationary pressure. For instance, the government decided to finance its public expenditure through non-inflationary means as far as possible, the bank rate was raised from 6 to 7% The cash reserve ratio was jacked up from 3 to 5%. The minimum rate of interest to be charged by the commercial banks on their loans and advances was fixed at 10% But all these steps failed to bring the desired result as the government resorted to a huge dose of deficit financing to the tune of Rs. 2150 crores against the original target of Rs. 850 crores. During the V Plan period there was no let up on the price front. The inflation rate was so alarming that the government had to introduce several measures. Through several ordinances, the government froze all profits and wages at current levels and through the third ordinance, the compulsory deposit scheme for the income tax payers was introduced. So prices slowly started declining. By March, 1976 the price level in India rose by 11 % To control this high rate of inflation, the government resorted to supply management policies. It curbed further increase in money supply and the effort was to increase the supply of wage goods. But the policies failed because the government gave a greater emphasis on controlling credit rather than controlling money supply. During the VI Plan the deficit finance was to the tune of Rs. 5000 crores and so the inflationary pressure continued to build up. the government came up with its anti-inflationary policy by laying emphasis on: increasing the production, better capacity utilization, imports of essential commodities in short supply, regulated exports of those needed domestically, curbing the activities of hoarders and black marketers, constant monitoring of the prices of essential good and making permanent the Compulsory Deposit scheme and enhancing the rate of this deposit. The RBI increased the Bank rate from 9 to 10% and it also increased the CRR to 7% from 6% and the Statutory liquidity ratio from 34% to 35% It raised the minimum margin for the food credit to 10% inspite of all these tasks the inflationary pressure not only continued but became more aggravated. During the VII Plan period also the government continued with most of the above mentioned measures with greater seriousness. But even at the end of the VII Plan period the inflation rate was hovering above 10% which taken is really high. It is to be noted that there is nothing wrong with the measures taken up by the government of India to curb inflation in India. The main problem is the implementation of these measures. In practice there is no co-operation from the public and other financial institutions especially in the unorganized sector. As a result all the efforts of the RBI are nullified. Large scales smuggling, hoarding, black marketing, etc continue to take place in the economy without any check. Further large scales tax evasion and existence of black money and the working of the parallel economy, etc., have also posed serious challenges to the effective implementation of the policies of the government. On its part the government is unable to brig down the size of deficit finance due to its commitment to the welfare activities. Hence, the time has come to take a drastic decision in the interest of economic stability to put an end to all the evils nd evil practices in the economy.
THE PRICE MOVEMENTS IN INDIA SINCE INDEPENDENCE AND CAUSES FOR RISE IN PRICE IN INDIA
Price movements in a country can be analyzed only when the wholesale price index is available. In India, though this wholesale price index was computed after independence, yet the price quotations were not complete as they did not include all the commodities. Further the government had been changing the base year frequently with an anxiety to prevent people from really comparing the purchasing power over a period of time. Hence, in India the base year originally was 1950-51, which was changed to 1960-61 and then to 1970-71 and finally to 1980-81.
Of course, now the wholesale price index is more comprehensive as it includes almost all the commodities traded. We will discuss the price movements in four phases: phase I : 1951 to 1971, Phase II : 1971-1980, Phase III : 1981-1990 Phase IV : l990’s.
Phase I (1951-1971) :
In this phase, roughly we study price movements through the first three five year plans and the annual plans. During the I Plan, the price movements were very much less and the wholesale price index was 99 (base year 1952-53 = 100). As regards the food articles, the price index was hovering around 90 which indicated a very comfortable position during this Plan. But encouraged by this trend, the government undertook various new projects by resorting to deficit financing. The result of this was that during the II Plan the price level went up by 20 per cent. The price position worsened during the III Plan as this was the time when there was Chinese aggression and Pakistan invasion. As a consequence the defence budget went up leading to soaring up of prices. For instance, between 1961 and 1966, the prices of foodstuffs went up by 40 per cent, the price of cereals was up by 45 per cent and in the case of pulses it went up by 70 per cent. There was inflationary spiral. Fortunately in 1967-68, with the sudden spurt in food production (Green Revolution), the price level came down and in 1968-69, there was a marginal fall in prices by one percent.
Phase II (1971-1980) :
This is a very crucial period as far as Indian price situation is concerned. It was during this period that India witnessed a very steep rise in price level. Though the rate of increase in price level was very much less (around 5 to 7 per cent) in the first three years of the III Plan, it soared up by 19 points in the fourth year and by 47 points by the last year The reasons for this were: heavy influx of refugees from Bangladesh and the expenses incurred on them, the failure of the kharif crop in 1972-73, the failure of the take over of the wholesale trade in wheat and the rise in crude oil price. For the first time in India, the wholesale price index touched a peak of 331 in September, .1974. The government initiated a number of measures like compulsory deposit scheme, nabbing of black marketers, smugglers and hoarders invoking the provisions of the Maintenance of Internal Security Act (MISA), etc., which together resulted in the decline" in the price level. The wholesale price index stood at 309 by March, 1975 and then further dropped to 283 by March, 1976. Though immediately after the pronouncement of-emergency the price level declined, it once again started increasing at the September, 1974 level by March, 1977. After the emergency period, the Janata government came to power and following various policies it succeeded in arresting the price rise. It could maintain the price at 185 points applying the demand - supply management, higher buffer stock, high foreign exchange reserve, increased food production as well as industrial production. But the inflationary budget of 1979, contributed to the reversal of trend in price that by January 1980, the wholesale price index stood at 234.
Phase III (1980-1990)
In January, 1980, the Congress (I) government came back to power and it kept controlling inflation as the prime objective. The government tried to achieve this through demand and supply management. All the anti-inflationary policies were brought in to contain inflation. The temporary price stability found by the end of 70's did not continue as the inflationary spiral resulted in the alround increase in prices. The whole sale price index increased from 218 in 1979-80 to 338 by 1984-85. The demand side adjustments announced by the government included altering the cash reserve ratio of commercial banks, ceiling on lending by commercial banks, ban on recruitment by government, reduction in the money supply, etc. On the demand side, the government attempted to increase the supply of goods and services using short term and long term measures. With all these measures the annual increase in price was around 7 to 8 per cent.
However during the later part of 80's, the situation did not continue to be the same. The wholesale price index which came down to 125 by 1985-86 started increasing and by 1989-90 it was around 166. The annual rate of inflation which was just 4.7 per cent by 1985-86, shot up to 8.1 per cent by 1989-90. The main reasons for this was the serious shortfall in the production of essential agricultural goods like edible oils, cotton, pulses, etc. Government resorted to tightening of selective credit control policies, and also used the supply management side by side. Specifically, it used the buffer stock built up over the previous years effectively and even imported edible oils, introduced employment schemes, relief programs, etc.
Phase IV (po.st-1990) :
This phase was marked by hefty increase in price right from 1990. Several reasons could be attributed to this viz.: high administered prices, gulf-surcharge on petroleum products, high dose of deficit financing, high indirect taxes, etc. The combined effect of all these was that the wholesale price index stood at 180 by 1990-91 and increased to 229 by 1992-93. The annual rate of inflation, however, came down from 12.1 per cent in 1990-91 to 13.6 per cent in 1991-92 and then to 9.9 in 1992-93. Having experienced a decline in price rise, the government announced reduction of excise duties, customs duties, etc., in 1993-94 budget to achieve a further fall in price by 1993-94.
DEMAND-PULL FACTORS THAT CAUSED INFLATION IN INDIA.
The demand-pull factors which caused inflation in India are : Demand-pull factors:
The demand-pull factors are responsible for increase in price, because, when the demand for goods and services increase at a higher rate than the rate at which the supply of these goods and services increase, there will be shortage which results in price rise. Under demand-pull factors we may mention the following factors to be very important:
a) Heavy government expenditure :
The administrative expenditure of the Central and State governments increase from a mere Rs. 740 crores in 1950-51 to nearly Rs. 2 lakhs by 1991-92. Added to this was the increase in; government investment on several welfare schemes and programs from Rs. 1000 crores in 1950 to Rs. 50000 crores by 1990. Apart from the plan expenditure, the non-plan expenditure of the government increased at a greater speed. With higher government expenditure, more money entered into circulation of the economy which fuelled inflation.
b) Deficit financing:
Deficit financing-is one basic reason for the drag in our development and the inflation prevailing in the economy. The justification that in the initial stage of development every country is bound to have deficit financing is no longer reasonable in Indian case, as the time has come that our Five year plans should lead us to generate more resources from other sources instead of depending too much on deficit financing. The amount of deficit financing has increased from Rs. 330 crores during the I Five year plan to a huge amount of Rs. 20,000 crores during the VIII plan. This implies that our planners have started using deficit financing as the main source of funds for meeting our plan expenditure. It should be noticed, that over the five year plan period since I plan there has been an increasing reliance on deficit financing that the peak is found during the VII Plan. With consistent efforts, the planners are hoping to bring down this quantum of deficit financing to around Rs. 20,000 crores during the VIII Plan. Whether this is going to be achieved or not can be found out only in future.
c) Existence of black money :
One of the reasons for the existence of too much money supply in the economy is the circulation of black money in -the economy in very large quantity. There is no reliable estimate of the extent of black money in circulation in India. According to one estimate the quantum is about the same size as that of the legal tender money. The large scale tax evasion, tax avoidance, black marketing, hoarding, corruption, buying and selling of real estate in the urban centers, etc., are the reasons for the existence of black money. While the source of this type of money cannot be easily found out, it is very difficult to bring to book those who are indulging in such illegal activity. With uncontrollable volume of black money in circulation, the price level continues to rise, and any measure to control the price will not be effective. So inflation will continue to remain in the economy.
d) Population explosion :
Ever since independence the growth of population has eaten away all the fruits of development. With the annual rate of population increase hovering above 2 per cent, the scarcity for foodstuffs and essential commodities will persist. As a result the prices continue to spiral up inspite of efforts to check the price level. Basically the size of population will work on (he demand forces and so the available quantity of output is proved to be inadequate always. As a result the prices continue to soar.
THE COST-PUSH FACTORS CAUSED INFLATION IN INDIA.
There are factors which act on the cost of production. These factors push the cost upwards and once the cost of production is high, the producers and manufacturers have to raise the price to recover the cost of production. As a result the price level will go up. There are several reasons for the operation of the cost-push factors. They are:
a. Erratic fluctuations in the supply of goods
In Indian situation, as agriculture is a gamble with the monsoon, die food production depends on the successful monsoon. Except a few years, there had been failure of monsoon. The shortage in agricultural output affects the supply of not only the food grains but also the raw materials to agro-based industries. Added to this are the power shortage, fuel shortage, labour problems, strikes and lockouts, transport bottlenecks, etc., The end result is that both the agriculturists and the industrialists experience rise in cost of production. They recover this by fixing a higher price for the finished product The position is worsened by the operations of the black marketers, smugglers, hoarderers, middlemen and others.
b. Imposition of heavy taxes
Taxation in India is itself a reason for the inflationary situation. There has been all-round heavy taxation on individuals, corporate bodies as well as commodities. With higher taxes, the cost of production only increases leading to rise in price. Whenever a fresh tax is imposed, the manufacturers simply pass this on to the consumers by raising the price more than the amount of tax. Added to this is the heavy allocation of funds by the government to public sector which added a precious little to the coffers of the government. Considering the investment in the public sector units, the return from them is meager that even the available funds are fritter away that the government simply imposes new levies to augment funds. This in turn affects the cost and the price.
c. Administered prices
In a socialist economy like ours, the market forces are intervened by the government in terms of administered price policy. As per this policy the government stipulates the minimum price for most of the essential commodities and raw materials. For example the railways have been revising their freight rate and passenger fare that the cost of transportation is going up adding significantly to the cost of production and in turn the price level. In the case of steel, cement, coal, etc., the government fixes a higher price which inflates the cost of production in almost every sector indirectly contributing to the inflationary spiral.
d. Rising oil price
The heavy import bill on petroleum crude itself makes a significant addition to our price level. The international price has been going up and to meet the import commitment, the government raises the internal price of petrol, diesel and petroleum products. One argument given for the stiff rise in the price of these products is that it would discourage the consumption of these products. But the increasing sale of two wheelers, three wheelers, cars, trucks and Lorries prove that there has infact been an increasing demand for oil. Further the major consumer of oil is government. As a result the overall rise in price cannot be controlled with any measure. Any change in international oil price immediately affects the domestic price of oil. For instance in 1980 alone, the oil price went up by 130 per cent in the international market followed suit by the domestic price. The gulf surcharge which was imposed also caused the rise in price of petroleum products. On the whole the fuel price adds fuel to fire.
METHODS OF CONTROLLING INFLATION
Inflation has to be controlled, otherwise the extent of damage done to the economy will be something substantial and the economy would take a long time to recover from the effects of inflation. In this direction of control of inflation, the following are the theoretical measures available. These measures could be classified into three groups viz., 1. Monetary measures, 2. Fiscal measures and 3. Other measures.
I. MONETARY MEASURES :
Monetary measures are steps taken by the Central bank of a country as the head of the monetary system. These measures are usually refereed to as the, quantitative credit controls and qualitative credit controls. The former include bank rate, open market operations and the variable reserve ratio. The, latter include margin requirements, moral suasion, direct action, control through directives, Consumer credit regulation or rationing, publicity, etc.
a) Quantitative credit controls : Bank rate is the first, measure to curb credit creation activity of the commercial banks, as during inflationary period the volume of money supply has to be reduced. Bank rate is the rate at which the central bank of a country re-discounts the bills already discounted by the commercial banks. When the central bank wants to control credit creation by commercial banks, it would simply increase the bank rate. Correspondingly the commercial banks would increase the discount rate which acts as a disincentive for the businessmen and others to approach the commercial banks for discounting their bills. However, the success of this policy depends on the co-operation of the commercial banks. Open market operations are another quantitative credit control measure. In this, the central bank would buy or sell securities in the open market which are sold or purchased by the commercial banks for cash. During inflationary situation, the central bank would sell securities; in the open market, and when the commercial banks purchase them, for cash then capacity of the commercial banks to create credit will be very much restricted With less credit created, the money supply in the economy will come down bringing down the pressure of inflation. The third: policy is variable cash reserve ration. As per statute, every commercial bank should maintain a certain percentage of its total deposits in terms of cash reserve with the central bank. The percentage of reserve to be maintained, called as cash reserve ratio, is determined by the central bank. By increasing the cash reserve requirement, the central bank can reduce the cash available with the commercial hanks thereby controlling their capacity to create credit.
b) Qualitative credit controls : Qualitative credit-controls aim at channelising the available funds in the most productive uses or applications. In terms of various measures the central bank can govern the credit policies of the commercial banks. The first of these control measures is the margin requirements. According to this policy, the central bank specifies the amount of margin that each commercial bank should maintain while lending on securities to the common public. By increasing the margin requirements, the central bank can discourage borrowings on certain securities. If the central bank wants to help the priority sector it can accordingly instruct the commercial banks to maintain a lower margin on securities offered for borrowing for priority purposes. Moral suasion refers to the persuasive technique adopted by the central bank with; the commercial banks in making the later understand the need to pursue a particular type of credit control policy. Though the central bank is empowered with statutory powers to regulate the commercial banks, yet the central bank believes persuasive policies rather than using its statutory authority. Central bank can also issue directives to the commercial banks outlining the details of the objectives of the various credit control policies, the need to follow them, the expected result of them, etc. This will help the commercial banks to understand and co-operate with the central bank in times of financial crisis. Central bank also regulates the flow of credit towards consumer requirements. This called as regulation of consumer credit The central bank can even specify the types of consumer credit which could be encouraged and those that could be discouraged. On receipt of directions from the central bank, the commercial bank act accordingly, either by liberalizing consumer credit or restricting consumer credit. Direct action may also be taken by the central bank to control the commercial banks. This can range between issuing warning to cancellation of license. But in practice central bank never resorts to this measure as all the commercial banks invariably follow the policies of the central bank.
2. FISCAL MEASURES
By fiscal measures we refer to the steps taken by the head of the fiscal system viz., the government. The fiscal measures include .
a) government expenditure b) taxation c) public borrowing and d) debt management e) Over valuation of currency.
a) Government expenditure : This is also known as public expenditure. It is well known that in a socialist country like India, the government undertakes several activities ranging from defence to welfare activities. All these mean that government pumps in a lot of money into the economy which ultimately adds to the money supply and fuel inflation. During the period of inflation, the money supply is high, the purchasing power of the people is also high and so the private consumption and investment expenditures will be of the high order. If the government also continues to invest heavily then the inflationary spiral will be worsening. To avoid this the government should slowly reduce its expenditure during inflation so that at least to that extent, the money supply in the economy will be reduced. But in practice such a policy is not at all possible as with ever rising prices, the poor and downtrodden needs protection from the inflation and this will be lost if the government reduces its expenditure. However, this is considered as one of the measures to control inflation by combining it with the other measures.
b) Taxation: Taxation is a well conceived measure against inflation. Under this the government will be able to achieve two purposes at the same time. Firstly, it will be able to augment the revenue of the government and secondly it will be able to curb unwanted consumption expenditure of the people by bringing down their purchasing power and disposable income. During inflation the government should increase the taxes so that it can achieve both the purposes mentioned above. Further the government can also design its tax policy in such a way that the lax burden is more on the rich and less on the poor. This is achieved by imposing heavy direct taxes which will directly affect the rich people. By imposing moderate indirect taxes, the government will be able to collect more from those who spend more. The rich as well as poor will be contributing towards the exchequer. However, it is often said that imposition of indirect taxes will only add to the increase in prices, especially when the producers shift the burden of tax to the consumers. But the object of indirect taxes is to curb the consumption of unwanted commodities. Hence, with the direct and indirect axes, the government should be in a position to redistribute the income in the economy which is a must during inflationary period.
c) Public borrowing : Public borrowing or public debt is one more method of controlling inflation. According to this policy, the government aims at siphoning-off the excess purchasing power in the economy by encouraging people to lead to the government. This can be done either making lending voluntary or compulsory. Under the voluntary lending, the government educates the people of the need to lend to the government especially during the inflationary period. However, sometimes compulsory lending is to be resorted to because, the people may not respond to the calls of the government. Compulsory lending can be i different forms. But it is often said that such compulsory lending will affect only the salaried class and not the rich people. In that case, the salaried class is worst affected during inflation and making them to surrender whatever little surplus that they have with them amounts to double taxing them. Further compulsory saving or lending may also encourage people to find ways of evading Such policies. In general, economists have favored only the voluntary saving or lending by the public.
d) Debt management : Debt management refers to the way in which the , government deals with the retirement or repayment of the public debt. This has to be done in such a way that brings down the money supply in the economy. So when there is inflation, the government should retire or refund the debt to the commercial banks by encashing the securities only out of the budget surplus. This will help to curb the commercial banks' ability to create credit. But a major problem with this policy is that during inflation budgetary surplus is not so easily created. Alternatively, the central bank can retire the debt by sales of bank ineligible bonds to non-bank investors like insurance companies, savings bank individuals, etc. This will take away the spend-able money from the public thereby reducing the inflationary pressure. But even this method can fail as the non-bank investors can always refuse to exchange the spend-able money for these bonds.
e) Overvaluation of currency : This is another method used to control inflationary pressure in an economy. According to this method, the value of the currency is revised upwards so that exports will be costlier and imports cheaper. This will help in increasing the stock of domestically produced gods and encourage more imports. This will mean the availability of goods int he country will increase [hereby the price level of them will have to come down. But this measure has to be cautiously adopted as it carries with it seeds of deflation.
3. OTHER MEASURES :
Apart from the measures discussed above, the government can also implement the following policies :
a) Increase output : This policy may appear to be very easy one but in practice this involves several difficulties. To make the producers increase their output, they should be assured of their profit as otherwise they will not be inclined to increase the output. Further the increase in output can be brought about by fuller utilization of the existing resources, prevention and settlement of industrial disputes, updating the technology, lending liberally to expansion and new establishment purposes of the industry, maintaining industrial peace by activating all the machineries of settlement of industrial disputes, etc. Mere increase in output will not bring down the inflation, it has to be followed by increased availability of products for the consumers. This calls for curbing and punishing black marketing, hoarding and smuggling activities so that the benefits of increased production will be enjoyed by the economy.
b) Wage policy : This is another important control measure. This is often misunderstood as wage freeze policy. This means that the government should not stand in the wage increase sanctioned to the employees if their productivity is very high. The government can encourage the employees to make voluntary contributions and reduce their expenditure. Simultaneously, through other measures, the government should bring down the cost of living so that the laborers will not demand higher wages. Wage policy cannot be effective unless it is coupled with several other policies.
c) Price controls and rationing: This is one of the most popular policies applied in every country while they face inflation. Under this measure, the government should prevent escalation in prices of essential commodities and control the price of other commodities. By resorting to retail and wholesale price maintenance policies the government can strive to bring down the price level. This calls for buffer stock operations as well as efficient demand and supply management of commodities which the country is badly in need of. This is achieved by introducing rationing of essential commodities through well designed public distribution mechanism. All this mean, enormous efforts are required on the part of the government apart from the willing co-operation from the traders and businessmen. In practice it is found that price control and rationing are very difficult to be implemented during inflationary period due to the exploitative and monopolistic attitude of the businessmen and traders. However, with stringent penal measures the government can make this policy effective in controlling inflation in a country.
Review questions 1. Assess the need for government intervention in an economy. 2. Discuss the role of public sector in India 3. Comment whether India is an under developed country 4. Discuss the features of Indian population 5. Examine the nature of population problem in India and the effects of population growth on Indian economic development 6. Outline the population policy of the government since independence 7. Analyse the Balance of payments position since 1991 and critically evaluate the New export-import policy 1992-1997. 8. Discuss the structural composition of national income in India. Explain the limitations of National income estimation in India. 9. Distinguish between absolute and relative poverty. Discuss the concept of Poverty line in Indian context. What are the causes for poverty in India and evaluate the various poverty eradication programme. 10. Analyse Problem of unemployment in India. 11. Discuss the problem of rural unemployment and the measures to solve this problem. 12. Examine the inflationary trend in India and discuss the steps taken by the government to control inflation in India. 13. Discuss the causes for inflation in India and suggest measures to arrest inflation.
CHAPTER III
Government controls and regulations - Regulating economic and industrial activities- Industrial Licensing policy- Control of monopolies - Capital issues control - Government control over FDI and collaboration - Distribution and price control - New EXIM policy - Foreign exchange flow regulation -Technology transfer
GOVERNMENT CONTROLS AND REGULATIONS
Since independence, Government of India introduced a number of controls and regulations so as to lead the country on the path of progress. Originally these controls and regulations were considered to be a part of development strategy. But subsequently, they emerged as the need of the society. While the 1948 Industrial policy resolution did not lay much emphasis on the controls and regulations, in 1951 the government brought in the Industrial [Development and Regulations] Act. This Act made licensing a part of industrial development. The objectives of licensing were stated as: • Facilitate desired pattern of industrial development • Provide for development of backward regions • To encourage broad based ownership of industries • To prevent concentration of power in the hands of a few • To offer protective environment for the small scale industries • To regulate inflow of foreign capital and technology • To provide for the use of appropriate technology • To eliminate industrial pollution • To encourage more of exports and adopt import substitution measures • To ensure conservation of foreign exchange resources and to ensure proper allocation of the exchange resources • To achieve high growth in employment opportunities
With the above objectives, the government passed the Act. Consequent to this Act, the following categories of industries were required to obtain license:
• New undertaking • Manufacture of new article • Expansion of existing capacity substantially • Continuation of certain category of business in certain areas • Changing the location of the industry
This licensing policy continued for a long time till 1991 Industrial policy adopted the policy of liberalization. The licensing policy has resulted in a number of malpractices among the large industrial houses. This was brought to light by the Dutt Committee report in 1967 The revelations of the Dutt committee led to the enactment of Monopolies and Restrictive Trade Practices Act in 1970. In 1991, the government changed the contents of the Licensing policy and the important provisions are spelt out hereunder.
The Dutt committee identified 20 larger industrial houses, 53 large industrial. houses and 60 large independent concerns through its study. Some of the important findings of the Committee are given below: 1. a] 73 large houses accounted for 56 % of the total proposed investment on machinery by the entire private corporate sector b] 60% of the value of import of capital goods by the entire private corporate sector was accounted for by these 73 large industrial houses c] 20 larger industrial houses accounted for 41 % in the total proposed investment on machinery and for 40 % in the total approved import of capital goods.
2. The percentage of unimplemented issued licenses was the highest for the large independent companies and other foreign companies. The largest number of unimplemented licenses was for the house of Birlas [168] followed by Tatas [41J. The Birlas were also leading on charges of preemption.
3. The private sector was allowed to participate in areas reserved exclusively for the public sector,
4. The four industrially advanced states namely Maharashtra, West Bengal, Gujarat and Tamilandu were able to acquire 62 % of the J0tal licenses issued. This was against the spirit of balanced regional development.
5. There was no indication as to which industries could be treated as specifically reserved for the small and medium sector.
6. Foreign collaboration was allowed even in non-essential consumer goods. The Committee observed that: “as a matter of fact, by permitting foreign collaborations sometimes in multiple numbers, and thus permitting capacities to be created, an inevitable demand for import of various components and raw materials for feeding plants is set up. This, combined with the allocation of other scarce materials, helps to satisfy the demand of the higher income groups, but it is not necessarily a contribution to economic growth nor is it the best way of utilizing the scarce foreign exchange resources of the country.
7. Financial institutions showed a distinct preference to the large industrial houses over the public sector.
All these would help to judge that industrial licensing system failed to achieve the objectives of planned economic development as well as of preventing concentration of economic power.
The Dutt committee made the following recommendations • To set up a core sector consisting of industries of basic, critical and strategic importance to the economy • To adopt the concept of ‘Joint Sector’ or undertakings where both the public and private sectors acted as partners in a project. The Joint Sector could have collaborations with foreign concerns as well as with the private sector in India • To change the basis of financial assistance by nationalized banks and • public sector financial institutions i.e., away from the large industrial houses • The government to have the right to convert its loans and debentures into equity • The middle sector to be kept open for new entrepreneurs
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90’s a number of changes in the system of industrial approvals have been brought about. The domestic producers will be able to withstand the competition in the country as well as abroad only through procedural reforms. Hence, the role of government will be changed from that of exercising control to one of providing help and guidance. Changes in the policy towards public sector in the last few years have clearly indicated that private sector enterprises will be allowed to compete in many areas hitherto earmarked for public sector. Consequently, the new policy has completely reclassified the Indian industries as below:
a) Eight industries have been completely reserved for the public sector. They are: i. Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils, v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tin, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transport
b) Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries:
i. coal and lignite, ii. petroleum other than crude and its distillation products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco substitutes, vii. asbestos and asbestos based products, viii. plywood, decorative veneers and other wood based products such as particle board, medium density fibre board, block board, ix. raw" hides and skins, leather, chamois leather and patent leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and newsprint except bagasse based units, xiii. electronic aerospace and defence equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi. drugs and pharmaceutical xvii. entertainment electronics and xviii. white goods like domestic refrigerators.
As regards the provisions of the industrial licensing policy,
i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector ,and the list of 18 industries and the areas reserved for small scale industries will continue.
ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations.
iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported goods does 1101 exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required.
iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in ares other than cities of more than one million population. In cities with more than one million population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas.
v) New Broad banding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing units.
vi) The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects.
vii) A very significant step is to abolish all the existing registration schemes.
viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum.
ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system).
As a result of the wide changes in the Licensing policy, the government also brought about changes in the MRTP Act. The following is the summary of the changes effected in that Act.
MRTP ACT
A major deviant of the new policy is in respect of the MRTP Act. The new policy aim at removing the unnecessary bureaucratic controls and allow the industries to breathe in an atmosphere of freedom. The efforts of the government in the past intervening in the investment decisions of the MRTP companies; have been proved to be counter-productive. Hence, the newly empowered MRTP Commission will enquire into complaints received from individual consumers or classes of consumers. The following is the essence of the provisions in the new policy regarding MRTP Act.
i. The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course.
ii. The need to obtain the prior approval of the central government for establishing new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed.
iii. The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair tarde practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices.
iv. All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers to the MRTP Commission.
Control of capital issues
Since independence, capital issues in India have gone through different types of control mechanism. Initially control of Stock exchanges was contemplated and accordingly Securities Contracts [Regulation] Act was passed in 1956. It aimed at centralization of control, regulation of the stock exchanges and the transactions entered therein, the avoidance of illegitimate and manipulative speculation and the protection of genuine investors, The Act applied to all transactions whether forward or ready and it prohibited or regulated factors, which facilitated speculation in stock exchanges. But the Act could not abolish forward trading which ultimately caused erratic behaviour of the Stock exchange. The government basically depended on two institutions to control the capital market viz., the Controller of Capital Issues [CCI] and the Directorate of Stock Exchanges. CCI gave consent to the issue of non-government companies consisting of equity and preference shares, partly and fully convertible debentures, bonus shares and right shares. It also gave consent to the issue of bonds of public sector undertakings. But on the recommendations of the Narasimham committee, the government abolished the office of CCI and freed the primary capitol market from the government regulations.
The recommendations of Narasimham Committee – II on financial sector reforms
The main recommendations of the Narasimham committee are:
1. Phased reduction of Statutory Liquidity Ratio to 25 % over a period of five years 2. Progressive reduction in Cash Reserve Ratio 3. Phasing out of directed credit programs and redefinition of the priority sector. 4. Deregulation of interest rates so as to reflect emerging market conditions 5. Stipulation of minimum capital adequacy ratio of 4% to risk weighted assets by March 1993, 8% by March 1996 and 8% by those banks having international operations by March, 1994. 6. Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts. 7. Imparting transparency to bank balance sheets and making full disclosures 8. Setting up of special tribunals to speed up the process of recovery of loans 9. Setting up of Asset Reconstruction Fund to lake over from banks a portion of their bad and doubtful advances at a discount 10. Restructuring of the Banking system so as to have three or four large banks which could become international in character, 8 to 10 national banks and local banks confined to specific regions and rural banks including RRBs confining to rural areas. 11. Setting up one or more rural banking subsidiaries by public sector banks 12. Permitting RRBs to engage in all types of Banking business 13. Abolition of branch licensing 14. Liberalising the policy with regard to allowing foreign banks to open offices in India 15. Rationalisation of foreign operations of Indian banks 16. Giving freedom to individual banks to recruit officers 17. Inspection by supervisory authorities based essentially on the internal audit and inspection reports 18. Ending duality of control over Banking system by Banking division and RBI 19. A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI 20. A revised procedure for selection of Chief Executives and Directors on Boards of Public Sector banks 21. Segregation of direct lending functions of IDBI to a separate institution 22. Obtaining resources from the market on competitive terms by DFIS 23. Speedy liberalization of capital market by removing restrictions on premia dispensing with prior government approval etc. 24. Supervision of merchant banks, mutual funds, leasing companies, etc., by separate agency to be set up by RBI and enactment of separate legislation providing appropriate framework for mutual funds and laying down prudential norms for such institutions.
After the abolition of CCI, the government set up the Securities and Exchange Board of India [SEBI] in 1988 which became a statutory body since 1992. SEBI has the following objectives: ❖ Regulating the business in stock markets and other securities market ❖ Registering and regulating the working of the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers and other intermediaries associated with the securities market ❖ Registering and regulating the working of collective investment schemes including mutual funds ❖ Promoting and regulating the self regulatory organizations ❖ Prohibiting fraudulent and unfair trade practices relating to securities market ❖ Promoting investors education and training of intermediaries of Securities market ❖ Prohibiting inside trading in Securities ❖ Regulating substantial acquisition of shares and take over of companies ❖ Performing such functions and exercising such powers under the provisions of Capital Issues [Control] Act, 1947, and Securities Contract [Regulation] Act, 1956, as may be delegated to it by the Central government
Since its inception, SEBI has achieved the following: guidelines to suing companies, regulation of portfolio management services, regulation of mutual funds, action for delays in transfers and refunds, action for delays in transfers and refunds, issue of guidelines to protect investors, ensuring proper functioning of the Stock exchanges, regulation of foreign institutional investors and periodical review of the working of the capital market.
FOREIGN CAPITAL AND THE POLICY OF GOVERNMENT REGARDING THE USE OF FOREIGN CAPITAL
Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital.
Forms of foreign capital:
a) Direct entrepreneurial investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad may participate in the stocks or share capital of Indian companies. Whenever the Indian companies go for public issue of shares or debentures, the foreign investors may respond by participating in such public issue. This is also called foreign capital. In the past external business group used to invest in new companies and that form of foreign capital used to flow much, but now-a-days participation in the equity or debenture of companies by foreign investors and non-resident Indians is becoming more predominant.
b) Foreign collaboration: Foreign collaboration is another form of foreign capital. Under this a domestic company may join with the foreign company, mostly the reputed one in the industry, and start with the joint operation in India. Usually this type of effort is undertaken to get the state of the art1 or the latest technology available abroad in the Indian companies. Foreign collaboration may be only for technology or for funding or both. Accordingly we may have technical collaboration, financial collaboration or mixed collaboration. The collaboration may be between private parties or companies in the two countries, or the foreign company with Indian Government or between the foreign government and the Indian government.
c) Inter-government loans: This type of foreign capital refers to the loans granted by the government of one country to that of the other for a specific purpose or for general economic reconstruction. For example under the Marshall plan, USA gave loans to various European governments to help them in the reconstruction of their war-shattered economies. The developed countries also grant loans and grants to the under developed countries to help them in economic development programme.
d) Loans from international institutions: This source of foreign capital has emerged as a very important source in the recent years. Most of the developing countries get sizeable quantum of funds from this source. International institutions like International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD), Asian Development Bank, Aid India Consortium, and others have all become very important providers of funds for developing countries. The role of IMF and IBRD in tiding over the balance of payment difficulties and execution of power and irrigation projects, cannot be exaggerated. The Asian Development, Bank has also been a major provider of funds for development in Indian case.
e) External commercial borrowing: Another source of foreign capital is the borrowing in the capital market of other countries. This can be done either directly or indirectly by the government. In both ways, the inter-government understanding and political relationship apart from the domestic investment climate are all important. Such capital is normally used for international trade purposes and specifically for export credits. Agencies like US EXIM bank, Japanese EXIM bank, ECGC of UK, etc., are all playing vital role in this segment of foreign capital.
Need for foreign capital:
No country can be self-sufficient today. Even developed countries have to depend on the developing countries for certain purposes and also for marketing their products. Further the specialisation in finance has become world wide, that every investor wants to maximise return on his investments and minimize the risk. This is applicable both to government investment as well as corporate and private investments. These are days of multi-national corporations and giants that closed economic system can no longer be realistic. In this situation, flow of capital from one country to another in different forms takes place for several reasons. From the view point of a country, there is a need to execute their plans for economic development. Specifically in Indian case, the need for foreign capital cannot be exaggerated. This could be explained in terms of the points given below:
a) The availability of funds for execution of plans and achieve rapid economic development determine the objective of such plans. Domestic availability of funds, especially in the developing countries is becoming difficult with the government in these countries undertaking increasing responsibility for the welfare activities. Hence, these countries have to tap the source lying outside to get the funds required for their development purposes. In this respect the foreign capital should be attracted at any cost and in any form.
b) Domestic investors and managers of funds available, may not have the required expertise or entrepreneurship in identifying the right and profitable avenues for investment. This may be due to lack of experience or inability to identify opportunities. When foreign capital is allowed to flow, the benefits of the experience of the foreign technicians, finance specialists, production specialists, marketing wizards, etc., are made available to the domestic ventures. This will improve the efficiency of the domestic projects which is directly benefitting the country. On this count foreign capital should be welcomed.
c) One of the basic requirements for achieving rapid economic development is mobilising savings. Savings depend upon income and income depends on the level of economic activity. Hence, any attempt to increase savings should start with attempts for increasing income which necessitates increasing investment If the domestic rate of savings and the purpose for which savings is used is unproductive, then efforts should be made to obtain the necessary investment from abroad. This would accelerate economic development leading to income generation and increased savings. Hence, in the process of economic development foreign capital becomes an essential ingredient.
d) Foreign capital is necessary for one more reason. In every developing country, the economic development requires investment in certain projects relating to infrastructural development, basic industries, etc., which are long gestation projects, low income yielding, but accelerating economic development. No private investment or corporate investment in these projects will come about in the early stage of development either because the investors have no inclination or because the capital market in such a situation is not developed. But the government has to initiate development activities, for which foreign capital becomes essential. Once the ‘economic engine’ is activated, in due course, the economic development will start taking place. Until then foreign capital is needed.
e) Foreign capital can be in different forms as has been already explained. Countries like India having high rate of savings, but low investment in productive projects, with large human force but with less employment opportunities, have to seek technical know-how and technology available abroad. These can be slightly modified to suit the domestic conditions so that the production can take place in large scale, cost can be minimized and employment opportunities can be generated in large scale. Further there are areas like atomic energy, automobile industry, management, marketing and others where we do not have the best of experts or expertise. The best available talent or technology available abroad can be imported so that we can improve our strength in these areas and become a force to reckon with. This will also help us to achieve higher level of economic development.
f) One of the methods of achieving higher levels of development is through mutual co-operation with other countries through bi-lateral or multi-lateral agreements which provide excellent scope for transfer of technology, etc., between countries. Political wisdom warrants use of such agreements for mutual benefits which leads to flow of foreign capital from one country to another.
Problems of foreign capital:
So far we have discussed the need for and role of foreign capital in Indian economic development. Let us now study the problems that are associated with the foreign capital.
1. The foreign investors are choosy in extending their funds to projects floated in our country. It is found that foreign capital flows easily towards the private sector projects but with a lot of hesitation to the projects of public sector. While there is justification for hesitant flow towards public sector, our government has been giving pride of place only to pubic sector in achieving rapid economic development Hence, it is clear that there is no lack of investment opportunities, but there is difference in ideology. Therefore, flow of foreign capital is not uniform to all sectors. This trend has to be observed so that corrective measures can be taken to attract more foreign capital to public sector projects.
2. Another serious problem of foreign capital is the domestic technology is simply duplicated due to over indulgence and dependence on external assistance. There are several areas where India has achieved excellence as in electronics industry, but there are collaborations with foreign products in this field. Such duplication is in no way beneficial to the country. This has to be corrected.
3. One more experience is that under the pretext cf transferring technology, foreign countries simply Jump their obsolete technology in India. Apart from importing inappropriate technology, there are also situations when the technology not required is imported. Further, there are tie-up agreements with such imported technology which are unfavourable to India. But such agreements have been approved much against the interest of our domestic manufacturers and technologists.
4. Often me complaint about foreign capital is the restrictive conditions imposed by the exporting country. It may be relate to spares or technicians or repatriation of profits, etc. An increasing number of such agreements would only be against our own interest
5. Heavy remittance of profits, dividends, etc., is yet another problem under foreign capital. In Indian experience, there were cases when the inflow of foreign capital was less than the remittance of profits, the classic examples being ESSO and CALTEX, the two oil companies of US origin. Such remittances cause severe strain on our already strained balance of payments and foreign exchange reserve position. Even if the agreement provides for such remittances, the country cannot afford to lose the hard earned foreign exchange resources under this type of remittances.
6. One more consequence of foreign capital is that it causes serious balance of payments problem. When foreign capital in different forms is permitted, with the preference of the foreign investors, the private sector is able to attract more than the public sector. As a result the private sector indulges in importing heavily their requirements which results in heavy outflow of earned exchange reserves on the one hand and leads to balance of payments deficits on the other. Even if the government has to ultimately approve of such imports, yet the private sector is able to appease the officials through liaison officers and get the necessary approvals.
7. One of the essential conditions laid by the government while approving the foreign collaboration is that in due course there should be Indianisation of personnel. This policy is easily defeated in practice. In the past under the provisions of Foreign Exchange Regulations Act, every foreign multinational company is made to dilute their ownership to 74% and in case of branches of foreign companies their total holding should not exceed 40%. It is found that these foreign companies have very high profitability, as in the case of Colgate Palmolive with 89% of profit rate, are able to very easily raise capital from the Indian capital market. Their shares are being quoted at very high rate that they raise the necessary funds easily. The shareholders of these companies indirectly support the company through political lobbying. The Indianisation of personnel is easily by-passed as these companies retain the powers to appoint their own Chairmen and Managing Directors. Obviously even with a holding of only 26% of the shares, these foreign companies have control over the companies easily by-passing the policy. Whenever the multinationals become Indian companies they stand to gain. So long they remain multinationals they are subjected to heavy taxes. But once our Indianisation of Personnel policy is invoked, these multinationals become Indian companies and pay less tax. Hence, our policy is in no way affecting the foreign companies, in tact, the policy is turning out to be unfavourable to India itself
Government policy:
Since independence, the government has been declaring its policy towards foreign capital of different types. The policy declared in April, 1949 has remained the main framework for the subsequent policies. The salient features of the 1949 policy are: i) Foreign capital will have the same treatment as given to domestic capital. ii) The investors will be allowed to remit the profits earned. iii) The ownership and control of the foreign companies should in due course be in the hands of Indians. iv) In case of take over of the undertaking, a fair and equitable compensation would be paid. v) In case a foreign company wants to have control for some time, the government may examine this in each individual case before giving permission.
This policy in nut shell means that there will be no discrimination against the foreign companies or their investments in India. This remained as the basic framework of foreign policy all through. With this policy, the government pursued its foreign policy making minor changes at times. Broadly we may refer to three phases through which our foreign policy relating to foreign capital and investments evolved. In the first phase which lasted from 1951 to 1965, the government was liberal in its attitude towards foreign capital. This included concessions and incentives to foreign capital which helped us to achieve industrial development. The second phase which started from 1965, is a period in which the government was very strict and imposed several restrictions and regulations. Once again in Phase III, starting from 1991, a liberal policy is introduced. The salient features of the latest policy towards foreign capital (199i) is given below:
Foreign investments:
Foreign investments carry with it the benefit of technology transfer, marketing expertise, modern managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the New Industrial Policy (NIP) has clearly contained the following provisions relating to foreign investments:
1. In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed. Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments to the FERA will be made.
2. The general policies governing the domestic units in regard to import of components, raw materials and intermediate goods and payment of knowhow fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on payments are balanced by export earnings over period of time.
3. All the other foreign investments not included in the category 1 stated above will require prior clearance.
4. Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in 1 above. However, the provisions of his export-import policy applicable to the domestic units will also be applicable to such trading companies.
5. To encourage substantial inflow of foreign investment, a Special Empowered Board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
As regards foreign technology agreement, a welcome change in the outlook of the government is the realisation that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedures and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameters. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulation governing foreign technology agreement: 1. No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guideline of the RBI and such payments can be made through blanket permits.
2. Automatic permission will be given for foreign technology agreements, relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provisions. Upto the payment of Rs. 1 crore royalty will be at the rate of 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of the sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production.
3. In case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment.
4. In all the other cases, the general procedures in practice will be adhered to and such industries will require specific approval.
Foreign assistance and Indian five year plans:
In the Table given below we find that the external assistance is playing a vital role in the financing of our five year plans. Right from the I Five Year Plan, we find that in absolute terms the inflow of foreign assistance is very much on the increase. While it was a modest figure of Rs. 190 crores in the I Plan, it was Rs. 15,139 crores by VII Plan and during the VIII Plan it rose to nearly Rs. 28,700 crores. Hence, it is clear that the external assistance or foreign capital has become a major component of financing of Indian five year plans. In terms of percentage, the external assistance went up from a mere 9.6 in the I Plan to 28.2 in the III Plan, 35.9 during the Annual plans. From the IV Plan onwards, the percentage of external assistance declined from 13 to 8.2% during the VIII Plan, but this decline should not be misunderstood as declining importance of external assistance in the financing of our five year plans. The table given below will clarify this aspect
FOREIGN ASSISTANCE AND INDIAN FIVE YEAR PLANS
|PLAN |AMOUNT |Percentage |
| |(Rs.crores) | |
|FIRST |190 |10 |
|SECOND |1,090 |24 |
|THIRD |2,390 |28 |
|FOURTH |2,090 |13 |
|FIFTH |5,830 |15 |
|SIXTH |10,930 |11 |
|SEVENTH |15,139 |8.4 |
|EIGHTH |28,700 |8.2 |
POLICY ON FDI
The government policies on Foreign Direct Investment [FDI] have been changing since 1991 - 92. Analysis of these policies would help to place in proper perspective the prospects and problems of FDI. This was also taken into consideration while suggesting methods of improving the inflows of FDI.
As apart of the structural adjustment policies introduced in the Indian economy by Government of India since July 1991, policies relating to foreign financial participation in Indian companies and those relating to foreign technology agreements have also undergone a radical charge. Briefly stated, three tiers for approving proposals for foreign direct investment in this country were introduced: (1) the Reserve Bank's automatic approval system; (2) Secretariat for Industrial Approvals for considering proposals within the general policy framework but outside the powers delegated to Reserve Bank; and (3) Foreign. Investment Promotion Board, specially created to invite, negotiate and facilitate substantial investment by international companies that would provide access to high technology and world markets. The foreign investment policy was further liberalized during the period under review. Fully owned foreign enterprises will hence forth be allowed to set up giant power projects without the requirement to balance dividend payments with export earnings.
The general permission granted by the Reserve Bank under the provision of.: the Foreign Exchange Regulation Act, 1973 has brought the FERA companies (i.e. those having more than 40% foreign equity) on par with the Indian companies and thus provides a level playing field to all. The existing FERA companies have also been extended the facility of 51% equity. Also, the use of foreign brand names and trademarks on goods for sale within the country has been permitted. Significant amendments to the FERA for relaxing several of its restrictive provision have been contemplated.
The following measures were introduced in the recent period to further liberalise the foreign investment policy:
1) Except for 22 industries in the consumer goods sector, the earlier stipulation that dividend remittances of companies receiving approval under the foreign equity up to 51% scheme, must be balanced by export earnings over a period of 7 years, was scrapped in respect of all foreign direct investment (by non -NRIs) in June 1992. The measure was extended to investment by NRIs /Overseas Corporate Bodies (OCBs) in September 1992.
2) For the purpose of investment in oil refineries and development of discovered oil fields, foreign private equity participation to the extent of 26 per cent is considered as sufficient. For making investment in Indian companies, NRIs/OCBs have been granted automatic approval by the RBI to invest, with full repatriation benefits, up to 100% in the issue of capital or convertible debentures of a private/public limited company engaged in or proposing to engage in high priority industries, subject to certain conditions.
The existing scheme of 100% NRI investment in cent per cent export oriented units and also for the revival of sick units will continue cent per cent NRI participation in power generation has also been permitted. In the context of such revisions, the earlier 74% scheme has been discontinued.
The Government has set up a Bureau, officially known as the Interface for NRI Scientists and Technocrats (INRIST), that will bring NRI scientists and technocrats in contact with Indian industries which would benefit from the expertise of NRIs.
The Department of Industrial Development has set up an “investment promotion and project monitoring cell” popularly known as facilitation ceil, to provide pre and post investment services for different industrial approvals and respond to queries relating to various ministeries / departments.
RBI has granted general permission to foreign citizens of Indian origin, whether resident in India or not, to acquire / hold and transfer by scale or inheritance, residential properties situated in India subject to certain stipulations.
General permission has been granted to Non-resident Indian citizens and foreigns citizen of Indian origin to let out their residential properties acquired for their bonafide residential purpose but which on account of their residence abroad, are not required for their immediate residential purpose. The rental income or proceeds of any such income shall both be repatriable outside India at any time in future and such funds should be credited to the owner’s Ordinary Non Resident Rupee account maintained with an authorized bank in India.
In order to simplify and remove regulations which hinder free flow of foreign capita! in to India as also investment by Indian companies in joint venture overseas, restriction imposed on FERA companies (i.e. companies incorporated in India in which the non-resident interest is more than 40%) under sec 26 (7), 28, 29, and 31 of FREA, 1973 have all been removed as outlined below, there by placing them on par with other Indian companies in regard to their operations in India. FERA companies are now permitted.
a. To borrow money or accept deposits from persons resident in India. b. To accept appointment as agent or technical or management advisers in India, of any person or company. c. To allow their trademarks to be used by any person or company. d. To carry on in India any activity of trading, commercial, or industrial nature except agricultural and plantation activity. e. To acquire any undertaking in India carrying on any trade, commerce or industry or purchase the shares of any such company, and f. To acquire, hold, transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise any improvable property in India.
Person of Indian nationality or origin and others (returning home after a minimum stay of immediate preceding 6 months abroad) have been granted general permission to bring into India as part of their baggage, gold, in any form, up to 5000gms, provided duty is paid at the rate of Rs220 / per 100 gms. (earlier Rs, 450/- per 10 gms ) in any convertible foreign currency (I).
As part of the continuing efforts to provide an investment friendly environment in India for foreign investors, the following policy initiative were undertaken during the year 1992-93.
I) To keep pace with the ever expanding global technological revolution in the field of computers, an Electronic Hardware Technology Park (EHTP) scheme was set up allowing for 100% equity participation, duty free import of capital goods and a tax holiday i.e. exemption from corporate income tax for block of 5 years commencing from the date of the starting of commercial production.
II) In the new National mineral policy, the ceiling on foreign .equity participation in Indian companies engaged in mining activities was hiked to 50%. In the area of non-captive mines, equity participation of over 50% by foreign partners could be considered on a case by case basis.
III) Authorized dealers were delegated powers to allow remittance of dividend (including interim dividend) on equity/preference shares to non-resident shareholders of all Indian companies, as also those in which investments have been made by NRIs/OCBs under the 40% scheme or any other scheme with repatriation benefits.
IV) NRIs were allowed to invest up to 100% on non-repatriation basis, in any partnership / proprietorship concern or in private / public limited companies (expect in agricultural / plantation activities) without seeking prior approvals of other RBI. However, OCBs are not permitted to invest-In proprietorship / partnership concerns (2).
In keeping with the objective of attracting funds from the NRIs in the form of deposit and foreign investment several steps were taken during the year 1993 -94, such inflows, even while adhering to considerations of cost effectiveness and dampening of volatility. Major policy initiatives undertaken during the year were as follows:-
(I) Deposits Under Foreign Currency Non Resident Account (FNCRA) scheme proved to be volatile during the payments crisis, of 1990-92. They were also relatively costly given the spread above international interest in the prescription of interest rates for these deposits as also the cost implicit in the provision of exchange guarantee for such deposits. In this regard, the Bank's Annual Report for 1992-93 had observed: "attempts have been made in the recent period to restructure the existing FCNRA scheme and to put in place new schemes which (a) reduce the reliance on the FCNRA scheme, (b) make exchange risk cover a commercial proposition, and (c) reduce volatile components of deposits under the existing FCNRA scheme.” In pursuance of this objective deposits of four different maturities i.e. “6 months and above but less than one year", one year and above but less than two years” two years and above but less than three years,” and three years only" were completely withdrawn effective from May 15,1993, Oct. 12,;993, Feb 15, 1994 and August 15, 1994 respectively. Furthermore, interest rates prescribed on FCNRA of various maturities were fine-tuned from time to time to secure alignment with movements in international interest rates. Interest rates on Non Resident (External) Rupee Accounts (NR (E) R) deposits were also revised downwards effective Oct 18,1994 while the interest rate on savings deposits was brought down from 5% to 4.5% those on term deposits are not allowed to exceed 8%.
(II) In consonance with the move toward full convertibility in the current account, the interest accruing on deposits under Non Resident (Non - Repatriable) Rupee Deposits (NR (NR) RD) was rendered eligible for repatriation effective from Oct 1, 1994. The principal amount under the scheme will continue to be non-repatriable
(III) The Foreign Currency Ordinary Non-repatriable (FCON) scheme, introduced in June J991, under which the principal as well as interest earned were not repatriable, was suspended with effect from August 20, 1994. Interest accruing on the existing FCON-scheme from the quarter beginning Oct 1, 1994 was however made eligible for repatriation.
Major policy changes were, effected with a view to ensuring that investment flows were channelled in a manner consistent with overall Macro-economic requirements. The following policy guidelines were drawn out in this regard:
(IV) With a considerable improvement in the external payments position and the level of reserves, it was considered necessary to follow a restrictive policy towards Foreign Currency Convertible Bonds (FCCBs) as they constitute a part of the country's external debt till their conversion in to equity. As per the fresh guidelines of the government (issued on May 11. 1994 ) for Euro issues, companies were allowed to issue FCCBS only on merits as a part of the external debt restructuring programme which was intended to lengthen maturity and soften terms.
(V) Under the automatic approval scheme for foreign investments, new guidelines were issued for determining issue price of preferential shares issued 10 foreign investors to increase their stakes up to 51% in the business of any Indian company engaged in the high priority industries shown in the Annex-Ill to the statement on industrial policy of July 24, 1991.
Consequent upon the abolition of the office of the Controller of Capital Issues (CCI) and subsequent guidelines issued by the Securities and Exchange Board of India (SEBI) on June 11 and 17,1992, existing companies wishing to raise foreign equity were to make the issue at a price decided by the shareholders in a special resolution. In certain proposal received from the existing companies for enhancement of foreign equity, however, the companies were found to be issuing foreign equities at a large discount to the market price, (set out in the last year's Report). This mismatch in the price of shares for investment and disinvestment could cause distortion in the inflows and outflows of foreign exchange under the head of foreign investment.
With the objective of preventing a few shareholders from getting substantial and undue enrichment and unearned gains, to ensure higher foreign equity flows, and to make both investment and dis-investments market-related, It was decided with effect from August 4, 1994 that preferential allotment of shares by companies must be at market related price applicable to all foreign investment proposals whether approved by the RBI or by the SIA / FIPB subject to the following, guidelines:
The issue price of shares under preferential allotment (other than allotment on rights basis), would have to be at the market value of the shares determined on the basis of their average price during the immediate preceding six months at the main listing center calculated on the monthly average of the high and low rates quoted for the shares at such centres. In the absence of a market price, however, (as in the case of Unlisted companies, Listed companies, where shares are not regularly traded, etc) the RBI would be guided by the net asset value and earnings per share.
(V) Indian companies engaged in or proposing to engage in housing and real estate development, i.e. (1) development of serviced plots and construction of built-up residential premises, (2) real estate covering construction of residential and commercial premises including business centers and offices, (3) development of townships, (4) city and region level urban infrastructure facilities including roads and bridges, (5) manufacturing of building materials and (6) financing of housing development were allowed to issue shares/convertible debentures to NRIs up to 100% of the new issue on repatriation basis. Repatriation of original investment in such cases would be permitted by the RBI only after a lock in period of three years from the date of issues of shares / debentures.
The above facilities which were not available to OCBs, have now been extended to them on the same terms and conditions as applicable to NRIs
VII) NRIs / OCBs were so far permitted to invest in schemes of domestic Mutual Funds floated by public sector banks / financial institutions on non-repatriation basis. With a view to providing further incentives to NRIs / OCBs to invest in domestic Mutual Funds, they were permitted to invest on repatriation basis also. As a new policy measure, such investments were also permitted to be made through secondary market.
(VIII) Under the Oct 1993 guidelines for issue of bonds by Public Sector Undertaking (PSUs). Government have allowed PSUs to issue bonds under its public issues to NRIs / OCBs through prospectus by private placement with the facility of repatriation of both principal and interest on the bonds. No limit, however has been specified for NRI / OCB investments in such bonds.
(IX) Besides the various investment facilities extended to NRIs / OCBs on repatriation basis and under various non repatriable schemes, the NRIs / OCBs were permitted to make investment in partnership/proprietorship concern, shares, debentures of Indian companies, Indian mutual funds floated by public sector banks/financial Institutions, deposits with Indian companies, real estate, etc. Neither the investment/deposit amount nor the income/interest thereon, was eligible for repatriation. Further, the investment/deposits held in India by Indian nationals who have become non-residents on account of their going abroad on employment/immigration, as well as income/interest earned on such investment / deposits was not allowed earlier to be repatriated abroad. The income /interest on such investment / deposits are, however, now permitted to be repatriated in a phased manner over a period of three years, as indicated below:
(I) Income accruing during 1994-95 and thereafter to the extent of US Si000 per annum is remittable with immediate effect (b) income earned over and above US $1000 in a year would be allowed to be remitted as follows:- (1) One third of the annual income earned during the financial year 1994-95, (2) Two third of the annual income earned during 1995-96 and (3) the entire amount earned during 1996-97 and onwards Remittance of such income, However would be allowed only after the payments of tax as per the provision of the Income Tax Act (3).
With a view to opening more areas for investment by NRIs / OCBs RBI has decided to allow them to invest, on a repatriation basis, in all activities except agriculture and plantation activities, subject to certain conditions during 1994 -95. Accordingly, existing or new Indian companies (both private and public limited companies) engaged/proposing to engage in any activity including financial, hire purchase leasing, trading other services etc. (except agricultural/plantation activities) are allowed to issue equity shares/convertible debenture's on repatriation basis to NRIs/OCBs provided the aggregate allocation of shares/ convertible debentures qualifying for repatriation benefits to such non-residing investors does not exceed 24% of the new issue. Earlier NRIs and OCBs were permitted to invest on a repatriations basis in new issues of shares/convertible debentures made by companies engaged in industrial or manufacturing activities and also in certain other sectors such as hotels, hospitals, shipping development of computer software and oil exploration. It has also been decided to permit authorized dealers to grant loans to NRIs holding Indian passports for acquisition of a house / fiats for residential purpose against security of immovable property proposed to be acquired by them subject to certain conditions.
(II) As a process of further liberalization , general permission has been granted to NRIs/OCBs to purchase the shares on repatriation basis of Public Sector Enterprise (PSES) dis-invested by Central Government subject to the condition that (a) the holding of share by a NRI or by an OCB, at any-time, does not exceed one percent of the paid-up capital of the PSE concerned, (b) the purchase consideration/bid money is received by way of remittance from abroad through normal banking channels.
(III) NRIs resident in Nepal will be permitted hence forth to make investment in India provided the funds for the purpose are remitted in free foreign exchange through proper banking channels. Such investments will either be on repatriation or on non-repatriation basis depending on the terms and conditions applicable under the existing schemes under NRI investment.
(IV) In the context of on going economic liberalization, the policy and procedures governing approvals under the schemes for 100% Export Oriented Units (EOUS) and Export processing Zones (EPZs) were further revised. All proposals conforming to the parameters presented vide press note No 13 (1991) series dated Oct 9,1991, Department of Industrial Development, Ministry of Industry, shall receive automatic approval within two weeks from Secretariat of Industrial Approvals (SIA), Ministry of Industry (Department of Industrial Development) in the case of 100% EOUs and from the Developments Commissioners (DCs) concerned for units to be set up in EPZs. All other proposals which do not conform to the parameters for automatic approvals, shall be considered by the Board of Approvals (BOA) and disposed within 45 days from SIA
(V) Under the National Telecom Policy, 1994 which enunciates the guidelines for the entry of private sector into Basic Telecom Services, joint venture between an Indian and a foreign company is allowed subject to a maximum of 49% equity participation from the latter.
(VI) It has been decided that foreign investment up to 51% and foreign technology agreements in the cast of bulk drugs, their intermediates and formulations thereof (except those produced by the use of recombinant DNA technology) will be granted automatic approval subject to the parameter of RBI.
Since the second half of 1993-94, the Indian economy has experienced surges in capital flows which took the forms of foreign investment flows both direct and portfolio, and inflows into various deposit schemes for non-resident Indians. With current account deficits remaining modest during 1993-94 and 1994-95, the policy response to the capital flows was accommodative and this enabled on unprecedented build up of international reserves. With the consequent attenuation of monetary targets threatening the objective of inflation control, the policy stance switched to one of throwing sand in the wheels in the second half of 1994-95. Various measures put in place were progressively tightened during the first half of 1995-96 in support of the conduct of monetary policy. With the widening of the current account deficit and the onset of volatility in the foreign exchange markets in the second half of 1995-96, the restrictive stance of policy was eased and a number of measures were taken to relax controls and allow for a larger inflow of foreign capital. As in the past, these measures were related to foreign investment flows and deposits by NRIs and the policy objective of attracting capital flows has been carried forward during the first half of 1996-97.
Policy changes in 1996 - 97 were: Under the Automatic route, the ceiling for lump sum payments of technical know-how fee was, increased from Rs. I crorc to US $ 2 million, effective Nov 5,1996. With a view to liberalizing the existing facility for investments by NRIs in India, it was decided to allow investments by NRIs to establish schools and colleges in India subject to certain regulations. With a view to expanding the coverage of investment proposals considered under the Automatic Approval Route effective Jan 17,1997, the Government announced the inclusion in Annexure III of the statement of Industrial Policy 1991 (i) 3 categories of industries / items relating to mining activities for foreign equity up to 50% (II) 13 additional categories of industries/items for foreign equity up to 51% and (III) 9 categories of industries / items for foreign equity up to 74%
Foreign Direct Investment was allowed into sixteen non-banking financial services (merchant banking, underwriting, portfolio management services, investments advisory services, financial consultancy, stock broking, asset management, venture capital, custodial services, factoring, credit refinance, credit rating, leasing and finance, housing finance, forex holding and credit card services) during the year 1997 98, through the Foreign Investment Promotion Board (FIPB) subject to guidelines relating to minimum capitalization norms, schedule of capitalization and domestic equity participation. In a major drive to simplify procedures for foreign direct investment under “automatic” route, the Reserve Bank dispensed with the need for its prior approval for such proposals. In order to simplify procedures further in respect to foreign direct investment cases already approved by the Government of India (SIA/FIPB), the Reserve Bank dispensed with requirement for its “in-principle” permission before receiving overseas investment or for issuing shares to foreign investors. Indian companies satisfying the conditions stipulated in the letter of approvals issued by SIA / FIPB could issue shares / securities to foreign investors and file one copy of the application together with required documents with the concerned Regional office of Reserve Bank within 30 days from the date of issue of shares. Expanding the scope of “automatic route” for foreign direct investments, the government of India approved 13 additional categories of industries / items under services sector for foreign equity participation up to 51% of the equity, three items relating to mining activity up to 50% foreign equity participation and nine categories of industries/activities up to 74% foreign equity participation.
As a part of liberalization process, Reserve Bank of India decided to permit foreign banks operating in India to remit their profits surplus to their head offices without the approvals of the Reserve Bank. The permission is subject to the banks complying with the provisions of Banking Regulation act, 1949.
Financial turmoil in the world economy, imposition of economic sanctions and sluggishness in domestic activity had some bearings on foreign investment during the year. The Union Budget, 1999-2000 announced the establishment of Foreign Investment Implementation Authority [FIIA] in order to rationalize and simplify approval and implementation procedures of foreign1 investment proposals. With a view to further facilitating inflows of foreign direct investment, expansion of automatic list of approvals and a more dynamic role for Foreign Investment Promotion Board were also announced.
Foreign investment recovered during 1999 - 2000 reflecting the stability of the domestic currency, broad-based industrial revival, easing of economic sanctions and return of orderliness in the financial markets coupled with strong stock market performance.
A number of policy initiatives were taken during the year to further facilitate inflows of foreign investment. In August 1999, a Foreign Investment, Implementation Authority (FIIA) was established for speedy conversion of approvals to actual flows. The Insurance Regulatory and Development Act (IRDA) was passed in December 1999 permitting foreign equity participation in domestic private insurance companies up to 26% of the paid-up capital. Moreover, investments in all sectors, except for small negative list, were placed, in February 2000, under automatic route for direct investments. Indian companies v»ere allowed, subject to specified norms, to raise funds for investments through issue of ADRs / GDRs without prior government approval and up to 50% of these proceeds were allowed for acquisition of companies in overseas markets. Indian companies could acquire companies engaged in information technology and entertainment software, pharmaceuticals and bio - technology in the overseas market through stock - swap options up to $ 100 m on automatic basis or ten times the export earnings during the preceding financial year as reflected in the audited balance sheet, whichever is lower.
FDI is seen as a means to supplement domestic investment for achieving a higher level of economic growth and development. FDI benefits domestic industry as well as the Indian, consumers by providing opportunities for technological up-gradation, access to global managerial skills and practices, optimal utilization of human and natural resources, making Indian industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services. Towards this end, the FDI policy has been constantly reviewed, and necessary steps have been taken to make India a most favourable destination for FDI. The major initiative taken to attract FDI during 2000 -2001 & 2001 - 2002 are as follows:
❖ In pursuance of Government's commitment to further facilitate Indian industry to engage unhindered in various activities, Government has permitted, except for a small negative list, access to the automatic route for FDI, whereby, foreign investors only need to inform the Reserve Bank of India within 30 days of bringing in their investment, and again within 30 days of issuing any shares.
❖ Non-Banking Financial Companies (NBFCs) may hold foreign equity up to 100% if these are holding companies.
❖ Foreign investors can set up 103% operating subsidiaries (without any restriction on number of subsidiaries) without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to brining in US $50 m out of which US $ 7.5 m to be brought upfront and the balance in 24 months. Joint venture operating NBFCs that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other Non Banking Financial Company activities, subject to the subsidiaries also complying with the applicable minimum capital inflow.
❖ FDI up to 49% from all sources is permitted in the private banking sector on the automatic route subject to conformity with RBI guidelines.
❖ In the process of liberalization of FDI policy, the following policy changes have been made: i) 100% FDI permitted for B, to B e-commerce ii) Condition of dividend balancing on 22 consumer items removed forthwith iii) Removal of cap on foreign investment in the Power Sector iv) 100% FDI permitted in oil-refining.
❖ Automatic Route is available to proposals in the Information and Technology Sector, even when the applicant company has a previous joint venture or technology transfer - agreement in the same field. Automatic Route of FDI up to 100% is allowed in all manufacturing activities in Special Economic Zones (SEZs), except for the following activities: i) Arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships; ii) Atomic substances; iii) Narcotics and Psychotropic substances and hazardous chemicals; iv) Distillation and brewing of alcoholic drinks; v) Cigarettes/cigars and manufactured tobacco substitutes.
❖ FDI up to 100% is allowed with some conditions for the following activities in Telecom Sector: i) ISPs not providing gateways (both for satellite & submarine cables); ii) Infrastructure Providers providing dark fiber (IP Category I); iii) Electronic Mail; iv) Voice Mail.
❖ FDI up to 74% is permitted for the following telecom services subject to licensing and security requirements (proposals with beyond 49% shall require prior Government approval): (i) internet services providers with gateways; (ii) Radio Paging; and (iii) End-to-end bandwidth.
❖ Payment of royalty up to 2% on exports and 1% on domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. Payment of royalty up to 8% on exports and 5% on domestic sales by wholly owned subsidiaries to offshore parent companies is allowed under the automatic route without any restriction on the duration of royalty payments.
❖ Offshore Venture Capital Funds / Companies are allowed to invest in domestic venture capital undertakings as well as other companies through automatic route, subject only to SEBI regulations and sector specific caps on FDI.
❖ FDI up to 26% is eligible under Automatic Route in the Insurance sector, as prescribed in the Insurance Act, 1999, subject to their obtaining licence from Insurance Regulatory & Development Authority.
❖ FDI up to 100% is permitted in airports, with FDI above 74% requiring prior approval of the Government.
❖ FDI up to 100% is permitted with prior approval of the Government in courier services subject to existing laws and exclusion of activities relating to distribution of letters. FDI up to 100% is permitted with prior approval of the Government, for development of integrated township, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems, and manufacture of building material in all metros, including associated commercial development of real estate. Development of land and providing allied infrastructure will form an integral part of township's development.
❖ FDI up to 100% is permitted on the automatic route in hotel and tourism sector and for Mass Rapid Transit Systems in all metropolitan cities, including associated commercial development of real estate. FDI up to 100% in drugs and Pharmaceuticals (excluding those, which attract compulsory licensing or produced by recombinant DNA technology and specific cell/tissue targeted formulations) placed on the automatic route.
❖ The defence industry sector is opened up to 100 per cent for Indian private sector participation with FDI permitted up to 26 per cent, both subject to licensing.
❖ International Financial Institutions like Asian Development Bank, International Financial Corporation, Commonwealth Development Corporation, German Investment and Development Company (DEG) etc., are allowed to invest in domestic companies through the automatic route, subject to Securities and Exchange Board of India / Reserve Bank of India Guidelines and sector specific caps on FDI (10).
FDI policies for the year 1998 -1999
Financial turmoil in the world economy, imposition of economic sanctions and sluggishness in domestic activity had some bearings on foreign investment during the year. The Union Budget, 1999 - 2000 announced the establishment of Foreign Investment Implementation Authority [FIIA] in order to rationalize and simplify approval and implementation procedures of foreign investment proposals. With a view to further facilitating inflows of foreign direct investment, expansion of automatic list of approvals and a more dynamic role for Foreign Investment Promotion Board were also announced.
FDl policies for the year 1999 - 2000
Foreign investment recovered during 1999 - 2000 reflecting the stability of the domestic currency, broad-based industrial revival, easing of economic sanctions and return of orderliness in the financial markets coupled with strong stock market performance.
A number of policy initiatives were taken during the year to further facilitate inflows of foreign investment. In August 1999, a Foreign Investment Implementation Authority (FIIA) was established for speedy conversion of approvals to actual flows. The Insurance Regulatory and Development Act (IRDA) was passed in December 1999 permitting foreign equity participation in domestic private insurance companies up to 26% of the paid up capital. Moreover, investments in all sectors, except for a small negative list, were placed, in February 2000, under automatic route for direct investments. Indian companies were allowed, subject to specified norms, to raise funds for investments through issue of ADRs / GDRs without prior government approval and up to 50% of these proceeds were allowed for acquisition of companies in overseas markets. Indian companies could acquire companies engaged in information technology and entertainment software, pharmaceuticals and bio-technology in the overseas market through stock - swap options up to $ 100 m on automatic basis or ten times the export earnings during the preceding financial year as reflected in the audited, balance sheet, whichever is lower.
FDI Policies For The Year 2000 - 2001
FDI is seen as a means to supplement domestic investment for achieving a higher level of economic growth and development FDI benefits domestic industry as well as the Indian consumers by providing opportunities for technological up-gradation, access to global managerial skills and practices, optimal utilization of human and natural resources, making Indian industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services. Towards this end, the FDI policy has been constantly reviewed, and necessary steps have been taken to make India a most favourable destination for FDI. The major initiative taken to attract FDI during 2000 -2001 & 2001 - 2002 are as follows:
❖ In pursuance of Government's commitment to further facilitate Indian industry to engage unhindered in various activities, Government has permitted, except for a small negative list, access to the automatic route for FDI, whereby, foreign investors only need to inform the Reserve Bank of India within 30 days of bringing in their investment, and again within 30 days of issuing any shares.
❖ Non-Banking Financial Companies (NBFCs) may hold foreign equity up u 100% if these are holding companies.
❖ Foreign investors can set up 100% operating subsidiaries (without any restriction on number of subsidiaries) without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US $50 m out of which US $ 7.5 m to be brought upfront and the balance in 24 months. Joint venture operating NBFCs that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other Non Banking Financial: Company activities, subject to the subsidiaries also complying with the 3, applicable minimum capital inflow.
❖ FDI up to 49% from all sources is permitted in the private banking sector on the automatic route subject to conformity with RBI guidelines.
❖ In the process of liberalization of FDI policy, the following policy changes have, been made: v) 100% FDI permitted for B to B e-commerce vi) Condition of dividend balancing on 22 consumer items removed forthwith vii) Removal of cap on foreign investment in the Power Sector viii) 100% FD permitted in oil-refining.
❖ Automatic Route is available to proposals in the Information and Technology Sector, even when the applicant company has a previous joint venture or technology transfer agreement in the same field. Automatic Route of FDI up to 100% is allowed in all manufacturing activities in Special Economic Zones (SEZs), except for the following activities: vi) Arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships; vii) Atomic substances; mi viii) Narcotics and Psychotropic substances and hazardous chemicals; ix) Distillation and brewing of alcoholic drinks; x) Cigarettes/cigars and manufactured tobacco substitutes.
❖ FDI up to 100% is allowed with some conditions for the following activities in Telecom Sector: v) ISPs not providing gateways (both for satellite& submarine cables); vi) Infrastructure Providers providing dark fiber (IP Category I); vii) Electronic Mail; ix) Voice Mail.
❖ FDI up to 74% is permitted for the following telecom services subject to licensing and security requirements (proposals with beyond 49% shall require prior Government approval): (i) internet services providers with gateways; (ii) Radio Paging; and (iii) End-to-end bandwidth.
❖ Payment of royalty up to 2% on exports and 1% on domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. Payment of royalty up to 8% on exports and 5% on domestic sales by wholly owned subsidiaries lo offshore parent companies is allowed under the automatic route without any restriction on the duration of royalty payments.
❖ Offshore Venture Capital Funds / Companies are allowed to invest in domestic venture capital undertakings as well as other companies through automatic route, subject only to SEBI regulations and sector specific caps on FDI.
❖ FDI up to 26% is eligible under Automatic Route in the Insurance sector, as prescribed, in the Insurance Act, 1999, subject to their obtaining licence from Insurance Regulatory & Development Authority.
❖ FDI up to 100% is permitted in airports, with FDI above 74% requiring prior approval of the Government. ❖
❖ FDI up to 100% is permitted with prior approval of the Government in courier services subject to existing -laws and exclusion of activities relating to distribution of letters, FDI up to 100% is permitted with prior approval of the Government, for development of integrated township, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems, and manufacture of building material in all metres, including associated commercial development of real estate. Development of land and providing allied infrastructure will form an integral part of township's development.
❖ FDI up to 100% is permitted on the automatic route in hotel and tourism sector and for Mass Rapid Transit Systems in all metropolitan cities, including associated commercial development of real estate. FDI up to 100% in drugs and Pharmaceuticals (excluding those, which attract compulsory licensing or produced by recombinant DNA technology and specific cell/tissue targeted formulations) placed on the automatic route. ❖ The defence industry sector is opened up to 100 per cent for Indian private sector participation with FDI permitted up to 26 per cent, both subject to licensing. ❖ International Financial Institutions like Asian Development Bank, International Financial Corporation, Commonwealth Development Corporation, German Investment and Development Company (DEG) etc., are allowed to invest in I domestic companies through the automatic route, subject to Securities and Exchange Board of India / Reserve Bank of India Guidelines and sector specified caps on FDI.
Industrial policy resolutions of 1948,1956 and 1980.
Industrial policy comprises of the procedures, principles, rules, policies and regulations which together govern the industrial sector to guide the industrial development or the country in conformity with the objectives of five year plans and the needs of the economy. As the economy develops, the government has to closely study the process of economic development and make necessary changes and modifications in the policies so as to make the policies relevant for the situation or the environment prevailing in the country at different points of time. A Sometimes the changes in policies are so drastic that a new approach at the industrial development or the development of any other sector is arrived at. When these changes are announced the reactions from the sector concerned are studied closely by the government and necessary amendments are made to the policies already announced. In Indian scene, the situation prevailed immediately after independence was completely different from what is being witnessed today. Hence, if we study the industrial policies announced in the later 40's and early and middle ‘50’s we would get a background with which we will be able to understand and appreciate the changes that have been announced in 1991. This would also help us to understand the justifications for the drastic changes announced at periodical intervals. Hence, we would discuss now in brief, the features of 1948, 1956 and 1980 Industrial Policy Resolutions.
INDUSTRIAL POLICY 1948
Immediately after independence, the government had to give a guideline for the industries in India and so it announced its policies for industries. The political freedom attained in 1947, posed a challenge to the government, to devise its own policies. With the production at low levels, population increasing, partition impacts, rising price level, industries to be developed to accelerate economic development, etc., the 1948 Industrial policy resolution was announced. Through that the government clearly accepted its responsibility of ensuring planned development of industries of various types. The 1948 policy laid the foundation for a new experience as would be clear from the following features of the policy. The industries were classified into the following four categories:
1. The strategic industries to be completely owned by the government included manufacture of arms and ammunition, production and control of atomic energy, ownership and management of railway transport, etc. No private sector participation or existence will be permitted in this category of industries.
2. The second group included the basic and key industries. Private sector existence in this group would be tolerated for a period of 10 years after which their performance would be evaluated. New units in this category' will be established only by the government and the existing ones would be taken over by the government if their performance is found to be not satisfactory after the review. The industries included in this category include: aircraft manufacture, coal, iron and steel, ship building, radio sets and mineral oils, etc.
3. In this category government included the basic industries like salt, automobiles, tractors, prime movers, electrical engineering, heavy machinery, machine tools, heavy chemicals, fertilzsers, electro-chemical industries, non-ferrous metals, rubber manufacture, power and industrial alcohol, cotton and woollen textiles, cement, sugar, paper and newsprint, air and sea transport, minerals and industries relating to defence. Private sector will be given complete freedom to enter into this category, but the government can intervene and regulate any of them, if found necessary.
4. All the other industries formed the fourth category. Mainly left for private sector, the government pointed out that progressively it may participate but not eliminate the private sector. Both individual as well as co-operative undertakings will be permitted in this sphere.
This policy also gave importance to small scale industries and suggested that both the central and state governments should join together in solving the problems faced by the small scale industries. As these industries would offer good scope for absorbing the displaced labourers, and agricultural workers and wee also ideal for co-operative type of organisation, the government felt that they must be developed. As regards the foreign capital, the government clearly pointed out that there is need for free flow of capital as well as technology. At the same time the government also said that it should regulate; no discrimination will be made between the Indian and foreign undertakings with regard to the applications of the provisions of the policy resolutions. Profits and repatriation of capital would be permitted subject to the provisions of the -foreign exchange control. Further if any undertaking is nationalised, then fair and equitable compensation would be paid.
Evaluation:
The main aspect of this policy is that it laid the foundation for the introduction of MIXED ECONOMY in India. Under this the government will encourage coexistence of both private and public sector units in industries according to the provisions of the policy. This paved the way-for the participation of government and the corporate sector in the industrial building process of the country. This also facilitated a direct comparison between the performance of both the sectors, in terms of various indicators. Being the first policy resolution the government had made a good beginning. But this policy was criticised for being classificatory. It gave an impression that the private sector, even in spite of possessing the potential was not allowed to play its due role in the industrial development. Secondly, there was a threat of nationalisation, specifically, in the case of industries under the second category. Thirdly, the government intervention was present even in the case of third category of industries. Hence, on the whole, being the first policy, the government could not make the policy more imaginative, except, of course, introducing the principle of mixed economy.
INDUSTRIAL POLICY 1956
A new policy was necessitated after 1951, because, India adopted a socialistic pattern of society, the Constitution guaranteed Fundamental Rights and Directive Principles of State policy and the First five year plan was completed by 1956. After reviewing the developments and achievements, the government came out with the Industrial Policy Resolution of 1956. For all the later policies, this became the basis and until 1980, the provisions of this policy remained more or less in force.
The following are the important features of this Policy:
The industries were classified into three categories. This was indicated in terms of Schedule A, Schedule B and Schedule C industries. • The Schedule A industries are completely slate owned and the state is responsible for the development and growth of them.
• The Schedule B included industries which were under the control of government, especially new units. The private sector is also permitted to enter into this category, but it will be given only a supplementary role.
• The Schedule C industries included all the remaining industries, the future of which would be completely in the hands of private sector. Of course, government regulation in general would be formulated and made applicable to them as any other industries. The first classification (Schedule A) included 17 industries, the Schedule B included 12 industries and Schedule C included all the rest.
The government clearly indicated that the above classification is not very rigid, and private participation and presence even in the first category in the nature of allied units, user of by-products, etc., would be permitted, similarly the government may enters the Schedule C industries if the planning and development warrants it. The private sector is expected to work in close unison with the state. The government assured fair and free treatment to private sector units and non-discriminatory treatment was also promised. The government continued to encourage the growth and development of small scale and village industries by extending subsidies, tax concessions, protection from large and medium industries, and assisting them in modernisation to improve their competitive strength. The Resolution also aimed at reducing the regional disparities in the growth and development of industry so as to achieve balanced industrial development throughout the country. The Resolution also highlighted the need to protect and improve the conditions of industrial workers in the country. Mainly several machineries for settling industrial disputes were thought of. The government continued with its policy regarding foreign capital without much change.
Evaluation:
This resolution assigned a major role to the public sector. It created a condition in which the public sector units could be established and developed well. This was fell necessary to achieve the desired rate and pattern of development of industries in India. The government made it clear that it had no intention to wipe out the private sector, instead it wanted the private sector to emerge as the supplementary sector for the public sector and join the latter to achieve rapid industrial and economic development. After the resolution came into force, over a period it was found that the private sector developed faster by taking advantage of loopholes and exceptions in the Resolution. There were cases where licenses were issued to private sector while public sector should have been given the license. Hence, it was found that this Resolution in fact, led to the rapid growth of private sector.
INDUSTRIAL POLICY OF 1980
As already pointed out the Industrial policy of 1956 formed the basis of this policy in 1980. This new policy had the following objectives: i) to achieve the optimum utilisation of the installed edacity ii) to achieve maximum production and through that achieve higher productivity and employment generation iii) to rectify the regional imbalance by focusing on the backward areas iv) giving priority treatment for agro-based industries v) to promote inter-sectoral relationship vi) to encourage the growth of export oriented and import substitution industries vii) to speed up the growth of small scale units, etc.
With these objectives in view, the new policy laid down the following provisions:
1. After reviewing the performance of the public sector units the government has decided to introduce measures for improving the efficiency of these units so as to make them contribute more towards the economy.
2. In order to promote economic federalism, the policy provided for integration of industrial development in the private sector. The government also decided to eliminate the artificial division between small and large scale industrial units. In each district a few nucleus plants will be set up which would generate opportunities for a number of small, cottage and ancillary units. This would ultimately create the scope for faster industrial development in the industrially backward districts.
3. To provide the scope for more and more small and cottage industries, the government redefined these units as below: a. the limit of investment for tiny units was to be raised from Rs. 1 lakh to Rs.2 lakhs b. the limit of investment for small scale units was to be raised from Rs. 10 lakhs to Rs. 20 lakhs and c. increase the limit of investment for ancillaries from Rs. 15 lakhs to Rs. 25 lakhs.
4. to promote industrial growth in rural areas and also to improve the employment opportunities there and raise their percapita income, the policy provided for promoting industries in the rural areas. This was also expected to maintain the ecological balance in the country. Greater attention would be given to the growth of handlooms, handicrafts and khadi and other village industries.
5. Another important provision was that the government decided to regularise the unauthorized excess capacity with the industrial units, especially the FERA & MRTP units by allowing them automatic expansion by 25% of the existing licensed capacity on a selective basis.
6. To prevent spread of industrial sickness, the government indicated that very stringent steps would be taken against those units which are deliberately mismanaged and indulging in financial improprieties. As regards the existing sick units, arrangements would be explored to revive them or to encourage their mergers with healthy units by introducing suitable tax concessions to encourage such actions. When other methods of revival of sick units are not found feasible, then the management of such sick units would be taken over.
EVALUATION
This policy has several lapses. Its claim to eliminate the division between small scale and large scale units is something contradicting the basis of such divisions. There was a need to treat the small scale with liberal treatment so that in a labour intensive economy, these units can create employment opportunities. There is nothing wrong with such specific preferential treatment of small scale units. But this policy aimed at removing such differences. Secondly, this policy created a precedence by regularising the unauthorized excess capacity created by large units, instead of taking action against such erring big units. While the big units welcomed this move of the government, yet this has resulted in the expectation that the government would continue to have such liberal treatment in future also. This indirectly has also affected the growth prospects of new industries and the existing medium and small scale units. Though the government justified its move by stating that such a move would facilitate fuller utilisation and higher output, yet the consequence of such a move was not thought about. However, it may be pointed out that the seeds of liberalization were sown through this policy and the government's intention to select capital intensive path of development.
The features of 1991 Industrial policy
The government announced its new Industrial policy in July 1991. The new policy has outlined several changes which have together opened a new era to the growth and development of industrial sector in India, The conventional regulations and restrictions have been replaced with liberalization and reliefs. Consequent to the announcement of the new policy, there has been all round jubilation in the industrial sector. The following are the salient features of the new industrial policy.
Even by 1985-86, the government realised the need to encourage the industrial sector to stand on its own legs and towards achieving this a number of policies and procedural changes have been announced. This was expected to increase productivity, reduce costs and improve the quality with which the domestic industries are expected to face competition with strength. There was an honest attempt to release the public sector from a number of constraints and it was given a large measure of autonomy. Technological and managerial modernization programs were taking place in large scale. All these measures together contributed to the achievement of an impressive annual growth rate of 8.5% during the VII Five year plan. Having understood the effectiveness of all the policy changes in the past, the new industrial policy will continue to pursue a sound policy to encourage entrepreneurs, develop the indigenous technology through intensive research and development activities, dismantle the regulatory system, improve the capital market, etc. Small scale sector would get a special attention and the government promised to come out with a new policy towards the small scale industries. Foreign technology and investment would be welcomed to improve the domestic production base and increase the exports. The MRTP Act would be suitably modified to encourage competition. Public sector will be made to run on commercial lines and play a vital role in economic development. The essence of this new policy will be discussed under the following heads: 1. Industrial licensing, 2. Foreign investment, 3. Foreign technology agreement, 4. Public sector, 5. MRTP Act and 6. Small scale and tiny sector policy.
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90's a number of changes in the system of industrial approvals have been brought about. The domestic producers will be able to withstand the competition in the country as well as abroad only through procedural reforms. Hence, the role of government will be changed from that of exercising control to one of providing help and guidance. Changes in the policy towards public sector in the last few years have clearly indicated that private sector enterprises will be allowed to compete in many areas hitherto earmarked for public sector. Consequently, the new policy has completely reclassified the Indian industries as below:
a) Eight industries have been completely reserved for the public sector. They are: i. Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils; v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tm, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transport.
b) Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries;
i. coal and lignite, ii. petroleum other than crude and its distillation products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco substitutes, vii. Asbestos and asbestos based products, viii. plywood, decorative veneers and other wood based products such as particle board, medium density fiber board, block board, ix. raw hides and skins, leather, chamois leather and patent leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and newsprint except bagasse based units, xiii. electronic aerospace and defence equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi. drags and pharmaceutical xvii. entertainment electronics and xviii. white goods like domestic refrigerators.
As regards the provisions of the industrial licensing policy, i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector and the list of 18 industries and the areas reserved for small scale industries will continue.
ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations.
iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported, goods does not exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required.
iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in ares other than cities of more than one million population. In cities with more than one million population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas.
v) New Broad-banding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing units.
vi) The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects,
vii) A very significant step is to abolish all the existing registration schemes.
viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum.
ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system),
FOREIGN INVESTMENT
Foreign investment carries with it the benefits of technology transfer, marketing expertise, modem managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the new policy has clearly contained the following provisions related to foreign investment: i) In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed- Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments will be made in the FERA.
ii) The general policies governing the domestic units in regard to import of components, raw materials and intermediate good and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on account of dividend payment also to ensure that such payments are balanced by export earnings over a period of time.
iii) All the other foreign investments not included in the Category I slated above will require prior clearance.
iv) Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in (i) above. However, the provisions of the Export-Import policy applicable to the domestic units will also be applicable to such trading companies.
v) To encourage substantial inflow .of foreign investment, a Special empowered board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
FOREIGN TECHNOLOGY AGREEMENT
A welcome change in the outlook of the government as evidenced by the new policy is the realization that the sophisticated technology, from abroad can be brought in only through liberal and less restrictive procedure and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameter. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulations governing foreign technology agreement:
i) No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through the blanket permits.
ii) Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provision. Upto the payment of Rs.1 crore, royally will be @ 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of sales over a 10 year period from the date of agreement or 7 year period from the dale of commencement of production.
iii) In the case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does riot entail any foreign exchange payment commitment.
iv) In all the other cases, the general procedures in practice will be adhered to and such industries will require approval.
PUBLIC SECTOR
The public sector was given the predominance in the industrial development over the last four decades and the amount of investment made in this sector, though justified from the point of view of socialistic democracy, it has been struggling with so many problems like poor productivity, excess staffing, lack of continuous technological up-gradation, inadequate attention to research and development, etc. The rate of return on investment in public sector has been so low that it has prevented the automatic growth of these assets to the government. The main reason for this poor performance of the public sector has been the taking over of the sick units from the private sector and the number of units which are in the consumer goods and service sector. Hence, in the new policy the government has rightly given the emphasis to the development of public sector in the field of essential infrastructure goods and services, technology development and building of manufacturing capabilities, manufacture of products such as defence equipment. The public sector will also enter the other areas not strengthened if they generate good profits and the management will be granted more autonomy through a system of memorandum of understanding. Private sector will be invited to induce competition in these areas. In selected industries in public sector, the government would disinvest a part of the equity share holding to provide market discipline to the performance of the public sector. Based on these views the new policy has the following provisions regarding the public sector:
i) A review of the public sector portfolio investment will be made to give the emphasis on the role of public sector in the strategies, high tech and infrastructure. Public sector units will be allowed entry into areas not strictly reserved for it.
ii) The Board for Industrial and Financial Reconstruction will be approached to help the sick units to rehabilitate them. To protect the interest of workers who are likely to be affected due to rehabilitation of public sector sick units, a social security system is proposed to be devised.
iii) A significant policy aimed at raising the resources and encouraging public participation in the growth of public sector units is that the government will offer a part of its share holding in the public sector to the mutual funds financial institutions, genera! public and workers.
iv) In the direction of strengthening the management of public sector units the Board of public sector management will be made more professional and given more powers. Further to make the management of such units more autonomous and accountable a system of memorandum of understanding will be adopted. Apart from improving the expertise of the government in implementing the MOU, the government also would place in the Parliament the MOU to facilitate detailed discussion.
MRTP ACT
A major deviant of the new policy is in respect of the MRTP Act. The new policy aims at removing the unnecessary bureaucratic controls and allow the industries to breathe in an atmosphere of freedom. The efforts of the government in the past intervening in the investment decisions of the MRTP companies have been proved to be counter-productive. Hence, the newly empowered MRTP Commission will enquire into complaints received from individual consumers or classes of consumers. The following is the essence of the provisions in the new policy regarding MRTP Act:
i) The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course. ii) The need to obtain the prior approval of the central government for establishing new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed. iii) The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair trade practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices. iv) All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers of the MRTP Commission.
Industrial pattern in India on the eve of planning and growth since the I Five Year Plan
By 1950, the industrial pattern in India was completely under the shackles of the British policy. Till independence, India was used as a market for the finished goods of Briton and so nothing spectacular could be explained about the industrial pattern in India at that time. The main features of the industrial pattern on the eve of planning (1950) were:
1. There was a conspicuous lop-sided pattern of industry found by 1950. On the one side large industries owned by British businessmen was existing and the other extreme the indigenous industries of small size but in large numbers was found. There was no medium scale industries at all. Obviously the employment pattern was concentrated in these two extreme types of industries.
2. The capital intensity in Indian industries was very low compared to several other Western countries. This was because of low wage level and very small market size for the products. So there was no scope for large scale production.
3. The composition of industrial output was such that the ratio between consumer goods and capital goods was 62: 38. This amply explains the under developed nature of the capital goods sector.
On the eve of the I Plan the government studied the prevailing situation and then decided to launch the process of industrialization in India in order to achieve a higher rate of growth. For this purpose steps were taken to design the industrial development to accelerate growth. The plan-wise steps for achieving a higher rate of industrial development is given below:
I Plan: During this Plan the emphasis was more on the development of agricultural sector than the industrial sector. However, the effort was to improve the power and irrigation facilities so as to facilitate rapid industrialization. The target for the growth was to achieve 7% But in reality this called for huge investment which did not come forth. Out of the total investment planned for the industrial sector (Rs. 797 crores), Rs. 94 crores was the outlay fixed for the public sector. The Plan also aimed at fuller utilization of the existing capacity. However several important industries like Sindiri Fertilizer factory, Chittaranjan Locomotive factory, Indian Telephone industries, etc were set up during this Plan.
II Plan: The seeds of industrialization were sown during this Plan. During this Plan period several important changes took place and the most notable one being the government declared its Industrial policy resolution 1956. Heavy industries and large scale industries were to be set up. The total investment by the private and public sector was Rs. 1575 crores. The following priorities were set up to achieve a desirable pattern of industrial development during this Plan. i) To give top priority to heavy engineering and machine building industries. ii) Expanding the capacity of some of the industries producing aluminium, cement, chemical pulp, fertilizers, etc. iii) To undertake modernization and re-equipment of the major national industries like cotton textile and jute. v) To achieve fuller utilization of available capacity and vi) To expand the capacity of the consumer goods industries.
With these priorities, major iron and steel plans were set up in public sector in collaboration with other countries. Apart from these the industrial development also included the development of several other medium scale and small scale units in large scale. The combined effect of all these industrial development was during this Plan period the index of industrial production shot up to 194 in 1960-61 from a mere 139 in 1955-56.
III Plan: This Plan provided for a big leap in industrial development by raising the rate of investment to a new peak to strengthen the industry, power and transport and also to achieve a rapid rate of industrial progress. With this view, the total investment ear-marked for industrial development was Rs. 3000 crores in which public sector contribution alone amounted to Rs. 1700 crores. In fact in this Plan the public sector was given predominant role. Apart from this the village and small scale industries received a great impetus in the form of Rs. 425 crores of investment by private and public sector. Added to this was to set up 300 new industrial estates throughout the country. The target for industrial development was" fixed at 14%, though the actual achievement was only 7.6% per annum. There was overall industrial development and it was thought that the country could receive the stage of self-reliance.
IV Plan: With a good agricultural output on the eve of this Plan (which coincided with the start of Green revolution), the industrial development started picking up. This Plan had specific objectives for industrial development as indicated below:
1. To fulfill the commitments made for investments 2. To expand the production capacity as required by the future 3. To bring down the level of dependence on import for supplies 4. To exploit the existing internal development to lay the base for new industries.
With a total investment of Rs. 5300 crores by the private and public sectors, the Plan provided for the development of large, medium and small scale and village industries. But during this Plan the achievement was well below the target due to several factors. Specifically, operational problems in some of the basic industries, lack of integrated planning, deficiency in design, loss of man-days due to strikes and lock-outs, decline in demand for industrial machinery, inadequacy of investment, stagnation in the production of commercial crops, etc.
V Plan: This Plan started with the emphasis on the following with the objective of achieving self-reliance and growth with social justice: i. Rapid growth of the core sector, ii. Encourage development of industries which accelerate rapid diversification and growth of exports, iii. Increasing the production of industries which supply for mass consumption, iv. To curtail the production of non-essential commodities except for export purposes.
With this emphasis the total investment by the public private sectors worked out to Rs. 10135 crores. The Village and small scale industries received tremendous encouragement during this Plan and the government reserved production of 124 items for small scale industries. Inspite of all these, the actual achievement of industrial development was just 5.3% per annum against a target of S.1% This was mainly because of the capacity constraints in industries like cement, paper and fertilizer, lack of transport facilities, shortage of fuel, electricity, low administered price, strained industrial relations, inefficient management, etc.
VI Plan: This Plan started with a strategy to achieve structural diversification, modernization and self-reliance. Towards this, the Plan formulated policies on the following lines:
i. Enhancing the manufacturing capacity in a substantial way covering a wide range of industries, ii. Giving special attention to the capital goods industry and electronics industry in particular, iii. In order to meet the foreign exchange requirements, the exports of the engineering goods and industrial products would be stepped up, iv. Providing for a combination of the import of contemporary technology and also development of indigenous technology through intensive research and development and v. Developing a strategy for backward regions.
The Plan provided for an overall of investment of Rs. 22187 crores, though the actual expenditure was of the order of Rs. 30000 crores. However, the industrial growth did not exceed the target determined due to various reasons, the important of which are: Power shortage, poor industrial relations and continued labour unrest, poor demand conditions, lack of concern for improvement of efficiency failure to give greater emphasis on the technology up-gradation, etc.
VII Plan: This Plan provided for a total investment of Rs. 19708 crores by the Public sector and Rs. 2752 crores for the development of the village and small scale industries. Over and above this the private sector investment of a very huge size was also forthcoming. The Plan developed an industrial strategy with the following elements: i) to completely remove the infrastructural deficiencies like power shortage, by providing for more efficient use of the existing capacity and also establishing new power plants. ii) to encourage modernization of industries especially sugar and textile industries through up-gradation of technology. iii) to determine specific targets for productivity for major industries like steel fertilizer, paper, cement etc. iv) to identify the industries which possess competitive advantage and then encourage them more to improve their export by making the export production an integral part of the domestic production. v) to encourage the ‘sunrise’ industries which carry enormous potential for improving productivity and quality vi) to reduce regional disparities in industrial development and also ensure dispersal of industries by locating new industries in industrially backward states and districts, vii) to extend the coverage of pollution control system in more industries.
An encouraging note during this Plan was that the actual achievement of growth was very much better than what it was in other plans, against a target of 8.5% This better growth rate was achieved mainly because of i. better performance of infrastructural sector, changes in the area of licensing, higher import of capital goods, higher utilization of the existing capacity, extending of broadbanding policy to more industries, etc. The overall outlay during this Plan was Rs. 22148 crores.
VIII Plan: At the start of this plan, the government had taken a crucial decision to change its fiscal, monetary, trade, industrial and foreign investment policies. In one word, the liberalization policy was announced. The continued emphasis on public sector was dropped as it had provided the necessary momentum for growth and so the private sector initiatives have to be encouraged. The overall efficiency of the private sector proved that it has come off age and play a greater role in the economic development. The competitive advantage of Indian industries should be made full use of and so the private sector is vested with the responsibility for improving the efficiency and productivity. An open door policy is adopted to facilitate the growth of private sector and also to integrate the domestic production with the rest of the world. External collaboration, joint ventures, etc will all be viewed with a main focus on the flow of benefits. The overall outlay in this Plan was set at Rs. 40673 crores. The Plan has fixed 8.9% as the annual average growth rate and with the prevailing conditions, this target appears to be reasonable and achievable.
EXIM Bank and the functions of EXIM Bank The schemes of financing of the Bank
The Export-Import Bank of India (EXIM Bank) established on 1st January, 1982 is a wholly owned financial institution of the government. It was established, by an Act of Parliament, for the purpose of financing, facilitating, promoting foreign trade of India. It is a principal financial institution for co-ordinating the working of institutions engaged in financing exports and imports.
Chapter IV of the EXIM Bank Act provides: “The EXIM Bank may grant, in or outside India, loans and advances, by itself or in participation with any bank of financial institution whether in or outside India, for the purpose of export or import and shall also function as the principal institution for co-ordinating the working of institutions engaged in financing of the export in such manner as it may deem appropriate." The Chapter provides further: "The EXIM Bank may also carry on and transact all or any of the following kinds of the following business, namely:
a) granting loans and advances to a scheduled bank or any other bank or financial institution notified in. the Official Gazette by the Central Government in this behalf by way of refinance of loans and advances granted by it for purpose of export or import.
b) underwriting the issue of stocks, shares, bonds or debentures of any company engaged in export or import, the Export-Import Bank of India Act, 1981.
c) issuing bid bonds or guarantees in or outside India by itself or in participation with any government bank or financial institution in or outside India.
d) accepting, collecting, discounting, re-discounting purchasing, selling or negotiating in or outside India bills of exchange or promissory notes arising out of transactions relating to export or import and granting of loans and advances in or outside India against such bills or promissory notes.
e) granting, opening, issuing, confirming or endorsing letters of credit and negotiating or collecting bills and other document drawn there under.
f) undertaking any transaction involving a combination of government to government and commercial credit for purpose of export or import.
g) granting loans and advances outside India for any Indian joint venture.
h) granting lines of credit to the government of any foreign state or any financial institution or person outside India for purpose of export and import.
i) granting loans and advances to any person in India in connection with his equity contribution in any joint venture in any country outside India.
j) financing export or import of machinery and equipment on lease basis.
k) subscribing to or entering into such other dealings in foreign exchange, as may be necessary for the discharge of its functions.
l) subscribing to, or investing in, or purchasing of, stock, shares, bonds, or debentures of any country outside India.
m) opening of any account in any bank in or outside India or the making of any agency arrangement with, or acting as agent or correspondent of, any bank or other institution in or outside India.
n) transferring for consideration, any instrument relating to loans and advances granted by it.
o) issuing participating certificate.
p) subscribing to, or investing in, or purchasing of stock, shares, bonds, or debentures to the extent necessary for the enforcement of a line, pledge or other contractual right
q) undertaking and financing of research, surveys, techno-economic or any other study in connection with the promoting and development of international trade.
r) providing technical, administrative and financial assistance of any kind for export or import.
s) planning, promoting, developing and financing export-oriented concerns.
t) forming or conducting subsidiaries for carrying out its functions.
u) acting as agent of the Central Government, any State Government, the RBI, the Development bank or any other person as the Central Government may authorize.
v) collecting, compiling and disseminating market and credit information in respect of international trade,
w) doing any other kind of business which the Central
x) government may authorize.
y) generally doing such other acts and things as may be incidental to or consequential upon, the exercise of its powers or to discharge of its duties under this Act or any other law of the time being in force, including sale or transfer of any of its assets.
Financing schemes of the EXIM Bank:
The present focus of the Bank is on medium term and long term credits. Whenever a buyer of goods or services exported from India is allowed to defer payment, an export credit, arises. Deferred export credit is available for the sale of machinery, manufactured goods and related services. Such credit may be in the form of “Supplier's credit” or “Buyer’s credit” - Supplier's credit arises when an Indian exporter extends credit to the overseas buyer and finances himself through the EXIM Bank. Deferred export credit takes the form of Buyer's credit when the EXIM Bank extends credit directly to the buyer.
The EXIM Bank operates three broad programs of financing viz. Loans, Rediscounting and Guarantees. At present the Bank operates nine lending schemes which are briefly described below
1. Loans to Indian companies:
Direct financial assistance to export: Funds are provided, on deferred payment terms, to Indian exporters of plant, equipments and related services, which enable the exporter to extend deferred credit to the overseas buyer. This programme covers project exports, which could be turn-key projects/construction projects. Such project exports arise when an Indian company contracts either to set up on a turnkey basis any textile mill, sugar plant or contracts a construction project overseas. Financing export of eligible goods is covered under this programme.
Consultancy and technology services: Indian companies can borrow funds from EXIM Bank and provide deferred credit overseas buyers of Indian consultancy of technology services.
Overseas investment financing: The bank provides financing, where an Indian company establishes a joint venture overseas, and requires funds towards equity participation.
Pre-shipment credit: This programme is available for companies, that have won an export contract for the eligible goods and are seeking finance to produce the goods which entails a production period exceeding six months.
Loans to foreign government companies and finance institutions:
This is offered directly to foreign importers for the import of eligible Indian goods and related services with repayment terms spread over a period of years.
Lines of credit to foreign governments:
Besides Foreign Government, such lines of credit are available to foreign financial institution. Such lines provide long term finance for import of Indian capital goods related services.
Relending facility to banks overseas: Relending facility to banks overseas is made available to enable them finance to importers, for import of Indian capital goods. Banks overseas would intermediate between foreign buyer and EXIM Bank, and the latter would intermediate with the supplier.
Rediscounting facility: Under this type of assistance, specific mention may be made about the following schemes:
Export Bills Rediscounting: This lending programme is available to commercial banks, in India, who are authorized to deal in foreign exchange. Such banks can re-discount their short term usance export bills portfolio with EXIM Bank. EXIM Bank provides funds, under this programme, for a period of 90 days against export bills that have equal period to run, before realization.
Refinance of export credit: Under this programme, commercial banks, in India, who are authorized to deal in foreign exchange, can obtain from EXIM Bank 100% refinance of term loans extended for export of eligible Indian goods. Such credit enables Indian Exporters to offer credit terms to foreign Importers. For an export contract upto Rs. 10 million, commercial banks can obtain financing participation under EXIM Bank's other programme, including syndication facility.
Guaranteeing of obligation: The Guarantee programme is available in the case of construction and turnkey contracts. Construction contracts involve erection, civil works and commissioning.
In such contracts, an Indian exporter usually requires bid bond, advance payment guarantee, performance guarantee, guarantee for retention money and guarantee for borrowings abroad. EXIM Bank participates with Commercial banks in India in the issue of guarantee.
Various facilities offered by the EXIM Bank to the exporters of different categories
i) Facility to exporters of engineering goods and turnkey project exporters:
Deferred payment exports arise when the export proceeds are to be received beyond six months from the date of shipment (in case of exports to Afghanistan and Pakistan beyond three months). Turnkey projects arc those which involve rendering of services like design, civil construction, erection and commissioning of plant along with supply of equipment. Typical projects include supply, erection and commissioning of equipment for generation, transmission and distribution of power and plants for manufacture of cement, sugar, textiles, chemicals, etc.
When an Indian' exporter extends deferred credit directly to the overseas buyer, the export contract falls under the category of “Supplier’s Credit.” On the other hand, if a foreign buyer is offered credit by a financial institution or a consortium of financial institutions in India and the Indian exporter is paid the export value by the institution(s) concerned, the relative export contract falls under the category of “Buyer's credit.”
Supplier's credit: Credit is provided by the EXIM Bank on deferred payment basis, in participation with commercial banks, to Indian exporters, of engineering goods and turnkey projects to enable them to extend credit to importers overseas.
Where individual contract value is not more than Rs. 1 crore banks may provide the credit and avail 100 per cent refinance from the EXIM Bank.
Overseas buyer's credit: As an alternative to Supplier's credit availed by the exporters, credit extended by the EXIM bank to buyers abroad with a view to enable the latter to import engineering goods and projects from India, on deferred credit terms. Credit to overseas buyers is also available from the EXIM Bank in the form of Lines of Credit to overseas financial institutions, foreign governments and agencies, and relending facility to overseas banks.
Pre-shipment credit: Credit is available to eligible exporters to buy raw materials and inputs required to produce capital equipment that has to be exported. EXIM bank participates in the credit if the requirement is for a period of more than 180 days.
Foreign currency loans: Foreign currency loans can be availed of from the EXIM Bank at market rates to cover purchase/procurement of machinery from third countries.
Technology and consultancy services finance:
Credit is also available to eligible Indian exporters of technology and consultancy services to enable them to extend term credit to importers overseas.
Non-funded facilities: Exporters of engineering goods and turnkey projects abroad arc also provided the following facilities: i) issue of Bid Bonds ii) issue of advance payment guarantees, iii) issue of performance guarantees, iv) issue of guarantees for release of Retention Money's and v) issue of guarantees for raising Borrowing overseas.
ii) Facility to overseas construction project exporters:
Construction projects involve civil work, Steel structural works, as well as design, equipment supply, erection and commissioning. Typical projects include electrification and utility, power transmission, pipelines, water resource management systems, airports, roads, bridges, hotels, housing and erection of industrial plants. The EXIM Bank offers funded, non-funded and advisory services to Indian construction project exporters.
Pre-shipment credit:
The Bank finances the exports from India and the preliminary expenses in rupees relating to the execution of the project. Commercial banks also extend this facility for definite periods at confessional rates of interest.
Post-shipment rupee credit:
The EXIM Bank enables financing of exports until progress payments are received commercial banks extend this facility at confessional rates of interest.
Foreign currency loan:
The Foreign currency loan can be availed of from the EXIM Bank, at market rates, to cover purchase/procurement of machinery from third countries.
Deferred credit:
The EXIM Bank provides deferred credit facilities against security for a portion of the contract covering export of selected items and technical services from India.
Non-funded facilities:
Exporters of construction projects overseas are also provided several facilities as explained already.
iii) Consultancy and technology service finance:
Indian companies executing overseas contracts, involving consultancy and technology services, can avail of EXIM Bank's financing programme with a view to offer deferred payment terms of their clients. This enlarges the market for export of Indian consultancy services. The consultancy and technology services for this purpose include:
a) providing personnel including skilled and unskilled workmen are persons for rendering technical or other services;
b) Transfer of technology, know how expertise or other skills;
c) furnishing any information, blue prints, plans or advice; and
d) any other activity considered acceptable by the EXIM Bank.
Indian consultants, having corporate status or otherwise who-have secured a contract for export of services wherein deferred payment term need to be offered to the client, can utilize the facility.
iv) Lines of credit:
EXIM Bank extends lines of credit to overseas Government of Agencies nominated by them to enable buyers in those countries to import capital engineering goods from India on deferred payment terms. This facilities enables Indian exporters to offer deferred credit terms to customers in those countries as per terms and conditions already negotiated between the EXIM Bank and the overseas governments. The exporters can obtain payment from the EXIM bank against negotiation of shipping documents, without recourse to the exporters.
v) Facility for syndication of Export credit risks:
Commercial banks, in participation with EXIM Bank provide long term credit, at competitive rate of interest, to Indian exporter of capital goods, turnkey projects and consultancy services, thereby enabling Indian exporters to compete effectively in the international markets.
The facility for syndication of term export risks lends flexibility to. the export credit mechanism by allowing banks to assume risks, without blocking their funds -for long terms, at fixed interest rates, commercial banks can now support export proposals without impairing their liquidity.
Commercial banks seeking enhancement in their export portfolio can avail of this facility end participate in the syndication arrangement.
vi) Facilities for deemed exports: .
"Deemed export” occur in case of specified transaction within India which result in foreign exchange earnings or foreign exchange savings.
Deemed exports involving supply of capital goods and other eligible goods have access to the EXIM bank's deferred credit facility .at internationally competitive interest rates. EXIM bank extends credit through the supplier or directly to the buyer. Intermediating banks/institutions can also avail of refinance facility from the EXIM bank covering the full value .of the term credit. EXIM bank may, in addition, provide pre-shipment (working capital) facility, normally for large transactions involving long manufacturing cycle time.
Other facilities available from the EXIM bank relating to 'deemed exports' include issue of guarantees and bridge financing in foreign currency. These facilities are normally availed by project exporters. vii) Advisory services:
Through its International Merchant Banking division, the EXIM Bank offers the following advisory services: a) work closely with Indian companies in designing financing packages for joint ventures in third countries; b) advise Indian companies executing contracts abroad, on sources of favourable financing overseas; c) providing access to Euro-financing sources and global credit sources to Indian companies engaged in exports; d) advise on exchange control practices globally and e) advise and design financial packages for export oriented industries in India
These services are being added to in order that tailor-made financing packages for high value export contracts are available.
Ministry of Commerce, Government of India, determines the eligibility of transactions which are to be treated as 'deemed exports. These are published, from time to time, in the Imports and Export Policy Book.
New export-import policy 1992 - 1997.
The balance of payments position, which had reached a point of near collapse in June, 1991, slowly stabilized during the course of 1991-92. Although new policies to deal with the situation were quickly formulated by the new government and implemented within a few months the external payments situation took time to stabilize primarily because it had been allowed to deteriorate to a state o/ near bankruptcy in June 1991. Foreign currency reserves had declined to $ I.I. billion despite heavy borrowing from the IMF in 1990-91 and a substantial part of this was held in illiquid deposits which could not have been easily mobilized if needed.
International confidence had all but collapsed, commercial borrowings had dried up and even letters of credit opened by Indian banks were being generally rejected unless accompanied by confirmation by foreign banks.
The strategy for the management of the balance of payments outlined in the Budget for 1991-92 which was presented in July, 1991 relied upon a combination of macro economic stabilization and structural reforms i industrial and trade policy. It was recognized that in the medium term, the solution to the balance of payments problem would have to come from a much stronger export performance, but in the shorter run the strategy had to be underpinned by mobilization of external financing from the multilateral agencies and from bilateral donors. Restoration of access to imports through liberalization had to depend initially upon –additional financing since the export efforts would take time to show results. Since access to external commercial borrowing was constrained the only other sources of funds were the bilateral and multilateral agencies. Visible support from the multilateral agencies was important for restoring international confidence.
Accordingly, the government negotiated a standby arrangement with the IMF in October, 1991 for 5 2.3 billion over a 20-month period, a Structural Adjustment Loan with the IBRD of $ 500 million and a Hydrocarbon Sector Loan with the ADB for $ 250 million. Parallel with the effort to draw on multilateral sources, the government also launched the India Development Bonds aimed at mobilizing NRI sources of funds.
With the assurance of external support through these efforts, there was a gradual stabilization of the balance of payments position in the course of 1991-92. Foreign exchange reserves were restored to more normal levels increasing from $ 1.1 billion in June, 1991 to $ 5.6 billion at the end of March, 1992. The entire amount of drawls from the IMF in 1991-92 with the accretion from India Development Bonds together amounted to an inflow of S 2.87 billion. This was less than the increase in reserves of $ 4.51 billion from June 1991 to end March, 1992. In effect, the exceptional financing mobilized in 1991-92 was used primarily to build up reserves.
Import restrictions were gradually lifted in the course of 1991-92 as the balance of payments stabilized. By the end of 1991-92 the new Liberalized Exchange Rate Management System introduced in the Budget for 1992-93 eliminated import licensing in most capital goods, raw materials, intermediates and components and introduced a dual exchange rate system with one rate effectively floated in the market. The Budget for 1992-93 also reduced the customs duties in line with declared Government policy in order to make the Indian economy more competitive and gradually exposing Indian industry to external competitive pressure. The trade and exchange rate policy regime for 1992-93 was therefore characterized by major progress in eliminating unnecessary administrative and discretionary controls over foreign trade which were contributing to making our economy uncompetitive.
The year 1992-93 saw a revival of imports to more normal levels. The total value of imports in US $ in the period April-December 1992 increased by 16.5% over the level in the corresponding period of 1991-92. The increase appears large only in comparison with a highly depressed level prevailing in 1991-92. In fact the level of imports in 1992-93 as a whole is expected to be around $ 25 billion which is somewhat lower than the level in 1990-91.
Exports in 1992-93 performed far better than in 1991-92. Total export growth in the period April-December was 3.4% in dollar terms compared with an observed decline of 1.5% in 1991-92. The performance of total exports is depressed by the decline of more than 60% in exports to Russia and other States of the former Soviet Union in 1992-93. The growth of exports to the general currency area in the period April-December was 11.4%. The average growth rate in April-December, 1992 has been adversely affected by a decline in exports of 12.5% in December, reflecting the disturbed conditions prevailing in that month, figures for January are also likely to be depressed by the riots US $ 19 billion. But it is hoped that the export performance in subsequent months will return to the high growth rates of 15 - 16 per cent observed during September-November.
The current account deficit in 1992-93 is expected to be around $ 7 billion, reflecting the revival of imports to more normal levels. This deficit is being financed through a combination of traditional financing sources and exceptional financing.
However, there are important uncertainties in the balance of payments. The full impact of the disturbances in December, 1992 and January, 1993 on exports and imports is difficult to assess at this stage. Clearly, the receipts on account of tourism would be less than anticipated. The inflow of NRI deposits has in any case been small this year. The inflow of external assistance is also subject to some uncertainties consequent upon constraints that affect the rate of utilization. A step-up in commercial borrowings was, in any case, not envisaged. Finally, there is the uncertainty arising from leads and lags. Interest rates and exchange rate expectations do affect the timing of receipt of export proceeds and payment of import costs. However, while these uncertainties justify a measure of caution in assessing prospects, the balance of payments in 1991-92 has performed more or less as expected,
New export-import policy 1992 - 1997
On March 31, 1992, the Government announced a new export-import policy for the period J 992-1997, This policy has the following objectives: 1. To institute the required framework for globalization of the India's foreign trade. 2. To improve the export capabilities of our industry, the policy aims at promoting the productivity, modernization and competitiveness. 3. To facilitate improvement of image of our products in foreign markets, the policy encourages the attainment of high quality in the export products, 4. By allowing liberal access to raw' materials, intermediates, components, consumable and capital goods etc., in the international market, the policy wants to achieve higher exports. 5. The policy provides for deregulation to achieve self-reliance so "that (he domestic producers can improve then- efficiency and become competitive internationally. 6. The policy also lays emphasis on research and development as well as technological advancements so that the domestic producers will benefit from globalization. 7. A significant object is to simplify the procedure for exports and imports.
Subsequently, the government announced further modification to the above policy by April 1, 1993. The important features, of this modified policy are: a) The duty-free export benefit given to the Export oriented units and the units in Export Processing Zones is extended to units engaged in agriculture and allied activities provided they export 50% of their total production. b) The government removed 144 items from the negative fist of exports leaving only prohibited items, items requiring license and canalized items. c) As a step to tap the potential of farm sector, professionals, hotels, travel agents and diagnostic centers, the government extended the Export promotion capital goods scheme to them. d) For more than 2200 items, standard input-output norms is fixed to enable the issue of license under the duty exemption scheme. e) The criterion for recognizing export houses is now based on the foreign exchange earning to FOB values of physical exports. f) The procedure relating to export and import has been further simplified. g) Compensation would be given for unutilized import licenses for duty free license scheme and EXIM scrip holders.
These provisions in the latest export-import policy would certainly enable India to improve her exports and bring down imports." This has been experienced during the first half of 1994 itself.
Public Distribution
1. Meaning and objectives of Public Distribution System [PDSJ
The countries like India with more population commensurate with production of minimum needs especially food grains, are necessarily in a position to have a streamlined system of distributing the essential commodities to the population living with lesser purchasing capacity to fulfill the objectives of democratic government.
As a fundamental Constitutional right, in India the producers and traders of food grain have the right to do business freely and can earn profit as much as possible. They were given every right to influence the market by means of pricing, supply, distribution, etc. At the same time the consumers are also given rights to protect themselves from greedy traders, who are indulged in malpractices in trade. It becomes the duty of the government to protect the rights of both producers, traders and consumers. In our country the government is liable (o protect consumers and that too consumers who are living below the poverty level. Consumers who are living below the poverty line are to be provided their minimum needs. "Poverty is concerned with the relationship between the minimum needs of people and their ability to satisfy their needs. "Minimum needs" and the amount of money required to satisfy their needs" - first its minimum food budget. [Economic and Social Issues - Leftwich & Sharp]
Gradually out government took steps to safeguard the interest of the population who are under poverty line and also to improve the growth rate of productivity in agriculture and industry and trade. These steps led to the dual price mechanism in market, legislation in pricing and marketing and introduction of PDS.
PDS is at present functioning for the cause of middle income and poor income group with consumer orientation. Consumerism has been explained as follows: "Measures are intended to protect consumers from unscrupulous 'sellers who presumably charge more for goods and services. Then they are worth to buyers. The price^ controls on various items fall into this category. These consumers who can get as much at the controlled price as they would purchase at an uncontrolled price clearly gains.
The market mechanism may be able to bring about an "equilibrium" between demand and supply. Even in this sphere, but it will not be able to bring about a balance between need and supply. Planning is necessary to take care of the poor and down trodden who are for the most part, outside the market system and have little asset endowment to benefit from the natural growth of economic activity.
"The market alone cannot ensure employment and a living wage to all our rural poor" [Prime Minister's statement on 8th Plan]
TABLE: 1.1 Net availability of foodgrains in India
|Year |Population in Mn. |Net availability of foodgrain in m.t. |Per capita availability in gms |
|1956 |397 |63 |431 |
|1961 |442 |76 |469 |
|1972 |562 |96 |467 |
|1979 |659 |114 |474 |
|1984 |738 |128 |478 |
|1988 |799 |132 |448 |
|1989 |816 |147 |494 |
|1990 |833 |144 |474 |
|1991 |849 |158 |510 |
[Source: Govt. of India, Economic Survey, quoted by Ruddar Dutt & KPM Sundaram in Indian Economy, 1993)
The net availability of food production has increased from 63 m to 158 m between 1956 and 1991, whereas the population has increased from 397 m to 849 m during the same period. To be more specific the greater growth of population was in the rural areas. It also signified that the share of family consumption in total food production will increase and much less will be left over as marketable surplus. This type of deviation, indicated the government to enter into equitable distribution system of food supply.
TABLE: 1.2 The growth of population and growth of food supply
|Year |Population in .m. |Food Production in m.t. |
|1979-80 |659 |110 |
|1983-84 |738 |152 |
|1987-88 |799 |140 |
|1990-91 |833 |177 |
|1991-92 |849 |175 |
(Source: Indian Economy, Ruddar Dutt & KPM Sundaram)
During the past planning years our country has faced heavy inflationary pressure. The vulnerable section of the community was very much affected by the heavy raise in prices. During unproductive seasons the daily bread winners in urban areas and the rural agricultural landless laborers are the ones very much affected by the steep rise in prices of essential commodities.
Hence it is the duty of our government to protect the vulnerable class from this crisis. Thus the government entered into this PDS.
The crop yield in India is very low when compared to other countries. The crop yield in India is quite disproportionate to the abnormal growth rate of population needs, Even after Green revolution, which took up the food production spectacularly, the international, comparison brings a low position of India. Hence it is the sole responsibility of our government to streamline the food supply to protect the weaker sections of the society.
TABLE: 1.3 Average yield per hectare [in Qtls.]
|Commodity |Country |1951-56 |1961-66 |1987-88 |
|Rice |India |8 |10 |17 |
| |China |17 |18 |35 |
| |Japan |26 |33 |40 |
|Wheat |India |7 |8 |20 |
| |China |9 |9 |30 |
| |France |21 |29 |30 |
| |Germany |28 |33 |68 |
Source: Economic Survey 1990, P …..
The seasonal fluctuations create disparity in the quantum of production. The growing regional disparity in food production creates an artificial food scarcity. The amount of food supply and other demand are taken into consideration by the Central government to fix up the prices. So it becomes important to distribute the food grains on the basis of population, supply and demand. Hence it is inevitable on the part of the government to bring a streamlined system in food production, management for equal distribution.
Food problem and its management become complex and multifarious due to black marketing and hoarding. These practices create artificial demand for food supply and reflects as the high prices, the worst sufferers would be the poorer and middle class people. This paved the way for PDS.
Famine were frequent in the past but rare in the present. Bihar [1965-66], Maharashtra [1972-73], West Bengal [1974-75], etc., Through PDS government shall augment food supply to tackle the food crisis. There are certain other factors which affect the free open market system such as social and political revolutions. So the government is liable to lay its hand and supply food grains and other essentials at the cost of affected people.
Fluctuations in prices of food grains affect producers and consumers as well. The negative effect of price rise will be more severely felt by the weaker sections of the society. The distribution system should aim at equal and fair distribution of commodities to the general public.
Quality food is the other criteria taken into consideration by the government.
More than 75% of the Indians cannot afford to pay for quality diet which results in malnutrition. Adulteration is one of the reasons for poor quality of food grains. Mass and mushroom growth of slums in Indian cities and their belt areas also necessitated the PDS. Hence PDS is becoming an essential system in urban areas.
Over crowding and the consequent pressure of population on land hence led to subdivision and fragmentation on land, decline in per capita area, disguised unemployment and thus marginal productivity of labour is zero or negative. The unemployed or under employed gets only seasonal employment only. They are not getting any personal income. This needs effective PDS.
2. Evolution of PDS in India
Before II World War the deficiency in food production was met out by importing food grains from Burma, Japan and other countries. During this time the import of food grain was highly affected. In 1941 the Central government fixed the statutory wheat price and in 1942 statutory price was fixed for rice also. The administration of controls was vested initially in the state government. The 3rd Price control conference in 1941 led to the interference of the central government The conference held in 1942 recommended an All India Plan for distribution of wheat and rice. For further streamlining, a Food grain Policy committee was appointed in July 1943 under the Chairmanship of TN Gregory [Food Policy and Economic Development in India, Jospeh, S.C., Madras 1961]
The recommendations of the Committee to bring all major food grains under statutory price control, calling for Central supervision to supply of food grains to deficit areas, introducing rationing system in the larger cities with over one lakh population initially and extendable to other gradually, to all food grains and all sections of society. Based on the scheme, the distribution of rice was introduced first in Madras in rationing and then in Bombay.
In 1950 government of India appointed a committee to review the situation known as Food grains procurement committee. The following were recommended by that Committee: Effective co-ordination and fo\d production, distribution system of essential commodities and a good control over the distribution of the same.
In 1950 due to bad crop and steep rise in food grain prices, due to Korean war, India had to face a slump period. This was overcome by getting a loan of 2 m t of wheat from USA.
During the First five year plan the government of India had the objective of reducing the dependence on foreign food and food and was to attain self sufficiency in domestic production. The series of good harvests in the country and the consequent decline in food grain prices during I Plan period made the government to relax the control and later remove it altogether. Food prices during this period were reduced by 23%
In 1955, the problem of food shortage and rise in prices again emerged. But soon it was rapid. In 1956 the government of India entered into an agreement with USA under PL480. USA agreed to supply 3.1 m t of wheat and 0.19 m t of rice for the next three years. This gave the opportunity for the government of India to stabilize the price structure.
In 1958-59, the crisis was acute. There was severe food crisis in Bihar, Bombay, Rajasthan, Tamilnadu, Orissa, etc. In 1959, food grains prices rose to 41% in the first three years of II Plan. In 1957, the government of India appointed a Committee to review the food problem called as "Food grains Enquiry committee" The recommendations were as follows:
1. compulsory procurement of food grains from foreign countries till a successful policy is framed by the central government of India. 2. it recommended for an organized PDS through a network of fair price shops and also to maintain buffer stock.
[Dandekar committee report] - about the fair price shop during 1961 -64 the prices of domestic grains in general continued to rule considerably above the price at which the imported grains were being issued through the fair price shops. So the government has set up in 1964-65 FCI to build up buffer stock of 5 m t every year. But it has failed due to two consecutive drought years.
During 1967-68, the name of the Fair Price Shop Scheme was corrected into PDS without arty change in the system of organization. However the PDS came in full swing during 4th and 5th Plan. This Plan has recommended the following: 1. It is needed on a regular basis 2. To have an adequate buffer stock system. Moreover the requirements of the PDS should be met mostly through internal procurement. Due to shortage of stock in 1973-74, the government had to import food grains and there was a high rise in price due to this the PDS could not fulfill its objectives.
In 1975 the government of India appointed the National commission on Agriculture. The recommendations were: 1. Al! towns and cities with a population of over one lakh should have a full fledged system of PDS. 2. All chronically drought prone areas should be covered under PDS. 3. All industrial town workers covered under all India Consumer Price Index numbers should have PDS. 4. Areas affected by flood, are to be covered under PDS.
All these recommendations were at a later stage fully implemented and executed by the government of India. Fifth five year plan was with the aim of removing poverty and growth of social justice and equality and also attainment of self-sufficiency' in all areas. Since 1974, the PDS has handled efficiently the distribution of food grains with FCI. In 1974 the government created a full fledged system of civil supplies and co-operation to ensure orderly production and distribution of commodities.
The Central government has developed support organization such as National Agricultural Co-operative Marketing Federation [NAFED] and National Consumers Co-operative Federation [NCCF] to undertake wholesale trading. Sixth and Seventh Plan took steps to minimize the problems of the society to get basic amenities like education, health care, sanitation, and safe drinking water food grains. The Seventh plan pays special attention in increasing the production of food grains, edible oils, sugar, textile and other items of mass consumption.
The Eighth plan aims at the growth of diversification of agriculture to achieve self- sufficiency in food production and to generate surplus for exports. The estimated agricultural production during the Eighth Plan is given below.
TABLE: 1.4 ESTIMATED AGRICULTURAL PRODUCTION DURING 8th PLAN
| |91-92 m t |96-97 |Annual growth output |
|Rice |72.5 |88 |3.95 |
|Wheat |56 |66 |3.34 |
|Course cereal |30 |39 |5.4 |
|Pulses |14 |17 |3.96 |
|All food grains |172.3 |210 |4.01 |
|Sugar cane |235 |275 |3.19 |
| | | | |
8th Plan proposed to raise the production of rice, pulses, oilseeds. It Aimed at self sufficiency and to prevent exports of food grain. The main objective of this Plan w-£s the extension of PDS to in accessible rural, tribal areas, etc.
Evaluation of consumer co-op. Fair price shops
Before 1912, co-ops. Was started in India as Agricultural co-ops. During the I World War period, a number of consumer stores came up in few important cities and towns. In 1928-29 there were in a) 323 primary stores in India. Before H World War period there were 396 stores with 43000 members. During II World war the dimension of (he objectives of these stores changed. The acute shortage of food supply during and after the II World War forced the government to intervene into the functions of consumer co-ops. Then the co-op stores acted as agencies for the government in the distribution of controlled commodities to prevent black marketing to ensure equitable distribution. In the first five year plan the importance of consumer societies was emphasized but it was not properly implemented. The Second five year plan reiterated the scope of the development of a network of the co-op societies in urban areas also. A committee was appointed by the Government to review the functions of these societies. They have recommended a good organizational set up an" effective structural pattern of consumer co-ops, their size, viability and whole sale stores promoters, etc.
The Committee differentiated the primary, wholesale and district wholesale societies and norms specified is given below. (Co-op sector in India - Sami Uddin, Mafazur Rahman,..............
| |Share Capital |Turnover |Members |
|Primary co-op. Stores |5000 |1 lakh |250 |
|Wholesale stores |50000 |2 lakh |100 Primary stores are members |
|Wholesale stores |100000 |300 lakh |200 Primary members |
In the 3rd five year plan it was observed that 'conditions for the development of consumer co-ops are generally favourable and if the special efforts are made rapid progress can be achieved. This will be of greatest help not only on in the stabilization of retail prices but also in preventing the evils of adulteration in food stuffs.' After Chinese aggression the government of India felt the need of co-op. Consumer societies to ensure the supply of food grains at controlled rate to the home needs. Hence the government provided financial and also establishment assistance to all co-op consumer stores.
|Share Capital |Primary Stores |Apex wholesale stores |
|Contribution |Rs. 2500 |Rs. 50000 |
|Management expenses |Rs. 1800 | Rs. 6000 |
|Godown contribution | | Rs. 125000 |
|Rent subsidy | | Rs. 9000 |
| | |(Maximum) |
(Ref: S. P. Jain President Indian Chamber of Commerce and Industry, Hindustan Times, Nov. 1962, P 6)
During III Plan period the number of stores promoted were as follows:
|More than 1 lakh populated city |113 |
|In towns with more than 50000 population |137 |
|District primary stores |4000 |
During 4th 5 year plan it was extended to urban areas with population of 1 lakh and more and stores opened to cover population of over 20% of urban and to capture at least 20% of retail trade. Co-op fair price shops in rural areas were also promoted during 5th and 6th plan periods. 2.12 lakh villages with 15000 societies undertook supply of daily essential goods of life. It rose up to 80000 during 1964-65. During 1973-74 Indian economy has witnessed an unprecedented inflation of essential goods.
In 1975 the emergency was declared in India and the then Prime Minister announced the 20 point programme. As per this programme the government envisaged to provide economic and social justice to common man. Drastic financial and fiscal measures were taken up against smugglers, hoarders, black marketers, etc., by the government.
In order to manage that situation, the government of India set up two new departments of Civil supplies and co-operative section is to coordinate and harmonize the activities at various levels of the state government and ministry of the central government for an effective PDS. These new departments have evolved a broad strategy for an effective PDS.
The strategy evolved with multi dimensional approach, and the vital points are identification of essential goods for different areas, effective monitoring of function and of retail prices of consumer goods and essential goods selection of vulnerable areas for introducing the scheme of public distribution, ear marking of manufactured goods in the organized sector for distribution through cooperatives, forging closer links between co-op. Marketing and public distribution, induction of representatives of consumers, including housewives in keeping a watch on the PDS, making administrative arrangements to ensure smooth functioning of the system and a more effective enforcement of various legislative measures designed to protect the interest of the consumers.
Thus co-ops have been given an important place in the PDS. Further essential items were being supplied to students hostels, universities and colleges on preferential terms. Accordingly, it has become the policy of the state government to the possible extent, new fair price shops should be allotted to the co-ops. And the co-op. Fair price shops. In due course, the central government advised the state governments that (hey should not deal directly with the manufactured essential commodities and should use the consumer co-ops as an agency to distribute the commodities.
The 6th and 7th five year plans of government of India had followed an integrated approach and paid attention not only to production and procurement but also to storage and transportation of selected commodities. Further the plan insisted to expand PDS quickly to cover all areas of the country, particularly backward, remote and inaccessible areas. Hence the government of India instructed all state governments to extend PD points inmost difficult inaccessible areas. The government of Tamilnadu took steps to open additional fir price shops in the said areas and also took steps to develop the infrastructure needed to open fair price shops in those areas.
From 1992, an additional quantity of 830 t of rice per month were issued in these areas under special subsidy scheme. Government of India reduced the issue price by Rs. 50 per quintal to these areas. Government India also bears Rs. 25. per quintal as incidental cost for effective distribution to tribal areas.
The price per quintal charged by Tamilnadu Civil Supplies Corporation ltd., after adjusting central contribution is given below:
|Rice |Central pool price |Tamilnadu PDS price |
| |(per quintal in Rs.) | |
|Common |337 |512 |
|Fine |617 |592 |
|Super fine |648 |623 |
The price in PDS is comparatively lower than the price under central pool. Four-; Kgs. Extra quantity of rice were given to card holders in tribal area in addition to general quota prescribed in other areas. According to integrated Tribal development. Programme, the issue price of rice is as follows in Tribal areas in Tamilnadu
|Rice |Before 1.2.94 (per kg.) |After 1.2.1994 (per kg.) |
|Common |2.25 |3.25 |
|Fine and Superfine |3.50 |4.75 |
|Wheat |3.05 |3.80 |
In order to protect the weaker sections of the society the government has further reduced the issue price of food grains by Rs. 50 per quintal by July 1994. The government of Tamilnadu consequently ensures minimum availability of 20 kg. Per person per month and per family in those areas, which are predominantly tribal and remote.
According to the report of the Ministry of Civil supplies, the government of India between April, 1993, to March 1994 over 4000 tonnes were lifted by states in the revamped PDS. With an off take of 85% After 1995 April, the position improved to 100% State governments are advised to integrate the schemes such as Jawahar Rozgar Yojana employment assurance scheme, wage employment programme, etc., along with issues under PDS. This indicates that the PDS has given very little to the poor. 'The responsibility of the revamping system will be, if there is true targetting. Targetting in terms of keeping high income group away from PDS." The poorer class should be taken care of by the PDS fully. [RamManohar Reddy's article in The Hindu, 12.7.194]
Further Chief Minister of Tamil Nadu said "It is not enough to associate women in the vigilance panels alone, the shops should be made to be entirely manned by women." [The Hindu dt. 12.7.1994] She appealed to women to adopt the PDS as a people's movement since it was an essential movement.
The structure of Organization: It has the following components: Central government, FCI, State government and Tamil Nadu Civil supplies corporation ltd., Co-operative societies, Link co-operative societies, Fair price shops, Village primary co-operative societies.
After the famine in 1962 the Central government took pains to tackle the problem of food supply. Thus according to the 5 year plan, the government had proposed to streamline the ration supply of essential commodities. One of the main objective of the central government was to maintain a sufficient amount of buffer stock. With this view the government of India promoted a separate company known as food corporation. FCI is procuring food grains during heavy harvest seasons and supplies to all over the country. Later during shortage of food supply civil supplies was
The food supply was fairly maintained by the FCI though PDS. FCI is maintaining their own purchase points, hulling and processing points, etc., all over the country. The government of India has appointed a Commission for the analysis of Agricultural Prices. This commission fixes the price considering the cost of production, cost of fertilizer, labour cost, cost of seeds, cost of scientific implements, transportation cost, etc.
The role of Civil supplies and consumer protection
The government of Tamil Nadu has a separate department and a ministry of Civil supplies. If is under the control of a minister of food and civil supplies. The policies and other objectives are effectively implemented through the ministry.
Policy and aim of Civil supplies department: To ensure that food articles and essential commodities 'are supplied in adequate quantity: To ensure that essential commodities are available at fair price. To supply adequate quantity of essential goods at an affordable price to all low and middle income group people m the country and to protect them from black marketers, hoarders, etc.
Main function of civil supplies department:
Consumer education is the main aim of the Government of India. By publishing pamphlets, dialogue and visual media through TV, movies new papers, government bulletins; etc., Civil supplies department co-ordinate the activities of officials so that the essential "commodities will be available at fair price. It has taken steps to maintain uniformity in the price allover the state, equitable distribution of commodities. Procurement and distribution of commodities are entirely at their disposal. Civil supplies department is empowered to issue licenses to traders, who are dealing in commodities: They regulate their market dealings and has the right to take steps against the black marketers, hoarders, etc., thus maintaining a strong and good PDS. In TN there is a Commissioner for Civil supplies controlling al districts. Below the rank of Commissioner there is one Joint commissioner. A district is divided into several zones, which are under the control of Deputy Commissioners. There are Assist Commissioners, in the rank of Deputy collectors. These officials are controlling the issue 2nd use of family cards and supply of essential commodities through family cards.
They play the role of inspecting authorities in the free flow of public distribution. Commissioners of civil supplies in Tamil Nadu is apex enforcing authority of government policies and laws in the state regarding food supply. Out of the total 1150 shops, 318 are managed and owned by TNSC ltd., and 832 run by co-ops. In Madras
4. Problems of PDS
Problems experienced under PDS in Chennai city reported by the sample respondents are classified source-wise and presented below.
Problems at the PDS shop levei
1. The allotment order for issue of commodities from the godown is issued regularly in the case of TNCSC ltd., while it is delayed in the case of Co-operatives because the TNCSC ltd., the allotment is directly made by the Food Corporation of India while for the Co-operatives it is done through the Civil Supplies department. Allotment to Co-operatives is made only when the payment is made before the' liftment of commodities. In the absence of regular allotment and supply of essential commodities, consumers suffer and they have to make several trips to the respective: shops: to draw their requirement.
2. In the absence of sizable quantity of commodities are lost through pilferage, damage by white ants, rats, rodents, etc While TNCSC ltd., shops experienced this problem to a limited extent, the shops in the co-operative segment reported this as a serious. problem. Poor storage facilities affect the quality of commodities, which drives the public from the PDS shops. As a result the objective of the PDS is defeated.
3. One of the important problems stated at the shop level was the non-issue of the essential commodities. But the surveys revealed that 72 per cent of the non-issue was due to the failure of the card holders to draw their requirement.
4. Under weighment is one of the standing complaints against the PDS shops. But most of these complaints are not properly registered in the complaint book. This is because the consumers are illiterate and not aware of the existence of such complaint book. This is because the consumers are illiterate and not aware of the existence of such complaint book. Another reason for not registering the complaint is the consumers do not want to incur the displeasure of the shop employees and face consequences of complaining.
5. Though the rules governing the administrating of the PDS shops provided for punishment of erring staff and actions against any malpractice, in more than 80 per cent of the cases no punishment was added. This is because of the Trade union interference, political pressure, inconvenience which will be caused to the customer due to the closure of shops, corruptive practices etc. The examination of the reasons for the prevalence of such malpractice among the staff in PDS shops revealed that the salary for the staff is very low and the several of them are not regularized in their services.
6. An important problem at the shop level is the security risk faced by the shops located in slum areas and other violence prone areas. They are under, constant threat from anti-social elements.
Problems of consumers 1. As no credit facility is extend by PDS, poor people, who are the target segment never get the benefits of PDS. Illiteracy coupled with poverty make them pledge their ration cards with the pawn brokers or other shop keepers, who in turn draw essential commodities from PDS shops using these ration cards, and sell the essential commodities at open market prices.
2. A serious problem reported by the consumers is the underwieghment. Nearly 40 per cent of the consumers of TNCSC ltd., shops and 90 per cent of the consumers of shops in Cooperative segment reported this problem. This brings to light the poor performance pf the PDS shops, which has a great impact on the overall performance of the PDS.
3. Indirectly, the consumers of the PDS shops are themselves responsible for the ills of the PDS. The failure of these consumers to draw their allotted quota of essential commodities facilitate all malpractices. The consumers cite poor quality of commodities, underweighment, inconvenient location of shops, absence of credit facility and non-availability of commodities in times of need as the reasons. But this leads to several other problems like, deterioration of quality of commodities, forced diversion of commodities to unauthorized persons through duplicate cards or cards on which only sugar and kerosene alone are bought.
4. To control the malpractices at the shop level, government has provided for a complaint register in each PDS shop. But the study, revealed that more than 40 per cent of the consumers are not aware of the existence of complaint register with the PDS shops. Even though the other consumers are aware of this facility, only four per cent of the complaints are registered. The reasons stated for this are: fear of consequences like protracted disputes with the staff concerned at the PDS shops, need .to establish the basis of complaint, time taken for enquiry, etc.
Problems of Officials of PDS 1. Issuing of cards is reported as a very difficult work as it involves a multistage operation involving issue of application, receipt of application, verification through enquiry and spot inspection, preparation of cards and issue of cards. Deliberate concealment of vital information like income details, size of family, correct address, etc. pose severe hurdles in the issue of cards. Added to these, the upcoming of new residential colonies and slum area pose a challenge to the officials in the verification of genuineness of the applicants.
2. Delay in the allotment to co-operative shops cause a serious of other problems. Delay in allotment, and liftment add, to the woes of the officials of PDS. This results, in delay in distribution infuriating the consumers of these shops.
3. Malpractices at the-shop level is another serious problem reported. In the absence of registered complaints no concrete and corrective actions could be taken. Whenever such actions are initiated, the political intervention and union threats make, them inactive.
4. Funds management is another problem of the officials of PDS. The source of income for these shops is the commission earned on quantity sold. With this the salary payable to staff, improvement of facilities at the shops like storage, issue counters, security for goods, etc., have to be managed. The necessity to make advance remittance to lift the controlled commodities from the godowns add to the financial difficulties.
5. Labour problems of different types at the PDS shops are experienced. For instance, aggressive unions stand in the way of any disciplinary action against erring staff; adoption of pressure tactics to get the regularization of service of laborers, demand for higher pay and allowances, etc.
Policy options
The evaluation of PDS with reference to the objectives set for the study revealed the need for formulating policies on various aspects. These are suggested hereunder.
Suggestions for shop level problems: ' 1. One of the primary need of PDS is the objective evaluation at regular intervals by an external body. Such an evaluation would bring to light the problems crippling the PDS, and once the problems are identified, they could be eliminated at the root itself, instead of allowing them to assume unmanageable proportions. This evaluation process could be handled by a Committee consisting of representatives of all interests - card holders, shop officials, policy makers, academicians, finance professionals and lawyers: The membership 'in the Committee should be strictly based on the credentials and exposure in such tasks. The Committee shall be constituted fresh once in two years, to avoid any scope for influence or interference. The policies formulated by the Committee shall be publicized and public are implemented, the follow up action shall be called for a monthly basis.
2. One of the basic problems of the shops in the Co-operative segment is the delay in the allotment. Efforts should be taken to study the system of allotment and eliminate unnecessary bureaucratic delays. The Food Corporation; of India (FCI] could be made, to supply directly to all shops thereby avoiding the delay. The allotment to shops for a month may continue to be on the basis of closing stock of the previous month, but the closing statements from each shop should be collected within first/two days of a month and consolidated area-wise. This would facilitate pooled shifting of commodities from the FCI godowns thereby economizing on transportation and avoiding delay. As regards the verification of closing stock, staff could be deputed from shops in another area to avoid any manipulations.
3. A major hurdle in. the successful functioning of Co-operative shops is the availability, of funds. This could be solved by implementing the following suggestions: a) Shops in an area could be grouped and the shop in-charge of each shop could be made to undergo a training in funds management. This training could be on a regular basis involving Finance professionals.
b) State government may consider granting financial assistance for the shops in the Co-operative segment on concessional terms through the Regional office of these Co-operative shops. A proposal for development plans shop-wise may be obtained and evaluated by the Regional office. Then the required funds may be obtained and allotted to each shop. As regards the repayment the shops could be allowed to sell controlled items to generate revenue. Priority in this regard, should be given for improvement of; storage facilities at the shop level.
c) The advance remittance to be made for allotment of commodities by FCI could be determined in advance on the basis of three monthly average allotment, instead of waiting for the closing stock statement each month. Any excess, advance remitted may be adjusted against the subsequent remittance and any deficit may, also be collected once the amount of, deficit is intimated. This would help to avoid delay in allotment and liftment of commodities. Consequently; the diversion of commodities to generate required funds, could be reduce to large extent. Further the quality of commodities, would also be maintained as with government funding the storage facilities could be improved.
4. Wide publicity should be given among the public, especially among people dwelling in slum areas to make them conscious of their right to complaint against any malpractice at the; PDS, shops achieved by printing in, bold letters, the information on the availability of complaint book in all the PDS shops. This could very easily be achieved by printing in bold letters, the information on the availability of complaint book in all the PDS shops, on the e ration card itself.
5. A frequently reported problem at the shop level is the labour, problem. This needs an integrated effort to solve. Apart from involving the & staff union in labour related matters, the reasons for the problems should be studied seriously. This may even be entrusted to the Committee constituted for evaluation of PDS shops. As the main reason for labour problem is related to service conditions and the salary structure and other allowances, the government must recommend the salary structure making it flexible to provide for modifications as and when the need arises. At the Regional level, establishment of a separate cell to address the labour problems would go a long way to improve the working relationship.
Suggestions for card holder related problems: 1. As regards the problem of under weighment, a multi-level approach is necessary to solve this. A flying squad with necessary powers and authority may be constituted which would check the weighment at the shops periodically and submit a report to the authority concerned. Any punitive action taken on erring staff should be, strictly in accordance with the procedure laid down by the government. In the case of complaints from card holders, their identity should be kept confidential. This would encourage, the card holders to come without any apprehension, whenever any manipulative practices are noticed.
2. Any unauthorized issue of controlled commodities should be viewed very seriously. The shop level workers should be made familiar with the series of actions that would be initiated in the event of such unauthorized issues. Preferably an undertaking from the shop level staff could be obtained at the & time of recruitment itself, explicitly empowering the organization to prosecute them for any such violation of rules and regulations. Publicizing the manipulative actions resorted to by shops would also serve as a deterrent -apart from educating the customers.
Suggestion for problems of Officials of PDS 1. The effectiveness of the PDS depends on the fool proof system of issue of cards. In this regard, the existing system of verification and cross checking are found to be operating well and these could be reviewed from time to rime. It would also be better to get an undertaking from the employers to the correctness of salary details in the application for cards renewed or new cards issued.
2. Issue of new cards or renewals to applicants in new residential localities or slum areas should be strictly under the supervision of a field inspection team headed by a person at the Assistant Commissioner level.
3. Wide publicity about the malpractices at the shop level should be given to educate the public and encourage them to register complaints.
4. Recruitment of staff at every level should be structured and preferably handled by an independent government body to eliminate any favoritism in recruitment,
Other suggestions 1. It would be a healthy practice to encourage independent study of functioning of PDS in different states so as to improve the existing system in any state. Interaction with the academic bodies on this would be much rewarding to strengthen the system.
2. Publication of the functions and performance of PDS in the state would help to invite suggestions for improvement from the common public.
3. While the policies are formulated, involvement of all interests like card holders, shop level workers and officials should be called for. This would help in drafting viable policies.
4. Incentive schemes could be announced at zonal level for shops which function efficiently. The criteria for determining the performance could be generated by involving the people concerned.
5. Similarly incentives and promotion could be announced for flying squads which are effective in detection and elimination of malpractices at the shop level.
6. There is an urgent need to constitute Card holder's council in each area which would help to resolve the disputes of various nature among the public and shops in that area Disputes beyond the powers of the Card holders council could be referred to higher level authorities for disposal.
7. Professionals from different fields may be invited to function as the Honorary Consultants to improve the efficient functioning of the PDS.
8. Card holder contact week could be organized every quarter to provide a forum for ventilating their grievances and making suggestions for improvement. These meetings should be held in the presence of Deputy Commissioners and the suggestions given should be examined and implemented.
Price controls
Price control refers to the policy of the government to monitor and regulate the price changes in an economy. This is attempted by the government with the following objectives: 1. To ensure that there is social and distributive justice. The fruits of planning and development should reach all the people so that the benefits of development is equally distributed. While the rich people in a community have the wherewithal to protect themselves under any eventuality, the poor and down trodden always get exposed. To protect such people price control is essential.
2. To ensure that people get quality goods at a reasonable price. This is achieved by controlling the price as well as the quality of the commodities produced.
3. To protect the community from the exploitative tendency of the monopolies who resort to restrictive trade practices.
4. To achieve supply control and management the government should control price.
5. As the price of inputs would ultimately get reflected on the output, [here is a need to control both the input price and output price.
6. To ensure that the available resources are properly allocated and directed and also to eliminate the misuse of resources, price control is necessary.
7. Unless there is price stability, the value of money is bound to; fluctuate which in turn, affect the exchange, rate. This results serious balance of payments problems.
8. To insulate the economy from wide fluctuations, inflation and deflation - price controls are necessary.
Agricultural price policy of the government:
Terms of trade refers to the relative changes in prices in two sectors, and the I corresponding effect of these on the respective sector. For example, suppose the agricultural prices increase at a slower rate than the prices in the manufacturing sector and industrial sector. Then the agriculturists have to pay a higher price for manufactured goods and sell their own goods at a lower price. This is certainly unfavorable to the agriculturists. On the other hand suppose the agricultural prices increase at a higher rate than that of the industrial prices, then the situation is favourable to agriculturists. Usually in developing countries the terms of trade is unfavorable to agriculturists and India is not an exception to this. To change this trend, government has been announcing its agricultural price policy so as to ensure that the terms of trade does not deteriorate. Thanks to the steps taken by the government that today to some extent the terms of trade is better than what it was in the past. The logic behind the government trying to design a policy in favour of agricultural sector is that when the agricultural sector is benefited by the terms of trade, then the agriculturists get better prices and this makes their occupation profitable. This would encourage them to demand, more of industrial goods. Automatically the industrial sector will be able to develop based on this ever increasing demand and market prospects It is always said that demand is a more potential factor in accelerating growth of industrial sector than the supply. Hence, the government is formulating the agricultural price policy to make me terms of trade better and favourable for agricultural sector.
The price policy for agricultural sector in India could be discussed in two distinct phases. One before 1965 and the other after 1965. Before 1965, our agricultural price policy was more consumer based. As the percapita income was low, the government felt the prices of agricultural goods should be controlled and when they have to be distributed through fair price shops, the consumer price was very much less than the open market price. This directly affected the interest of the agriculturists. Hence, the government decided to set up in 1965 the Commission on Agricultural Costs and Prices (CACP). This CACP has the following major functions to perform:
1. To function as the advisory body to government in matter- relating to price policy for major food crops and commercial crops to formulate a balanced and integrated price structure taking due care of the producer's and consumer's interest.
2. To review periodically the price policy already determining and then make necessary adjustments and revisions to make the price policy effective.
3. To examine the existing method* of determining cost of marketing and marketing margins for different crops in different regions, so as to make suggestions for reducing marketing costs and margins to ensure that the" producers get a fair return on their investment.
4. To make regular review of the studies on agricultural prices and collect, information and data relating to agricultural prices and to suggest methods of improvement.
5. To study and advise the government on all matters relating to agricultural production and prices referred to it by the government.
With the setting up of the CACP, India is able to follow a consistent price policy, for agriculture. This has helped to narrow the gap in agricultural prices prevailing in surplus and deficit states and stabilize the price of food grains. The CACR follows a specific procedure before giving shape to the price policy for crops. First it collects the opinions and information from various State Governments, the producers organization, marketing organization and other agro-based industries, consumer organizations, research institutions and others through a detailed, questionnaire. Once the reply is received from the State governments, the CACP hold discussions with other agencies for each commodity. Then it finalises its findings and recommendations and sends its report to the government. This report, is circulated among the concerned ministries and departments as well as Planning" Commission. After getting the views of these institutions and organizations, the final report is submitted to the Parliament for its approval and final decision. The agricultural price policy has the following constituents:
1. Minimum support price:
This is the price announced by the government for various crops well in advance of the harvest. If the actual market price falls below this level, then the government has the commitment to buy the quantity available for sale irrespective of the ruling price in the market. This is basically to ensure that the fanners are not affected due to fall in price in the market. The CACP arrives at this minimum price for each crop after taking into account the cost of production, input prices, the prices for competing crops and the need to maintain the economic stability. Once the price is announced well before the harvest, the expectation is that the farmers are certain atleast to get the minimum assured by the government. But a major problem in arriving at the price is that sufficient data are not available on a continuous basis. To overcome this the data relating to cost of production and input prices are being collected regularly by the research institutions throughout the country from whom the CACP is collecting the data.
2. Procurement prices:
These are prices at which the government buys the agricultural produce from the farmers mainly for the purpose of public distribution. It is easy to understand that the procurement prices should be higher than the minimum support price, so that the government can encourage the fanners to sell the produce to the government. The CACP arrives at the procurement prices for all crops on the basis of input prices, price of related crops, inter-state disparities in prices of the produce, fair return to the farmers, etc.
3. Public distribution:
This is in fact the back bone of the pricing policy in that through this arrangement the government ensures availability of produce to the common man at a reasonable price. Through statutory rationing as well as the informal rationing the government achieves the object of stabilizing the prices of agricultural commodities. At the same time the government also allows the open market in all these commodities so that any one who can afford to pay the open market price can buy these goods and those who cannot afford can get these from the ration shops or fair price shops.
4. Minimum buffer stocks:
This is yet another important constituent of the price policy. Through this the government maintains sufficient stocks to prevent any violent price fluctuations in the market for agricultural produce. For example, suppose the price in the open market soars up, then the government would release the produce from its stock and brings down the price while when the price in the open market goes down, the government makes the purchase to add to its buffer stock, thereby prevents further fall in price.
All efforts to maintain the agricultural price have not been successful due to the following reasons:
(i) Procurement policy of the government has not been very successful and it is found that hardly 15% of the total food grain produced is covered by the procurement of the government. This shows clearly the inadequate, effectiveness of the procurement policy.
(ii) The prices fixed for the various crops do not have any link with the rising cost-of cultivation. As a result the farmers incur loss. This they avoid or minimize either by curtailing the output or switching on to some other crop.
(iii) The public distribution is found to have several loop holes. Right from the stage of procurement, storage, till the stage of sale through fair price shops' several malpractices are noticed. The result, the public distribution fails to bring the benefits expected of it.
(iv) Consumers often complain that the price they pay is much higher than the price paid to the farmers by the government. This price differential is due to various taxes and costs incurred apart from the margins claimed by the; intermediaries. As a result the government plans for price stabilization taking the price it pays to the fanners, while the actual price at which the consumers pay is much in variation. Hence, the price policy objective is not accomplished.
(v) The objective of price policy is to obtain an integrated price by taking into account various components before arriving at the final price. But such an integration is not found in practice and more frequently, the farmers use political pressure to get a higher price for the produce. This defeats the principles on which the price policy is formulated.
In order to rectify the defects in the price policy, the following suggestions are made: 1. The minimum support price fixed by the government should protect only the efficient producer and not just every producer.
2. The price policy should only help the farmers to prevent the losses and not to make profits.
3. The minimum support price should be arrived at on the basis of the cost of cultivation of efficient farmers.
4. The support price announced by the government should enable the farmers to make necessary adjustments to minimize their loss.
5. The price fixed by the government should not be inflationary in nature.
6. The price policy should help to discourage and eliminate oligopolistic practices in the market.
The government on its part, having realized the need to revise the basis of arriving at the cost of cultivation figures, set up a committee under the chairmanship of Hanumantha Rao in 1990 to suggest an alternative methodology for computing the cost of cultivation. This committee suggested the following revised methodology which was accepted by the government: I. The wages paid to the laborers included in the valuation of labour could be based on either the statutory minimum wages or actual wages whichever is higher. II. Managerial element is valued at the rate 10% of the total cost. III. The procurement price and the minimum support price announced in advance could be adjusted according to the actual in the market.
With all the above development, we are slowly coming closer to the determination of a realistic price for agricultural produce. But a very recent development is now posing a new challenge. The Dunkel's draft has suggested that the government should slowly withdrew all the subsidies extended to the agricultural sector that the farmers should be made to compete with each other and also the international farmers purely on the basis of the quality of the produce. The protection given to the agricultural sector should slowly be withdrawn that only the efficient farmers; can continue in the fold and that way the country would be benefited. Though there is some truth in this argument, yet, in our country liberalization is catching up, in the industrial sector and the agricultural sector is not matured enough to react positively to liberalization policies and there is a school of thought that the acceptance of Dunkel's draft may make the situation difficult for the Indian farmers, in spite of the government's assertions to the contrary.
Foreign exchange regulations
Foreign exchange refers to the earnings and payments made by a country on its exports and imports of goods and services over a year. The more the country earns, the better it is. There are several sources through which the foreign exchange flows into a country. Apart from the exports of goods and services, there are remittances made by the non - residents Indians living abroad, other countries making payments to their consulates and embassies, gifts and grants from other governments to Indian government, loans and advances received by Indian government, other adhoc receipts under various heads, etc. Similarly, the if outflow of foreign exchange would include the corresponding payments made by any source in India to countries abroad. Over and above all these official sources of inflows and outflows, there are several other unofficial resources, of inflows and outflows. In fact, the government can control effectively the official sources but the unofficial sources remain outside the government control and so 4-they cause havoc to the economy. There is a need to control and regulate the foreign exchange resources, as otherwise, they might have a direct impact on the exchange rate and the balance of payments position, which, in turn would affect the internal price stability. Hence after independence, the government passed a Foreign exchange regulation Act in 1947 which was subsequently modified in 1973.
The following are the objectives of regulating foreign exchange: ❖ To conserve the foreign exchange resources. ❖ To account for all inflows and outflows of foreign exchange to eliminate any negative impact on balance of payments and exchange rate. ❖ To monitor, control and channelising the utilization of foreign exchange resources and through that to accelerate the economic development
As per the regulations, RBI is the institution vested with all powers to deal with all aspects of foreign exchange. Normally, the RBI empowers travel agencies and the commercial banks to deal with foreign exchange. They are required to submit returns on a daily basis so that the extent of foreign exchange received and issued is closely monitored. The 1991 Industrial policy resolutions had specific provisions relating to foreign exchange regulations. These are briefly summed up below.
Foreign investments:
Foreign investments carry with it the benefit of technology transfer, marketing expertise, modern managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the New Industrial Policy (NIP) has clearly contained the following provisions relating to foreign investments: 1. In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed. Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments to the FERA will be made.
2. The general policies governing the domestic units in regard to import of components, raw materials and intermediate goods and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on payments are balanced by export earnings over period of time.
3. All the other foreign investments not included in the category 1 stated above will require prior clearance.
4. Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in 1 above. However, the provisions of he export-import policy applicable to the domestic units will also be applicable to such trading companies.
5. To encourage substantial inflow of foreign investment, a Special Empowered Board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
As regards foreign technology agreement, a welcome change in the outlook of the government is the realization that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedures and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameters. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced he following changes in regulation governing foreign technology agreement:
1. No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through blanket permits.
2. Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provisions. Upto the payment of Rs. 1 crore royalty will be at the rate of 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of the sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production.
3. In case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment.
4. In all the other cases, the general procedures in practice will be adhered to and such industries will require specific approval.
In 1999, some more modifications were brought in the Foreign Exchange Management Act [FEMA]. These modifications are to come into effect from May 31, 2000 and until then the Enforcement Directorate was given time to probe and investigate all cases of FERA violations. The basic difference between FERA and FEMA is stated by the RBI as ; the object of FERA was to conserve foreign exchange resources, whereas the object of FEMA is to facilitate external trade and payments and to promote orderly maintenance of foreign exchange market in India. FEMA has the following important features: ❖ FEMA substantially liberalized various provisions to make the external trade and payment very simple, which, specifically benefited .the residents traveling for business / professional reasons. ❖ The Exchange Earners' Foreign Currency account holders and the Residents' Foreign Exchange account holders are now permitted to freely use the funds held in both the categories of accounts for any permissible current account transactions. ❖ The rules relating to foreign investment have been made more transparent. ❖ FEMA provided for civil procedure in cases of violation and contained elaborate redressal machinery for total justice and fairness to the aggrieved persons. ❖ The FEMA also prohibited seven categories of current account transactions in lotteries, banned magazines, football pools, narcotics, etc,
Technology Transfer
Jawaharlal Nehru was responsible for the improvement of Science and Technology in India. Under his leadership several research institutions like The Council of Scientific and Industrial Research [CSIR], Department of Atomic Energy, The Indian Council of Agricultural Research were all established. These were followed by Department of Electronics, Department of Space Technology, the Indian Space Research organization, etc. In 1958 the Science Policy Resolution was passed with the objectives to: ❖ Foster, promote the sustain by appropriate means the cultivation in science and scientific research in all its aspects - pure, applied and educational. ❖ Ensure an adequate supply within the country of research scientists of higher quality and recognize their work as an important component of the strength of the nation. ❖ Encourage and initiate with all possible speed programs for the training of scientific and technical personnel on a scale adequate to fulfill the country's needs in regard to science and, education, agriculture, industry and defense. ❖ Ensure for the people of the country all the benefits that can accrue from the acquisition and application of scientific knowledge
Following this policy, on the agricultural front, the country witnessed Green Revolution, which made the entire world turn to India for its experience and experiments in agriculture. The success achieved was phenomenal that production and productivity increased manifold. But correspondingly the irrigation and other infrastructure facilities like storage facility, transport, communication, etc., developed slowly. For a long time, there was absence of effective linkage between the scientific laboratories and the fanners. But this was overcome by early 1970's and since then Indian agriculture has been on the forward march.
On the industry front, though there was wide talk about self-reliance, yet in reality the industries spent precious little on Science and technology. Modernization was given low priority. Research and development activity and investment was found only in a very few industrial units. Another aspect was the improvement in Science and Technology never crossed the urban frontiers. Though India ranked second in the world in terms of technical manpower, this was never utilized to our advantage. Only government organization gave some serious considerations to research and development activities. Further the attempt was to develop and apply technology to meet the requirements of the rich community in India. Whatever technology that was imported never suited our domestic requirements and attempts to adopt them for Indian environment did not succeed. After the declaration of Liberalization in 1991, the government has given very serious consideration to Technology and development. The summary of the Technology policy of 1991 is given below.
A welcome change in the outlook of the government as evidenced by the new policy is the realization that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedure and policies. The interference of the government in this regards to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameter. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India* with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulations governing foreign technology agreement:
(i) No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through the blanket permits.
(ii) Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provision. Upto the payment of Rs. I crore, royalty will be @ 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production.
(iii) In the case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment.
(iv) In all the other cases, the general procedures in practice will be adhered to and such industries will require approval.
REVIEW QUESTIONS 1. Discuss the objectives of licensing policy in India. 2. List the findings and recommendations of Dutt committee report. 3. Discuss the features of Indian licensing policy. How far the current policy is a deviation from the old ones ? 4. Explain the circumstances under which MRTP Act was brought. Why was it given up on the eve of Liberalization? 5. What do you understand by control of capital issues ? List the recommendations of Narasimham committee II in this context. 6. Discuss the forms of foreign capital. 7. Why is foreign capital required? 8. Discuss the role of foreign capital in economic development. 9. Analyze the problems of foreign capital. Discuss in this context the policy of the government towards foreign capital since independence. 10. Explain the government policy on Foreign Direct Investment. 11. Critically evaluate the Industrial policy resolutions of 1948, 1956 and 1980. 12. Explain briefly the provisions of the Industrial policy 1991 which laid the foundation for liberalization. 13. What is an EXIM bank ? What are its functions? 14. What is meant by public distribution system? Discuss the justifications for it continuance. 15. Comment on the working of public distribution system in India. 16. Critically examine the functioning of public distribution system from the view point of institutions, people and government. Suggest suitable remedies. 17. Outline the contours of agricultural price policy in India. 18. What is meant by foreign exchange? What are the justifications for regulating it? Comment on the policy of the government in relation to foreign exchange.
Discuss the need for technology transfer. Analyse the policy of the government in this regard.
CHAPTER IV
Monetary and fiscal system - Banking and credit structure in India - Financial institution - Fiscal system - theory and practice
INDIAN FINANCIAL SYSTEM AND COMMERCIAL BANKING
The shape and status of an economy to a large extent depend on the development it had achieved, which in turn depends on the strength of financial sector. A country with a strong financial sector is bound to progress faster and steadier than any other country. Financial sector refers to all the categories of financial institutions which provide as a conduit between those who are in need of funds and those who are supplying funds. Such institutions are usually referred to as financial intermediaries. While these intermediaries do function at a profit, not all of them are profit centered. In other words, the financial intermediaries can be broadly classified as organized sector institutions and unorganized sector institutions. Those in the former category function in the interest of the society and so not very much profit centered. The way in which all these institutions are integrated is understood through a study of financial system. The structural positioning of these intermediaries determine the flow of funds in an economy. That is, how these institutions mobilize funds and how they distribute or channelise the funds mobilized depend on how they are organized. For instance, in the olden days, only money lenders provided the needed funds either from their own savings or that of their close relatives. Obviously they confined their operations only to a limited locality and purposes. Depending upon the borrower and the security offered, they charged varying rate of interest and there was absolutely no regulation of their business practices. But once public institutions like commercial banks came into the scene, there was a need to organize their operations strictly in relation to the national priorities. Thus came the institutions in the organized sector, which are governed by a set of rules and regulations. Hence, if in a country the size of operation of the institutions in the organized sector is large, then the flow of funds from the savers to investors will be smooth and would contribute towards the economic development. Even the mere presence of unorganized sector institutions will countervail the contributions of the organized sector institutions.
In the Indian context, the financial system includes a number of institutions in the organized sector and unorganized sector.. Under the organized sector we could include: the State bank of India and its associates, all the nationalized commercial banks, the Regional Rural banks, private sector Indian and foreign banks, non-scheduled hanks, all the levels of co-operative banks, Government institutions like National Savings Corporation, Post office savings banks, Provident fund, all the corporations created by legislature like LIC, UTI, etc. In the unorganized sector, the institutions are of several types ranging between money lenders, chit funds, nidhis, finance companies, etc.
The constituents of Indian Financial system changed over a period of time, as the nature of demand for funds changed and so institutions had to come up to meet the specific needs of a demand segment. For instance, while the rationalized commercial banks and co-operative banks are focussed more towards the priority sector and rural segment, the chit funds and nidhis came into the scene to cater to the needs of businessmen and small firms. Finance companies entered the scene mainly to meet the funds requirements of hire purchase and leasing firms. While specialised institutions add to the maturity of the financial system, the difficulty in regulating them exposes the gullible small savers and investors to a great risk. The regular failure of finance companies, nidhis, etc., have rudely -shaken the confidence of the common public and discouraged them from investing activities.
Growth of NBFCs:
Non banking financial companies have emerged as a single most important constituent of our Financial system. These institutions have originally started functioning as hire purchase agencies, but introduced in due course a host of innovative services, that their number has swelled to nearly 50000 by 1998. They have been very popular in the Indian scene mainly because they could mobilize huge funds by offering attractive high rate of interest, adopting a simple procedure for processing and lending, improving customer relations and introducing new customer oriented funding schemes. To understand their extent of coverage, there are hire purchase finance companies, housing finance companies, investment companies, mutual benefit financial companies, etc. Though their growth was actually adding to the financial products in the market,
the operation of a number of them raised questions about their stability. and genuineness of intentions. When a number of such NBFCs failed, in response; public outcry, regulatory guidelines were brought by the RBI. A number, of committees were set up to examine the nature and content of the regulatory mechanism. Particularly, the recommendations of the Shah committee of 1992 and Khanna committee of 1996 assume significance. Their recommendations included:
➢ Abolition of categorywise classification of finance companies. ➢ Application of uniform regulation for all finance companies. ➢ Focussing regulatory attention on large size companies. ➢ Compulsory registration of all deposit accepting companies. ➢ Determining capital adequacy standards and prudential norms. ➢ Prescription of provision for bad and doubtful debts. ➢ Compulsory annual credit rating.
Following this, a number of provisions in the Regulations Act were amended and the RBI [Amendment] Act 1997 has brought forth the following regulations: ❖ NBFCs are more clearly defined and their minimum net owned funds was, fixed at Rs. 25 lakhs. ❖ Registration with RBI at the time of entry is made compulsory. ❖ Existing units were given time of three years to reach the minimum level of), net owned funds. ❖ NBFCs should transfer not less than 20% of their profits to the reserve fund every year.
In case of any violation of any of the regulations by the NBFCs, the RBI will prevent them from accepting deposits and also sell, transfer, etc. their properties.
Several other regulatory measures were announced in January, 1998 which include: ❖ NBFCs with credit rating below 'A' are not allowed to accept deposits. ❖ For any violation of norms, the repayment of deposits will be ordered by RBI. ❖ Interest rate and brokerage fixed. ❖ Regular tax returns should be filed. ❖ No lending is permitted against the own security.
But the NBFCs appealed to the RBI to relax the provisions, as otherwise their business would be at stake. Accordingly RBI some of the regulations, providing for the growth of these NBFCs at the am protecting the interest of investing public.
Housing Schemes
Housing emerged as one of the important priority sector lending schemes. This so because of both increase in the demand for houses in both the urban and rural areas. With considerable number of people settling down in urban slums, housing problem has assumed a tremendous proportion. As a sequel to this, the government has established National Housing Bank in 1988 with a number of programmes to address the housing needs of various sections of the population.
Specifically a Home Loan Account is devised to promote the savings habit among the public for acquiring houses. With a minimum periodicity of 5 years, any one can open a Home loan account with any scheduled bank. The amount deposited into the account is also exempted from income ax. The balance in the account earns interest at 10%. Once the specified period of deposit is over, the account holder is eligible for housing loan. The loan amount is determined as a multiple of accumulated savings in Housing Loan Account.
Loans granted under this category will be refinanced by the National Housing Bank. The Commercial banks are advised to provide 1.5% of their incremental deposit over the previous year for direct or indirect loans or investments. Schemes funded by HUDCO, like Nehru Rojgar Yojani have gone a large extent in easing the housing problems of the rural masses. Apart from this under Priority Sector allocations the following housing loans are provided :
A] Direct advance : Loans upto Rs. 5 lakh are granted for construction of houses and upto Rs. 50,000 towards repairs of houses for all categories of borrowers.
B] Indirect advance : Under refinancing scheme, non governmental agencies are also eligible when they lend for house construction. Advances are also given for the clearance of the slum and rehabilitation of the slum dwellers.
Subscribing to the bonds issued by the National Housing Bi.nk and HUDCQiis also extended.
As regards the margin on loans, the percentage of margin is determined based on the loan amount. As a security, mortgage of the property and Government guarantee are acceptable. Maximum repayment period is-fixed at 15 years, and the repayment holiday is also granted to the borrower. The eligibility condition for getting loan is fixed in relation to the income of the borrower. Interest rate on loan is again linked to the amount borrowed.
Through Indira Ayas Yojana scheme free dwelling units are given to the persons living below poverty line in the rural areas, belonging to SC and ST community and bonded labourers. The scheme is, also extended to families of servicemen of the armed forces and paramilitary forces killed in action irrespective of their income limit.- This scheme is implemented through the District Rural Development Agency. Beneficiaries are identified through Gram Panchayat or Block Development Officer. The beneficiary has to under take the construction of the house and the money is released in stages.
THE FUNCTIONS OF COMMERCIAL BANKS
The functions performed by the commercial banks may be listed 2.5 follows :
|1) Accepting deposits, |2) Lending loans and advances, |
|3) In vestment of funds, |4) Promote the use of cheques, |
|5) Agency functions, |6) Purchase and sale of foreign exchange, |
|7) Financing of internal and international trade, |
|8) Creation of credit, |9) Other functions and |
|10) Fulfillment of socio-economic objectives. |
1. Accepting deposits:
This is one of the primary functions of commercial banks. The commercial banks accept different types of deposits, the deposits may be broadly classified as a) demand deposits and b) time deposits. The former refer to the deposits which are repayable by the banks on demand by the depositors, while the time deposits are accepted by the banks for a fixed period of time before the expiry of which they don't return the deposit. The demand deposits include the current account deposits and savings bank account deposits. These two types of deposits earn very low rate of interest as they can be withdrawn any time. In the case of savings deposit, the depositor is not allowed to withdraw more than a fixed number of times or amount over a period of time. The time or term deposits include the fixed deposit and recurring deposits. In the former a sum is deposited for a fixed period of time determined at the time of deposit and is never allowed to be withdrawn before the expiry of period of deposit. Any such foreclosures will invite penalty apart from forfeiting the interest. Recurring deposits are the type of deposits in which a depositor agrees to deposit a fixed sum of amount every month for a number of months as determined in advance, and at the end of which the depositor will be repaid his deposit amount along with interest. Every bank will be interested in mobilising as much deposit as possible as it would improve its liquidity with which the bank can meet is liabilities and expand its business.
2. Advancing of loans :
Commercial banks accept deposits and use them for expansion of their business. The banks never keep the deposits mobilized idle. After keeping some cash reserve, they invest the funds and earn. They also lend loans and advances to the common men after satisfying themselves about the credit worthiness of the borrowers. They grant different types of loans like ordinary loans in which the banks lend money against collateral security. Cash credit is another type of loan in which the entire amount sanctioned is credited into the borrower's account and he is permitted to withdraw only a specified sum at a time. Overdraft is yet another facility under which the customer is allowed to withdraw an amount subject to the ceiling fixed, from his account and he pays interest on the amount of overdrawn. Discounting bills of exchange is another type of advance granted by the commercial banks in which a genuine trade bill is discounted by the banks and the holder of the bill is given the amount and the banks arrange to collect the due from die drawer of the bill on the date of maturity.
3. Investment of funds :
One of the main functions of the commercial banks is to invest their funds so as learn interest and returns apart from utilizing their funds in a productive manner. India as per the statutes, they must invest a part of their total investments government securities and other approved securities so as to impart liquidity. Banks apart from enabling them to earn out of their investment Banks now. days have set up mutual funds through which they mobilize funds from the people invest them in very attractive projects which is a help rendered to the investors who otherwise will not have the benefit of participating in the project. Banks administer these mutual funds through specialists and experts whose services are not available to the common men.
4. Promote use of cheques:
By the spread of banking habit, banks have achieved a remarkable successi-pil promoting and encouraging the use of cheques by people in the settlement of their-claims. Cheques are not only safe but are die cheapest medium of exchange in me place of cash, apart from being fully negotiable instrument
5. Agency functions of commercial banks :
Commercial banks function as he agent of their customers and help them several ways. For these agency services, the banks charge a nominal amount The agency services include, transfer of customer's funds, collection of funds on behalf of the customers, transactions in the shares and securities for their customers, collection of dividends on shares and interest on debentures for their customers, payments of subscriptions, dues, bills, premia on behalf of the customers, acting as the Trustees and Executor of the customers, offering financial and other consultancy services, acting as correspondents of the customers, etc.
6. Purchase and sale of foreign exchange :
The banks also undertake to help their customers in dealing or transacting in foreign exchange. Though only banks with license to deal in foreign exchange along can act on behalf of their customers, yet in India several commercial banks by virtue of their relationship help the customers in this connection.
7. Financing internal and international trade :
This is a major function of the commercial banks. The international trade depends to a large extent on the financial and other support given by the banks. Apart from encouraging bills transactions, the banks also issue letter of credit facilitating the importers to conduct their trade smoothly. The banks also process all the documents through consultancy services and reduce the botheration of the traders. They also lend on the basis of commercial bills warehouse receipts, etc., which help the traders to expand their business.
8. Creation of credit:
It is worth noting the credit created by the commercial banks. In the process of their lending operations they create credit The process involves the following mechanism: whenever the banks lend loans, they do not pay cash to the be Towers; instead they credit the accounts of the borrowers and allow them to withdraw from their accounts. This means every loan given will create a deposit for the banks. Since every deposit is equal to money, banks are said to be creating money in the form of credit As a result the volume of funds required by the trade, government and the country is met by the banks without any necessity to use actual cash.
9. Other functions:
Other functions of the commercial banks include providing safety vault facility for the customers, issuing traveller's cheques acting as referees of their customers in times of need, compiling statistics and other valuable information, underwriting the issue of shares and debentures, honouring the bills drawn on them by their customers, providing consultancy services on financial and investment matters to customers, etc.
10. Fulfillment of socio-economic objectives :
In the process of performing all the afore-mentioned services, the banks do play key role in the economic development and nation building. They help the country^ in achieving its socio-economic objectives. With the nationalization of banks, the priority sector and the needy people are provided with sufficient funds which helm them in establishing themselves. In this way the commercial banks provide a firm and durable foundation for the economic development of every country.
CREDIT CREATION BY BANKS
Commercial banks accept deposits and lend loans and advances. In this process* they create two types of deposits, namely primary deposits and derivative or deposits. The form refers to the cash deposited by a customer in a bank or deposit a cheque with the bank for collection. The banker merely accepts cash am converts it into a deposit. Hence, this is merely a passive role performed by the banks. These primary deposits do not add to the money stock in the economy From their experience and observation the banks know that not all the customs will withdraw their deposits on any single day. Hence, after providing for some reserve to meet the cash requirement of the depositors, the banks lend the balance to the borrow. The amount of reserve to be maintained by the banks is Cash Reserve Ratio which is determined by the central bank.
The derivative or active deposits refer to the deposits which are created out of the %x loans and advances granted by the banks. Suppose an individual is sanctioned loan of Rs. 10000 by a bank A. The bank does not give him cash while sanctioning the loan. Instead the bank merely opens an account in the name of individual and credits his account with Rs. 10000. He is then allowed to withdraw this amount whenever he wants. When the bank credits his account with Rs. 10000, it is treated as a new deposit received by the bank. Hence, the bank derives this new deposit from the loan given and the bank has actively created this new deposit. This is the reason why it is always said that loans create deposit'. The new deposit created in this manner will add to the money stock of the economy. Whenever the loan is returned by the borrower to the bank, then there is no further possibility of creating new deposit. This results in net decrease in money stock.
Therefore creation of credit or granting of loan adds to money supply to in the economy and the return of loan results in reduction in money supply.
It should also be noted that the banks create active deposits while they purchase assets or securities from others or discounting the bills of exchange or any other negotiable instruments. But the majority of credit is created only out of the loans given.
The multiple credit creation process can be explained with a single bank or more than one bank. The former is called single bank credit creation and the latter multiple bank credit creation model. To explain both these models, let us assume i) there are three banks A, B, and C ii) the cash reserve ratio is 10% and iii) an initial deposit (primary deposit) of Rs. 10000 is made into bank A.
When bank A receives the new deposit its balance sheet will appear as below :
BALANCE SHEET OF BANK A
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|New deposit |10000 |New Cash |10000 |
| |10000 | |10000 |
Out of this new deposit of Rs. 10000 the bank has to maintain a reserve of 10% which works out to Rs. 1000. The balance of Rs. 9000, can be lent by the banker. Suppose Bank A lends Rs. 9000 to P, a borrower, who uses this fund to pay off his creditors. On giving the loan to P, the balance sheet of Bank a will be :
BALANCE SHEET OF BANK A
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|Deposit |10000 |Cash (Reserve) Loan to Mr. P |1000 |
| | | |9000 |
| |10000 | |10000 |
The creditors of P may have an account with bank B" and so they may deposit Rs. 9000 received from P in bank B. This is the primary deposit of fresh deposit bank B. Of this the bank will maintain a reserve of Rs. 900 and it may give a loan, of Rs. 8100 to Q. Then the balance sheet of bank B will appear thus :
BALANCE SHEET OF BANK B
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|New deposit |9000 |Cash (Reserve) Loan to Mr. Q |900 |
| | | |8100 |
| |9000 | |9000 |
Suppose Q uses this loan of Rs. 8100 to pay off his creditor who has an account with Bank C. Bank C will, then, get a fresh deposit of Rs. 8100 and it would lend^ Rs. 7290 after keeping a cash reserve of Rs. 810 The balance sheet of bank appear as below :
BALANCE SHEET OF BANK C
|LIABILITIES |ASSETS |
| |Rs. | |Rs. |
|New deposit |8100 |Cash (reserve) Loan to Mr. R |810 |
| | | |7290 |
| |8100 | |8100 |
R may use this loan to repay his creditor who may have an account with Bank D and it would create loan out of the new deposit received. Hence, in the above example, a fresh deposit of Rs. 10000 in Bank A has resulted in the creation of loans to the tune of Rs. 24390 (9000 + 8100 + 7290). If this process continues more amount of credit will be created.
In the above example, we have assumed that each borrower has enabled fresh deposits in different banks. Suppose the amount lent by Bank A is retained by it (because the creditors of P deposit the money in bank A itself). Hence, the example given above explain the multi-bank credit creation model and if it is altered sightly, assume the existence of bank A alone, then it becomes an example for single bank credit creation model.
It is of interest to know the total amount of credit created by the commercial banks in the above example. This could be found out that die following formula K = 1/r. In the formula K is the deposit multiplier and r is the cash reserve ratio. In the above example r = 10%, ie., 1/0.10 which is equal to 10. This means that original deposit will multiply by 10 times if the cash reserve ratio is 10% Suppose we increase the cash reserve ratio to 20% then the multiplier will be 5 and the cash reserve ratio is 5%, the multiplier will be 20. Hence a rise in cash reserve ratio will reduce the volume of credit created and a fall in cash reserve ratio will increase the volume of credit created. We find the total amount of credit created we can use the deposit multiplier calculated above multiply it with the initial deposit In otherwords,
Addition aggregate deposits - Fresh deposit x K
In the above example, fresh deposit is Rs. 10000 and the multiplier is 10. Hence the total credit created is 10000 x 10 = 100000.
So far we have explained the credit creation process by the commercial banks. We can also explain the credit contraction process which means, that whenever the depositors withdraw their deposits then the banks will be left with lesser cash to create only lesser credit. Both the credit creation and contraction are subjected to the following limitations:
1. The volume of cash in circulation determines the extent of credit created. With larger volume of cash, the primary deposits will be more thereby the credit created will also be more. Any reduction in the volume of cash will reduce primary deposits and so the credit created.
2. Cash reserve ratio, in fact, is a primary determinant of credit created. It has been already shown that higher the cash reserve ratio lesser will be credit created and lower the ratio greater will be the credit created.
3. The external drain or the extent of withdrawal of cash by the depositors also determine the volume of credit created. When there is heavy withdrawal of cash by depositors there will be reduction in credit crated and lesser withdrawal will encourage a larger volume of credit created.
4. Banking habit of the people is one of the factors influencing the credit created; If people conduct most of their businesses using cheques rather than cash, then the banks will have more cash (primary deposits) to create more credit when people use more of cash rather than cheques, bills, etc.
5. The central bank is the leader of the monetary system and its decision to follow a liberal credit policy will encourage more of credit creation and a stringent credit policy will bring down the credit created.
6. The availability of a large volume of collateral securities will facilitate larger volume of credit creation and with lesser volume of collateral securities only, lesser credit will be created.
7. The business condition prevailing in the country will be one more factor; determining the extent of credit creation activity. With prosperity and boom conditions prevailing there is greater opportunity for additional investment and': so the credit creation will take place in large scale. During the period of depression and. adversity, as the investment opportunities are very limited, there is no scope for credit creation.
PERFORMANCE OF THE COMMERCIAL BANKS IN INDIA, THEIR PROBLEMS AND SOLUTIONS TO IMPROVE THEIR FUNCTIONING
The trends in performance of commercial banks in India can be explained in terms of various indicators given below.
I. Deposit mobilization : A phenomenal success in deposit mobilization is achieved by the commercial banks since nationalization. In 1950-51 the total deposit with the commercial banks was Rs. 880.6 crores which rose Rs. 102127 crores in 1986-87. This was mainly due to raid branch expansion after nationalization, the increase in money supply in the economy, the improved banking habits among the public, etc, however, the rate of increase in deposit has not been commensurate with the rapid rate of increase in branch expansion.
This is easily understood from the low per capital deposit of Rs. 723. further even in 1986 the total deposit with the commercial banks amounted to only 34% of the national income. However, encouraging signs and indicators are being observed which may herald a sizeable increase in deposit mobilization in the years to come. The main indicators are the increasing fixed deposit and declining current deposits. With better interest on deposits, the banks should be able to improve their deposit mobilization.
2. This objective has been certainly achieved as is clearly indicated by the following facts. From a mere Rs. 546.93 crores in 1950-52 the total advances by the commercial banks stood at Rs. 57518 crores in 1986-87. This is more than 100% increase in advances compared to 1950-51. In 1950-51, the banks were lending only 62.1% of their total deposit in the form of advances which has increased to 65.7% in 1986-87. Since the nationalization, the advance to priority sector by the commercial banks has infact enabled this sector to grow without any financial constraint. In 1986-87, the advances to the priority sector out of the total bank credit rose to 43.6% achieving a significant objective of nationalization in providing the scarce resources to the priority purposes. An important feature of this sizeable advances is that the share of the public sector banks is the maximum and the commercial banks have also started concentrating on the priority sector.
3. Substantial increase in investments : One of the important reasons for maintaining: the profitability in the commercial banks is their pattern of investments. The investments by thebanks went up from about Rs. 360 crores in ,1955-56 to more than Rs. 38563 crores in 1986-87. Of this about 37.8% of the investments are in government securities.
4. Branch expansion : One of the significant achievements of the government is the rapid branch expansion achieved over these 36 years. From a few thousand branches in 1050-51, the number of branches stood at 8321 in 1969 which increased to 53567 branches by June, 1987. This was also due to the merger of smaller banks into bigger banks. The voluminous banking operations^ in the country today is mainly due to the fact that almost every third village has a branch 6f a bank. Though initially such a branch expansion activity led to competition among them, yet over a period with the measures taken by the banks, the competition among the banks have come down.
5. Sizeable increase in the advance towards the priority sector : Banks have played a commendable role in the provision of advance to the priority section Apart from the quantum of assistance, the coverage of banks in terms of assistance to various segments also increased. By December, 1979 the priority sector advances constituted 34.4% of the total bank credit as against 25.8% un June 1977. The government fixed a target of 40% which was achieved by the banks as already indicated under the advances given by the banks. The banks;" have been strictly instructed that they should extend 60% of the deposit mobilized in the rural and semi-urban areas to the priority segments in those areas. By June 1987, the commercial banks' advance was 43.6% of their total deposits which was extended to the priority sector.
6. Declining profitability of banks : A very serious matter of concern about the operation of the commercial banks in India is that their profitability is fast' declining. There are several reasons for this. Firstly, the banks have to mobilize; their deposits among the increasing competition among themselves and also, among the various schemes of savings announced by the government. As a result the banks have to bear a higher cost of deposit mobilization which directly, affect their profitability. Secondly, the interest paid on the reserves maintained by the commercial banks with the central bank is very low and this considerably reduces their profitability. Thirdly, with the expansion of branches throughout the country, the operational cost of the banks have gone-Up, thereby bringing down their profitability. Fourthly, the outgo in terms of staff salary and other allowances also take away a sizeable amount of income from the banks bringing down their profitability. Fifthly, the priority sector lending by the banks at concessional rates is yet another reason for poor profitability. Sixthly, the banks have been lending large amounts to the sick units due to the compulsion from the government. Consequently their profit is affected.
Problems of the commercial banks : 1. Commercial banks, though very large in number have not effectively mobilized the deposits in the country. This is very clear from the fact that a large number of non-banking financial institutions mobilize considerable deposits from the public.
2. The banking habits among the public is not yet at an encouraging level. Especially in the rural areas people prefer to keep their money at home at great risk man depositing with the banks.
3. Government is also responsible to some extent for the slow development of banks in India. There is no compulsion from any government institution that the funds available with the government agencies should be kept as deposits with commercial banks only.
4. Competition from foreign banks, non-banking financial intermediaries, a score of government aided institutions have also made the business of the banks difficult.
5. A sizeable amount of funds of the commercial banks are locked with the sick units. The investments in these units are made.only on the government insistence.
6. The frequent loan melas organized and disbursal of unproductive loans have also created a big problem to the banks. Further the cancellation of loans from banks, waiver of these loans for specified period, etc., also add to the problems of banks.
To overcome the above problems in an effective manner the following suggestions can be considered:
1. The competition between the commercial banks and the other non-scheduled banks as well as foreign banks should be eliminated. This is being done by various provisions relating to opening of a new branch, working hours, investment of funds, allotment of area for each bank, etc. But in terms of working it is better that the competitive spirit is maintained so that the banks will be constrained to maintain and improve their efficiency.
2. The existing banking structure should be modified to match the requirements and changes. For instance, instead of allowing the existence of a number of small banks, attempts should be made to amalgamate the small and inefficient ones with the big and efficient ones. Especially in the case of branch expansion a more critical study is called for so that establishment of uneconomic and] unviable branches can be avoided. The areas really in need of banking facilities should be carefully identified with long term perspective and then the branches! should be opened. A close monitoring of the working performance of each] such new branch should be made so as to determine the justification allowing their existence.
3. The banking functions should be thoroughly overhauled so as to introduce; modern methods of functioning. For instance, the age-old method of maintaining a large number of ledgers should be done away with and; computers should be used in large way. Apart from this, possibility, of extending banking services throughout the day (24 I/ours banking) should be; thought of. Some of the branches of foreign banks have started offering this 1 facility and Indian counterparts can also think of such methods.
4. Streamlining the banking procedure is a long felt need in India. Surprisingly, even among the nationalized banks there is no uniform procedure for several functions. Uniformity will not only help the people to understand; the procedure but also the banks to economic their operations, for instance, if there is a uniform account opening for prescribed for all the banks, then possibly large scale printing of this form will bring down the cost of printing. Like this; uniformity in every procedure wherever possible should be identified and-implemented. This will be identified an effort to economize the use of resources.
5. Periodical and stringent review of the competency and efficiency of the staff is' also a must By devising a healthy procedure for staff evaluation, every bank can attempt to maximize the output and minimize the strain. Mere-strengthening of the staff without arrangement for improving the staff performance through rigorous training, updating of knowledge, evaluation, etc., ' will only weaken the functioning efficiency of the bank.
6. Innovative methods of deposit mobilization should be thought of, apart from the conventional methods. The banks could call for opinion from the public regarding the methods of deposit mobilization and may even consider giving rewards and prizes for the best suggestions.
7. Extending the area of operation of the banks should take up new areas like leasing, hire purchase, etc., to mop up the additional deposits and also to extend the banking coverage.
8. Investment of funds should be very carefully planned and every attempt should be made to maximize the return on various types of investments. As far as possible the loan recovery should be maximized. Any attempt to waive the loans or cancel the loans will only encourage defaulters.
9. Government should also be sympathetic towards these banks by allowing their funds to flow towards the banking sector. The surplus funds available with the government could be placed at the disposal of the banks which will strengthen their operation and in fact the economy would be benefited more in terms of new loans and advances.
10. Efforts should also be made to solve the customer problems by involving them in the decision making process. The service charges imposed on various services should be rationalized and restructured and as far as possible the uniformity in this regard must be achieved. It is often seen that the private sector banks give concessions or even waive the service charges to some of the major customers, while the nationalized banks have no such provision. As a result, private sector banks are able to attract a sizeable volume of funds through deposits.
11. Educating the common public about the manipulative activities of the non-balance financial institutions like chit funds, nidhis, mutual funds, etc., so as to make them understand that the same type of services can be availed of from the banking system but with lesser risks. The regulation in this regard should be made more rigid so as to discourage any ‘blade companies’ from resorting to any shady dealing and manipulative activities.
12. Considering the pivotal position occupied by the banking sector in the country, it is high time that politicians are prevented from pressurizing the banking sector to yield to their unhealthy practices with ulterior motives. A country where banking sector is completely free from political interference alone reaps the expected benefits from that sector and encourage health banking practices.
LEAD BANK SCHEME
A milestone in the history of banking in India is the nationalization of the 14 major commercial banks in 1969. This process was undertaken with the main objective of involving the banking sector in a big way in the nation building and economic development. To help to achieve this commendable objective, two committees were set up viz., National Credit Council Study Group with D.R. Gadgil as the Chairman and the Committee of Bankers under the chairmanship of Nariman. These committees independently went into their terms of reference and recommended an 'area approach' for involving the banks in economic development. This paved the way for giving a concrete shape to the, lead bank of scheme'. As nationalization of banks took place to extend and expand the banking services to all the un-banked areas especially the rural areas, the RBI decided to implement its Lead Bank scheme through the nationalized banks. But this did not discourage the private sector banks from playing their role in economic development. Infact the Lead bank scheme involved all the nationalized banks, State bank of India and its associates and three private sector banks. Hence, the era of bank-propelled economic development started.
The Lead bank scheme has the following features : 1. All the districts in the country except the Metropolitan area were allotted among the banks selected for this purpose.
2. Each bank was expected to take all the initiative to develop the district allotted to it. The initiative includes conducting a detailed survey to identify the resources and the potential of the district concerned and then to devise suitable schemes for utilizing these resources.
3. The identification of unbanked centers is also included in this regard and such centers will be examined thoroughly to determine whether bank should be established in such places or not.
4. The districts were allotted to the different banks depending upon the size of the bank, the resources with which they operated, the ability to handle additional volume of work, regional orientation of the bank concerned, etc.
5. The district allotted to a bank should not be considered as the area wherein only the bank concerned alone should initiate or carry out the developmental works. In otherwords, the lead bank should not become a monopoly in the district allotted, but it should also invite participation from other agencies in the district. In that manner the lead bank will function as a leader of a consortium.
6. To co-ordinate all the development activities taking place in the allotted district and other potential projects for the district, the lead bank is expected to set up a district level consultative committee of banks and other financial institutions. This committee was vested with the powers to review the performance in various schemes periodically.
Working of the Lead bank scheme
To start with the 25 banks selected a, lead banks have completed the survey of the district allotted, to each of them. The district consultative committee in each district has also been formed. The lead bank scheme also designed and monitored the branch expansion activities in all the unbanked areas and with nationalization in 1969, the branch expansion took place simultaneously in about 336 district of the country. The lead banks also started co-ordinating the activities of various agencies in the rural areas like co-operative banks, commercial banks, other financial agencies and other development agencies. The lead banks also started identifying the potential of each district and studied critically the existing line of business and other activities. It also could identify the credit gap in each district. Credit gap refers to the difference between the credit needs of the rural areas and the credit supplied by all the agencies, to bridge this credit gap the lead bank took several steps. Firstly, it decided to improve the deposit mobilization in the area concerned. Secondly, the quantum of funds required for the development activities in the district was estimated. Thirdly, the various agencies in the district were, approached to participate in the scheme. Fourthly, with the district consultative committee the performance of each scheme would be reviewed periodically and corrective steps if any required, would be taken up. I this manner the lead bank scheme aimed at removing the credit gap in each district.
The lead bank scheme was expected to generate the following benefits: 1. The entire country would inherit a sound banking system. 2. there will be perfect and effective supervision and expansion of the credit facilities. 3. The various agencies connected with the developmental activities in each district would be able to achieve a high degree of co-ordination and operation. 4. The available scarce resources in each district would be mobilized and used for the development of the district concerned. 5. The banks will start playing a significant role in the economic rebuilding! and development. 6. A systematic attempt will be made to identify the credit gaps in each district' and appropriate action will be taken to fill up these gaps. 7. There is absolutely no scope for achieving development in ont- district at tile's cost of other district. In otherwords, the lead bank scheme would also." contribute in its own way towards the balanced regional development.
But the lead bank scheme failed in certain respects encouraging the critics of this scheme to argue against this scheme on the following grounds: 1. While it is true that lead bank would take up the role of initiating-the development in the district allotted, but it cannot assume the role of the Planning commission.
2. A lot of confusion prevailed among the lead banks regarding their exact function and objectives. However this confusion was removed later on when the lead banks started sharing their survey findings with other interested agencies in the district and also started opening branches themselves in the areas identified by them.
3. Critics also pointed out that a financial and commercial institution like bank cannot be best suited to analyse and solve the task of techno-economic work. r Further the banks can be taken as professional institutions in the field of finance and not in the area of development. It was pointed out that banking function is completely different from the development function. In the absence of trained and skilled staff the lead banks could not accomplish the objectives for which they were created.
4. There were several other practical difficulties in executing this scheme. For instance, the allotment of districts to the banks was not done strictly, on the basis of regional orientation of the banks. As a result the banks could not effectively attend to the initial spade work in the district allotted to them. Operational difficulties like language barrier, difficulty in controlling the work from long distance, difficulty in finding staff for the newly opened rural branches, reluctance of the staff to move to rural areas, absence of trained and skilled people, etc., together raised serious doubts about the success of this Scheme.
5. A major criticism of the scheme was that the authors of this scheme thought that once the banks are established in the rural or unbanked areas, the other problems in those areas would automatically be solved. Development of any region or area depends on the availability of infrastructural facilities, in that area. Hence, without the other facilities basically required for developmental efforts, banks alone cannot transform the area or region.
Considering these problems of the lead bank schemes, steps have been taken to improve the scheme. For instance, the Banking commission itself has recommended the regrouping of the banking system so as to make; the allocation of districts more meaningful and purposeful. A detailed training programme was charted to be implemented by every bank among the existing and the newly recruited staff. The detailed requirement of each region including finance, was assessed so as to make the appropriate agencies to come up with necessary assistance to the bank to implement the scheme. Another effort taken up was-to arrange for multi-level discussion among the participating banks the scheme so as to share the available information and other details of the scheme to find out solutions for various problems. A close co-ordination and cordial relationship was maintained with the state government concerned to strengthen the scheme.
FUNCTIONS OF CENTRAL BANK
According to De Kock, modem central bank performs six important primary functions. They are: 1. Central bank has the monopoly of note-issue. 2. Central bank acts as-the banker, agent and adviser to the government. 3. Central bank acts as bankers' bank. 4. Central bank acts as the custodian of the nation's gold and foreign exchange reserve. 5. The Central bank collects and publishes economic statements and other useful information. 6. The Central bank acts as the controller of credit.
Apart from the above functions, Central bank also performs the following two functions:
a) it is the custodian of the cash reserves of commercial banks and -
b) it acts as the bank of central clearance, settlement and transfer.
Let us now discuss each one of these eights functions in detail.
Central bank has the monopoly of note issue :
In olden days when the paper currency was introduced, each king issued his own currency or in each province a paper currency was used. When commercial banks were established, each one issued its own currency. Under both these situations, % there was lack of uniformity in the notes issued. There was also lack of recognition of the notes issued, further there was a maximum limit up to which the commercial bank could issue notes as they had been maintaining limited cash reserve and sometimes commercial banks failed to convert their notes into other forms of assets which shook the confidence of the common public. Therefore, the government itself undertook the issue of currency in its own hand. Even this was not satisfactory as it lacked elasticity and flexibility, hence, finally central bank was made in charge of issue of currency.
This centralized system of note issue has the following advantages
1. It facilitated uniformity and absolute control over the monetary system. 2. It built up public confidence on banks. 3. It offered complete flexibility to the monetary system. 4. It enabled perfect control over the credit created by the commercial banks. 5. It also helped to maintain the internal and external value of money.
Hence, in these days every country has vested the Central bank with the responsibility of issuing currency and it started with Bank of England in 1884. In India the Reserve Bank of India is issuing currencies. Every currency issued is backed up by suitable asset of value, like foreign currencies, government securities, other securities and other metallic reserves. As a result of this back up, the public confidence on the banks and the currency issued has gone up.
ii. Central bank acts as the banker, agent and adviser to the government:
As the banker of the central government, the central bank performs several functions. Some of the important functions are: 1. It keeps the account of the government and so accepts receipts to the government and payments by the government. 2. It acts as the collecting banker of the cheques, drafts, etc., payable to the government. 3. It also transfers funds from one place to another on behalf of the central government. 4. It also provides short term loans to the government to tide over the temporary crisis. 5. It also conducts all the international financial transactions on behalf of the government. Any payment for imports or receipts from exports are all accepted by it on behalf of the government. 6. It manages the public debt on behalf of the government, spent from receiving tax payments from the common public.
By virtue of the information that it possesses, the central bank functions as the adviser of the government It helps the government to monitor the economy. It formulates the monetary policy and helps in the implementation of the policy. It suggests to the government the type of foreign policy, tax policy, commercial policy, exchange rate policy, etc., depending on the economic conditions prevailing in the country. It also maintains the foreign exchange reserves of the government.
iii. Central bank acts as the bankers' bank:
This function of the central bank can be classified into two sub-functions. They are: 1. It is the custodian of the cash reserve of the commercial banks and 2. It is the lender of the last resort.
Let us discuss each one these sub-functions.
As regards the first sub-function, it is mandatory in the case of commercial banks in every country to keep a part of their total liabilities in the form of cash reserves. The quantum of cash reserves which the banks have to maintain depends on the policy of the central bank. Usually the commercial banks maintain two types of cash reserve. One type of reserve is maintained with the central bank and the other is maintained by the commercial banks with themselves. This type of centralization of reserve of commercial banks confer the following advantages : 1. It improves the public confidence. 2. It facilitates effective and fuller utilization of cash reserve of the country. 3. It enables the central bank to go to the rescue of the commercial bank which is in need of funds. 4. On the basis of the serve, the commercial banks are able to create credit. 5. It also conducts all the international financial transactions on behalf of the government Any payment for imports or receipts from exports are all accepted by it on behalf of the government. 6. It manages the public debt on behalf of the government, apart from receiving tax payments from the common public. 7. The central bank is able to exercise absolute control over the activities of the commercial banks.
We have already stated that the central bank acts as the lender of the last resort. This means whenever the commercial banks, in times of need, are not able to get financial accommodation from any other source, they can get it from the central bank. This is done in several ways. One popular way is that the commercial banks sell their securities and rediscount valid trade bills with the central bank and in turn get financial resources. The financial support by the central bank enables the commercial banks to improve their liquidity apart from carrying on their functions with limited funds. While this strengthens the public confidence, this also empowers the central bank to impose and exercise absolute control over the commercial banks. A significant merits of this function is that it has enabled the central banks over the globe to direct and regulate the flow of credit. They could ensure the availability of adequate funds for the priority sectors.
iv. The Central bank is the custodian of the nation's gold and foreign exchange reserves:
Central bank performs this very important function to protect the country from the consequences of foreign, trade. It issues the export and import permits to the traders and others. Through this, it ensures that all the international transactions are performed only through the central bank and the payments and receipts are routed through it. This prevents misuse and speculation in foreign exchange. With the centralized system, the central bank is able to maintain the exchange rate and resort to selling or buying of foreign currencies to minimize the fluctuations in the exchange rate. It is also able to encourage all the productive export oriented activities and discourage the unnecessary and wasteful import activities. It also formulates and executes exchange regulation policies, punishing and penalizing the erring individuals and institutions. It strengthens the county's trade relations with other countries.
v. The Central bank collects and publishes economic statistics and other useful information:
In every country, it is the central bank which is given the powers to collect all the economic data related to the country and publish them as authoritative information. This helps the government to understand the actual economic condition prevailing in the country and take suitable policies. For instance, through the collection and analysis of price data the government is able to understand and formulate the necessary price policies to maintain internal price stability. Similarly, credit policy, agricultural policy, industrial policy and other policies are all formulated on the basis of the economic data and useful information provided by the central bank.
vi. Central bank acts as the bank of central clearance, settlement and transfer:
With the expansion of branch of banks and increasing use of banking services, the transmission of funds from one place to another place has become essential. The volume of funds transmission has gone up by several times these days that any delay is causing irreparable damage to the economy. The transfer of funds takes place efficiently and quickly only with the help of central bank. Central bank is the /centre of clearing house operations. Every bank having an account with central bank is able to easily settle its payments receipts without any need to go through cumbersome cash movement. Further the credit base in an economy can expand only when the negotiable instruments can be freely transferred and honored with minimum delay possible. In this respect the clearing house operation of the central^' bank in every country assumes special importance. The value of this service of thereof central bank can be understood only when this service is affected in times of banker strikes. Huge amounts of cash transactions remain immobile causing immense of difficulties and paralyzing the economy. vii. Central bank acts as the controller of credit:
Of all the functions of the central bank, this function of the central bank is very important. Indiscriminate and uncontrollable creation of credit will result in serious implications. Hence, the central bank performs this function. It helps in first limiting the quantum of credit created through its quantitative credit control policies and second it also ensures that the available funds are channelized properly; so that the funds will be used productively. The central bank achieves this through its qualitative credit control policies or selective credit control policies. Through the credit control policies, the central bank strives to maintain domestic price stability, exchange rate stability, high level of employment, etc. Central bank has several weapons to discharge this function which are interlinked and help to achieve the objectives of credit control policies.
OBJECTIVES OF CREDIT CONTROL POLICY OF THE CENTRAL BANK VARIOUS INSTRUMENTS OF QUANTITATIVE CREDIT CONTROL ALONG WITH THE LIMITATIONS OF EACH ONE OF THE INSTRUMENTS.
The following are the objectives of the credit control policy of the central bank : 1. Maintaining the internal price stability. 2. Controlling the economic fluctuations, i.e., business cycle. 3. Achieving the stability in exchange rate. 4. Maintaining the stability in the money market. 5. Promotion of economic growth through well planned and coordinated efforts and 6. Preparing the country to meet any eventuality like wars.
Broadly, the various methods of credit control can be classified
i) Quantitative credit control and ii) Qualitative credit control.
The former aims at controlling the volume of credit and money supply in the economy, while the latter aims at channelising the available credit in the desired direction. The quantitative credit control policy makes use of three important methods of controlling the volume of credit and money supply in a country. The three methods are: 1. Bank rate or discount rate policy. 2. Open market operations and 3. Variable cash reserve ratio.
1. Bank rate or discount rate policy :
It is one of the earliest methods of general credit control developed by the Bank of England and it was considered an effective method till the outbreak of I World war. After the war, Bank of England developed other methods as it found the bank rate policy to be not so effective. The essence of this policy that commercial banks approach the central bank whenever they are in need of financial accommodation. They get the necessary assistance by re-discounting the eligible bills and other securities. The Central bank would re-discount these instruments at a rate which directly determines the volume of funds which the commercial banks can get through this method of financial accommodation. A revision of this re-discounting rate by the central bank will necessitate the commercial banks to change their rate of discounting of eligible bills and securities.
As a result the businessmen will be encouraged or discouraged in approaching the commercial banks to get financial accommodation. Hence, it could be understood that the re-discounting rate is very much linked with all the other market rates and; discounting rate. In order to understand the process let us take an example. Suppose a commercial bank has a discounted trade bill worth Rs. 2 lakhs at 15% and given holder of he bill Rs. 1.70 lakhs. Suppose the commercial bank is in need of funds it can approach the Central bank and get the same bill re-discounted. Suppose the re-discounting rate 10%, then the commercial bank will get after re-discounting the bill Rs. 1.8 lakhs. Now it should be noted that the rate at which the Central bank discounts the eligible bills already discounted by the commercial banks is called re-discount rate or bank rate. The discount rate refers to the rate at which the commercial bank discounts the bills of the businessmen. The bank rate or the re-discount rate and the discount rate are very closely related. Suppose there" is inflationary situation prevailing in the economy and the Central bank wants to> reduce the purchasing power. It will then raise the bank rate. Suppose the bank rate is raised from 10% to 15% correspondingly the commercial banks will also raise their discounting rate from 15% to say 22% As a result the commercial bank/ will get only Rs. 1.7 lakhs after re-discounting the bill and the businessman will get only Rs. 1.56 lakhs after discounting the bill. Since the rate of discount is very high or the cost of borrowing in the market becomes high, the business men will start borrowing less and so volume of credit will come down. This will lead to decline in economic activity and the price level will fall down. Similarly during deflationary situation, the downward revision of bank rate will bring down the discount rate and encourage more borrowing and expand the economic activity and allow the price level to go up helping the economy to recover. At a lower bank rate and discount rate the bank credit is made cheaper and borrowing is attractive-There are two interpretations available in explaining the process of the bank rate policy. One was developed by Hawtrey and the other by J.M. Kemes.
According to Hawtrey, the interest changes constitute major part of the cost of holding and that businessmen are very much sensitive to changes in interest rate. He explained that any change in bank rate will bring about corresponding changes in short term interest rates. Suppose the bank rate is raised, the short term rate of interest will go up making the bank credit costly and discouraging the business men from borrowing and investing. This will lead to shrinking of business activity affecting employment and income. When the employment goes down, the income goes down, bringing down the purchasing power, thereby the demand for goods will fall causing price to fall. Similarly a rise in bank rate will have opposite effect.
Keynes, on the other hand, was of the opinion that any change i bank rate will affect the short term interest rates and bring down the capital value of old long term securities as the new short term securities carry higher return. So there will be diversion of investment from long period to short period securities. To avoid this diversion, the long term rates should be revised upwards which will make borrowing costly. As there will be no corresponding upward revision in the marginal efficiency of capital of long term investment the businessmen will be forced to reduce their investment which will mean fall in output, employment and income. As a result the aggregate demand will fall down and the inflationary tendency will be arrested. Both these interpretations are correct as one approaches the problem of inflation through short period securities and the other through long term securities.
The effectiveness of the bank rate policy in controlling the credit depends on the following conditions: 1. The bank rate and the other interest rates should be very closely interconnected, as otherwise the desired effect through manipulation of bank rate cannot be achieved. 2. The economic structure of the country should be elastic. This means that wages, costs and' prices should be flexible so that they cart change depending upon the changes in bank rate. 3. The existence of well developed and well Organized short term funds market is the next requirement.
Limitations of the bank rate policy:
The bank rate policy in practice has not been very effective because of the following reasons: 1. The conditions for the success of the bank rate policy are rarely met in practice, making it ineffective. 2. Businessmen and industrialists are found to be less sensitive to changes in interest rate as they change their policies depending upon the business prospects and adversities. 3. Bank rate has been found to be non-effective in controlling deflation, as mere reduction in bank rate and through that making credit cheaper does not enthuse the investors to increase their investment. 4. There exists conflict between the internal and external effects of the bank r policy. For instance, when domestic borrowing becomes costly, international borrowing may become cheaper defeating the purpose changing the bank rate. 5. Commercial banks are found to be increasingly less dependent on the central bank and so any change in bank rate fails to bring the necessary effect. 6. Rank rate policy affects both the productive as well as unproductive activities in the same way; so it is not advisable. 7. The increasing importance given to the fiscal policy, especially after Keynes has made the bank rate less useful. 8. The changing pattern of business finance with over emphasis on ploughing back of profits, building up reserve funds, etc have made investors relying less on commercial bank credit and as a result bank rate policy has become ineffective. 9. The formulation of other methods of credit control has also led to the decline in importance of bank rate policy. 10. Financing through discounting of bills or other negotiable instruments has become outdated as there are other modern methods of financing and so bank; rate policy is less effective.
As far as India is concerned the bank rate policy has not been very effective because:
(i) the existence of organized banking sector and the unorganized indigenous banking sector. Any change in bank rate will affect only the former and not the latter.
(ii) there is no co-ordination between the organized and unorganized sectors.
(iii) the Indian commercial banks always keep extra cash reserve to tide over their/ financial crisis without relying on the central bank and
(iv) the bill market and the non-availability of eligible bills have made the bank rate policy ineffective.
2. Open market operations :
The open market operations as a method of quantitative credit control are interpreted in two ways. In a broad sense, it refers to the buying and selling of government securities as well as other eligible papers like bills and securities of private concerns by the central bank. In a narrow sense it means the buying and selling of only government securities by the central bank in the money market. The process of open market operations affects the volume of credit, the level of business activity and the internal price level. The process is explained below.
Suppose in an economy there is inflationary tendency and the expansion of credit is very high, and die central bank wants to control this. Then the central bank will start selling securities in the open market to both the banks as well as the private individuals. When these securities are bought, payment is made in terms of cash. This will bring down the cash reserve of the commercial bank with which they can only crease lesser credit As a result the expansion of credit will be reduced. Similarly, suppose the central bank wants to expand credit in order to revive an economy in deflationary situation. Then it will start buying securities in the open market from the commercial banks and others. This means, the central bank will pay them cash adding to their cash reserve. This will enable commercial banks to create more credit. Apart from expanding or contracting credit creation, open market operation can also influence the interest rate. For instance, when the central bank buys securities giving cash, the interest rate will fall down and when the securities are sold, the interest rate will go up.
The open market operations became very popular since the 1 World war. With the increased availability of government and other securities, it has become more useful. As the bank rate was proved to be ineffective, there was need to make increasing use of open market operations. Further it has helped to remove the shortage of money in the money market apart from helping to make the bank rate policy successful. A major contribution of the open market policy is that it is very helpful in checking the 'run on banking.' However, the success of the open market operation depends on the following conditions:
1. Existence of a well developed securities market is a must for making the policy effective. The non-fulfillment of this condition has made this policy less effective in under developed countries. 2. The maintenance of excess cash reserve by the commercial banks defeats the object of this policy easily. 3. The operations of extraneous factors like leakage of cash or injection cash into the country may affect the effectiveness of this policy. Suppose when the central bank buys securities, the injection of additional cash be used to set right the balance of payment deficit or people may ; holding more cash or the velocity of money may decline. As a result policy becomes ineffective. 4. The attitude of the borrowers may stand in the way of this policy succeeding, suppose the central bank wants to expand credit and so buys securities. The availability of credit need not induce the investors to borrow more from commercial banks. That is if the investor's attitude is not in consonance with the policy of the central bank, the open market operation^ will fail. 5. The central bank should have adequate stock of securities to effectively, participate in the open market operations. 6. The commercial banks should not have any other way of getting financial accommodation from the central bank as otherwise die open market operations will be less effective. 7. It has been found in practice that this policy is more effective in controlling^ credit creation or expansion rather than in stimulating credit expansion as the borrowers are influenced by other factors apart from the cheapness of credit.
3. Variable cash reserve ratio :
Considering the limitations of the bank rate policy and the open market operations, the need to develop a very effective method, of credit control was felt. Especially, the need was to directly control the power of the commercial banks to create credit Variable cash reserve ratio was suggested as one more method of quantitative credit control by Keynes. Further this method is considered necessary for promoting the overall liquidity and solvency of the banking system, apart from improving the public confidence on the banking system.
The process of working of this method of credit control can be easily understood with an example. Suppose in an economy there is over expansion of credit which is possible with excessive cash reserves with the commercial banks. To check this, the central bank may raise the cash reserve ratio say from 20% to 25% Then this will bring down the availability of cash reserve with the commercial banks. With lesser cash reserve they can only create lesser credit. Similarly, suppose the central bank wants to expand the credit creation by the commercial banks. Then it will bring down the cash reserve ratio say from 25% to 20% This will enable the Commercial banks to have more cash reserve with which they can create more credit. It should be noticed that the cash reserve ratio determines the credit multiplier in an economy. An increase in former will contract credit through multiplier effect and reduction in the former will expand credit through multiplier.
In India the variable cash reserve ratio is slightly altered and it is called Statutory Liquidity Ratio (SLR). SLR means that every commercial bank should maintain a certain amount of liquidity to meet its liabilities. This SLR includes, the cash reserve with the RBI, cash-with other banks-and investment in government securities, any increase in SLR will reduce the lendable funds with commercial banks and decrease in SLR will increase the lendable funds with them. SLR helps in not only credit control but it also helps in assisting the government's borrowing programs. This method is also called as the method of secondary reserves requirements.
Though the variable cash reserve ratio is considered superior to other methods of quantitative credit control, it has the following limitations: 1. Commercial banks with excess reserve are least affected by the method. 2. Commercial banks with a very strong source of foreign funds can by-pass this policy. 3. The central bank's policy of liberalizing or contracting the credit may not be commensurate with the investor's attitude. 4. This policy also affects all commercial banks uniformly i.e., banks with large cash reserve as well as small reserve. As a result the policy may harm some banks in the process protecting the economy. 5. The commercial banks will lose their freedom because of the policy, hence, they will always be cautious in maintaining additional reserve. 6. As the cash reserves maintained by the commercial bank do not fetch any interest, in a way, this policy brings down the earnings of commercial-banks. 7. As this method is very effective, it has to be very carefully applied by the central bank as otherwise it has to undo itself all that it has attempted to maintain economic stability. 8. This policy directly affects the securities market as increase in cash reserve required by the central bank will force the commercial banks to dispose of securities they have, causing depression in prices of securities resulting in heavy financial loss.
In spite of all these limitations, the variable cash reserve ratio is by and large effective method of controlling the quantum of credit in an economy this policy has to be carefully adopted as otherwise, it may result in severally, unwanted consequences on the economy.
QUALITATIVE CREDIT CONTROL OR SELECTIVE CREDIT CONTROL! POLICY AND THEIR LIMITATIONS.
Qualitative or selective credit control policy refers to the set of policies implemented by the central bank in order to channelize the available credit in-the desired direction. For example, suppose in India the agricultural and small scale industry sectors are to be encouraged, then the RBI may direct the commercial banks to be more liberal in lending to these sectors and be strict while lending to other sectors. This will help the economy to provide ample opportunities for the priority sectors to grow. In other words, in every country the government determines in advance the priorities and to ensure that the banks conform to the priorities in their lending policies, the selective credit control policies are implemented. Hence, while the quantitative credit control policies aim at controlling the volume of credit created, and the money supply in the economy, the qualitative credit control policies help in using the available funds only for the important purposes and discourage unnecessary lending by commercial banks. The objectives of the selective credit control policies are : 1. to divert available funds only to the urgent and desirable purposes, 2. to control and regulate a particular sector an economy without affecting the entire economy as a whole 3. to discourage wasteful and uneconomical consumer expenditure on non-essential items. 4. to correct the unfavorable balance of payments of a country and 5. to control and regulate even the non-banking financial houses or intermediaries.
The important methods of selective credit control policies are : 1. Margin requirements 2. Regulation of consumer credit 3. Control through directives 4. Rationing of credit 5. Moral suasion 6. Direct action and 7. Publicity.
1. Margin requirements :
It is well known that commercial banks lend against valuables and securities. These securities are the collateral for the amount lent. While accepting the securities for the loan the banks first asses the market value of the securities and then considering the amount of loan required the bank would require the margin to be paid by the borrower which on most occasions is the difference between the market value of the securities and the amount of loan required. However, the central bank has the right to determine the margin amount payable by the borrowers. This margin amount is stipulated in terms of percentage of the value of the securities offered or the amount of loan required. The central bank can vary this percentage of margin requirement from time to time to regulate the flow of credit on certain securities. In other words, central bank can also fix different percentages of margin requirements on different types of securities against which the loan is given, this method is effectively used to counter inflationary a deflationary conditions in an economy.
The major advantages of this method are: 1. it ensures use of available funds only for productive and useful purposes, 2. it discourages speculative activities, 3. it helps to control inflation by diverting the funds available to produce only goods which will help to bring down the price level and 4. it encourages sound investment projects.
However, this method has serious limitations as explained below : 1. fixation of very high percentage of margin may drive the borrowers to black: money market and 2. it may encourage collusion and corruption among the bank officials to show undue favors to certain borrowers.
Example : Suppose a person X approaches a commercial bank A for a loan of Rs. 20000 to buy a motor cycle. The banker then would ask borrower to remit, say 20% of the value of the motor cycle as margin money. Mr. X would remit Rs. 4000 and then the banker would give him a loan of Rs. 200. Suppose the central bank wants to discourage such lendings. It may increase the margin requirement from 20% to 40% Then Mr. X should remit Rs. 8000 to the banker to get a loan of Rs. 20000. This may discourage X from approaching the baker for the loan^, Suppose Mr. Y wants a loan of Rs. 50000 to start a small scale business unit. The-banker then may ask him to remit Rs. 5000 (just 10% of the amount of loan) as margin money. Suppose the central bank want to encourage such lendings it may, fix just 5% as the margin requirement for such loans and then Mr. Y would have to. pay only Rs. 25000 as margin money.
2. Regulation of Consumer credit:
According to this method of selective credit control the commercial banks are instructed to encourage borrowing for certain purposes and discourage certain, other types of borrowing. Usually consumers approach the commercial banks for loans to buy durable consumer good like T.V., refrigerators, washing machines, etc. The banks would direct the consumers to pay a part of the price of the item to be purchased and the, remaining amount is given as credit. The central bank may regulate the consumer credit in different ways. Most popular methods are :
(i) Central bank may extent or curtail the consumer loans to buy certain items during a particular time. For example, during inflationary period, the central bank may curtail the commercial banks from lending to enable consumers to buy T.V. fridge, etc. Then the demand for these luxury items will come down bringing down their price and indirectly helping to control general price level.
(ii) The central bank may alter the initial money to be deposited by the borrower and through that encourage or discourage borrowing. For example, during inflationary situation, the central bank may instruct the commercial banks to" get 40% of the value of the item to be purchased as the initial deposit payable by the consumer. Then this would discourage the consumer from borrowing. During the normal period this initial deposit requirement may be reduced to just 10%.
(iii) Changing the maturity period of the loan is one more method of consumer credit regulation., Suppose the central bank wants to encourage the consumer credit, then it may. allow maximum repayment period say 60 month's. On the other»hand, if it wants to discourage the consumer credit, it may fix the maximum repayment period as only 30 months. Accordingly the lending operations will increase or decrease.
(iv) Changing the rate of interest on consumer credit is one more usual method to regulate. Increase in rate of interest will discourage borrowing while reducing the interest will encourage borrowing.
3. Control through directives :
This method means the periodical directions, instructions, information, guidelines and warning issued by the central bank to the commercial banks to make the latter follow the credit policies of the former. The main objectives of this method are : i) to control the lending policies of the commercial banks. ii) to channelize the available credit to more productive and urgent uses from less urgent and less productive purposes. iii) to completely prohibit lending towards a particular purpose and iv) to determine the maximum amount that could be lent for certain purposes.
Every central bank is empowered to issue such directive by virtue of the statutory powers conferred on it and usually the central bank implement this policy by offering incentives like liberal refinancing facility to banks which follow the directives and restraining the erring banks by arranging for scrutiny of their lending pattern or imposing penalties for violation. In practice the commercial banks usually follow the guidelines and directives of the central bank and conflict on the ground seldom arises.
4. Rationing of credit:
It is necessary for every commercial bank to approach the central bank to improve its liquidity in times of need. Central bank can effectively use this 'dependence of commercial banks to control the credit creation or make them work according to the need t>f the time. Rationing of credit can be interpreted in two ways: i) the central bank may fix the maximum amount of financial accommodation to an commercial bank on the basis of rediscounting facilities. ii) the central bank may fix the quota for every commercial bank for financial accommodation.
The central bank may use the policy in any one of the two ways or both the ways, For instance, it may feel that a particular bank is creating excessive credit. To control this central bank may fix the maximum amount of financial accommodation that the particular commercial bank can get from central bank through re-discounting of eligible bills with central bank. This will certainly make the commercial bank to control its credit creation. But this method of credit control has certain limitations. Firstly, the central bank is suppose to be the lender of last resort for the commercial banks. But when it rations the credit to the commercial banks, it appears to be contradicting its role as a lender of the last resort. Secondly, the method is not so effective in a situation where the commercial banks have built up sufficient reserve so that they need not approach the central bank in times of need. In that case, rationing of credit has no purpose to serve. Thirdly, this method can be effective only when there is excess demand for credit over the supply of credit However, the central bank uses this policy along with the other policies in order to improve the over all effectiveness of the selective credit control policies.
5. Moral suasion:
Moral suasion refers to the persuasive approach of the central bank towards the commercial banks in making the latter follow and implements the policies of the former. Though the central bank is empowered to take direct action on the erring or violating commercial banks, yet it exercises that option only rarely. In its place, the central bank takes efforts to explain to the commercial banks the need for following certain policies. This is done either through periodical conference with commercial banks, or by appealing to the sentiments of the commercial banks. In effect this method aims at bringing to commercial banks into line through use of moral force instead of resorting to the legal powers. It should be noted that this method has no legal back up or support. It is merely applied using the conventional relationship between the commercial banks and the central bank. It has been quite successful in countries like UK, France, Holland and others. But it has not been very effective in USA under the unit banking system. In India, the RBI has found this to be very effective as there exists a very cordial relationship between the central bank and commercial banks. Of course, the success of this policy depends on the prestige, influence and leadership of the central bank Further since it has no legal back up in times of credit expansion it is not effective.
6. Direct action:
Direction action is one more method of selective credit control in which the central bank uses coercive measures against the erring commercial banks or banks violating the central bank ruling. It may vary from general instructions to the banks to special directives to the erring banks. Though this method has the legal sanction, central banks around the globe rarely apply this method. As a matter of direction action, central banks are vested with vast powers ranging from refusing credit and re-discounting facilities or imposing penal rate of interest on banks which have sought financial accommodation from central bank beyond the prescribed limit. In several countries, the central bank is empowered to formulate general credit policy or prescribe die rates of interest on different types of loans and advances or to divert the available bank credit to a particular industry etc. Though this method is very effective it is very rarely applied in isolation. It is normally combined with other methods. But this method has certain limitation like:
1. Direct action on commercial banks may make them work against the central bank at least psychologically. 2. The commercial banks are at a loss sometimes to follow the policy of central bank regarding productive and unproductive lending, essential and non-essential borrowing, etc., in the absence of clear cut definition. 3. The central bank through this method is able to regulate the functioning of commercial banks only. It cannot control directly any misuse of credit by any borrower. 4. This role of central bank contradicts its traditional function as the last resort.
7. Publicity :
Use of publicity as a method of selective credit control is a debatable question. In advanced countries this is used as an effective method of credit control while developing countries it is yet to be recognized as a measure. However the central bank can public its views, opinions, policies, guidelines, directions, observations, etc., periodically about the economic situation prevailing in the country of economic -variable's behaviour, money market, public finance, trade, industry, agriculture, etc. Such publications help to understand the changing situations and the needs of a country. The commercial banks are able to formulate their policies with the back ground information published, by the central bank, this method is very widely used in most of the advanced countries and in India the RBI publishes / various statements, returns, etc., helping the country to follow the changing.; economic situations and through that guiding the commercial banks. But the effectiveness of this method of credit control is debatable and it is usually applied along with the other methods control along with the other methods of credit control.
On the whole all the methods discussed above are not free from limitations which are explained hereunder: 1. The selective credit control policies are applicable to commercial banks; institutions in the unorganized sector and the non-banking financial intermediaries are left out of the coverage. As a result these policies may land commercial banks in a disadvantageous position. 2. In the absence of clear cut definition of productive and unproductive lendings, commercial banks cannot be effectively controlled through these policies. 3. These policies are ineffective as the commercial banks are unable to ensure the use of funds for the purpose for which they are given. 4. Commercial banks are encouraged to resort to manipulations and unhealthy practices to remain outside the effect of these policies. 5. In practice, these policies were not found to be effective in unit banking system. 6. These policies have no relevance if the businessmen, investors and other resort to different methods of raising funds than approaching the commercial banks. 7. It has to be noted that credit is one of the factors affecting the price of goods and services but control of credit-alone cannot bring about the desired changes in price level. In this respect, the selective credit control policies can be treated only as the alternative available and not the only method of achieving economic stability.
FINANCIAL INSTITUTIONS
Industrial Finance Corporation of India (I-^CI) and evaluate its working
The IFCI was set up by the Government of India in July, 1948 under a special Act with an authorized capital of Rs. 10 crores, (increased to Rs. 20 crores later) with a view to achieve speedier industrial expansion of the country. Pre-independent India could not advance industrially, since the British rulers at that time had no interest in the growth of industries in India, Indian industries needed institutional finance support to expand and modernize and this need was met by the establishment of IFCI. The shareholders of IFCI consist of IDBI, scheduled banks, insurance companies, investment trusts and co-operative banks. The repayment of capital and a minimum annual dividend are guaranteed by the Government of 1 India. The Corporation is authorized to issue bonds and debentures in the open, market, to borrow foreign currency from the World Bank and other organizations, accept deposits from the public end borrow from RBI. The important functions of the Corporation are: i) To grant loans and advances to industrial concerns and to subscribe to the debentures floated by them. ii) To guarantee loans raised by the industrial concerns in the capital market. iii) To underwrite the issue of stocks, shares, bonds and debentures of industrial concerns. iv) To directly subscribe to the shares of any concern.
The Corporation gives long and medium term finance only to companies engaged in manufacturing, mining, shipping and generation and distribution of electricity; with a ceiling of Rs. 1 crore to any single loan. The period of the loan shall not exceed 25 years. The Corporation charges lower rates of interest in case of projects in notified backward areas.
The following aspects are examined by the Corporation before a loan is granted: i) the importance of the industry to die national economy ii) the feasibility of the scheme, iii) the cost of the scheme, iv) managerial competence, v) nature of security offered, vi) adequacy of the supply of inputs like raw materials, availability of technical personnel etc. vii) the quality of the product, viii) end use of the product.
The Corporation accepts only fixed assets of the borrowing company as security and does not normally accept floating assets like raw materials and finished products as security. Personal guarantee of the Directors is also insisted upon. The Corporation exercises supervision and control over the borrower-company by appointing directors to the Board of Management and as a last resort could take over the management in case of persistent and willful default. Periodical reports from the borrowers and inspections by the-Corporation help the Corporation to watch the activities of the borrower.
The Corporation has rendered considerable service to our industries. Among the many industries which have received assistance from the Corporation, mention may be made of fertilizers, cement, power generation, paper, industrial machinery, etc.
In March, 1975, the Corporation sponsored the Risk Capital Foundation (RCF) to provide assistance to new entrepreneurs including technologists and professionals for promoting industrial projects to provide loans free of interest or at nominal rate of interest.
The Foundation was later (1988) converted into Risk Capital and Technology Corporation Ltd. (RCTC).
In addition to providing risk capital, the new Corporation provides technology finance by: i) providing substantial innovative technologies products, processes, market services, technological up-gradation, energy conservation, etc. ii) meeting the expenditure of national and international consultants, iii) financing sponsored commercial R & D programs.
In the area of priority sector, the IFCI has started new promotional schemes such as Interest Subsidy Scheme for Women Entrepreneurs, Consultancy Fee Subsidy Scheme for providing marketing assistance to small scale units, encouraging the modernization of tiny and small scale and ancillary unit and control of pollution in the small and medium scale units. Lately, the IFCI has evinced great interest in the development of backward districts.
Considering the financial facility available to the large and medium scale industries, even after 4 decades of independence, the role played by IFCI is something commendable. When the commercial banks have their own policy restrictions in lending for large and medium scale industries, the big units could not also raise funds easily through the capital market, general hesitation of the common, public (both domestic and foreign) to invest in such big units, IFCI is the only institution which has come forward to fund the large and medium scale industries. Since its formation in 1948, till March, 1992 IFCI has extended financial assistance to the tune of Rs. 14,300 crores to the industries of which nearly Rs. 9,660 crores have been disbursed.
Though the IFCI has been criticized for charging high rate of interest, delay in sanctioning of loans, insisting on personal guarantees of the Directors, etc., the Corporation has been rendering extremely credit worthy service in the industrial development of the country.
It has entered into the field of funding through underwriting debentures and shares guaranteeing of deferred payments in respect of imports from, abroad by industrial units, directly participating in the public issue of shares and debentures by the industrial concerns, etc. Hence, this institution, has certainly served the purpose for which it has been formed.
Industrial Development Bank of India (IDBI)
The IDBI was established under the Industrial Development Bank of India Act, 1964 as a wholly owned subsidiary of the RBI. It started functioning on July 1, 1964. The main objective in establishing this Bank was to provide long term finance to industries. From February, 1976 the ownership of IDBI was transferred to the Government of India, With the de-linking from RBI, the IDBI became the apex body for all industrial financing institutions in the country.
The Bank plays a special role in: i) planning, promoting and developing industries to fill the gaps in then industrial structure in the country; ii) co-ordinating the working of institutions engaged in financing, promoting or developing industries and assisting in the development of such institutions, iii) providing technical and administrative assistance for promotion, management or expansion of industry and (iv) undertaking market and investment research and surveys as also techno-economic studies in connection with development of industry.
IDBI enjoys considerable operational flexibility. The Bank can finance all types of industries irrespective of the form or size of an organization. Its activities are not crippled by restrictions on the nature and type of security which it should accept. The Bank is empowered to finance all types of industrial undertakings engaged in manufacturing, mining, processing, shipping and other transport industries and hotel industry.
The assistance rendered by the Bank can be grouped under three categories viz., i. direct assistance, ii. indirect assistance and iii, special assistance. 1. Direct assistance: This category consists of project finance, underwriting of and direct subscription to industrial securities, modernization assistance scheme for all industries, soft loans, technical refund loans and equipment finance loans. The Bank has the option to convert its loans into equity. It can guarantee loans raised by industrial concerns in the: open market from 'notified’ financial institutions. It can also accept, discount or rediscount bonafide commercial bills or promissory notes of industrial concerns. 2. Indirect assistance: This category is in the form of assistance through other institutions. It can refinance term loans given by other financial institutions like, IFCI, SFCs, etc., repayable within 3 to 25 years. It can refinance term loans repayable between 3 and 10 years given by scheduled banks/State. 3. Co-operative banks. The Bank can subscribe to stocks, shares, bonds or debentures of IFCI, the SFCs or any other 'notified' financial institutions. 4. Special assistance: The Bank has a special fund known as the Development Assistance Fund to be used for assisting those industrial concerns which are not able to secure funds in the normal course because of low rate of return. 5. The Bank also renders assistance to Backward areas by giving loans on softer terms, such as concessional rate of interest, longer grace and repayment periods.
The Bank extends assistance to small scale industries and small road transport operators indirectly through the State level institutions and commercial banks by way of refinance.
The Bank has launched a Fund called national Equity Fund Scheme in 1988 for providing support, in the nature of equity to tiny and SSI units and has set up all Voluntary Executive Corps Cell to utilize the services of experienced professionals for counseling SSI units tiny and cottage units and for providing consultancy support in specific areas.
The principal sources of funds for the Bank are its own share capital and reserves, borrowing from Government of India and RBI, market borrowing by way of X bonds, etc. The authorized capital of the Bank is Rs. 1,000 crores which can be raised further upto Rs. 2,000 crores.
The IDBI (as well as other term lending institutions) have introduced a two-tier interest rate structure for loans for industrial projects in the large, medium and small scale sector with effect from August, 1990. The first tier relates to the initial two years or the construction period of industrial projects (whichever is shorter) and the second tier applies to the period thereafter when industrial projects are expected to commence production. For the first tier, the normal interest rate would remain unchanged at 14% per annum, whereas for the second tier, the normal interest rate would be 15% per annum. To impart greater flexibility from July, 1991, the Bank has the freedom to charge interest rate above the floor rate of 15%.
According to the provisional figures available during the year 1990-91, the Bank sanctioned financial assistance to the tune of Rs. 5,604.6 crores and disbursed Rs. 3,511.5 crores. Similarly, in 1992-93 alone, the Bank had sanctioned Rs. 9,459.4 crores of financial assistance of which it disbursed Rs. 6,669 crores. Since its inception in July 1964, till the end of March, 1992 IDBI had sanctioned financial assistance of nearly Rs. 64,696 crores and disbursed nearly Rs. 47,088 crores.
Industrial Credit and Investment Corporation of India (ICICI)
ICICI was set up in 1955 under the Indian Companies Act. This was sponsored by a mission from the World bank as a result of international co-operative effort to encourage private investment in India. It started with an authorized capital of Rs. 60 crores and a subscribed capital of Rs. 22 crores. The authorized and subscribed capitals have since been increased to Rs. 100 crores and Rs. 49.5 crores respectively.
The aim of ICICI is to stimulate the promotion of new industries to assist the expansion and modernization of existing industries and to furnish technical and managerial aid so as to increase production and thus create employment opportunities. With this aim in view the Corporation provides financial assistance to enterprises as detailed below: • underwriting of direct subscription to shares, bonds, and debentures, • loans in rupees and foreign currencies • guaranteeing payments for credits given by Indian and foreign sources. • credit facilities to indigenous manufacturers who sell industrial equipment on deferred payment basis. • equipment leasing facility • merchant banking services • project counseling for non-resident Indians
Regarding sources of funds for its activities, the Capital of the Corporation is supplemented by borrowing from Government of India, the World Bank, IDBI, other foreign governments/agencies, and issue of bonds/debentures in India and foreign commercial markets.
The ICICI has promoted/sponsored the following institutions: a) Housing Development Corporation of India (HDFC) to provide long term finance to middle and lower income group of individuals, co-operatives, etc b) Credit Rating Information Services of India Limited (CRISIL) to provide credit rating services to the corporate sector; c) Technology Development and Information company of India limited (TDICI) to finance the transfer and up-gradation of technology and provide ' technology information.
The provisional figures available for 1990-91 put the Corporation's assistance at Rs. 3,857.5 crores as sanctioned and Rs. 1,936.5 crores as disbursed.
Adam Smith's canons of taxation and the principles of a sound tax system '
Adam smith's Canons of taxation : .
Adam Smith laid down four canons of taxation. They are: i) canon of ability, ii) canon of certainty, iii) canon of convenience and iv) canon of economy. i) Canon of ability : According to this principle of taxation, the people in a country should contribute towards the government expenditure. Their.:*§ contribution should be according to the ability to pay of each individual. A rich man should contribute more and the poor either should contribute less & or can be exempted. This principle of taxation will ensure that the cost of public expenditure is shared by the people in accordance with their individual ability.
ii) Canon of certainty : Adam Smith insisted that the-government should know in advance the amount of revenue that it could raise and the time when it could mobilize the revenue. On the part of individual tax payers, they must know clearly the amount of tax that they have to pay; the time when they should pay and the method of paying the tax. Adam smith felt that it is necessary that the people should be certain about their tax commitment, so that there cannot be any exploitation of the tax payers either by the government or by the tax collectors. This implies, once the people are clear about the amount of lax, they will plan their expenditure accordingly so that tax payment will not be felt a penalty.
iii) Canon of convenience : According to this canon, the tax should be such that it is levied at the time when it is convenient for the people to pay. Similarly the manner in which the tax has to be paid should also be convenient for the tax payers. For example, the sales tax paid on any commodity is included in the price and the consumer does not feel when he pays the tax. At the same time, the government is able to collect the tax effectively without any possibility of evasion or avoidance.
iv) Canon of economy : This is a very important principle stating that the cost of collection of tax should be less than the tax revenue. In other words, the purpose of imposing tax will be defeated if the government has to spend f more money to collect less tax revenue. Only when there is economy in tax collection, that the tax revenue realized can be spent usefully. For example, in the case of direct tax like income tax, the government may organize tax raids on people who evade tax. If the cost of these raids is greater than the amount of tax recoverable, then it is not wise. On this ground, indirect tax like sales tax is more economical than income tax.
Several other canons of taxation have been introduced by the modem economists. Some of these canons are : canon of simplicity, according to which the tax structure should be easily understandable to the common men so that payment of taxes will not be difficult. Another canon is canon of productivity which implies that the taxes should fetch adequate revenue to the government to meet the public expenditure. Other canons like canon of elasticity, canon of flexibility, canon of diversity and canon of neutrality have also been introduced. According to Mrs. Hicks, a sound tax system should have the following characteristics: a. It should facilitate financing of public services. b. Tax, should be levied according to the ability of the people, the index of ability being income and family circumstances and c. similarly placed persons should pay similar taxes to avoid any discrimination. From the discussion above, we may lay down the following four broad characteristics as the principles of a sound tax system.
1. Equality in tax burdens :
This principle suggests that when the taxes are levied they ensure equality in tax burdens. In other words, through taxes the government can ensure that the tax burden is spread in such a way that persons who are placed in similar positions are made to bear the same burden of taxes. This implies that people who are better-off should bear more tax burden than those who are worse-off. Though this principle is universal, yet in the implementation of this principle problem like indicators of equality, effectiveness in practice, the method of achieving this equality, etc., will all be faced.
2. Productivity:
With the ever increasing responsibility of modern welfare state, the need for financial resources is always felt. As the modern governments spend huge amounts of money on public projects to maintain high level of public welfare, they have to raise enormous funds through taxation. Unless taxes are productive, the governments will find it difficult to implement public projects. Especially in a developing country, taxes are to be highly productive so that country can achieve growth with stability. Apart from being productive, taxes should also be flexible and ensure regular inflow of funds for the government. This implies that taxes., should not only fetch regular flow of revenue, but this flow should increase on decrease depending upon the circumstances. Of course, the productivity of taxes is a relative term and it depends on several factors such as tax base, rate of tax, the exemptions and concessions granted, the efficiency of collection, the tax payers psychology, etc. Hence, the fiscal authorities should design the tax system in such a way at each tax levied is productive and flexible.
3. Recognition of the rights and problems of the tax payers:
Government should not be aiming merely at high revenue through taxes. While designing the tax system, it should take into account the various problems and difficulties of the common public so that the taxes imposed will be successfully implemented. The government should also recognize die rights of the tax paying public. The tax system should be such that the public are able to easily pay the tax with minimum inconvenience and their complaints and grievances are sympathetically heard and redressed. No tax system can bring the expected revenue unless the tax paying public understands the purpose of the tax and cooperate with the tax administrators. Hence, the government should make the tax laws simple and comprehensible and the collection procedure simple. Tax payment should be a pleasure and must not irritate the public. The tax administrators should be tactful, courteous, remain impartial and be alert all the time to avoid any evasion and avoidance. A system to enquire into the grievance of the tax paying public should also be formulated so that the public will have a way of settling their problems and difficulties in paying taxes. Only when the administrators are understanding and sympathetic, the morale of the tax payers will be high and die tax system will function smoothly.
4. Adaptability of the tax structure:
The tax system evolved should be such that it matches well with the prevailing situation, hi a developing country, the burden of tax should not be very heavy as this will directly affect the morale of the tax payers. At the same time the government should also raise adequate revenue to meet its mounting public welfare expenditure. The best tax structure is one which can be modified suitably with changes in economy.
Distinction between direct tax and indirect tax
Direct and indirect tax:
Taxes are classified as direct tax and indirect tax. But the meaning of these two types of taxes is not clear. For a long time economists interpreted these two types in different ways. For instance, one group of economists considered taxes on production as direct taxes and those on consumption as indirect taxes. Taxes imposed on income are treated as direct taxes and those on expenditure treated as indirect taxes. J.S. Mill distinguished these two types of taxes in terms of the ability to shift the tax. Any person on whom the tax is imposed, if he himself pays the tax, it is called direct tax and if he is able to shift the tax Jo somebody who ultimately pays it then it is called indirect tax. For example, income tax is paid by a person as it is levied on the income earned by him, so it is a direct tax. On the other hand the sales tax imposed on the seller is shifted to the buyer. Now-a-days the distinction between direct and indirect taxes is explained with reference to the basis of assessments and not on the point of assessment. Hence, taxes assessed on the basis of income are called direct taxes and those assessed on the basis of expenditure are called indirect taxes. However, even this classification is not free from difficulties. For instance, when one man's income is treated as another man's expenditure, tax on one man's income may become the tax on another man's expenditure. Hence, till date there has been no satisfactory distinction between direct and indirect taxes. However, in practice this distinction is retained more for the purpose of grouping the different taxes.
Merits and demerits of direct tax:
Merits:
1. Direct taxes are based on the principle of ability to pay and so they help to distribute tax burden equally. 2. As the tax is imposed on each individual, for example, based on his income, he is certain about the amount of tax payable by him. Hence, the direct tax satisfies the canon of certainty. 3. Direct taxes are also highly flexible. The revenue from them can be increased or decreased depending upon the need of the government. For example, the government can simply raise the rate of tax to get more revenue and bring down the tax rate to reduce the revenue. 4. The tax paying people are more interested in the ways in which the tax revenue is spent by the government. They feel proud of participating in the public projects by paying tax.
Demerits: 1. Direct taxes like income tax, are considered as tax on honesty of the people. Those people who can evade or avoid it are rarely prosecuted. Hence, there is no incentive to pay the tax. 2. There is no logical basis for levying or determining the tax. As a result political considerations overweigh the economic and other considerations. For example, a communist government may impose very stiff tax rate while a socialist government may not do so. Hence, there is ample scope for arbitrariness in the imposition of tax. 3. From the view point of tax collection, the cost of collection of direct taxes is very high compared to that of indirect taxes, For example, income tax has to be collected from every person who should pay tax. Hence, a very elaborate arrangement is required in the form of administrative machinery which simply increases the cost of tax collection. 4. One more difficulty is not all the tax paying individuals are aware of the provisions of income tax. The provisions are so complicated that unless an individual is clear about them he will be paying more tax. In the case of corporate tax, every effort is made to minimize the tax burden by taking advantage of the loopholes in the tax laws. 5. Another demerit of the direct taxes is that in case of any dispute, it takes a long time for the common public to secure justice and still more time to get back the excess tax paid.
The evaluation of the merits and demerits of direct taxes indicates the problems experienced are more related to administrative aspect and not the economic aspect. Efforts have been taken in India to simplify the assessment, exemptions, procedures and refund of direct taxes. This has helped to increase tax revenue from direct taxes. The tax administrators in India adopt persuasive techniques instead of coercive methods to obtain as much tax revenue as possible and minimize tax evasion and avoidance. Frequently amnesty schemes are announced to provide opportunities to the public to turn honest
Merits of Indirect tax: 1. Indirect taxes are imposed at the point of consumption and so it is very easy to collect them. 2. The cost of collection of indirect taxes is almost nil as every person will pay the tax as he buys the commodity on which the tax is imposed. 3. It is very simple and easily understandable as only a fixed percentage of the sale price is collected as tax. 4. A significant merit of indirect taxes is that it cannot be evaded or avoided as the only alternative to not paying the taxes is not to consume. 5. Like direct taxes, indirect taxes are also highly flexible. They can be altered to suit the requirement of government's need for funds. 6. Another important merit is that even the poorest in a country will contribute towards the cost of public service. 7. Indirect tax is the ideal way to discourage consumption of luxurious and unwanted goods.
Demerits: 1. The fundamental defect of this type of tax is that it does not conform to the principle of ability to pay as it affects every individual hi the same way irrespective of his economic position. 2. The revenue from indirect taxes cannot be certain. This is because a tax imposed on a commodity with highly elastic demand will bring down the demand for the commodity and along with that the taxes. On the other hand a tax on a good with inelastic demand can fetch the desired revenue. A main difficulty is that the elasticity of good is influenced by several factors and so the tax revenue may be uncertain. 3. As the indirect taxes are usually a fraction of the price paid, the tax payers never feel the payment of taxes. Hence, they evince little interest to know how the amount of tax revenue is spent. 4. Yet another problem of indirect taxes is that very stiff rates encourage black marketing, smuggling and other illegal trading practices. 5. Sometimes, the indirect tax levied on a commodity will vary from state to state causing lot of hardship for the tax administrators and encouraging the people to buy the goods in the state where the tax is less and sell the goods, in the state where the tax is high. This might affect the businessmen in the latter state. 6. Though the cost of collection of indirect taxes is less, yet, the records to be maintained and inspected are voluminous involving enormous time and energy of the lax administrators. This gives wide scope for corruption and malpractice among the officials.
Comparison of direct and indirect taxes:
Having discussed the merits and demerits of both the direct and indirect taxes, it could be understood that indirect taxes are superior to direct taxes in several respects. For example, indirect taxes can be selectively imposed on goods of harmful nature to discourage the consumption of such goods. This selectivity is not possible under direct tax. Between the two types of taxes, direct taxes directly affect the incentive to work and save severely. But indirect taxes have no such direct impact. In a developing country, to reduce income inequality increased dose of indirect taxes is better. Though this may mean taxing the poor also, yet in modern times, with overall improvement in standard of living, slowly poor people should also be subject to the tax net. Moreover, in a country where there is large scale tax evasion, tax avoidance, black marketing, smuggling, etc., indirect taxes are the best instruments to put down such evil practices. All these superiority of indirect taxes over the direct taxes need not mean that direct taxes should be abolished. A balance should be maintained between these two types of taxes so as' to discourage and avoid any attempt to evade or avoid tax. The various problems associated with each one of these two types of taxes should be seriously studied to overcome them. Especially the administrative problems can be overcome only by exposing the officials to the modem techniques of tax collection, giving them attractive incentives and rewards for honest work, encouraging them to suggest modification to improve the effectiveness of the taxes, etc.
DEFICIT FINANCING
Its purpose, effects and limits of deficit financing
Deficit financing is understood in different ways in different countries. It is understood as the excess of current expenditure over current revenue which is financed either through public borrowing or the creation of new money by the government. So the deficit budget is also called deficit financing in USA. But in India deficit financing is understood in a different way from deficit budget. While the former refers to a situation where the current expenditure exceeds current revenue of the government, the latter is taken to mean the excess of aggregate expenditure (both on current and capita! accounts) over aggregate revenue. The former is called deficit budgeting and the latter deficit financing in India. Deficit financing in Indian context refers to the meeting of budgetary deficit through the creation of new money adding to the existing money supply in the economy. Deficit financing includes any or all of the following in India:
i) the government withdrawing its cash balance with the Central bank, ii) the government borrowing funds from the Central bank, and iii) the government; resorting to printing of new currency notes with a view to cover the budget deficit
Purpose of deficit financing: :
There are several purposes for resorting to deficit financing. The following are the; purposes: 1. War finance: A country in war experiences severe shortage of financial, resources, especially the cost of modem warfare is so prohibitive that the country resorts to deficit financing. During this period the country cannot resort to taxation or public borrowing because of the situation in the economy. But it should be noted that such a method of financing the war expenditure, is very dangerous, as during the war period apart from the destruction of, the existing assets, there is no possibility of increasing the production. Further all the productive activities will be to meet war requirements. Hence, with the addition to money supply, there is no corresponding increase in the production. As a result, deficit financing during the war time should be highly inflationary in nature.
2. Economic depression: During the period of depression the purchasing now of the people is very low and the private investment will not be possible because of the gloomy picture all round. Therefore economists like Keynes suggested that public investment should be increased in large scale. The funds for such a dose of public investment can come from either taxation or public debt or deficit financing. If taxation is resorted to for raising funds for public investment, as it means only a transfer of purchasing power from the people to the government, while during depression what is required is new additional, public expenditure. Public borrowing or public debt as a source of public expenditure is also having its own limitations. For example, public borrowing only means addition to the financial burden of the government and the pubic in terms of debt servicing or payment of interest on public debt. Therefore as a third alternative deficit financing is considered. Though there are objections to this alternative stating that it is basically inflationary, Keynesian supporters argue the other way. During depression the economy is in a pit and all the resources are remaining unutilized or under utilized. In such a situation, if the government resorts to deficit financing it will only help to increase employment, output and investment. So there cannot be any inflation until the economy reaches-the lull employment level, no more deficit financing should be allowed as it then becomes highly inflationary.
3. Economic development; Alter the II World war, several countries around the world became independent. In their effort to build up the nation, these countries were in need of heavy dose of funds. This is all the more felt because some of these countries selected planning as a strategy of economic development. They had only three alternatives to raise funds for their development efforts. They are taxation, public borrowing and deficit financing. Taxation as a source of raising funds was ruled out because of the nature of war shattered economy, low purchasing power of the people and also the political reasons prevented this alternative as most of the countries turned to be democratic one. Public borrowing also could not be resorted to as people were already impoverished and there was no way of inducing them to lend more. Further the debt servicing was expected to over-weigh the government's financial burden. Then every country preferred to use* deficit financing as a method of financing their economic planning and economic development. Even India relied on deficit financing right from the I Five year plan. Of late deficit financing has become a permanent source of funding of Plan requirements.
I) Effect of deficit financing on price level:
There are two opinions regarding the effect of deficit financing on the price level especially in a developing country. According to one view, deficit financing need not be inflationary in character especially if it is used during the peace time. The advocates of this view argued that: a) In a developing economy the existence of non-monetized sector will absorb the issue of new currency and shrink in its size over a period of time. Therefore the additional money pumped into the economy will not go to affect the price level. b) Over a period of time the demand for money for transactions and liquidity purpose will increase. Therefore the additional money injected will not be spent but will only be kept by the people. Therefore, deficit financing need not be inflationary. c) A developing economy will have a large amount of unutilized resources and during peace time when the government resorts to deficit financing the additional money will be used only for resource utilization and so it need not be inflationary in nature.
However, the following arguments are leveled to claim that deficit financing is essentially inflationary in character:
i) There will be a lag in the expansion of output and the injection of additional money in the economy, such that the output will increase at a lesser rate than the money supply. Consequently, there will be inflation in the economy. This is because of certain rigidities in the effort to increase the output. Therefore, the actual output will fail short of the potential output.
ii) Developing economies follow unbalanced growth strategy and so they invest heavily on capital intensive projects which have a long gestation period. As a result the return on investment in terms of higher output will take a longer time and meanwhile increased use of deficit financing will only affect the price level causing inflation.
iii) In a developing economy majority of the people are poor and so their marginal propensity to consume is very high. Hence, when their income increases due to deficit financing, the demand for goods will outstrip the supply causing the prices to go up.
iv) Governments also resort to deficit financing for unproductive purposes, which will only fuel the inflationary pressure.
v) The developing countries have neither the necessary expertise nor the efficient administrative set up to keep the inflationary pressure caused by deficit financing under check. As a result deficit financing should lead to inflation. Considering the above arguments and also the practical experience, it is found that deficit financing is inflationary in character.
II) Effect of deficit financing on income distribution :
Deficit financing is inflationary in character and as a result it affects a section of the society favorably and the other section unfavorably. Rich people become richer and the poor turns out to be poorer because of deficit financing especially during the war period. The businessmen, traders, speculators, industrialists and other benefit by deficit financing through inflationary pressure while the workers, salaried income group, and others are affected badly. Hence, the existing inequality in a developing country will be widened more by deficit financing thereby defeating the ultimate purpose of socialism in bringing about equality. Therefore deficit financing is unjust and it not only worsens the income inequalities, it also prevents the attempt to improve the standard of living.
III) Effect of deficit financing on unemployment:
Regarding the effect of deficit financing on unemployment, we have to classify the economies as developed and developing economies. This is because the Keynesian prescription of deficit financing helps the developed countries to overcome the unemployment but it has not helped the developing countries in this respect. This is because in developed countries, when the economy faces depression, to revive the economy the government should undertake a large scale public investment. Funds for this purpose cannot be raised through taxation or public borrowing and so only deficit financing is the ideal method. Defied financing has helped the developed countries to overcome unemployment, because during depression the government increases the public investment which will increase the effective demand and thereby constitute the ground for increasing the private investment. With the operation of multiplier then the output, employment and effective demand continue to increase pulling the economy out of the pit. But such a result in a developing economy is not possible, because, i) the nature of unemployment is not cyclical but chronic and caused because of deficiency of capital ii) there exists a large scale voluntary unemployment and disguised unemployment in the developing countries. Those who are coming under the second category do not know that they are unemployed. iii) in developing economics the multiplier process takes place regularly and smoothly and so unemployment is very much reduced. .But the conditions for the successful operation of multiplier are not found in developing countries and so the unemployment persists. iv) further in developing economies because of rigidities, large scale investment in capital intensive industries, high marginal propensity to consume and high marginal propensity to import affect the possible increase in investment and employment opportunities. With every increase in money supply, only the price level goes up and not the output and employment. Hence, the use of deficit financing in developing countries to solve the unemployment problem calls for a lot of precautions and careful administration as otherwise it would create several other complications.
IV) Deficit financing and economic growth:
It has been clearly proved that deficit financing m developing countries will accelerate economic growth, provided certain precautions are taken. The positive, role played by deficit financing in developing countries is because of the following reasons:
Firstly, in developing economies, the physical and human resources are under utilized and so the /created money' will facilitate, fuller utilization of these resources.
Secondly, in developing countries, because of economic planning the national income will be increasing and along with that the money supply should also increase. This should happen, as otherwise, the prices may fall and discourage any productive investment which should be disadvantageous for the economy.
Thirdly, the developing countries are characterized by the existence of non-monetized sector. When the economy grows, the size of this sector will shrink, which in fact means, that the additional money supply is being absorbed by this sector and so there is very little scope for inflationary pressure in the economy due to deficit financing.
Fourthly, with economic growth the standard of living of the people also goes up. Then they would require more money to meet their increased demand or otherwise, their liquidity preference will go up. This can be met only with increased money supply.
In spite of all the above arguments in favour of deficit financing, care should be taken to take notice of certain points. Firstly, in developing countries the existence of idle-human power is due to the limited growth of complementary capita / resources. Therefore, the country concerned should aim at developing more labour intensive industries. Secondly, in developing countries deficit financing may be inflationary affecting the balance of payments position distorting the pattern of investment.
The diversion of resources to the production and consumption of non-essential resources cannot be ruled out. This in turn will aggravate inflation. Therefore, the countries concerned should take the following steps to avoid facing the above consequences. Firstly, the country should resort to a moderate dose of deficit financing due to the poor absorption capacity of the country. Secondly, the authorities concerned should effectively check the rising prices of essential commodities, may be by following strict rationing and public distribution policies. Thirdly, a well planned taxation policy will also help to contain the inflationary pressure. Fourthly, the financial resources mobilized through deficit financing should be used for investment in short period high yielding productive projects. That is care should be taken to identify industries with short gestation period so that with the increase in money supply there can be corresponding increase in production. Inspite of all these efforts, the country may experience inflation. But such inflation need not be taken as a serious problem, and in one way it is also required to keep the initiative of the private sector investment. In other words, it will only help in achieving a higher economic growth. Hence, deficit financing does promote economic growth, provided the inflationary pressure is held under complete control.
V) Views on limits of deficit financing:
Economists have favored deficit financing for several reasons. To them a country needs enormous resources to achieve a higher rate of growth. Especially a developing country will require huge resources for public expenditure projects. A country like India wedded to public welfare, really requires a huge quantum of funds. This can be arranged for in different ways. One way is taxation, the second. is public borrowing and the third is deficit, financing. While taxation in a developing country would bring down the effective demand, the public borrowing may add to the financial burden of the people as the cost of debt servicing and management of public debt is so prohibitive that this cannot be an ideal source of funding economic recovery. Hence, only deficit financing is left with as an alternative. If it is administered with proper care and diligence, it should in fact be growth stimulating rather than inflationary. Therefore, resorting to deficit financing need not be considered as a wrong step. It is often said that if the, government can keep the inflationary rise in price below a certain level, say 3% then deficit financing is the ideal method of financing economic growth.
However, several precautionary steps are to be taken to ensure that deficit-financing is justified and plays the role expected of it. The following are some of the suggestive measures:
Firstly, the government should note the rate of growth of real income. If the real income grow at a faster rate than the rate of money supply, then there will be very limited increase in price. On the other hand if the growth of real income is less than the rate of money supply, then the economy will experience inflation. Hence, the government should carefully monitor the growth rate of real income.
Secondly, the government should, as far as possible use the funds obtained through deficit financing in promoting short period income generating projects which are productive in nature. This will facilitate absorption of increased purchasing power by the increase in output.
Thirdly, a developing economy with the existence of a large amount of unutilized physical and human resources may realize that deficit financing is helpful in higher utilization of these resources. In that case the inflationary pressure should be very much under control.
Fourthly, though deficit financing is the easiest way of raising resources for the government, the government should use this source judiciously. This means it should be conscious of (lie efficiency of its administrative machinery and capacity.
Specially, a hard working, devoted and uncorrupted set up is required if the inflationary effect of deficit financing is to be avoided.
Fifthly, the government should not use the funds raised through deficit financing in funding long period gestation projects even if they are highly productive. The investment in such projects will yield the return only over a period of time and by that time the inflationary pressure might set in the economy.
Sixthly, the impact of deficit financing on balance of payments situation of a country should be studied closely so as to avoid any inflationary pressure affecting the economy. Usually the favourable balance of payments is inflationary in character and so the government must resist the temptation of adopting deficit financing while there is balance of payments surplus.
The extent of deficit financing in India is given in the Table below. From the table, we can understand that the deficit financing is one basic reason for the drag in our development and the inflation prevailing in the economy. The justification that in the initial stage of development every country is bound to have deficit financing is no longer reasonable in Indian case, as the time has come that our Five year plans should lead us to generate more resources from other sources instead of depending too much on deficit financing. The amount of deficit financing has increased from Rs. 330 crores during the I Five year plan to a huge amount of Rs. 20,000 crores during the VIII plan. This implies that our planners have started using deficit financing as the main source of funds for meeting our plan expenditure. It should be noticed, that over the five year plan period since I plan there has been an increasing reliance on deficit financing that the peak is found during the VII Plan With consistent efforts, the, planners are hoping to bring down this quantum of deficit financing to around Rs. 20,000 crores during the VIII Plan. Whether this is going to be achieved or not can be found out only in future.
DEFICIT FINANCING DURING FIVE YEAR PLANS
(Amount in Rs. Crores)
|PLAN |AMOUNT OF DEFICIT FINANCING |
|I |330 |
|II |650 |
|III |1,150 |
|IV |2,060 |
|V |5,830 |
|VI |5,000 |
|VII |28,457 |
|VIII |20,000 |
Objectives of fiscal policy and the role played by fiscal policy in a developing country
The following are the objectives of fiscal policy: 1. Maximization of the aggregate saving is the first objective. Tins are achieved by encouraging people to reduce the current and future consumption. Specifically' the attempt is to bring down and control the conspicuous consumption of the rich people.
2. Maximization of capital formation is the second objective. Through this objective the country can try to achieve an accelerated economic growth. This will help the country to overcome the stagnation and achieve a higher rate of economic growth.
3. The third objective is to divert the available resources from the less productive to most productive purposes. Through this it is hoped that the resources will be applied more for socially useful projects. In a country like India, where centralized planning is followed, the plan determines the priorities of the country and the fiscal policy ensures the accomplishment of these priorities through redistribution of productive resources.
4. Fiscal policy also helps in protecting the economy from inflation. Inflation in an under developed country is very dangerous, if it is not controlled in the initial stage itself. Though inflation cannot be avoided in the growth process, yet it has to be under full control as otherwise the benefits of growth will be eaten away by inflation.
5. Fiscal policy also helps in removing the sectoral imbalance in the economy in the process of growth. Usually in a developing economy, the price level may go up in certain sector in the growth process affecting that sector badly. Fiscal policy through appropriate tools can always prevent this sectoral imbalance, and help to maintain overall price stability.
6. Fiscal policy provides the necessary incentives for the industries which are capable of generating employment opportunities in large scale. For instance, the small scale industries are employment oriented and so fiscal policy can extend incentives to them.
7. A very important objective of fiscal policy is to bring down and eliminate inequalities in income and through that ensure equitable redistribution of income and wealth in society. This may be considered as the social objective of fiscal policy. But this objective is in contradiction with the growth, objective. That is, to achieve rapid economic growth, the savings in the economy should increase to facilitate rapid growth of capital formation. For this purpose, the rich should save maximum. If the fiscal policy tries to eliminate income and wealth inequality then the saving potential of the economy will come down and affect the growth prospects. Hence, the fiscal policy should neither be too much growth conscious nor attach importance to social objective. An ideal mix of these two objectives is the right fiscal policy.
Role of fiscal policy in a developing economy:
The important role played by the fiscal policy in a developing economy can be explained through : i. fiscal policy during inflation, ii. fiscal policy during depression, iii. fiscal policy and unemployment, iv. fiscal policy and income inequalities and v. fiscal policy and economic growth.
To understand the role of fiscal policy in a developing economy, first we should understand the four tools or instruments of fiscal policy. These tools are:
i. public expenditure, ii. taxation, iii. public borrowing and iv. public debt management. Now let us understand how these tools have to be used to achieve the various objectives of fiscal policy in a developing economy.
i. Fiscal policy during inflation:
Inflation is a period in which the purchasing power with, the people in the economy is high. The first step to curb inflation is to control the purchasing power with the people. This can be done using all the tools of fiscal policy. For instance, during inflation, since the private expenditure is high the government should bring down the public expenditure so that, to that extent the income generation will be, controlled. Alternatively, the government can increase the existing tax rates or impose new taxes. This will have the effect of taking away the purchasing power from the rich and well-to-do people thereby curbing the consumption expenditure. The tax revenue will then be used for public expenditure purposes which will also be low during inflation. Hence, there will be effective control of money supply in the economy. Another way in which the fiscal authorities can function is o indulge in public borrowing. The government may start borrowing from the people in large scale so that the disposable income with the people will be reduced bringing down the demand and prices. If voluntary lending is not effective, then the government may resort to involuntary lending or compulsory saving by the people. Through its debt management policy also the fiscal authorities can control inflation. The anti-inflation debt management requires the retirement or payment of bank-held securities or debts through budgetary surplus. But this is very difficult in practice as in a developing country the government cannot have budgetary surplus.
ii. Fiscal policy during depression :
Depression is a period characterized by low income, low employment and low consumption. Fiscal policy should change this situation. The government must adopt deficit budget in order to increase the income stream in the economy through increased injection of fresh purchasing power into the economy. Secondly, the government must encourage consumption and investment and for this purpose the taxation should be brought down. Liberalized corporate tax policy will also help to increase the corporate expenditure giving the necessary thrust for the revival of economic activity. Public expenditure during this period must be increased. The government can achieve this either through pump priming or compensatory spending. Pump priming refers to the initiation of investment activity by the government through its expenditure on public projects which will be followed up by the increased private investment. Compensatory spending is resorted to when the private investment is not adequate enough. Then the government also injects public investment through public projects. Public debt policy can be suitably modified to fight against depression. The government should borrow more from the rich people-and spend this amount in-large: scale on public works, and social security projects. All these steps will help to protect the economy and enable it to recover from depression.
iii. Fiscal policy and unemployment:
Fiscal policy plays a vital role in generating employment opportunities in the developing countries. In a developing economy, it should aim at solving the problem of both cyclical unemployment and disguised unemployment. While the former is of temporary nature, the latter has the snow-balling effect The latter refers to a situation in which more than the required number of people are employed in a job. In other words, by reducing the excess of labour from that job, the productivity or production will not be affected. Hence, it has been found that fiscal policy alone cannot solve this problem of unemployment in a developing economy. It has to be coupled with monetary policy. For instance, during inflationary period, the government should adopt surplus budget, along with hard money policy, while during depression, deficit budget should be combined with cheap money policy.
iv. Fiscal policy and income inequalities:
The Role of fiscal policy removing income inequalities in a developing economy cannot be exaggerated. With public expenditure and taxation, the government can very easily achieve income equality. The government should devise its public expenditure scheme by focusing on the poor and down-trodden people in the society. It may provide cheap food, cheap cloth, subsidized housing, free medical aid, free education, etc., to the poor people thereby raising their standard of living. For this purpose, the government should raise funds by imposing taxes on the rich people so as to bring down their purchasing power. It may completely or partially relieve the poor people from the tax net. This has the effect of-taking away as much as possible from the rich people and spending on poor people. It may also resort to large dose of indirect taxes so as to make the rich bear the burden as the poor will be paying such taxes only if they spend on items on which the government has imposed heavy indirect taxes. Therefore, taxation and public expenditure are the two very useful instruments of fiscal policy which can bring about the income equality in a developing economy.
v. Fiscal policy and economic growth :
Economic growth calls for the application of all the tools of fiscal policy. In developing economy, there may be no shortage of real or physical resources, but there may be a severe shortage of financial resources which are required to utilize the physical resources. The object of fiscal authorities should be to mobilize much funds as possible so as to carry out large scale public projects. A very effective method of mobilizing financial resources is taxation. The government can resort to both the direct as well as indirect taxes so as to generate as much funds as possible from all those who have the ability to pay. Different type of direct taxes and indirect taxes may be levied to cover every section of-the population. There can be specific taxes to curb certain consumption activities. Another instrument available is public debt. Apart from the voluntary lending schemes the government should also devise schemes to encourage compulsory savings. Resources mobilized in this manner should be spent in such a way that the infrastructural facilities are strengthened first. This should be followed by the expenditure on growth oriented industries and other related activities. Care should be taken to avoid creating or widening sectoral imbalance so that the benefits of growth will be shared by all the sectors in the economy. Government must use its planning machinery to identify the right priorities so that the hard mobilized funds are utilized in the best way possible. In this process now-a-days the governments also resort to deficit financing. It is considered as a means of financing economic development. But too much reliance on deficit financing will also be dangerous. However, fiscal policy can play a vital role in helping to achieve a rapid economic growth.
Public expenditure ii India and the causes for the mounting public expenditure in India
Public expenditure refers to the expenditure incurred by the government (both central and state) on various public projects. In these days, the welfare governments have to incur heavy expenditure so as to provide the minimum basic requirements to the poor and needy. Apart from this, the government should also undertake various activities like defence, transport, communication, power generation and distribution, medical, educational, etc.
All these will involve investing huge funds, which no private individual or corporate body can afford to make. Further the public expenditure is incurred mainly for the purpose of achieving economic growth and development and without any anticipation of reward or return. Hence, public expenditure incurred in large doses sometimes on wrong priorities may prove to be waste. In India the size of public expenditure incurred by the government is so huge as is clear from the table below.
EXPENDITURE OF THE CENTRAL GOVERNMENT (in Rs. crores)
|YEAR |REVENUE EXPENDITURE |CAPITAL EXPENDITURE |TOTAL EXPENDITURE |
|1950-51 |350 |180 |530 |
|1970-71 |3,180 |2,490 |5,570 |
|1980-81 |14,540 |9,630 |24,170 |
|1993-94 |1,01,840 |29,840 |1,31,320 |
|BUDGET | | | |
In the table above we have indicated only the central government expenditure and if we include the state government expenditure, then the total expenditure of the government stood at Rs. 36,850 crores in 1980-81 and went up to Rs. 1,98,16Q crores in 1993-94 (budget). From this it could be understood that the public expenditure in India has been increasing year after year.
Before we analyse the factors responsible for this huge increase in public expenditure, let us understand the components of public expenditure. Public expenditure has two major components viz. 1. Non-plan expenditure and 2. Plan expenditure. Both these are once again classified as Revenue expenditure and Capital expenditure. The Non-plan revenue expenditure includes : interest payments, defence revenue expenditure, major subsidies, debt relief to farmers pensions, postal deficit, police, social services, economic services, grants to states and Union territories, grants to foreign governments, etc.
The Non-plan capital expenditure includes: loans to public enterprises, loans, to States and Union territories and loans to foreign governments, etc.
The Plan expenditure is used to finance various Central plans like agriculture, rural development, irrigation and flood control, energy, industry and minerals, transport, communication, science and technology, environment, social services, etc. This also includes Central assistance for Plans of the States and Union territories. In the table below we have represented the Total expenditure of the government (both Central and State).
EXPENDITURE OF THE GOVERNMENT SECTOR (CENTRAL AND STATE) (IN Rs. Crores)
|PARTICULARS |1960-61 |1980-81 |1991-92 BUDGET |
|DEVELOPMENT |1,730 |24,430 |1,16,730 |
|EXPENDITURE | | | |
|NON-DEVELOPMENT |830 |12,420 |81,430 |
|TOTAL EXPENDITURE |2,560 |36,850 |1,98,160 |
Reasons for the growth in public expenditure in India :
Several reasons could be given for the ever increasing public expenditure in India. The important reasons are given below: 1. Increasing defence expenditure is one of the main reasons for the increasing public expenditure. With perennial threat in borders, India cannot but spend heavily on defence so as to keep the force with latest equipments and implements. 2. The next reason is the mounting expenditure on social welfare schemes like family planning, aids control, malaria eradication, etc,. Such schemes are very important from the national health point of view. Similarly the expenditure on noon-meal scheme by Tamilnadu and other schemes aimed at the poor and down trodden cannot be given up just because the government expenditure is on the rise. 3. The increasing expenditure on major irrigation projects and power projects is another reason for the growth in public expenditure. 4. With the objective of improving the literacy, the government is spending huge amount on education which is another reason for the rising public expenditure. 5. Various services like community development programs, police, general hospitals, public parks, roads, communication, etc., also take a huge share in public expenditure. 6. Ever increasing expenditure on wages and salaries of government employees is another basic reason for the increasing public expenditure. 7. The increasing cost of administering and managing the public sector units and public utility concerns also account for a sizeable part of public expenditure. 8. The ever growing public debt servicing is yet another reason for the heavy public expenditure in India
When we study the above reasons for increasing public expenditure in India, we will be able to understand that every developing country is going through a similar experience. After all this is inevitable in the process of growth.
INDIA'S PUBLIC DEBT
Before independence, Indian public debt was basically productive in nature as-,it borrowed mainly for the capital requirements of railway construction, irrigation; works, etc. According to an estimate, by 1939 India's public debt stood at Rs. 1,200 crores, of which nearly Rs. 925 crores was productive type. Further the total public debt included about Rs. 730 crores of internal debt and Rs. 470 crores was India's obligations in UK.
During the II World war, India's public debt shot up to Rs. 1,940 crores mainly due to war expenditure and other capital expenditure.
In the post-independence period, India's public debt during the I Plan was targeted for Rs. 520 crores while in the II Plan it was raised to Rs. 1,200 crores. Subsequently, the government fixed higher target for public debt and mainly this could be realized through government borrowing and small savings.
India's public debt consists of both internal debt and external debt. While the, former includes loans raised from open market, compensation bonds, prize bonds and 15 year annuity certificates, apart from treasury bills issued to RBI and other commercial banks, the latter mainly included borrowing from international institutions like IMF, IBRD, ADB, etc.
The public debt in India could be discussed under two sections viz. i.) public .debt of central government and ii) public debt of state governments.
i) Public debt of central government:
The Central government mainly borrowed for development schemes, though in these days it has started borrowing even to .meet its current expenditure. The central government has been increasingly relying on the external debt as is shown in the table below. The percentage of external debt in the total debt increased from a mere 1.5 in 1950-51 to nearly 18 by the year 1993-94 (budget).
Of the total external debt, India borrowed more than 30% from the USA alone. It is also interesting to note that the debt servicing has been increasing every year with increase in debt and the interest payment of the Central government alone is around Rs. 38,000 crores by 1993-94.
In the table below we have represented the debt and other obligations of the central government.
PUBLIC DEBT AND OTHER LIABILITIES OF CENTRAL GOVERNMENT
|ITEMS |1950-51 AMOUNT Rs. crores % |1993-94 AMOUNT Rs. crores % |
|Internal Debt |2,020 98.5 |2,04,690 82 |
|External Debt | 30 1.5 | 46,450 18 |
|Total Public Debt |2,050 100.0 |2,51,140 100 |
Public debt of State governments:
As regards the state governments, the public debt is incurred mainly towards* the welfare schemes and other social projects. The constituents of public debt in the case of State governments are: i.e. internal debt consisting of market loans, Ways and means advances from the RBI, and Loans from banks and other institutions ii. Loans and advances from the Central government and iii. Provident funds, etc. In the case of India, the loans and advances from the Central government alone constituted nearly 60% of the total debt till 1971 and by 1993 (budget) this component accounted for about 70% of the total debt. This is shown in the table below.
Another important aspect of state government public debt is that it was only around Rs. 3,300 crores by March, 1961, while it increased to about Rs. 1,68,780 crores as per-the budget estimate of 1993. It is said that the State governments are using the overdraft facility from the RBI without any control and this causes serious concern for the Central government. But this is so because, the Central government is able to raise loans easily from various sources and that too at a cheaper rate, but the State governments find it difficult to raise funds through public borrowing. They depend mainly on small savings and provident funds schemes. Though higher targets in small savings are achieved by the State governments, yet not every state is successful in this regard. The debt position of the States is presented in the table below:
DEBT POSITION OF THE STATE GOVERNMENTS (In Rs. crores) (Figures as end of March)
|Items |1961 |1971 |1993 (Budget) |
|1. Internal Debt (a+b+c) |590 |1,850 |25,460 |
|a) Market loans |500 |1,230 |22,060 |
|b) Ways an means advance from the RBI |40 |380 |390 |
|c) Loans from banks and other institutions |50 |240 |3,010 |
|2) Loans and advances from Central Government |2,020 |6,360 |95,630 |
|3) Provident funds, etc., |130 |540 |22,230 |
|4) Total debt (1+2+3) |2,740 |8,750 |1,43,320 |
REVIEW QUESTIONS 1. Explain the place of commercial banks in the Indian Financial System 2. Discuss the functions of commercial banks. 3. What is meant by credit creation? Explain the process of credit creation with an example. 4. Discuss the performance of commercial banks in India. What are the problems that they experience and suggest suitable measures to overcome them. 5. Explain the features of lead bank scheme. What benefits are they expected to generate and to what extent their functioning ensures this ? 6. Discuss the functions of central bank. 7. What the reasons for having both quantitative and qualitative credit control policies? 8. Discuss the instruments of quantitative credit controls along with their limitations. 9. Explain the various qualitative credit control instruments. To what extent are they effective? 10. Critically explain the functions of Industrial Finance Corporation of India. 11. Discuss the functions of IDBI and comment on its performance. 12. Explain the purposes for which ICICI was established. How far these purposes have been achieved? 13. What do you mean-by canons of taxation? Discuss Adam Smith's canons of taxation. 14. Distinguish between direct and indirect tax along with their merits and limitations. 15. With an example, explain the meaning of deficit financing. Discuss its purposes, effects and limits. 16. What is the need for fiscal policy? What are the objectives that fiscal policy is expected to accomplish? 17. Briefly outline the extent of public expenditure in India. What are the causes for mounting public expenditure in India? 18. Comment on Indian public debt.
CHAPTER V
Economic planning and development - Government and planning—India's eight Jive year plan and structural reforms - Industrial policies and promotion schemes - Government policy and 537- Interface between Government and public sector
ECONOMIC PLANNING AND DEVELOPMENT
Objectives of Indian Five Year Plans and the achievements during the earlier Five Year Plans
After attaining independence, India decided to adopt democratic socialism as its philosophy to achieve rapid development and allow the benefits of development to reach every section of the people. The setting up of a democratic socialist country could be possible only if all the sectors in the economy could be developed simultaneously. For this purpose India selected economic planning as the instrument to achieve rapid economic growth and development. The Centralized planning mechanism was adopted and since 1951, the country has gone through seven five year plans and three annual plans and we are in the course of the Eighth plan. The five year plans in India have set several objectives. But the emphasis on any objective changed from time to time. While the earlier plans emphasized economic growth of late the emphasis is on modernization. Hence, the priority among the various objectives of economic planning changed from time to time. However, all the five year plans in India have the following objectives as principal objectives :
1. Economic growth, 2. Self-reliance, 3. Full employment
4. Modernization and 5. Social justice which includes reduction in income inequalities and removal of poverty.
Each one of these objectives is discussed briefly hereunder.
1. Economic growth :
Economic growth has been considered as one of the primary objectives of economic planning as it is hoped and once a higher rate of economic growth is achieved all the other objectives laid for the plan would be automatically achieved. But the experience in other countries has been that economic growth has benefited only the rich at the cost of poor. However, India gave top priority to the achievement of economic growth because of a long period of stagnation under the British rule when India's resources had been plundered and so it could not develop fast. Hence, India adopted achievement of higher rate of economic growth as one of the principal objectives of planning.
Economic growth is measured in terms of the rate of increase in national income over a period of time. During the I five year plan India set 11% of growth in national income as the target for the five years of I Plan. India could easily achieve this target and in fact the "achievement was 18% increase in national income. Having been inspired by this remarkable achievement, India set a target of 25% increase in national income over the five years of the II Plan. The plan model suggested by Prof. P.C. Mahalanobis was adopted and priority was accorded to industrial development with emphasis on large scale industries. This led to the emergence of public sector units and along with this developmental works on transport and power were also undertaken in a very large scale. But at the end of the II Plan, the achievement was only 4% increase in national income per year on an average. Hence the target was limited to 5% growth per year in the UI Plan. But due to Chinese aggression and Pakistan invasion, only 11.2% growth in national income over the five-years could be achieved. Economists had a lot of hope on the outcome of this clan as they expected with the success achieved through this plan, the economy would enter the stage of self-sustaining growth. Further, rate of increase hi population was almost equal to that of increase in national income and so no significant addition was made to the per capita income. This made the government to give up the long term planning approach and so three annual plans were gone through. With so much experience in planning, the planners decided to set ‘growth with stability' as the objective of the IV Plan. The economists wanted to overcome the influence of uncertainties on economic performance and so they laid emphasis on building up huge buffer stocks of food grains and reducing the dependence on foreign capital. During the IV Plan the achievement was only 3.4% growth in national income per year against a target of 5.7%.
The V Plan initially laid emphasis on self-reliance and removal of poverty but subsequently the final draft accorded top priority only to economic growth. Hence, a growth rate of 5.5% per annum was determined as the target and the achievement was really commendable with 5.2% per annum. But this achievement has not been smooth but highly erratic. Further growth was not self-sustaining.
The VI Plan therefore set 5.2% per annum as the target and wanted to achieve this target by improving the efficiency of capital stock utilisation raising the investment rate, changing the investment pattern to suit growth requirements and taking up all measure; to prevent emergence of foreign exchange crisis. At the end of the plan, the target was almost achieved though this could not be viewed as a great achievement as the acceleration in growth during this period had occurred after a year of negative growth.
The VII Plan has aimed for 5% per annum of growth rate. The target of growth rate was expected to be achieved in this plan as the growth rate in major sectors of the economy was found to be around 5.5% per annum.
Encouraged by this achievement, the VIII Plan has set a target of 5.5% per annum and it remains to be seen how this is going be achieved with all round difficulties, specifically that of balance of payments.
2. Self reliance:
During the I and II Plans self-reliance was mentioned as one of the objectives, though the objective could not be clearly defined. In the HI Plan also the same position continued. Only from the IV Plan the concept of self-reliance could be clearly defined and understood. The IV Plan clearly pointed out that the dependence on foreign countries for concessional import of food grains should be reduced so that whatever way India could earn foreign exchange should, be sufficient to meet her requirements of exchange. But the failure on the agriculture front due to monsoon failure forced imports of a large quantity of food grains and the rise in prices of several essential commodities, import of essential articles worsened the balance of payments position. Therefore in the V Plan export promotion measures were given priority. Since 1977-78, India could successfully reduce the imports of food grains with increased buffer stock. Simultaneously the encouraging growth of domestic basic industries like iron and steel, machine tools, heavy engineering, etc., made India to export these items and she could acquire expertise in sophisticated technology. But a very serious obstacle to the achievement of this objective was the sharp rise in petroleum products. Hence, efforts are underway to develop alternative sources of energy as well as discover new petroleum deposits.
3. Full employment:
This objective has been included in the plan objective right from the day the planning as a methodology of development was adopted by India. But this objective has not been achieved in any of our plans. It was never accorded the priority that it richly deserves. As a result employment generation during the plans has not been significant; the main reason for this is that our planners have been linking employment with investment targets. To them if the investment increases the employment should also be generated. The ever growing unemployment since the I Plan clearly proves that the increasing investment has not been generating employment. Further with ever increasing population, there is sizeable addition to the number of people seeking employment or the labour force. Nothing spectacular has been done through the plans to increase the employment opportunities along with the increase in labour force. All the schemes relating to generation of rural employment, self-employment, etc., have not in any way solved the problem of unemployment. Every year the backlog of unemployment is swelling and unless something drastic is done the objective of achieving full employment will only remain on paper.
4. Modernization:
Modernization has been specified as one of the plan objectives only from the VI Plan. It is taken to mean only upgradation of technology. To make this objective very clear the planners defined Modernization as :
"Modernization connotes a variety of structural and institutional changes in the framework of economic activity. A shift in the sectoral composition of production, diversification of activities as advancement of technology and institutional innovations has all been part of the drive to change a feudal and colonial economy into a modem and independent entity." Inspite of this clear definition, in practice Modernization is restricted only to technological advancement. In agricultural sector the technological advancement has not been very high though certain achievements like, increase in the area under high yielding varieties^ increase in consumption of chemical fertilizers, increase in the area under irrigation, etc., have been recorded. Several other areas like Modernization of canal system, irrigation and water management, use of new sources of energy, etc., are still to reach any commendable position. As regards the industrial sector, though, Modernization has taken place to a large extent, yet the productivity remains at a low level. While in other countries, a high degree of advancement in technology has been achieved; in India progress has been slow and tardy in this regard. The VII and VIII Plans have aimed at improving the situation by giving top priority to the development and use of modern techniques in the existing as well as new industrial units. A major stumbling block in this task is the funds required. While import of foreign technology is resisted, development of domestic technology is taking place at a very slow pace. It is hoped that the New Industrial Policy announced by the government in July, 1991 can create the necessary atmosphere for updating our technology.
5. Social justice:
This objective of Indian planning implies:
a) Reduction in income inequalities and
b) Removal of poverty.
a) Reduction in income inequalities :
In the initial stages of planning it was expected that with economic growth, the fruits of growth will trickle down to the lower strata of the economy. But this did not happen. Therefore reducing inequalities in income has to be spelt out as an objective planning from the IV Plan onwards. India is an example of a complex nature of income inequalities. In the rural areas the aftermath of feudal system has created a very wide disparity in income and in the urban centres the rapid industrialization has brought about a very serious and wide income disparity. The root causes for income inequalities in India are capital gains receipts, entrepreneurial and speculative profits and astronomical salaries and perquisites for the business executives. The Planning Commission itself has pointed out that such serious inequalities in income could be set right only through restrictive measures and fiscal efforts. But a very important set back is the lack of reliable data about the magnitude of income inequalities. In the absence of this, any measure to check this problem cannot be effective. In the case of taxation, it is found to be regressive in nature, that only the middle income group is severely affected while the high and very high income groups continue to remain unaffected. Hence, a fresh look into this problem is urgently required that social justice can be ensured.
b) Removal of poverty :
Removal of poverty as an objective of planning was introduced only from the VI Plan. Till the VI Plan, the benefits of growth did not percolate to the poor and downtrodden. Therefore the VI Plan determined to combat poverty. For this purpose the Planning Commission decided to introduce specific programs aimed at the poor. These policy programs should aim at apart from influencing the content of food for mass, more regional and class distribution of output. The VI Plan defined poverty in terms of calorie intake and this has helped to measure the poverty in the VII Plan. According to VII Plan the poverty has come down from 50% to 37.4% during the first four years of the VI Plan. The Plan attributed this to the success of IRDP and NREP programs. But these two programs have not been very successful as they are implemented with least efficiency. Economists like Raj Krishna, K. Sundaram and Tendulkar have pointed out that the achievements under these schemes are exaggerated. However, the VII Plan expected to bring down the poverty from 37% to 26% by the end of the Plan. The VIII Plan continues to lay emphasis on rural development schemes to solve the problems of employment, poverty and income inequalities.
Based on the detailed discussion about the objectives of economic planning in India, it can be understood that planning is a method of growth strategy. But in India planning failed in the initial stages mainly because of uncertainties but from the W Plan, planning efforts are more efficient, thanks to the application of latest techniques of planning. The emphasis in Indian planning has been on achieving a higher level of growth, though some deviations were made during the IV, V, VI and VII Plans. But these deviations in effect only underline the need for accelerating economic growth. Hence, achieving economic growth has been in the back ground of Indian plan objective since 1951. This is also clear if we look into the way the objectives like poverty alleviation, equitable distribution of income and wealth and employment generation are all given up whenever they are found to; be conflicting with the objective of higher economic growth. But our experience over these four decades of planning has been that even a higher rate of economic growth cannot benefit the entire society, particularly the poor people. Fortunately the economic policies announced by the government in mid-91 have taken this fact into consideration that measures have been introduced to make our industries and producers face the international competition, to give a boost to our export, to reduce the extent of reliance on imports, to increase the productivity of labour, to modernize the industries, etc. The effect of such liberalization on the economy has to be seen only in due course of time.
Mixed economy
Evolution of the concept of Mixed economy:
There was no reference to the mixed economic system in Economic literature in the past. Economists were mainly familiar and advocated the Laissez faire or free enterprise system, as several countries could develop fastly following the free enterprise system, in which there was no or little government intervention. The entire economic system operated with the price mechanism at its center point. The producers produced what the consumers wanted and this provided very little scope for the government to intervene in the system. The Classical economists and their ardent supporters believed that the invisible hand will direct the economy and with private initiative and enterprise, every country should be able to record a faster growth as proved in the case of UK, USA, Europe, Australia, and other countries. But over a period under the leadership of Karl Marx, a new economic system was developed called socialism, in which there is no scope for any private enterprise as everything is owned and controlled by the government. The government decided the type of developmental activities and the requirements of the society and used the available resources in the provision of these requirements. Several countries like USSR, Communist China, Vietnam, Cuba and others preferred this socialist system In which government is made the custodian of the society. The main reason for the emergence of this new economic system was the failure of capitalism during the 1929 depression to revive every economy from depression.
Keynes himself thought that capitalism without some of its evils could certainly help economic recovery. Hence, a time came when economists felt that per cent free enterprise or cent per cent government governed economic development cannot work satisfactorily. A compromise between these extremes was thought of as an ideal economic system. The new system called ‘mixed economic system’ contained the merits of both the capitalism and socialism and appeared to be full of promise. This mixed economic system is adopted by India as indicated by the First Industrial Policy Resolution 1948.
Characteristics of mixed economy:
i. Co-existence of public and private sectors:
In a mixed economy, one will find the existence of both the private and public sectors. In such a system, the government will undertake the responsibility to build and develop certain sectoral activities and leave the other activities for the private initiative. In India, the government announced the adoption of the mixed economy system through its 1948 Industrial Policy Resolution. The government clearly earmarked the industries to be completely under the state control, the industries which are to owned and controlled by the state as well as the private sector and industries which are completely left for the private sector. In this way the Resolution provided for the simultaneous existence of both private and public sectors.
ii. State participation in economic development:
This is the second feature of mixed economy, according to which the state reserves its right to design and decide the type of development to be achieved. In such a set up, die government strives to promote the welfare of the country by ensuring social order, social justice and establishing all the necessary institutions which are required to achieve the desired pattern of growth and development.
iii. Distribution of ownership and control of resources:
This is the next feature of mixed economy. In this system, the government itself enters the field of production so that the available resources are fully utilized. This will also help to avoid concentration of wealth in the hands of a few and enable distribution of ownership and control of productive activities. As a result there is no scope for exploitation of any group, say labour, by any other group. In this way the weaker section of the community is well protected and taken care of. Only the mixed economy will enable the government to attain the objectives of the Directive Principles of the Indian Constitution. –
iv. Directing the investment in socially desirable projects and channels :
Mixed economy facilitates the flow of investment into channels which confers the society with several benefits. For example, the Indian government has invested huge amount in several projects to develop the infrastructural facilities. This forms the basis for the development of other sectors. The investment in this infrastructural area will not come forth from the private sector as the return is nil. Hence, the government in a mixed economic set up provides the thrust by developing the necessary background and strength which will encourage the private sector to invest in profitable opportunities. In this way the government plays a key role in a mixed economic system.
v. Scope for achieving balanced economic development:
Left to itself, the private sector would establish its enterprises only in urban or sub urban areas and that too in already well developed states. This will mean other areas will have no scope for development. But in a mixed economy, the government will itself undertake the initiative to set up industries in backward-areas and encourage the private initiative to set up industries in such areas by offering several concessions and exemptions. In the absence of mixed economy, several states in India would have remained industrially backward.
vi. Ultimate control and regulation in the hands of government:
This feature of mixed economy clearly spells out that in every activity affecting the economy, the government will be the ultimate authority. Though the private sector is assigned its role to perform, the government will still monitor and control the way in which the private initiative is performing its role. Infact, according to the 1948 Industrial Policy Resolution, the government made it clear that the industries already established by the private sector belonging to that category in which new industries will be established by the government alone, the government would undertake the review of the working of these industries in private sector after a period of ten years and if found not satisfactory, they would be taken over by the government. Though this was criticized as a threat of nationalization, yet through such a provision the government underlines its authority. Similarly in the banking and insurance sectors, the government nationalized banks emphasizing its powers to control and regulate any sector.
vii. Co-operation in the field of economic development:
According to this feature of mixed economy, the government formulates the design for development and invites the private sector to participate in the development. It clearly spells out the guidelines which would govern such co-operative efforts and the limits of freedom granted to the private sector. In Indian case, the government prepares the plans for development and spells out the areas left for the private initiative and the areas that will be under state control. Hence, there is scope for the development of private sector, though only according to the design developed by the government
Planning process under mixed economy:
As has been already stated, in a mixed economy there is a need to achieve a compromise between self-interest and social interest. This is a very difficult task as the government has to carefully foresee the type of development it wants to achieve and closely monitor the activities of the private sector to ensure that the social interest is never at stake. Obviously, planning is a very difficult exercise in a mixed, economy set up. The success of planning will depend upon: i) the extent to which the public sector is able to rise to achieve the social gains aimed for, ii) the success of the state in guiding and regulating the private sector activities towards social goals and iii) the extent to which the state is able to check the distortions taking place in investment by private sector affecting the interest of the public sector. Hence in the planning process the state has taken up the following steps to ensure the accomplishment of the objectives of the mixed economy.
a) By holding complete ownership of defence and heavy industries, the, government has provided an industrial base with which the private sector is expected to plan its investment activities. b) The state also has made huge investments in economic infrastructures so as to help the extension of market for goods, raising the productivity in agricultural; and industrial sectors, encouragement of further productive investment. c) The government has complete control of the financial institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the state. The government could also realize the expected gains by encouraging the priority activities in every sector. The economic institutions are made to support the weaker sections of the community. d) Through powerful legislations like MRTP Act, FERA, etc., the government, could ensure that there is no scope for exploitation of the common people by; the private enterprise. Such a legal framework lays down the rules of the, game and ensure fair play in a mixed economic set up. e) As a method of protecting the weaker and downtrodden' people, the government has policies like rationing, price controls, etc. Such regulations are built in the planning mechanism itself so that the private sector cannot exploit the community. f) Towards the improvement of welfare in the economy, the state has undertaken several specific programs aimed at specific target groups. For example schemes aimed at the backward and schedule tribe providing them reservation in educational, employment and other opportunities, rural oriented schemes" for the rural folks, health for all schemes, provision of free educational and medical facilities upto a certain level, etc. All these schemes aim at improving the social welfare. In all these activities the private sector is also welcome to play its role. g) The government makes effective use of the tools of fiscal policy viz. taxation and public expenditure, so as to achieve the objectives of economic planning.
Distortions in the planning process:
We have explained above that the fundamental objective of the mixed economy is to subordinate the self-interest for the national-interest. Whether this has been achieved in Indian situation is a moot question. Inspite of various types of regulations and controls, the fruits of mixed economy have not appeared to have reached the common men. Even after four decades after the adoption of mixed economy principle, we come across glaring distortions which go to prove that mixed economy in practice has not been very effective. This is mainly because of the influence exercised by the private enterprise through political influence, corruptive activities, dishonest bureaucrats, powerful national and international lobbying, etc. The extent of distortions could be understood if we study the following points: 1. One of the basic objectives of Indian planning is to eradicate poverty, but five decades after the adoption of planning strategy, the proportion of population below the poverty line has not significantly changed. 2. The planning mechanism has failed to check the rise in price level. Inflation has come to stay in India with no policy being effective. When double digit inflation is controlled and results in single digit inflation, the country boasts of having achieved something very great. 3. The emergence and existence of black money is yet another yardstick to prove the failure of the mixed economy. The high level of taxation has only resulted in effective tax evasion and tax avoidance. As a result the distance between the rich and the poor remains wide. 4. Till date there has been no effective method to prevent the concentration economic power in the hands of a few. The rich becomes richer and the poor, the poorer. 5. Inspite of five decades of planning, unemployment is very much on the ^ increase and the backlog in every plan is assuming dangerous proportions. This is mainly because of the failure to control the growth of population and the adoption of capital intensive production techniques. 6. The failure to achieve re-distribution of income is yet another glaring distortion. AH the efforts to bridge the gap between the wages of rural and urban workers or increase the real wage of the working class has not succeeded.
When we study the above points, it is clear, that mixed economy has not carried us in the desired direction. This is mainly because of the inability of the government as it is frequently yielding lo the pressure exerted by the vested interests. Even the recent liberalization measure could be viewed from this angle. But a country cannot remain independent of the international pressures, especially when India is depending upon the IMF and IBRD, all its internal policies are indirectly governed by these lending agencies. Whether this is right or wrong is a question that could be answered only after we evaluate the gains of liberalization policy. But on the whole, the expected benefits of mixed economy have not been realized as, is clearly proved by the distortions discussed above.
Sources of finance for Indian Five Year Plans
Financial resources for the five year plans in India are mobilized from various sources. These sources could be broadly classified as i) internal sources and ii) external sources. The government is mobilizing funds through both these sources and over a period we find that some of the sources have become permanent as in (he case of deficit financing. Before we study the pattern of financing the Five year plans, let us understand the components of the sources of finance. It may be noted that sources of finance refer to only the sources of finance for public sector.
Internal sources of finance include the following: a) surplus from current revenues, i.e., excess of current revenues over current expenditure, b) contribution of public enterprises, c) mobilization of internal private savings through market borrowing, small savings, provident funds, etc., d) additional resource mobilization in the form of additional taxes and additional revenue from public enterprises. e) deficit financing
External sources of finance mainly includes :
a) loans and grants from foreign countries,
b) loans from international institutions like IMF, IBRD,IDA, etc.,
Pattern of financing of Five year plans:
In the table below we have shown the various sources of finance for the Indian five year plans upto VI Plan. It may be noted that the total amount available from the domestic source has gone up from Rs. 1,440 crores in the 1 Plan to Rs. 86,610 crores in the VI Plan. In percentage terms we find that the domestic source of funding constituted nearly 73 during the I Plan and which increased to 78 by the VI Plan. Similarly the external assistance which was Rs. 190 crores (10%) in the I Plan, went up in absolute terms to Rs. 8,530 crores, though in percentage term it has declined to 8% of the total. It could also be noticed that the amount of deficit financing has consistently increased from Rs. 330 crores during the I Plan to a whopping Rs. 15,680 crores during the VI Plan. This could be used to understand the unhealthy practice which the government is following. It is well known that such a huge amount of deficit financing would only be inflationary, if [he production does not correspondingly increase. It may be observed that the inflationary rise in price in India is namely due to this huge size of deficit financing of Indian Five Year Plans.
SOURCES OF PLAN FINANCE : I TO VI PLAN (Amount in Rs. Crores)
|PLAN |DOMESTIC BUDGETARY RESOURCES |EXTERNAL ASSISTANCE |DEFICIT FINANCING |TOTAL |
|I |1,440 |190 |330 |1,960 |
|II |2,560 |1,090 |950 |4,600 |
|III |5,090 |2,390 |1,150 |8,630 |
|IV |12,010 |2,090 |2,060 |16,160 |
|V |32,120 |5,830 |5,830 |43,780 |
|VI |86,610 |8,530 |15,680 |1,10,820 |
As regards the VII plan, the Domestic resources fetched Rs. 35,988 crores, the Capital receipts (net) accounted for Rs. 1,03,232 crores, the external assistance was to the tune Rs. 15,139 crores and deficit financing was Rs. 28,457 crores. All these sources of funds augmented totally Rs. 1,82,816 crores for the Plan.
In the VIII Plan, it has been estimated that the Domestic resources would total to Rs. 2,83,915 crores, the Net capital inflow from abroad would be Rs. 28,7QO crores, and the Deficit financing would be limited to Rs. 20,000 crores. The total-finance resource for the VIII Plan is fixed at Rs. 3,32,615 crores.
Among the domestic budgetary resources, the surplus from the current reserves has not been very significant as in almost all die plans we had only deficit in this account. The contribution from public enterprises was quite insignificant atleast up to the VI Plan as the percentage of contribution hardly exceeded 10% even during the VII Plan the contribution on this account was only about 7%. Having realized that the contribution from the public sector has not been commensurate with the investment made in this sector, several measures are taken during the VIII Plan that, it is estimated that the public sector contribution during this Plan would be not less than 34%.
The inflow from domestic private savings and additional resource mobilization during the I to VI Plans have been quite significant. It is interesting to observe that domestic saving in India has been quite consistently high around 30% during the I to VI Plans. Subsequently also this domestic saving has been high, but the conversion of savings into productive investment is not coming forth. Once that is achieved, the financial resource from this side will assume significant proportion. On the whole we find that the pattern of financial resources for the implementation of our Five year plans has remained almost the same, though-there is some change in the contribution from each source in absolute terms over the plan period.
Government and public sector
Since 1948, the public sector in India has been playing a significant role in every sphere along with the private sector. These two sectors have been functioning as complementary to each other, though the government policies have been usually more favourable to public sector than to the private sector. Inspite of this, the private sector has also emerged victorious in several fields and since the announcement of Liberalization polices in 1991, we can reasonably expect the private sector to reach its potential and the public sector would also strive its best to withstand the domestic and international competition. Hence, the future offers excellent scope for both the sectors, but it is clear that only the most efficient sector can survive, so how the private and public sectors are going to react to this challenge will be known in due course. However; jet us now discuss the role of public and private sector in India in detail.
1. Role of public sector;
First of all it is necessary to understand that the public sector includes the autonomous corporations, the departmental enterprises owned and controlled by both the State and Central Governments. The role of public sector would be discussed with reference to various indicators like employment, investment, output, national income contribution, savings, capital formation, capital stock, etc.
a) Public sector and employment generation:
One of the important contributions of public sector to the Indian economy is that it has generated huge employment opportunities and this has reduced the problem of unemployment to a large extent The employment opportunities in public sector includes government administration, defence, health, education, research and development, enterprise owned by Central and State governments. It offered employment for 107 lakhs of people in 1971 which slowly increased to 154.8 lakhs in 1981 and it has touched 190 lakhs in March, 1991. This constituted nearly 71 % of the total employment generated in the economy, in 1991. As regards the sector-wise employment opportunities created by the public sector, in 1989 public sector accounted for 47.8% of the total employment generated by it through employment in government administration, community, social and personal services, followed closely by transport, storage and communications with 16.1% and manufacturing 10.1%.
Hence, it is clear that with the growth of public sector, the country is benefited with more and more employment opportunities.
b) Public sector and income of the public sector:
The share of public sector income in the net domestic product has been increasing consistently from 7.5% in 1950-51 to about 25% in 1987-88. In a matter of about 35 years the public sector contribution to net domestic product has risen appreciably and constitutes one fourth of the total net domestic product. This is mainly because of the rapid expansion of the public sector since 1951. This 25% of contribution in net domestic product, is certainly better than 9.6% ,of contribution by the public administration. However, the private sector income constituted 75.1% of the total net domestic product. It should be noted that the public sector units are run on service motive and very little commercial motive.
c) Public sector and saving and capital formation:
This is yet another crucial yardstick to evaluate the contribution of public sector. The percentage share of public sector in total domestic savings increased from. 1,7, to 2.3 of Gross national product at market prices. But in absolute terms it increased from Rs. 169 crores in I Plan period to Rs. 7815 crores in VII Plan. When we consider the percentage share in total savings, the contribution of public sector has actually gone down from 17 in I Plan period to 11 in the VII Plan.
However, the contribution of public sector in capital formation (gross domestic) is really commendable. It increased from a modest figure of 3.5% of Gross national product at market prices in I Plan period to 10.7% in VII Plan. As a result the ratio of percentage contribution by public sector and private sector in total domestic, capital formation changed from 33 : 67 in the I Plan to 47 : 53 in the VII Plan; From this it is clear that the contribution by the private sector during the same period has declined from 67% to 53%
d) Public sector and capital stock :
Capital-stock refers to the total stock of plant and machinery, equipment and tools and other capital goods available at a point of time for further production. Based on the data available up to 1979-80, it was found that the percentage share of public sector in total capital stock between 1960-61 and 1979-80 increased from 26 to 37 while that of private sector declined from 74 to 63 during the same period. In absolute terms, the capital stock increased from Rs. 16,377 crores in 1960-61 to Rs. 68,478 crores in 1979-80 in public sector (i.e., an increase by over Rs. 52fOOO crores) but in the private sector the increase was from Rs. 46,583 crores to Rs. 1,16,089 crores (i.e., an increase by over Rs. 65,000 crores). The increase is less, pronounced in public sector because of the following reasons:
1. Public sector investments are mostly in economic infrastructure which do not contribute any output. 2. Public sector is mostly concerned with high capital intensity projects like railways, iron and steel, power, irrigation, etc. 3. The gestation period of public sector projects are very long. 4. The-capacity utilization is very much less in public sector units. 5. Most of the projects of public sector are having higher capital-output ratio.
e) Public sector and infrastructure:
The economic development of a country depends on the development and maintenance of infrastructural facilities. The essential requirement is provided by public sector. The industrialization is accelerated only through infrastructural development. Investment in power, roads, bridges, irrigation, etc., is non-income yielding, long gestation period oriented, and heavy investment projects. Hence these are not attractive for private sector. But without them the country cannot develop faster. Therefore it is apt to state that the public sector units are responsible for the creation of infrastructures which constitute the backbone of economic development and industrialization.
f) Public sector and industrial base:
There is no denying the fact that public sector has provided a strong base for our industrialization. Our industrial policy has clearly assigned a significant role for public sector, till the end of the third five year plan; industrialization was taking place at a slower pace because only the important public sector units were established till then. Since the private sector could not really rise up to meet the task, since the IV Plan the establishment of public sector units started on a brisk rate and the industrialization has been accelerated to a commendable level. Further private sector with its commercial objectives could not undertake several of the projects and investment requirement of these projects was also beyond the potential of the private sector. Hence, if at all India today is having a strong industrial base," it is mainly due to the contribution of the public sector.
g) Public sector and export promotion:
Public sector has responded well to the needs of the nation by taking up the task of exporting our products and finding market for them in other countries. In this respect the contribution of State Trading Corporation.
Minerals and Metal Trading Corporation, Hindustan Steel Limited, Hindustan Machine Tools, etc., are worth noting. Infact, these units are primarily responsible for exploiting the captive market for our goods abroad. The foreign exchange earnings of the public sector has gone up from a modest figure of Rs. 35 crores in 1965-66 to Rs. 170 crores in 1969-70, to Rs. 5,831 crores in 1984-85 and then to Rs. 9,198 crores in 1991-92. The increase has been more than 300 times comparing 1965-66 figures with that of 1991-92. Though there may be criticisms about the performance of the public sector units, yet there can be no dispute about the export achievements of public sector units within a period of 25 years.
h) Public sector and saving of foreign exchange through import substitution:
India's balance of payments has been a cause for worry since Independence, the main reason being increasing imports. This trend had to be reversed and the government rightly selected public sector to establish units to produce domestically the goods imported so as to conserve the foreign exchange and also utilize more the-domestic resources. Units like Hindustan Antibiotics Limited and Indian Drugs and Pharmaceutical Limited, have together effectively checked the inroads attempted by the multinational corporations in the field of drugs and pharmaceutical. Similarly Indian Oil Corporation Limited and Oil and Natural Gas Commission have succeeded in bringing down our dependence on other countries for crude to some extent. They are very active in identifying oil deposits and natural gas. Their efforts are supplemented by research and development to invent methods of using the natural gas and reduce the imports of crude. In this respect the public sector works towards achieving self sufficiency. With concerted efforts it should be possible for India to achieve self-sufficiency in the near future. However, the poor performance of the public sector is causing concern, as unless steps are taken to improve their performance, the achievement of self-sufficiency may be delayed.
i) Public sector and generation:
A close scrutiny of the public sector performance will certainly make one to note the contribution towards internal resources made by the public sector. For example, the internal resources generated by the public sector during V Five year plan was Rs. 3,439 crores, during VI Five year plan Rs. 11,721 crores and during the period 1985-86 to 1989-90, the generation was Rs. 37,678 crores. In 1990-91 and 1991-92 also the public sector undertakings together generated Rs. 24,376 crores. This indicates that the public sector units have turned the comer and with die measures taken up already to spruce up their working we should be able to realize still greater generation of internal resources.
j) Public sector and contribution to exchequer:
Public sector contribution to the Central Exchequer is, in terms of dividend, corporate tax, excise duty, customs and other forms. These contributions add to the mobilization of resources for our planned development. It is interesting to note that the contributions totaled Rs. 27,570 crores in the VI Plan period, Rs, 70,893 crores during the VII Plan and Rs. 19,520 crores in 1990-91 and Rs. 20,366 crores in 1991-92. It may be noticed that the annual contributions during the VIII Plan period is nearly 75% of the contributions during VI Plan. Among the different forms in which these contributions are made, Excise duty and Customs alone constituted more than 82% of the total in the VI Plan period, while this 76% during the VII Plan. Subsequently, in 1990-91 these two accounted for 82% of the total contributions and in 1991-92 it was almost 81% indicating that public sector units do make a valuable contribution to the Exchequer. Since the performance of the public sector is poor, their contribution in terms of dividend is very insignificant and this has Co be changed at the earliest so as to make them contribute sizably even in this form.
k) Public sector and growth of ancillary units :
Public sector also makes a valuable contribution by helping the growth of ancillary units and small scale units. The Bureau of Public Enterprises have undertaken the study to find out the public sector units which could transfer their production and other facilities to small scale sector. Under this scheme about 1800 units were set up till 1986. The public sector also enters into regular contracts for purchasing the entire production or 50% of the production of small scale and ancillary units. Such purchases from ancillary units amounted to Rs. 451 crores in 1985-86.
I) Public sector and development of states and backward regions :
One of the objectives in establishing public sector units is to facilitate the states and the backward region to develop faster. In this connection, public sector has certainly creditable performance. Public sector contributes to the State government's resources in terms of sales tax and other state level taxes. Public sector investments are directed towards the projects in the backward regions and industrially poor districts. In this way the public sector works in its own way to : eliminate the industrial imbalance in states and districts.
So far we have explained in detail the contributions made by the public sector towards Indian economic development. It is often said, that even when their performance is poor, the public sector contributions have been so much, and by improving their performance, we should be able to make them contribute their full potential to achieve a higher rate of economic development. It is satisfactory to note that efforts in this direction to improve the public sector performance have been initiated and by the turn of the century public sector will emerge as the main contributor to our economic development.
Industrial policy resolutions of 1948,1956 and 1980
Industrial policy comprises of the procedures, principles, rules, policies and regulations which together govern the industrial sector to guide the industrial development or the country in conformity with the objectives of five year plans and the needs of the economy. As the economy develops, the government has to closely study the process of economic development and make necessary changes and modifications in the policies so as to make the policies relevant for the situation or the environment prevailing in the country at different points of time. Sometimes the changes in policies are so drastic that a new approach at the industrial development or the development of any other sector is arrived at. When these changes are announced the reactions from the sector concerned are studied closely by the government and necessary amendments are made to the policies already announced. In Indian scene, the situation prevailed immediately after independence was completely different from what is being witnessed today. Hence, if we study the industrial policies announced in the later 40's and early and middle '50's we would get a background with which we will be able to understand and appreciate the changes that have been announced in 1991. This would also help us to understand the justifications for the drastic changes announced at periodical intervals. Hence, we would discuss low in brief, the features of 1942, 1956 and 1950 Industrial Policy Resolutions.
INDUSTRIAL POLICY 1948
Immediately after independence, the government had to give a guideline for the industries in India and so it announced its policies for industries. The political freedom attained in 1947, posed a challenge to the government 10 devise its own policies. With the production at low levels, population increasing partition impacts, rising price level, industries to be developed to accelerant economic development, etc., the 1948 Industrial policy resolution was announced. Through that the government clearly- accepted its responsibility of ensuring planned development of industries of various types. The 1948 policy laid the foundation for anew experience as would be clear from the following features of the policy. The industries were classified into the following four categories:
1. The strategic industries to be completely owned by the government included manufacture of arms and ammunition, production and control of atomic energy, ownership and management of railway transport, etc. No private sector participation or existence will be permitted in Ibis category of industries. 2. The second group included the basic and key industries. Private sector existence in this group would be tolerated for a period of 10 years after which their performance would be evaluated. New units in this category will be established only by the government and the existing ones would be taken over by the government if their performance is found in he no: satisfactory after the review. The industries include in this category include: aircraft manufacture, coal, iron and steel, ship building radio and mineral oils, etc. 3. In this category government included the basic industries like salt, automobiles, tractors, prime movers, electrical engineering, heavy machinery, machine tools, heavy chemicals, fertilizers, electro-chemical industries, non-ferrous metals, rubber manufacture, power and industrial alcohol, cotton and woolen textiles, cement, sugar, paper and newsprint, air and sea transport, minerals and industries relating to defence. Private sector will be given complete freedom to enter into this category, but the government can intervene and regulate any of them, if found necessary. 4. All the other industries formed the fourth category. Mainly left for private sector, the government pointed out that progressively it may participate but not eliminate the private sector. Both individual as well as co-operative undertakings will be permitted in this sphere.
This policy also gave importance to small scale industries and suggested that both the central and state governments should join together in solving the problems freed by the small scale industries. As these industries would offer good scope for absorbing the displaced laborers and agricultural workers and wee also ideal for co-operative type of organization, the government felt that they must be developed. As regards the foreign capital, the government clearly pointed out that there is need for free flow of capital as well as technology. At the same time the government also said that it should regulate; no discrimination will be made between the Indian and foreign undertakings with regard to the applications of the provisions of the policy resolutions. Profits and repatriation of capital would be permitted subject to the provisions of the foreign exchange control. Further if any undertaking is nationalized, then air and equitable compensation would be paid.
Evaluation:
The main aspect of this policy is that it laid the foundation for the introduction of MIXED ECONOMY in India. Under this the government will encourage coexistence of both private and public sector units in industries according to the provisions of the policy. This paved the way for the participation of government aid die corporate sector in the industrial building process of the country. This also facilitated a direct comparison between the performances, of both the sectors, in terms of various indicators. Being the first policy resolution the government had made a good beginning. But this policy was criticized for being classificatory. It gave an impression that the private sector, even in spite of possessing the potential was not allowed to play its due role in the industrial development. Secondly, there was a threat of nationalization, specifically, in the case of industries under the second category. Thirdly, the government intervention was present even in the case of third category of industries. Hence, on the whole, being the first policy, the government could not make the policy more imaginative, except, of course, introducing the principle of mixed economy.
INDUSTRIAL POLICY 1956
A new policy was necessitated after 1951, because, India adopted a socialistic pattern of society, the Constitution guaranteed Fundamental Rights and Directive Principles of State policy and the First five year plan was completed by 1956. After reviewing the developments and achievements, the government came out with the Industrial Policy Resolution of 1956. For all the later policies, this became the basis and until 1980, the provisions of this policy remained more or less in force.
The following are the important features of this Policy:
The industries were classified into three categories. This was indicated in terms of Schedule A, Schedule B and Schedule C industries. The Schedule A industries are completely slate owned and the state is responsible for the development and growth of them.
The Schedule B included industries which were under the control of government, especially new units. The private sector is also permitted to enter into this category, but it will be given only a supplementary role.
The Schedule C industries included all the remaining industries, the future of which would be completely in the hands of private sector. Of course, government regulation in general would be formulated and made applicable to them as any other industries. The first classification (Schedule A) included 17 industries, the Schedule B included 12 industries and Schedule C included all the rest.
The government clearly indicated that the above classification is not very rigid, and private participation and presence even in the first category in the nature of allied units, user of by-products, etc., would be permitted, similarly the government may enter the Schedule C industries if the planning and development warrants it. The private sector is expected to work in close unison with the state. The government assured fair and free treatment to private sector units and non-discriminator}' treatment was also promised. The government continued to encourage the growth and development of small scale and village industries by extending subsidies, tax concessions, protection from large and medium industries, and assisting them in Modernization to improve their competitive strength. The Resolution also aimed at reducing the regional disparities in the growth and development of industry so as to achieve balanced industrial development throughout the country. The Resolution also highlighted the need to protect and improve the conditions of industrial workers in the country. Mainly several machineries for settling industrial disputes were thought of. The government continued with its policy regarding foreign capital without much change.
Evaluation :
This resolution assigned a major role to the public sector. It created a condition in which the public sector units could be established and developed well. This was felt necessary to achieve the desired rate and pattern of development of industries in India. The government made it clear that it had no intention to wipe out the private sector, instead it wanted the private sector to emerge as the supplementary sector for the public sector and join the latter to achieve rapid industrial and economic development. After the resolution came into force, over a period it was found that the private sector developed faster by taking advantage of loopholes and exceptions in the Resolution. There were cases where licenses were issued to private sector while public sector should have been given the license. Hence, it was found that this Resolution in fact, led to the rapid growth of private sector.
INDUSTRIAL POLICY OF 1980
As already pointed out the Industrial policy of 1956 formed the basis of this policy in 1980. This new policy had the following objectives: h) to achieve the optimum utilization of the installed capacity. i) to achieve maximum production and through that achieve higher productivity and employment generation. j) to rectify the regional imbalance by focusing on the backward areas. k) giving priority treatment for agro-based industries. l) to promote inter-sectoral relationship. m) to encourage the growth of export oriented and import substitute industries. n) to speed up the growth of small scale units, etc.
With these objectives in view, the new policy laid down the following provisions: 1. After reviewing the performance of the public sector units the government has decided to introduce measures.
2. for improving the efficiency of these units so as.to make them contribute more towards the economy.
3. In order to promote economic federalism, the policy provided for integration of industrial development in the private sector. The government also decided to eliminate the artificial division between small and large scale industrial units. In each district a few nucleus plants will be set up which would generate opportunities for a number of small, cottage and ancillary units. This would ultimately create the scope for faster industrial development in the industrially backward districts.
4. To provide the scope for more and more small and cottage industries, the government redefined these units as below: a. the limit of investment for tiny units was to be raised from Rs. 1 lakh to Rs. 2 lakhs b. the limit of investment for small scale units was to be raised from re. 10 lakhs to Rs. 20 lakhs and c. increase the limit of investment for ancillaries from Rs. 15 lakhs to Rs. 25 lakhs.
5. To promote industrial growth in rural areas and also to improve the employment opportunities there and raise their percapita income, the policy provided for promoting industries in the rural areas. This was also expected to maintain the ecological balance in the country. Greater attention would be given to the growth of handlooms, handicrafts and khadi and other village industries. 6. Another important provision was that the government decided to regularize the unauthorized excess capacity with the industrial units, especially the FERA & MRTP units by allowing them automatic expansion by 25% of the existing licensed capacity on a selective basis. 7. To prevent spread of industrial sickness, the government indicated that very stringent steps would be taken against those units which are deliberately mismanaged and indulging in financial improprieties. As regards the existing sick units, arrangements would be explored to revive them or to encourage their mergers with healthy units by introducing suitable tax concessions to encourage such actions. When other methods of revival of sick units are not found feasible, then the management of such sick units would be taken over.
EVALUATION
This policy has several lapses. Its claim to eliminate the division between small scale and large scale units is something contradicting the basis of such divisions. There was a need to treat the small scale with liberal treatment so that in a labour intensive economy, these units can create employment opportunities. There is nothing wrong with such specific preferential treatment of small scale units. But this policy aimed at removing such differences. Secondly, this policy created a precedence by regularizing the unauthorized excess capacity created by large units, instead of taking action against such erring big units. While the big units welcomed this move of the government, yet this has resulted in the expectation that the government would continue to have such liberal treatment in future also. This indirectly has also affected the growth prospects of new industries and the existing medium and small scale units. Though the government justified its move by stating that such a move would facilitate fuller utilization and higher output, yet the consequence of such a move was not thought about. However, it may be pointed out that the seeds of liberalization were sown through this policy and the government's intention to select capital intensive path of development.
The features of 1991 Industrial policy
The government announced its new Industrial policy in July 1991. The new policy has outlined several changes which have together opened a new era to the growth and development of industrial sector in India, The conventional regulations and restrictions have been replaced with liberalization and relief. Consequent to the announcement of the new policy, there has been all round jubilation in the industrial sector. The following are the salient features of the new industrial policy.
Even by 1985-86, the government realized the need to encourage the industrial sector to stand on its own legs and towards achieving this a number of policies and procedural changes have been announced. This was expected to increase productivity, reduce costs and improve the quality with which the domestic industries are expected to face competition with strength. There was an honest attempt to release the public sector from a number of constraints and it was given a large measure of autonomy. Technological and managerial Modernization programs were taking place in large scale. All these measures together contributed to the achievement of an impressive annual growth rate of 8.5% during the VII Five year plan. Having understood the effectiveness of all the policy changes in the past, the new industrial policy will continue to pursue a sound policy to encourage entrepreneurs, develop the indigenous technology through intensive research and development activities, dismantle the regulatory system, improve the capital market, etc. Small scale sector would get a special attention and the government promised to come out with a new policy towards he small scale industries. Foreign technology and investment would be welcomed to improve the domestic production base and increase the exports. The MRTP Act would be suitably modified to encourage competition. Public sector will be made to run on commercial lines and play a vital role in economic development.
The essence of this new policy will be discussed under the following heads:
1. Industrial licensing, 2. Foreign investment, 3. Foreign technology agreement, 4. Public sector, 5. MRTP Act and 6. Small scale and tiny sector policy.
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90's a number of changes in the system of industrial approvals have been brought about. The domestic producers will be able to withstand the competition in he country as well as abroad only through procedural reforms. Hence, the role of government will be changed from that of exercising control to one of providing help and guidance. Changes in the policy towards public sector in the last few years have clearly indicated that private sector enterprises will be allowed to compete in many areas hitherto earmarked for public sector. Consequently, the new policy has completely reclassified the Indian industries as below:
Eight industries have been completely reserved for the public sector. They are: a) Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils; v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tm, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transport. b) Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries:
i. coal and lignite, ii. petroleum other than crude and its distillation products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco substitutes, vii. asbestos and asbestos based products, viii. plywood, decorative veneers and other wood based products such as particle board, medium density fiber board, block board, ix. raw hides and skins, leather, chamois leather and patent leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and newsprint except bagasse based units, xiii. electronic aerospace and defence equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi. drags and pharmaceutical xvii. entertainment electronics and xviii. white goods like domestic refrigerators.
As regards the provisions of the industrial licensing policy, i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector and the list of 18 industries and the areas reserved for small scale industries will continue. ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations. iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported, goods does not exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required. iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in areas other than cities of more than one million population. In cities with more than one million population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas. v) New Broadbanding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing units. vi) The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects. vii) A very significant step is to abolish all the existing registration schemes. viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum. ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system),
FOREIGN INVESTMENT
Foreign investment carries with it the benefits of technology transfer, marketing expertise, modem managerial techniques and new possibilities for promotion of exports. As this requirement is felt in this world of industrial change and cooperation, the new policy has clearly contained the following provisions related to foreign investment: i) In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed- Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments will be made in the FERA. ii) The general policies governing (he domestic units in regard to import of components, raw materials and in intermediate good and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on account of dividend payment also to ensure that such payments are balanced by export earnings over a period of time. iii) All the other foreign investments not included in the Category I slated above will require prior clearance. iv) Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in (i) above. However, the provisions of the Export-Import policy applicable to the domestic units will also be applicable to such trading companies. v) To encourage substantial inflow .of foreign investment, a Special empowered board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.
FOREIGN TECHNOLOGY AGREEMENT
A welcome change in the outlook of the government as evidenced by the new policy is the realization that the sophisticated technology, from abroad can be brought in only through liberal and less restrictive procedure and policies. The interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industrialization. As a result of this liberalization, automatic approval for technology agreements related to high priority industries will be made with respect to certain specific parameter. Other industries which can enter into such agreements without incurring the expenditure of foreign exchange will also be extended liberal treatment. The industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises. In due course this measure is expected to pave the way for exchange of superior technology from India with other countries. With the overall liberalization, the competition will be high and it is expected that industries will invest much more in research and development activities. Keeping in view all these expectations, the government has announced the following changes in regulations governing foreign technology agreement: i) No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through the blanket permits. ii) Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provision. Upto the payment of Rs. 1 crore, royally will be @ 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of sales over a 10 year period from the date of agreement or 7 year period from the dale of commencement of production. iii) In the case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does riot entail any foreign exchange payment commitment. iv) In all the other cases, the general procedures in practice will be adhered to and such industries will require approval.
PUBLIC SECTOR
The public sector was given the predominance in the industrial development over the last four decades and the amount of investment made in this sector, though justified from the point of view of socialistic democracy, it has been struggling with so many problems like poor productivity, excess staffing, lack of continuous technological up-gradation, inadequate attention to research and development, etc. The rate of return on investment in public sector has been so low that it has prevented the automatic growth of these assets to the government. The main reason for this poor performance of the public sector has been the taking over of the sick units from the private sector and the number of units which are in the consumer goods and service sector. Hence, in the new policy the government has rightly given the emphasis to the development of public sector in the field of essential infrastructure goods and services, technology development and building of manufacturing capabilities, manufacture of products such as defence equipment. The public sector will also enter the other areas not strengthened if they generate good profits and the management will be granted more autonomy through a system of memorandum of understanding. Private sector will be invited to induce competition in these areas. In selected industries in public sector, the government would disinvest a part of the equity share holding to provide market discipline to the performance of the public sector. Based on these views the new policy has the following provisions regarding the public sector: i) A review of the public sector portfolio investment will be made to give the emphasis on the role of public sector in the strategies, high tech and infrastructure. Public sector units will be allowed entry into areas not strictly reserved for it. ii) The Board for Industrial and Financial Reconstruction will be approached to help the sick units to rehabilitate them. To protect the interest of workers who are likely to be affected due to rehabilitation of public sector sick units, a social security system is proposed to be devised. iii) A significant policy aimed at raising the resources and encouraging public participation in the growth of public sector units is that the government will offer a part of its share holding in the public sector to the mutual funds financial institutions, general public and workers. iv) In the direction of strengthening the management of public sector units the Board of public sector management will be made more professional and given more powers. Further to make (he management of such units more autonomous and accountable a system of memorandum of understanding will be adopted. Apart from improving the expertise of the government in implementing the MOU, the government also would place in the Parliament the MOU to facilitate detailed discussion.
MRTP ACT
A major deviant of the new policy is in respect of the MRTP Act. The new policy aims at removing the unnecessary bureaucratic controls and allows the industries to breathe in an atmosphere of freedom. The efforts of the government in the past intervening in the investment decisions of the MRTP companies have been proved to be counter-productive. Hence, the newly empowered MRTP Commission will enquire into complaints received from individual consumers or classes of consumers. The following is the essence of the provisions in the new policy regarding MRTP Act: i) The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course. ii) The need to obtain the prior approval of the central government for establishing/new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed. iii) The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair trade practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices. iv) All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers: the MRTP Commission unemployment, small scale industries should be established and encouraged to grow with government assistance in every way possible. Since then, the government has shown a priority for the development of small scale industries and this concern has yielded the fruits that today the small scale sector has emerged as an important segment of Indian industrial sector. The investment of the small scale and ancillary industries has been raised periodically and as per the Industrial policy of 1990, the investment limit for small scale industry is raised from Rs. 35 lakhs to Rs. 60 lakhs and units which export 30% of output by the third year, will have a higher investment limit of Rs. 75 lakhs. In the case of ancillary units the investment limit has been raised from Rs. 45 lakhs to Rs. 75 lakhs. Small scale units today include both the traditional and modern units. While the former is basically labour intensive, capital light, using simple indigenous technology, and the modern units are capital intensive using up-to-date technology.
Role of small scale industry (SSI) 1. SSI and production: SSIs have significantly added to their level of total production, which simply means that they make a sizeable addition to national income. The production level increased in value from Rs. 7,200 crores in 1973-74 to Rs. 1.78,700 crores in 1991-92, an increase by mere than 20 times within a span of two decades. 2. SSI and employment: One of the important reasons for establishing SSI is to generate employment opportunities, especially in the rural areas. This objective has been certainly achieved as could be seen from the figure, SSI provided employment for 39.7 lakhs of people in 1973-74 and in 1991-92 this has touched 128.8 lakhs people, a three fold increase. This implies that with more encouragement and solutions to the problems, SSIs can play a vital role in rural and urban employment generation. 3. SSI and export earnings: A significant contribution of SSIs is in the field of exports. Over the period, our products have consistent demand in the world market, as it proved by the exports figures. From a modest earnings of Rs. 393 crores in 1973-74 this sector has earned Rs. 12,568 crores in 1991-92 roughly 30 times increase. This constituted 28.7% of the total exports in 1991-92. A very important point to be observed is that our exports consists of mostly non-traditional items. 4. SSIs and dispersal of industries : One best way of industrializing the rural areas is to establish SSI. This would relieve the urban centers from the industrial congestions and other problems associated with it and help the rural areas to get industries. With SSI in the rural areas, the seasonal unemployment is eliminated, unskilled laborers are used, farmers are able to supplement their agricultural income, etc. However, in India the regional dispersal of SSI is mostly concentrated in six states: Maharashtra, Tamilnadu, West Bengal, U.P., the Punjab and Gujarat and these states alone account for 59% of the total SSIs in India. But this concentration was mostly due to specialization by particular districts. 5. SSIs and industrial disputes : Unlike the large and medium industries, SSIs do not have serious industrial disputes and even if there are any, they do not affect all the units like the large and medium segments. Since in most units there is direct contact between the proprietor and the workers, the possibility of disputes is very much minimized. The loss of man-days due to disputes is very high in medium and large scale industries than in SSIs. This implies that thee industries ensure regularity in production, supply, etc. 6. Inter-relationship between SSIs and large scale and medium scale industries: This is very important aspect. SSIs today forms the backbone of the large and medium industries in that they supply the components, implements, etc., required by the large and medium scale industries and also function as the user of industrial waste to produce by-products. There are several products flowing from the large and medium scale industries which actually are the output from small scale units under sub-contracting provisions. 7. SSIs and utilization of resources: SSIs in India also make a valuable contribution to the economy. Economic development can be accelerated and consolidated only when the available resources are fully utilized. In this respect, SSIs make use of physical, human and financial resources available in the rural areas. In the absence of SSIs, vast physical and human resources will remain unutilized and to that extent the national income will be low and employment will be less. At the same time, the SSIs have also facilitated the growth of entrepreneurship in our country. Persons with requisite qualities come forward to set up SSIs and once they succeed, slowly his encourages the others and in this manner the entrepreneurship skill develops and spreads.
Having discussed the role of SSIs in Indian economic development, we now turn to understand their problems. It was pointed out earlier that the SSIs are best suited for our country and they have contributed in so many ways to the economy but the country is yet to realize the full potential of this sector. This is because this sector is crippled by several problems. An understanding of these problems will help us to assess the policy prescriptions of the government and to suggest the necessary changes in them.
1. Funds requirement : SSIs like any other industrial unit, require both fixed capital and working capital. Though the fixed capital requirement of SSIs is low, yet the small entrepreneurs who come forward to start these units do not have sufficient fund of their own. This being the situation, for their working capital, these SSIs need some source. As most of the SSIs are located in the rural areas they approach for funds with several agencies ranging between the friends and relatives of entrepreneurs, money lenders, and other specialized financial agencies. A major obstacle in their way of getting funds is that being small their credit worthiness is never accepted as satisfactory by the lenders. It is estimated that more than 50% of the Sols seek financial assistance of some sort or other. Government has established several institutional agencies to meet the requirements of (he SSIs. But these agencies have their own rules and regulations insisting on securities, furnishing technical and other details at periodical intervals, project funding pattern, justification for the project and the repayment: capacity, marketing arrangements, other legal formalities to be fulfilled, etc. The small entrepreneurs not being professional are unable to cope with these rigidities of these specialized institutional agencies. The application form for loans and the procedure for filling it and getting the loan are all lengthy, that the SSIs struggle for funds.
2. Shortage of raw materials: This is another basic problem of SSIs. When these units are started, they estimate the availability of raw materials and then make arrangement for purchasing them from the source. But there are several inputs like chemicals which are always in perennial shortage. As a result these units have to compete with other medium and large scale units to get these raw materials. Since these raw materials are in scarcity, the demand being high, the cost of them is high. The SSIs do not have any professional assistance who can liaise with the government or other agencies to get the raw materials supply. Therefore, they are unable lo compete with the large and medium scale industries. Though the government shows some priority in supply of these raw , materials to the SSIs, the claimants are in large number and so the raw materials are bought at high cost The market variation in price is such that the medium anpVlarge units buy in bulk and maintain stock which the SSIs cannot afford to do as this would lock up their capital. As a result of these, the SSIs incur higher cost of production which eats away a large part of their profits.
3. Shortage of power : Most of the modem SSIs depend on power for their working. As they are mostly located in semi-urban and rural areas, the supply of power is not regular. This directly affects their level of production. Even when power is available it is supplied only for restricted hours. Hence, when these units are started, they assume the availability of regular power and estimate their production level. But in reality when they are unable to achieve that production level, they lose heavily. They cannot also afford to make alternative arrangements for power supply as is found with medium and large scale units with generators and other captive power plants. This results in under utilization of capacity having impact on their profitability.
4. Problem of marketing: Yet another important problem for the small scale units is marketing their products. With their rural bias in location, these units have to either sell in the rural areas or identify customers in the nearby towns or cities. Never can they hope to market their products in distant places. With local demand at a low level and the selling in distant places becoming difficult, they cannot avoid stockpiling which means they run short of working capital Except in the case of ancillary units which may have a permanent tie-up with large or medium units, the other SSIs always have the problem in marketing their products. Neither can they indulge in aggressive advertising or sales promotion nor can they adopt modern methods of selling. Though some of the units are 100% export oriented, yet not all of them can afford to approach the distant markets. Even if the government assists them through policies like Stores purchase policy under which certain items required by the government organizations are to be purchased only from the SSIs, yet selling through this channel means waiting for a long time to get the bills cleared by the government. Hence, these SSIs neither can market their products efficiently themselves or through other agencies. As a result, most of the units indulge in reducing their production level, which affects their economies of scale. So in every way the marketing problems are experienced by the SSIs.
5. Procedural wrangles with the government: It is often said that the government offers several concessions, subsidies, priorities, etc., to the SSIs. True, but what is offered by the government is very much less than what is needed by this sector. As a result several claimants for these limited assistance force it on the officials to determine certain norms for allocation or extension of these facilities. In other words, whatever the government can offer is rationed among the SSIs. At this stage, the general concessions offered to the industrial sector make the situation worse. The SSIs have to compete with the other medium and large units to get their share. At this stage deliberate discrimination, official apathy, red tapism, corruption among officials, etc., are all becoming rules rather than exceptions. Further the procedures involved in obtaining the government assistance are so cumbersome that the SSIs do not have the professional talent to complete them.
6. Problems relating to exports: Small scale units in India have made a significant deviation from the export of traditional items. Today these units produce a number of products like electronic components, spectacle names, leather goods, handlooms, chemicals, dyes, cosmetics, etc. These goods have great demand in other countries. Our Indian products are comparable in quality with the products from other countries, but prices of our products are higher than those from other countries. This is because of various reasons: lack of knowledge about the market for different products, market information relating to consumer preference, selling terms, exchange rate regulations, packing and forwarding procedures, remittance, facilities, absence of bank guarantees, payment of various duties, etc. In each one of these areas, the SSIs lack experience and guidance. Hence inspite of producing good quality products our units are unable to succeed in marketing them abroad. The various agencies and boards established for this purpose are unable to really assist the SSIs. There is complete lack of co-ordination among various agencies and producers. As result this sector, which can fetch considerable foreign exchange resources, is unable to realise it.
7. Labour problems : SSIs are encouraged mainly because the are labour intensive. But over the years, these units have started losing considerable mandays due to labour problems. There are several statutory regulations like Provident Fund contributions, Employee State Insurance, etc., which the SSIs have to comply with. Whenever there is any violation, the labour problems erupt and affect the smooth functioning leading to accumulating loss.
8. Lack of Modernization: SSIs by nature depend on indigenous technology. But whenever there is scope for improving the technology by importing if from abroad, the requirement of funds emerge s a hurdle. Hence, with old technology production becomes costlier, and these units are unable to find market for their products and compete with other rivals.
9. Difficulty in location of units : SSIs are encouraged to move towards the rural areas and backward regions. But the facilities in these places are very limited or under developed, that even though units are established in these locations, their operations are severely hampered by the limited availability of the facilities. Of late there is objection from the rural folks on the ground of environmental pollution. For instance, a tannery will not be allowed nearby the villages as it is feared that there will be water pollution. Similarly there is objection to the location of chemical units, meat producing units, etc., and this leads to competition for the place where the facilities are available and where there is not much of social resistance.
10. High rate of industrial sickness : The industrial sickness is found afflicting this sector very much. Among the industries which are declared sick, maximum number of units is found only in the small scale sector. The reasons for this are the problems so far explained. Whenever the SSIs fall sick, the effort to revive them is not at all on the lines found with the medium and large scale units. As a result the sickness is prevalent more among SSIs and the funds required for reviving them rim to several crores. Government with its financial stringency cannot also come forward to bale out this sector from industrial sickness. By 1991, 2,21,472 small scale units were found to be sick resulting in the lock up of total bank credit to the tune of Rs. 2,792 crores. Of these units, 2,02,998 units were declared non-viable units involving an outstanding baiik credit of Rs. 1997 crores. The magnitude of industrial sickness among SSIs has been a main concern of the government in these days. Efforts taken to solve the occurrence of sickness among the SSIs are not found to be effective for one reason or the other.
Having discussed the problems of the SSIs, let us now study the measures required and policies taken by the government to solve these problems.
1. Institutional agencies: The government has taken a keen interest in the development of SSIs. Having identified the basic problems of this sector, the government has introduced an institutional structure to look after various aspects of this sector. The Small Industries Development Organization has been established by the Central government mainly to co-ordinate, monitor and formulate policies for SSJs. It has Small Industries Service Institutes, branch institutes extension centers and regional testing centers and production and training centers. The National Small Industries Corporation (NSIC) has been established to provide them" raw materials and capital equipment and assist them in marketing of goods, etc. such corporations are also established at the state level. To attend to the developmental functions of the SSIs, the Small Industries Corporations have been set up at the slate level. Apart from these, several specialized Boards for each segment of the small scale sector have also been established like Coir Board, Central Silk Board, Coffee Board, etc.
2. Technical assistance: One of the important areas where the SSIs need assistance is in technical matters. Right from the stage of production down to packing and forwarding, they require guidance. Though initially they are started with the internal technical expertise, over a period, they have to be guided properly for updating their technology so as to maintain their cost of production and profitability. The installation and maintenance of machines and equipments, servicing them etc., are also areas where the SSIs need help. To extend this assistance, several agencies like Small Industries Service Institute, Small Scale Industries Development Corporation and such others are established which take care of the technical assistance to SSIs. The various Boards set up for different SSIs also extend their help in this regard. Apart from guiding the SSIs, these institutions^ are also engaged in research and development and their research findings are also disseminated to benefit the SSIs.
3. Industrial estates: Though SSIs can be easily formed, it is very difficult to get a location in these days where all the infrastructural facilities are available at a reasonable price. For this purpose the government has started establishing industrial estates. Industrial estates are areas where all the basic infrastructural facilities are provided by the government. Facilities like water, work sheds, transport, communication, roads, power, etc., are made available in the industrial estates. Individuals who want to locate their SSIs in such estates should apply to the government and get the work sheds allotted. They will make the necessary payments to the governments in lump sum or installment as the case may be. The government locates these industrial estates in backward regions and rural and semi-urban areas so that when SSIs are started, these regions slowly develop. The government has also set up the SIDBI mainly to extend assistance for supporting the activities of the State governments, and their agencies in connection with the development of SSIs. Special concessions are also granted to these agencies when they plan for locating the industrial estates in the rural areas.
4. District Industries Centres (DICs) : DICs are institutional agencies which have links with the Development blocks on the one hand and the special agencies on the other. They provide guidance to entrepreneurs and SSI owners in almost every stage since the formation and also in pre-formation and post-formation, marketing, finance, credit guarantee, raw materials, training, etc. They also guide the unemployed candidates with all the necessary details regarding the starting of SSIs. By March, 1993, there were 433 DICs covering 431 districts in India.
5. Financial assistance: One of the basic problems of the SSIs is the lack of funds. To overcome this, several steps have been taken since 1960. Briefly we may refer to the following steps :
a) Under the control of RBI, the government introduced a Credit Guarantee Scheme for the supply of institutional credit to SSIs. b) IDBI is extending refinancing facilities to the State Governments Commercial banks, and State finance corporations. c) The State governments provide seed capital and margin money to the entrepreneurs of SSIs to enable them to get assistance from the Commercial Banks and State Finance Corporations. d) Small industries development fund was set up by the IDBI in May, 1992 mainly to increase the refinance facility to the banks and other institutional agencies to enable them to participate in a greater way in extending assistance to the SSIs. e) A significant development was the establishment of Small Industries Development Bank of India with the main purpose of functioning as the principal financing institution. It would concentrate on Modernization and technological up-gradation, promotion of employment oriented industries, improving the marketing facilities, etc. f) Arrangement for die supply of raw materials : Raw material shortage has been crippling the SSIs for a long time. This problem is being solved by the government through the State Small Scale Industries Corporations. These corporations are made in charge of distributing the scarce raw materials among the SSIs so that every unit will be able to get its quota. Government is also exploring a scheme for maintaining a buffer stock of raw materials, especially those which are in heavy demand, so that the SSIs will not have any difficulty in getting their supply from the authorized agencies. g) Marketing assistance : In order to provide marketing assistance to the SSIs, the government has come out with several schemes like : a) Stores purchase policy under which the government has earmarked items which should be purchased by the government organisations and departments only from SSIs. b) Price preference to the products purchased from the SSIs by the public sector units. c) To improve the competitiveness of the SSI products, the government has provided quality control and testing facilities at various places. d) Organization of exhibitions, sales emporia, etc., at various places to enable the SSIs to market their products.
8. Fiscal incentives: The government also has extended several fiscal concessions and incentives to SSIs to encourage them to grow. These incentives include, tax holidays for new units, investment allowance, exemption from taxation, offering capital subsidies to units located in backward regions, exemption from excise duty, etc.
Apart from the above steps and measures taken, the government also allots huge amounts of money for establishing and developing SSIs. The table below has the details regarding the total expenditure incurred by the government plan wise. It could be noted from the table that the expenditure on SSIs has been increasing from the I Plan and by the VIII Plan it has gone up nearly 130 times.
GOVERNMENT EXPENDITURE ON SSIs. (Amount in Rs. crores)
|PLAN |TOTAL EXPENDITURE |
|I |48 |
|II |187 |
|III |248 |
|IV |242 |
|V |592 |
|VI |1,945 |
|VII |3,249 |
|VIII |6,334 |
In the Industrial Policy 1991 the SSI sector has been given special emphasis. The following are the important provisions:
(i) To facilitate SSIs to have access to capital market, equity participation in them is allowed for other industrial undertakings not exceeding 34% of the total share holding, this is expected to provide funds for Modernization, improving the technology, etc.
(ii) To liberalize the flow of funds through commercial banks by involving them in financing and also to extend the Single window scheme as well as the Equity Fund scheme.
(iii) To invoke the provisions of the Partnership Act to limit the liability of the new entrepreneurs in the event of failure of SSI.
(iv) To improve the effectiveness of collection of dues,
v) factoring services may be extended to SSIs. vi) Involving the public sector units, co-operatives and other professional agencies to improve the marketing of the products of SSIs.
vii) Allocating the raw materials to the SSIs and tiny industries on priority basis.
viii) To achieve co-ordination in the production programs of large, medium and small scale units.
ix) To establish and extend quality control and testing facilities,
x) To encourage location of SSIs in the rural and backward regions.
xi) To make the Small Industries Development Organization as nodal agency for SSIs mainly in export promotion.
With (lie above steps already taken, the government has clearly shown its interest in the development of SSI sector. But a main problem is yet to be solved and that is the extent of industrial sickness in the small scale sector. The number of units afflicted is on the increase year after year and unless some positive and preventive steps are immediately taken, the SSI sector will not be able to reach its potentials and make the invaluable contributions to the Indian economy.
REVIEW QUESTIONS 1. Explain the objectives of Indian five year plans and to what extent they have been accomplished? 2. Trace the evolution of mixed economic principle in Indian economy. What are the characteristics of mixed economy? 3. Explain the planning process under mixed economic set up? What distortions that can take place in the course of such a planning process? 4. Comment on the sources of finance for Indian five year plans. 5. How would you justify the existence of public sector in India ? What role does public sector play in Indian economy? 6. Critically evaluate Industrial policy resolutions of 1948, 1956 and 1980? 7. Discuss in detail the Industrial policy of 991 which set the liberalization process on? 8. Explain the role of small scale industries in India. To what extent the government policy has been supportive of the small scale industries?
Discuss the problems of small scale industries and suggest suitable measures to overcome them?
CHAPTER VI
New Economic Policy Environment in India - Privatisation - Liberalisation and Globalisation - Experiences and issues - Environmental assessment and evaluation.
PRIVATISATION
Since the time the government in several countries undertaken the economic development as the basic function, several developmental efforts have been made and a number of them failed to yield the expected results. This is the experience of government both in developed countries as well as developing countries. When such efforts of government failed, it is felt that such efforts could be left for private initiative. In this context privatisation assumed very great importance. Privatisation in general means the reduction in the involvement of the State or public sector in economic activities of a country. This may be in different forms as explained below. 1. Denationalisation - those units which were nationalised in the past, to enable the government to have, management and control over them, are handed*over to (he private sector for continued operation.- For example, suppose a commercial was nationalised by taking it over from a private management, under privatisation, the government voluntarily reducer its hold in the bank by disposing of its ownership equities to the private sector.
2. Another form of privatisation is allowing the entry of private sector in the areas hitherto reserved or meant only for government or public sector. In other words, areas which are exclusively for public sector are opened up inviting the private sector to enter. The exclusive state monopolies cease to be so once the private sector is encouraged to enter. For example, the electricity generation and distribution was hitherto completely under the government, but this areas is being opened up for private sector.
3. One more way in which privatisation is made is by transferring the management and control of certain public sector undertakings or departmental type of organisation to the private sector. This usually takes place in any one of the following ways :
a. Franchising - the government may provide the technical know-how and the name and brand name may be provided by the private sector. For example, the millions of STD/ISTD telephone booths are owned by the private parties and the telephone link is provided to them by the government. In this case the private parties are franchistd to use the telecommunication links provided by the government. Before (his, the Postal and telegraph departments were completely providing this service. b. Government may contract out its service and make the service available to the common public through private bodies. For example, railways or airways may contract the catering service to an outside hostel or restaurant for a fixed period. c. Leasing of facilities provided by the government is yet another form of privatisation. For example, a shopping complex built by the government may be leased out to private parties for a specified period against the, payment of lease rentals. d. Allowing the private sector to participate in the equity of government held company or public sector unit is one more form of privatisation. In this case the government widely announces its intention of selling the equities of a public sector unit inviting the private sector to buy these , equities and become partner in the ownership, management and control of the unit.
4. By limiting the scope of public sector, the government may encourage private entry into a particular industry. This, is another way in which privatising take place. The best example is the recent announcement by the government about the sale of LPG by the private sector units apart from the existing public sector units.
Hence, privatisation may mean any of the above mentioned activities resulting in the entry of the private sector in the area completely reserved for the public sector.
Now let us go through the arguments which favoured privatisation in India.
1. The large number of public sector units existing in India, is accounting for a sizeable budgetary deficit year after year. That is these public sector units are run inspite of incurring loss, by meeting the funds requirement by them through deficit financing. This has a direct impact on price level and inhibit the development of the economy. Hence, privatisation is opted for.
2. With the mounting non-development and non-plan government expenditure, the government faced with serious resource constraint. This further widened by the dismal performance by the public sector. Hence, privatisation is resorted to.
3. The poor performance of the heavily invested public sector accounts for increasing capital output ratio in the economy. This can be checked only through privatisation.
4. There has been a very low rate return on investment in public sector units. Against an investment of more than Rs. 1,00,000 crores, the return is a mere Rs. 2,730 crores in 1990-91. This clearly shows the worst performance of the public sector. Most of them are running on loss for year. This is a serious drain of economic resources. The alternative rectify the situation lies in privatisation.
5. The large scale loss of man days through strikes and lock outs in public sector units has already denied the economy what is due. Continued public sector existence will only worsen the situation. Hence, privatisation is a must.
6. Over staffing and low productivity are associated with public sector units leading to repeated loss. One way of overcoming this is privatising the public sector.
7. With the liberalisation policy announced, there is a need for every unit to gear up itself to face the extern; competition. The umbrella protection is removed and the potential of each unit has to reach its peak to survive the competition in the field. Public sector units cannot withstand this external competition, unless they are run on efficient lines. The option therefore is to privatise.
The arguments given above may not be taken as final to mean that privatisation is the panacea for all evils in the industrial sector of India or the ills of public sector. Even private sector is subjected to a number of criticisms. Before we conclude whether privatisation is a wiser move or not, let us consider the arguments against privatisation.
1. In every developing economy, there exists a serious economic and social imbalance. This is widened by the private sector. The basic objective of the public sector is to ensure that the material progress in the society is shared by every sector of the society. Only for this purpose planning and the public sector are made indispensable. By privatising, the material progress will be reaped only by a minor segment of the society and the economic and social imbalance will only widen.
2. Privatisation does not ensure any rising level or income or standardisation. Especially when the need of the hour is to rise the standard of living, privatisation cannot help to achieve this by itself. Further privatisation cannot be the alternative in several areas of bad performance. Instead of resorting to this alternative, efforts could be made to identify the reasons for bad performance and rectify the situation.
3. Being governed by profit maximisation objective, the private sector always attempts to minimise its costs in every way possible. Sometime this is achieved by using the obsolete technology. This means that the private sector is fully responsible for under utilising the available resources.
4. It could be easily understood that in India private sector is highly subsidised by the government. The government invests heavily on infrastructural development like transport, electricity, water, etc., and the private sector just gets its share of the cake and enjoy the profit at the cost of the nation. Public sector also invests heavily on research and development .areas and the know-how developed is used by the private sector for its profit maximisation.
5. There are several areas in which the public sector is providing the market for the products from private sector. For example, the number of sodium vapour bulbs, tube bulbs, etc., required by the government for various purpose is supplied only by the private sector. In this way the public sector is directly working for the profits of private sector.
6. The important reason for the slow tardy economic growth of our country is the weak public sector. Instead of strengthening the public sector units to accelerate economic growth, privatisation is not the right step.
7. One of the inevitable result of privatisation is the emergence of private monopolies and restrictive practices against the interest of the country. Just because the public monopoly failed, private monopoly cannot be encouraged. Private monopolists do more damage than any good. Hence, privatisation should be objected with all force.
8. As regards the fuller utilisation of resources, a study on this in private sector and public sector will certainly reveal that the under utilisation is more in private sector than public sector. This in turn mean deliberate under production and creation of artificial scarcity. Hence, by privatisation we will only encourage the tendency to under utilise whereas the expectation is to achieve fuller utilisation.
9. The efficiency, being a relative term, has to be objectively measured. The rate of return on investment in public sector cannot be compared with that of private sector. The private sector uses a different norms of estimating return on investment. Further mere financial performance cannot be taken as the basis for good overall performance. Hence, one will be surprised to find that the public sector in several areas perform better than the private sector.
10. Private sector by nature is interested only in short term quick profit yielding propositions and not on long gestation ones. Hence, several basic and key industries cannot be and will not be started by private sector. But without these industries the economy cannot move forward. Hence, public sector units have to be continued.
11. Public sector units function under loss, mainly because they are made to work under various regulations and controls. These are not in any way deterring the private sector and so they have complete freedom to determine their policies. Suppose the public sector is also liberated from such oppressive controls and regulations, we also find it functioning with profit and may even do better than the private sector. Hence, privatisation is only an attempt to allow the public sector function freely. Such a policy could be only help to underline die superior performance of the public sector.
The move towards privatisation in India has already started with the disinvestment of public sector undertaking. To start with 20% of the interest in public sector undertaking is to be disinvested. There has been a good response from the market for such a move. It is said that the resources mobilised through such disinvestment will be used for paying off the dues to employees opting for voluntary retirement, retrain the labourers and also for restructuring the unit. With the disinvestment of 20% shares of public sector undertakings, their managerial complexion will undergo a change and they may become commercially successive. But as pointed out by the Rangarajan Committee in June, 1993, such disinvestment will exclude the strategically important areas like defence and atomic energy. The privatising effort is being carried on with the hope that the public sector units will start operating on commercial lines and justify their existence.
Globalisation
There has been a tremendous change in the global environment in the 90V Several developments throughout the world have resulted in a new challenges forcing every country to gear up to face these challenges. The important changes like unification of Germany, resurgence of the Far East countries like Singapore, Taiwan, Korea and Hongkong, the fall of communist regime in Eastern Europe and the disintegration of USSR, as well China slowly becoming an open economy, etc., have resulted in a new wave of optimism and growing opportunities around the globe. Every country is trying to seize these opportunities by throwing open their economy and embarking on global marketing strategies to win over the world. In otherwords, such an approach has made it clear that economic inter-dependence is on the increase and no country can remain a closed economy for ever. The best example is that of communist China, that when it has decided to open to receive the Western countries, especially in the trade sector, a sea change has taken place in China. The Western countries are now competing among themselves to invest heavily in China to reap the fruits of hitherto unaccessible market.
Globalisation in this environment is a policy involving the following aspects: Exports sector forms the nucleus of an economy as through this sector every country tries to maximise its external earnings. It is obvious that when export sector becomes a significant macro economic aggregate, the industrial sector completely depends on its for its own growth. Automatically the banking, insurance and other related sectors are also integrated well with the export sector. All these mean, that the growth of and economy is inextricably linked up with the growth of its trading partners. Hence, by opening up the market a country also enters into the markets of other countries and it becomes essential for the countries in the world, to change their production and marketing orientation towards global market. In other words, competing and succeeding in the international market becomes the objective rather than confining to internal market. In this process of globalisation, the country concerned has to liberalise all its trade restrictions and barriers paving the way for the entry of international giants and throwing open challenges to the internal producing and exporting sector. Hence, globalisation in a way is the back door entry of FREE TRADE philosophy of the earlier days.
Globalisation has been the result of various forces in the international markets such as: i) Over the period countries are found to have attained similarities in terms of the infrastructural facilities, channels of distribution and the marketing strategies. Hence, such of those countries with these similarities find it beneficial to strengthen their trade ties.
ii) There has been a huge flow of funds from country to country which has resulted in the opening up of the domestic capital market. As a result several major corporate giants raise funds through international capital market thereby facilitating flow of huge funds from country to country in hitherto unknown volume.
iii) Technology revolution has led to the emergence of cheap technique of production and improved the quality of the products which together remain a force to reckon with in the international market.
iv) As a consequence of all the above development, marketing strategies have become more complicated as in the global market consumers of various countries are to be satisfied. The best way to win over the consumers in the international scene i\ through best technology and quality.
With the globalisation becoming a reality, producers in the world over have started adopting a strategy to maximise their gains. No longer they have constraints in the form of geographical territories. They are able to produce at a cheaper cost of production by taking advantage of cheap labour cost in developing countries, apart from entering into alliance with even their traditional rivals as has happened in the case of IBM and Microsoft or General Motors and Toyota. All these efforts help the producers to achieve maximum efficiency, which in turn inspires them to move forward to conquer new peaks.
As regards the developing countries, the globalisation policy is opening up a new unlimited opportunities for them to achieve a higher level of economic growth. Hitherto they were bound by protectionist rule, discriminatory policies, compulsory technology transfer, etc. All these have denied the opportunities for them to enter the global market which would have sharpened their abilities and helped them to realise their potentials. The practice used to be bilateral and multilateral agreements thereby satisfying the policy of mutual help and mutual growth. But with globalisation there is no such necessity as country with the right set of policies should be able to stand shoulder to shoulder with even developed countries on the strength of their technology and product quality. In this connection the General Agreement on Tariff and Trade (GATT) has provided for the growth of multilateral trade based on negotiations at different points of time among the trading partners. In the latest negotiations at Uruguay Round has touched upon certain new areas like trade in services and trade related aspects of investment and intellectual property rights. This has created a new challenge for the developing countries.
The trend in globalisation has also led to the growth of trading blocks at the regional level like European Economic Community, Asia Pacific Economic cooperation, USA-Canada-Mexico Free Trade Agreement, etc. At the same time there has been a big challenge for developing countries viz. international debt. To overcome this problem the developing countries should have some preferential treatment so that they would be able to increase their exports and tide over the international debt problem. Interestingly, countries like South Korea, Singapore, Taiwan and Hong Kong have improved their export performance and have been immensely benefitted through globalisation. Other countries like India have entered the race late and over a period they should also be successful.
For this new challenge thrown open, India has responded well and its policies indicate that India is slowly heading forward. Thanks to the 1991 policies announced by the government, that India now has initiated reforms in the field of trade, industrial policy, fiscal policy, etc. There has been greater reliance on foreign technology to improve the competitive efficiency of the Indian industries. The days of industrial licenses and controls have gone and are replaced by an atmosphere of liberalisation. This is done to integrate the Indian economy with the international market and global economy. However, over these three years, India has not made any significant achievement like South Korea or the other South East Asian countries, inspite of having unlimited resources, broad based industrial infrastructure, trained manpower, abundant supply of cheap labour, etc. But certainly she is lacking in competitive efficiency which is very much required for achieving success in the international scene. Globalisation certainly offers India great opportunities which must be seized. Especially on the following areas India has to seriously think and devise plans :
a) India best suited for large scale production at cheaper cost especially in agro-based industries. We have the necessary skill and trained manpower in this sector. What is called for is the ability to enter into alliance with the partners overseas. This should be followed by a National policy for each sector. Once this is done, there is no reason why we cannot also emerge as the South East Asian countries.
b) India should develop on its strength i.e., areas where it has the talent and potential like knowledge-led sectors, agricultural and fashion-led industrial products. Once we identify this strength, our corporate sector engaged in these areas of production, should be encouraged to enter into global market to become Indian multinationals abroad with production facility in various part of the globe.
c) There is a basic necessity for India to attract foreign investment in substantial quantum. This called for: i) to obtain the funds required for large scale production and ii) to create awareness among the investors abroad about the investment opportunities in India and also to make our producers understand the reality that unless they improve they cannot withstand the global competition.
As on date, India is unable to attract foreign investment because of the competition from China, Far East Asian countries, Latin American countries, etc., India must come up with the necessary policies to out-beat these competition soon.
Constraints :
While moving towards the global market, India has to be conscious of certain serious constraints and prepare herself to overcome them.
Firstly, India should be aware of the consequences of getting integrated with developing economies. The interdependence is more unfavourable to the developing countries in the sense that when there is economic fluctuations in the developed countries, that is bound to affect the developing countries. India should device methods to insulate itself from such external shocks and destabilisers.
Secondly, the export based economic reforms will certainly lead to inflow of funds But what this results in, has to be carefully observed. Once the export earnings go up, the income increases and the tendency will be to import heavily which will rob the benefits realised. Hence, efforts should be taken up now itself to channelise the export earnings towards export boosting efforts and activities', and discourage the tendency to import
Thirdly, there is an increasing danger in the form of the emerging regional trade blocks. Countries in different regions have completely removed the trade blocks among themselves, thereby they fight against any foreign invasion in the global market. Further such regional blocks have the tendency to create cartel like barriers in the market and how such a combined onslaught can be managed by India is another constraint for which an answer or a strategy should be found.
Fourthly, historically free-trade has not benefitted every participant and so there is no guarantee that by globalisation policy India would be certainly reap the prospects of higher growth.
With the knowledge of these constraints, the globalisation policy should provide for achieving technological excellence in the manufacturing sector. The competitiveness of the Indian industries must be improved through higher productivity and best quality output. Efforts, should be made to enter into alliance with the partners abroad to get the best out of globalisation. The Indian corporate sector should learn to operate in an unregulated environment by strengthening themselves in every way possible. Having opened up, there is a compulsion that India has to prepare itself on the above lines if at all it should succeed in this globalisaticn efforts.
ENVIRONMENT ASSESSMENT AND EVALUATION
The necessary inputs for assessing environment has been already dealt with. While any one can compile information on environment, not every one can succeed linking this information and come out with meaningful understanding of inputs. This being a specialist job, different methods are followed at different places for assessing the environment. Broadly these methods could be categorized under: i. verbal and written communication, ii. Searching and scanning iii. Spying and iv. Forecasting. Each method has its own merits and demerits. But all of them depend on the ability to cull out information. The first method involves collection of oral and written information from different sources. The second one refers to the serious search for information at different places apart from using the internet websites for scanning for information. Spying as a method involves, compiling information in a secret manner from competitors and others so as to suitably position an organization. Forecasting is an exSearching and scanning iii. Spying and iv. Forecasting. Each method has its own merits and demerits. But all of them depend on the ability to cull out information. The first method involves collection of oral and written information from different sources. The second one refers to the serious search for information at different places apart from using the internet websites for scanning for information. Spying as a method involves, compiling information in a secret manner from competitors and others so as to suitably position an organization. Forecasting is an exercise in which based on the understanding of the past and present the future is predicted.
In all the methods determination of information required is the first step. This is followed by identification of sources of the required information. Thirdly, the collection of information followed by processing of information. Fourthly, the processed data is subjected to analyses. The results of the analysis are then interpreted with which the necessary action plan is devised. To explain this process, let us consider the SWOT Analysis. Each letter in the word 'SWOT' stands for: S - Strength, W - Weaknesses O - Opportunities and T - Threats. All the information compiled is grouped under these four aspects and based on the outcome, a suitable strategy is developed. This is explained with an example about the Leather industry. Suppose we confine to two segments in the leather industry, viz., footwear segment and leather segment. How to assess their environment is explained below.
SWOT analysis - Example of Leather - footwear segment and leather goods segment
The SWOT analysis is undertaken for these two segments viz., footwear segment and leather goods
ij SWOT analysis of footwear segment:
Strengths: a) Finished leather is 15 per cent to 20 per cent cheaper in India compared to other competitors in the world. b) India has the largest cattle population in the world which ensures continuous availability of raw material. c) The cost of labour is relatively cheap in this industry in India compared to other manufacturing countries. d) The cost of effluent treatment is considerably lesser in India. e) There are specialised institutions like CLRI which facilitate access to inputs in manpower training, shoe design, quality control, etc. f) Overall cost-competitiveness in India compared to European manufacturers is very high. The cost difference works out to be 25 per cent to 50 per cent in different processes.
Weaknesses : a] Weight of carcass of Indian cattle is less and so only small hides are available for tanning. b) Advanced machineries required by the industry are mostly imported. c) Use of untrained manpower has a significant impact on quality of the output apart from loss of production due to frequent labour strikes. d) Huge losses are incurred due to wastage of hides and skins. e) Shoe components are largely imported by India. f) Existence of poor infrastructure viz. non availability of power, poor transport, etc. g) The industry is dominated by the small scale units, which frequently become sick. The reservation policy is responsible for this status.
Opportunities : a] The removal of import barriers in advanced country markets opened the markets in these countries. b) Over the period the flow of output from the organised sector has been increasing. c) CLRI has initiated action on a three level tannery modernisation programme which should improve the recovery of fallen hides, chrome recovery and effluent treatment, etc. d) The Rs. 220 m leather technology mode mission project launched by the Council of Scientific and Industrial Research to improve the tannery sector has opened opportunities. e) Quick response manufacturing techniques - wherein, instead of assembly line - enable workers to do a number of different operations, covering for each other as dictated by flow of work gives higher throughput and quality, fewer rejects.
Threats : a] Delivery delays cause loss of margins. b) The lack of income tax benefits and excise duty relief are the main barriers to the development of the organised sector. c) There is a constant threat of regulations governing this industry being changed in the importing countries.
ii] SWOT analysis for leather goods
Strengths : a) Availability of large-raw material base. b) Abundant availability of cheap labour. c) Long tradition of processing leather and manufactured goods. d) Strong entrepreneurial culture. e) Significant presence in the global markets. f) Existence of developed and supportive engineering and chemical industries. g) Improving infrastructural facilities in the form of transport, telecommunication. h) Exporter friendly policy framework. i) Institutions like CLRI, CLE, etc., serve as the voice of the industry and also promote design and market development.
Weaknesses :
Inspite of the above strengths, India's share in world leather trade is abysmally low. The following are the reasons for this : a] Nearly 85 per cent of the leather units in India are in the private sector, and are basically small sized and semi - mechanised production units. b) Poor quality raw material in the form of hides, skins and semi processed leather is a major problem. c) Low value additions and inefficiency in the industry. d) Lack of focus in marketing our leather products. e) Weak fashion consciousness. f) Excessive dependence on a few markets. g) Dearth of skilled and trained personnel. h) Slow paced modernisation, upgradation due to insufficient resources.
Opportunities: a) Mobility of manufacturing units to low cost countries like India, due to rising wage level in developed countries. b) Existence of growing middle class which provide large domestic market apart from reflecting international fashions which would ensure that the industry is in line with the latest global fashion trends. c) Increasing establishment of joint ventures in India by several global companies. d) Reduction in import duty on chemicals, liberal import of machineries for processing leather
Threats : a) A number of countries like China pose a threat to India's advantage in terms of cheap labour. b) Supply of high quality end-products and strong design infrastructure in spite of high wage levels, with competing countries like Italy. c) China is strengthened by the integration of Hong Kong with China. d) China's membership in APEC implies that the US market will be much harder to tap. e) Eco - labelling is gaining global acceptance. Exporters will have to suitably adapt their product manufacturing processes immediately to even retain current market access.
Having identified the SWOT of both the segments, one should decide about the policies required to exploit the opportunities, avoid the threats, build up the strengths and eliminate the weaknesses. When the assessment is made about the national market all the other relevant inputs like cultural preferences, religious beliefs, demographic aspects, etc., should all be considered. But assessment of the international scenario is very complicated job, as all information relating to the export markets should be available on a day to day basis. However, these days, it is possible to get hourly information from every comer of the globe, thanks to the internet websites.
REVIEW QUESTIONS 1. What do you understand by privatization ? What are the different forms of it? 2. Discuss the arguments for and against privatization in India. 3. With an example, discuss the meaning of globalization. Why globalization has become a reality ? 4. In the context of globalization, what are the areas that India should focus and why ? Discuss the constraints in this context. 5. Outline the need for environment assessment. What are the different methodologies available for this purpose ? Give an example for SWOT analysis.
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