PCTI Group

An ISO 9001:2000 Certified Organization

PCTI Group

Economic and Social Environment

MS-3

An ISO 9001:2000 Certified Organization

MS-3 ECONOMIC AND SOCIAL

ENVIRONMENT

© Copyright PCTI Group 2009Presentation Title | April 21, 2023 | <document classification>

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UNIT 1 ECONOMIC ENVIRONMENT OF BUSINESS

• Your success or failure as a manager depends on a number of factors and these factors may not always be within your control; very often such factors constitute your work environment. These include your job, your department, your organization, your nation and the world around you. As a marketing manager, would you not study your market environment before launching a new product

• Environment : The term “environment” refers to the totality of all the factors which are external to and beyond the control of individual business enterprises and their managements.


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Environment

Social

PhysicalPolitical

Economic

Factors Affects on Business Environment


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Propositions on Business Environment

Three basic propositions given below :

1. Business is an economic activity.

2. A business firm is an economic unit.

3. Business decision-making is an economic process.


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Economic Environment

Economic Environment

Micro-EconomicMacro-Economic


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The critical elements of macro-economic environment are :

• Economic system • Nature of the economy • Anatomy of the economy • Functioning of the economy • Economic planning and program's • Economic policy statements and proposals • Economic controls and regulations • Economic legislations • Economic trends and structure, and • Economic problems and prospects


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The New Economic Policy• The new economic policy was announced in July 1991

which is of far reaching importance. The new economic policy, among other things, has a baring on:

• (i) Industrial Licensing,• (ii) Foreign Investment and Foreign Technology

Agreements,• (iii) MRTP regulations, and• (iv) Public Sector. Our purpose is to acquaint you with the

main ideas or philosophy behind the economic policy


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The business environment influences business managements. The critical elements of business management are : planning, direction, organization, control or coordination, leading and motivation and evaluation. Management all levels, top, middle as well as supervisory, is concerned with these critical elements to certain degree.

ECONOMIC ENVIRONME NT AND BUSINESS MANAGEMENT


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A good amount of managerial skills is required in adjusting to the environment. The managers must have a thorough knowledge and understanding of the immediate business environment.

Environmental scanning, thus, becomes an important step towards corporate planning and business policy decisions. Corporate mangos analyze the Strengths (S), Weakness (W), Opportunities (O) and Threats (T) that exist for their organization in the context do its environment. The SWOT analysis precedes the making/taking of strategic and tactical decisions by the management.

ECONOMIC ENVIRONMENT AND BUSINESS MANAGEMENT


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UNIT 2 Socio-cultural and Politico-legal

Environment

PART – I

SOCIO-CULTURAL ENVIRONMENT


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• Business must have a social purpose; business concerns must discharge social responsibility and social obligations and have social commitment.

• No business can survive and grow without social harmony. Different countries, over different time periods, attain social harmony and order of different forms, through different ways and means. Thus the social environment differs over space, time and methods.


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The critical elements of the sociological environment of business. These elements are :

• Social institutions and systems• Social values and attitudes• Education and culture• Role and responsibility of the Government• Social groups and movements• Socio-economic order• Social problems and prospects.


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UNDERSTANDING THE SOCIAL ENVIRONMENT OF BUSINESS

• “Social justice and economic growth must go together”.

• “Society cannot materially progress without a significant structural development of the economy”.


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SOCIAL RESPONSIBILITIES OF BUSINESS

Business determines society as much as society determines business.

Social movements should support business by indicating right directions in the national interest.


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SOCIAL RESPONSIBILITIES OF BUSINESS

The critical elements of the socio-cultural environment are :Social institutions and systems, social values and attitudes, education and culture, social groups and movements, the socio-economic order, social problems and prospects, etc.


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Social Movements

Social Movements

Trade Union Movement

Shareholders’ MovementManagement Movement

Consumer Movement


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PART – II POLITICO – LEGAL ENVIRONMENT

• Legislations and enactments, rules and regulations, systems and procedures, policies and plans, statements and announcements, directives and guidelines by the Government, constitute the politico-legal environment.


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The politico-legal environment

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

• The form of Government• The ideology of the ruling party• The strength of the opposition

Political stability is another critical element which affects business operations. Business grows in a region which is politically stable.


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GOVERNMENT MACHINERY FOR INDIAN INDUSTRIAL ECONOMY

A The Ministry of Industry

The Ministry of Industry was constituted on August 24, 1976. It comprises two

Departments :

i) Department of Industrial Development

ii) Department of Heavy Industry/Public Sector Undertakings.


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• The principal functional divisions/desks in the Department of Industrial Development are:

• Secretariat for Industrial Approvals• Policy Desk for the Formulation and Implementation

of Industrial and Licensing Policies• Industries Division• Finance Division• Administration and General Division


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Recent Policy Measures

• The Department of Heavy Industry or what is now called the Department of Public Sector Undertakings is exclusively concerned with basic and capital goods industries.


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• The Directorate-General of Technical Development (DGTD) is the technical advisory organization in the industrial field to various ministers/departments of the Government.

• The Office of the Economic Adviser • Bureau of Industrial Costs and Prices (BICP)• The Directorate – General of Industrial Contingency

(DIGC) was established in December 1976• Directorate-General of Supplies and Disposals (DGS

&D)


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Development Commissioner (Small-Scale Industries): It provides a wide range of facilities and services including consultancy in the techno-managerial aspects to small units through the network of Small Industries Service Institution (SISI), Production Centres, Testing Centers, Product-cum-Process Development Centers, etc.


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B. The Ministry of Civil Supplies

• The current strategy of industrial development in India is to place heavy emphasis on heavy industry and at the same time to ensure large-scale production (or distribution ) of mass-consumption goods. Production is conducted b the availability of required inputs landform this point of view, the purchase function is important. We have already referred to the role of the purchasing organization which functions under the above ministry, i.e.,

• DGS&D.


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• The functional division of the department of Commerce are :

• (i) Administrative and General Davison;• (ii) Finance Davison;• (iii) Economic Division;• (iv) Trade Policy Davison;• (v) Foreign Trade Territorial Division;• (vi) Export products Division;• (vii) Export Industries Davison;• (viii) Export Services Division, and• (ix) Vigilance Division

C. The Ministry of Commerce


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UNDERSTANDING THE LEGAL ENVIRONMENT OFBUSINESS

We may list these legislation which define the legal environment of business in India :

• Company laws• Laws relating to capital market• MRTP (Monopolies and Restrictive Trade Practice Act)• FERA (Foreign Exchange Regulation Act)• IDRA (Industrial Development and Regulation Act)


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• Trade Unions Act• Bonus Ordinance• Factory Legislations• Social Security Enactments• Laws for Consumers’ Protection


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• A. Company Laws: Company laws include represents the principal laws affecting the organization and management of corporate business.

• B. Capital Market: The Securities Contract (Regulation) Act (SCR Act 1956 is designed to regulate the functioning of stock exchanges in India and to prevent undesirable transactions/dealings in securities.


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• Every stock exchange must have rules approved by the Central Government/SEBI. Securities and Exchange Board of India Act, 1992.

• Over-the-Counter Exchange of India (OTCEI) : over-the counter (OTC) markets are envisaged as a floorless security trading system equipped with an electronic or computer network through which nationally and internationally scattered buyers and sellers can conduct business more efficiently and economically.


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• In India, OTCEI has been promoted by the UTI, ICICI, IDBI, IFCI, LIC GIC and its subsidiaries, SBI Capital Markets Limited and Can bank Financial Services Limited. OTCEI has been incorporated as a company under Section 25 of the Companies Act, 1956, which means that it cannot distribute its income among its members by ways of dividend; instead, it has to use its income for furthering its objectives.


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Composition of World Trade

C. Foreign Exchange Regulation Act (FERA):

FERA Act 1947 has emerged as a very important piece of legislative control over (a) the activities of multinational businesses; (b) the flow of foreign capital, technology and managerial enterprise; and foreign collaboration and joint ventures. In short, FERA regulates the stock and flow of foreign investment in India.


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• D. The Sick Industrial Companies (Special Provisions) Act 1985 (SICA, 1985): The Sick Industrial Companies (Special Provisions) Act 1985 was enacted to address the problem of industrial sicknesses The objects of SICA are :

• i) securing the timely detection of sick an potentially sick industrial undertakings;

• ii) speedy determination, by a panel of experts, of the preventive,ameliorative, remedial another measures which need to be taken with respect to such companies;


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• iii) expeditions enforcement of the measures so determined;

• iv) providing for matters connected with or incidental to the above mentioned objectives.

• Central Government constituted the Board for Industrial and Financial Reconstruction (BIFR) with effect from January 12, 1987

• BIFR is empowered to look into all matters relating to industrial sickness including :

• i) intuitional fiancé;


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• ii) rehabilitation of sick industrial companies;• iii) revival of sick industrial companies;• iv) amalgamation of sick industrial companies;• v) sale/lease of part or whole of the undertaking of sick

industrial companies;• vi) liquidation/winding up of sick industrial companies;

and• vii) other allied matters.


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E. Monopolies and Restrictive Trade Practices (MRTP) Act 1969 (MRTP ACT):

The Monopolies and Restrictive Trade Practices (MRTP) Act has its genesis in the Directive Principles of State Policy embodied in the Constitution of India. Article 39(b) and (c) thereof lays down that the State shall direct its policy towards ensuring :

i) that the ownership and control and material resources of the community are so distributed as best to sub serve the common good, and

ii) that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.


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The Objectives of the MRTP Act are :

• a) To prevent concentration of economic power to the common detriment and control of monopolies;

• b) To prohibit monopolistic trade practices; and• c) To prohibit restrictive trade practices and unfair trade

practices.


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F. Consumer Protection Act, 1986:• Consumer Protection Act, 1986, extends statutory

recognition to the rights of consumers. The Act recognizes the following six rights of consumers :

1 Right to safety, i.e., the right to be protected against the marketing of goods and services which are hazardous to life and property.


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2 Right to be informed , i.e., to be informed about the quality, quantity, potency, purity, standard and price of goods or services, as the case may be, so as to protect the consumer against unfair trade practices.

3. Right to choose, i.e., the right of access to a verity of goods and services at competitive prices. In case of monopolies, say railways, telephones, etc., It means right to be assured of satisfactory quality and service at a fair price.


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4. Right to be heart, i.e., the consumers; interests will receive due consideration at appropriate forums. It also includes the right to be represented in various forums formed to consider consumers’ welfare.

5 Right to seek redressal, i.e., the right to seek redressal giant unfair practices or restrictive trade practices or unscrupulous exploitation of consumers.

6 Right to consume education, i.e., the right to acquire the knowledge and skill to be an informed consumer.


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G. The Environment Protection Act, 1986: The Environment Protection Act, 1986, came into effect in November 1986 and is in addition to the two allied Acts, viz., Water (Prevention and Control of Pollution) Act, 1974, and Air (Presentation and Control of Pollution) Act, 1981.

• The objectives of the Act is to provide for the protection and improvement of the environment and matters connected therewith. The law covers not only land and water or air but all aspects of the environment.


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UNIT 3 CHANGING ROLE OF GOVERNMENT

• Japan and China differ from each other tidally in terms of their political and economic ideologies.

• The tiny Japanese nation is considered to be a capitalist giant. The populous Chinese nation is one of the very few countries which still, by and large, practice communism.


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PITFALLS OF COMMUNISM:

(a) Good produced not in line with consumer’s preferences.

(b) Difficulties in training martial balancing.

(c) Outdated technologies.


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• EMERGING CONSENSUS ON THE CHANGED ROLE OF GOVERNMENT:

Capitalist countries are increasingly accepting the fact that governments have to play an important role in their economies. The governments come into the picture to provide public goods and to ensure that competitive forces are not impeded in play their role. The governments promote the production of commodities with beneficial externalities and curb the production of commodities with detrimental side effects.


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Block 2Structure of Indian Economy

UNIT 4

Structural Dimensions of Indian Economy


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Economic Growth and Development

Growth may well involve not only more output derived from greater amounts of inputs but also greater efficiency, that is, an increase in productivity or an increase in output per unit of input. Development goes beyond this to imply changes in the composition of output and in the allocation of inputs by sectors.


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Economic Growth : Economic growth may be defined as a significant and sustained rise in per capita real income. One must distinguish the “level” from the rate of economic growth, though these two concepts are obviously related.

Real national income = National income at current

prices/General price index In

symbols.

Y = (Y/P) x 100

Per capita real income = Real national income/

population


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• Economic Development: ‘Economic development’ is a broader concept than ‘economic growth’. As and when the economies grow in terms of national and per capita income levels, certain structural changes accompany the process of growth.

• For an understanding of the changing economic environment in a developing country, we may examine specifically the nature of some of the structural changes which are economic in character.


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Structure of National Output: The percentage contribution of agriculture to gross domestic product declines and the contribution of industry and services to gross domestic product increases.

Structure of Employment:It is generally accepted that one of the structural changes that occur in the course of economic growth is a progressive shift of labour from agriculture and allied activities to secondary and tertiary sectors.


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• Structure of Employment: Economic growth is also associated with a chane in the structure of employment of people.

• Structure of Investment and Capital Formation: A change in the structure of investment and capital formation is another development during the process of economic growth and development.

• Economic Growth Equation (G)• G=Rate of investment/ICOR(Incremental Capital Output

Ratio


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• Structure of Consumption: The upward trend in per capita income (economic growth in short) which initiates and accelerates changes in production, employment, factor proportion, skill and capital formation directly brings about a change in the structure of consumption.


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INDIAN ECONOMIC GROWTH EXPERIENCE:

• During the period 1950-51 and 1999-2000, the Net National Product (NNP) at factor cost at constant (1993-94) prices (real national income) recorded an annual growth rate of 2.4 per cent and 6.2 per cent respectively, while per capita NNP growth rate was only 1.71 per cent. The per capita NNP at constant (1993-94) prices (real per capita income) increased from Rs. 3687 in 1950-51 to Rs. 10306 in 2000-01.


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Two structural features of the Indian economy emerge clearly from the above account:

1) Agriculture continues to be important in the Indian economy. A little more than 30 per cent of national income originates in the agricultural sector.

2) There is only slight structural change in the economy if we go by the employment criterion.


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INDIA’S SAVING AND INVESTMENT : TRENDS AND COMPONENTS

A well-developed financial system is necessary for mobilising savings from net surplus units in order to lend to the net deficit units largely to finance their investment activity.

Savings Rate: In our country, the saving rate (net domestic saving as percentage of NNP at current prices) was a mere 6.2 per cent in 1950-51. In the same year, the household sector accounted for Rs. 441.3 crores of the total net domestic savings of Rs. 572.2 crores or in percentage terms for 77.1 per cent of the total net domestic saving.


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• Financial-Asset Structure of the Household Sector : The phenomenal growth of banking facilities and other financial intermediation and spread of banking habit among households becomes evident from this. There is still an untapped potential in respect of government securities, investments in UTI (Unit Trust of India) and life insurance business.


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• Gross Domestic Capital Formation: Gross Domestic Capital Formation (GDCF) is classified on the basis of type of assets into two components – (a) Gross Fixed Capital Formation (GFCF) and (b) changes in stocks or inventories. The share of the former improved from about 84 per cent in 1950-51 to 92 per cent in 1990-91.


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INDIA’S MONETARY AND PRICE TRENDS:• Money Supply: Money supply has increased rapidly and

regularly. The money supply with the public (currency plus demand deposits, plus other deposits with RBI.

• Growth Rate : Principal Factors:• Money supply growth rate has been an important factor

behind the Indian inflation experience. The three principal factors responsible for the expansion of money supply are :

• a) Bank credit to commercial sector, (b) Bank credit to government and (c) net foreign exchange assets of the banking sector.


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• Industrialization is an important element of economic growth. Considering the importance of Industrialization, GOI announced the first Industrial Policy in 1948. Many changes were made in the policy several times and the new economic policy was brought in 1991.The present Industrial policy focuses on the globalization of Indian economy.In tune with the globalization the foreign investment policy has been further liberalized.


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OTHER STRUCTURAL DIMENSIONS: Other structural dimensions of the Indian economy are :

• 1) As for the tax structure, heavy reliance on indirect taxes and declining importance of direct taxes, such as income tax, have been resulting in adverse consequences so far as the objectives such as price stability and reduction in inequalities in income and wealth distribution are concerned.

• 2) Growth in non-developmental government expenditure has been a significant factor in several economic ills facing the economy.


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• 3) Heavy reliance on debt financing of government expenditure has been another feature of the Indian fiscal system.

• 4) Rapid population growth largely because of fast decline in death rate and very slow decline in birth rate is another feature of the country with adverse consequences.


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DEMOGRAPHIC TRENDS AND STRUCTURE • The fast rate of growth of population, given the rate of

growth of GNP implies lower per capita GNP growth rate. For example, if GNP growth rate is 5 per cent per annum, and population growth rate is 2 per cent, then per capital GNP growth rate is 3 per cent annum. To maintain a rapidly growing population, the requirements of food, clothing, shelter, medical and educational facilities and so on will be rising.


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Sl. Period Growth in Investment ICOR

No. GDP at Rate

1. 1950-51 to 1955-56 3.61 10.66 2.95

2. 1956-57 to 1960-61 4.27 14.52 3.40

3. 1961-62 to 1965-66 2.84 15.45 5.44

4. 1966-67 to 1970-71 4.66 15.99 3.43

5. 1971-72 to 1975-76 3.08 17.87 5.80

6. 1976-77 to 1980-81 3.24 21.47 6.63

7. 1981-82 to 1985-86 5.06 20.98 4.15

Table 4.6 : GDP Growth, Rates of Investment and Incremental Capital-Output Ratio (ICOR) in Indian

Economy (1951-90)


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Sl. Period Growth in Investment ICOR

No. GDP at Rate

8. 1985-86 to 1989-90 5.81 22.70 3.91

9. 1985-86 to 1991-92 5.31 23.17 4.36

10. VIII Plan 6.54 3.43

11. IX Plan 5.35 24.23 4.53

12. X Plan 7.93 28.41 3.58

11. IX Plan 5.35 24.23 4.53

12. X Plan 7.93 28.41 3.58

Table 4.6 : GDP Growth, Rates of Investment and Incremental Capital-Output Ratio (ICOR) in Indian

Economy (1951-90)


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Unit 5 Structure of Indian Industry

INDUSTRIAL GROWTH EXPERIENCE:AN OVERVIEW: The progress of industrialization

during the four decades and more since the beginning of the planning era has been a significant feature of the Indian economic development.

The progress the country has made in respect of industrial sector is clearly reflected in the commodity composition of India’s foreign trade. The share of imports of manufactured goods in foreign trade has steadily declined, while industrial products, particularly engineering goods have become a growing component of India’s exports.


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• STRUCTURAL CHANGES IN THE INDIAN INDUSTRY: industrial development has proceeded in three stages. In the first stage, industry was concerned with the processing of primary products. Milling grain, extracting oil, tanning leather, spinning vegetable fibers, preparing timber, and smelting ores. The second stage in the evolution of secondary industry comprises the transformation of materials making bread and confectionary, footwear, and metal goods, cloth, furniture and paper. The third stage consists of the manufacture of machines and other capital equipment to be used not for the direct satisfaction of any immediate want but in order to facilitate the future process of production.


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OWNERSHIP PATTERN OF THE INDUSTRIAL SECTOR : The scope of each sector was well-defined in the industrial policies announced from time to time by the Government. Industrial Policy Resolution of 1956 was the major policy announcement. We will learn about these policies in detail in the next two units. Here our interest is to describe the structure of India’s industrial sector on the basis of ownership pattern.


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The Private sector including cooperative sector accounted for 91 per cent of total number of factories, 69 per cent of employees, 55 per cent of net fixed capital and 59 per cent of value added. This sector has four components:

i) Corporate enterprises,

ii) Partnerships,

iii) Individual proprietorships, and

iv) Cooperative enterprises.


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Unit 6

PUBLIC SECTOR IN INDIA


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Objectives and scope of public sector:

1. To accelerate the economic growth and industrialization of the country by creating the necessary infrastructure for development.

2. To promote fair distribution of income and wealth, interpersonal as well as inter-regional.

3. To promote balanced regional development.

4. To promote the growth of strategic defense-oriented industries.

5. To Create Employment Opportunities.


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Structure and growth of public sector:

Priority areas for growth of public enterprises in future will be the following:

1. Essential infrastructure goods and services.

2. Exploration and exploitation of oil and mineral resources.

3. Technology development and building of manufacturing capability in area which are crucial in the long term development of the economy where private sector investment is inadequate.

4. Manufacture of products where strategic considerations predominate such as defense equipment.


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Working of public SectorThere are two aspects of working of public enterprises.

1. Public Accountability.

2. Price Policy in public enterprises.


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1. Public Accountability

Three Major Constituents of public enterprise accountability are:

• Accountability to Parliament• Accountability through Audit• Accountability in Annual Report.


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2. Price Policy in Public Enterprises

As far as Public enterprises are concerned, the government decides the pricing policy while the managers of particular enterprises decide the price structure within the managers of particular enterprises decide the price structure within the general framework of the Government’s price policy.


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Unit 7

Private Sector in India


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• The private sector is subject to various regulations/laws so that sub serves the social and economic objectives of economic planning for development. The unregulated capitalism in the western countries during the 19th century and the first quarter of the twentieth century was found to be suffering from several limitations and evils. The Keynesian Revolution clearly brought out the role of government in ensuring stability in a capitalist economy.


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NATURE AND SCOPE OF THE PRIVATESECTOR IN INDIA

• Broadly speaking, the public sector is to assume the responsibility of developing basic and heavy industries, social and economic overheads (infrastructure) while the private sector is left with the right to develop consumer goods industries. While major banks and financial institutions (in 1969 and in 1980 major commercial banks were nationalized), railways, civil aviation, power generation and distribution.


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GROWTH AND STRUCTURE OF THE PRIVATE SECTOR IN INDIA:

• The public sector was insignificant, being confined to irrigation, power, railways, ports, posts and telegraphs and ordinance establishments. After 1951, the public sector was expanded fast both by the Central and State Governments.


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PROBLEMS AND PROSPECTS OF PRIVATESECTOR IN INDIA

• The capital market institutions developed rapidly and have been playing an important part in the private sector expansion. The institutions such as Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), National Bank for Agriculture and Rural Development (NABARD) and State Financial Corporations (SFCs) have been playing significant promotional and financing role to help the private sector growth.


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Role of the Private Sector:• In the western capitalist countries and in Japan, private

sector enterprises were responsible for rapid economic development. The development was capitalist oriented with private initiative, enterprise and profit motive as the driving forces. The economic maladies associated with capitalism were sought to be cured through government's macroeconomic policies, thanks to the Keynesian thought and policy prescriptions. For example, the wild economic fluctuations, a feature of uncontrolled capitalism (Great Depression of 1930s being a revealing example), was almost eliminated through macroeconomist stabilization policies in the western economies.


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• Informal or Unorganized Sector: Sector of the economy characterized by small size of operations, informal structure and family ownership, use of traditional technology, lack of access to government favors (subsidies etc.) unprotected product and labor markets.


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S. No Nominal

Sales

Gross fixed

PBDIT*

1 Public Sector 13.18 15.1 16.2

2 Private Sector 17.93 18.4 22.0

Table 7.3: Indian Corporate Sector (selected Growth Rates)

*PBDIT: Profit before interest, depreciation and tax.


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UNIT 8

SMALL SCALE INDUSTRY IN INDIA


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• Small Scale Industry (SSI) has some significant characteristics which have been attracting increasing attention of the policy makers all over the world, particularly developing countries in recent decades. In general:

• SSI requires relatively less amount of capital per unit (i.e., it is capital ' light). Therefore, SSI can be developed even in capital scarce economies

• SSI generates more employment per unit of capital invested (i.e., it is labour intensive). Therefore, SSI growth will help to generate more Employment

• SSI can make use of unskilled labour force and SSI can be set up within a short period of time (short gestation period)


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Exclusive policies and programmes for small industry in both developed and developing countries comprise some or all of the following elements:

Exclusive administrative body.• Industrial extension and advisory services.• Specialized trading and technical services.• Infrastructure services.• Training for entrepreneurship development.• Measures to promote sub-contracting.• Exclusive financial institutions.• Fiscal and financial incentives.• Industrial estates, etc.


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• SSI unit is defined in terms of initial investment in plant and machinery. The definition of "Small Scale Units" and "Ancillary Units" is periodically changed by raising the ceiling of investment.


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• INDUSTRIAL POLICY FOR SMALL SCALE INDUSTRY• Several innovative policy guidelines are introduced:

• Equity participation in SSI for large (domestic and foreign) enterprises is allowed upto) 24 per cent. This is to encourage modernization and technology up-gradation.

• Industry associations are to be encouraged to set up sub-contracting exchanges. This is to promote complementarily between large and small enterprises.

• Private industry can also set up industrial estates.

• Introduction of technology up-gradation schemes called "UPTECH, in selected centers in SSI clustered regions.

• Sale of SSI products under common brand names.


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In India, employment criterion was dropped from the SSI definition due to the following factors:

• Employment changes seasonally and from year to year. Hence, it is difficult to administer this condition.

• An employment limit acts as an incentive to limit employment to remain within SSI.

• Using employment criterion would discriminate against industries using simple and labor intensive technologies as against sophisticated and labor saving technologies.


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INDUSTRIAL POLICY FOR SMALL SCALE INDUSTRY

• SSIs and their branches and extension centers provide the following services:

• Provide technical and managerial consultancy to existing and potential small entrepreneurs.

• Organize training programmes on technical and managerial issues.


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INDUSTRIAL POLICY FOR SMALL SCALE INDUSTRY

• Make techno-economic surveys in select areas and industries to identify new industrial opportunities.

• Conduct entrepreneurship development programmes to motivate new entrepreneurs.

• Provide common facility services and vocational training in the workshops and through mobile demonstration vans.

• Prepare reports for modernization of select units in select industries, etc.


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GROWTH OF SMALL SCALE INDUSTRY IN INDIA: Several factors would have contributed to the sustained

growth of small industry in the 90's:• The remarkable upsurge in recent years in the growth of

durable consumer goods and capital goods industries, particularly auton~obilesa nd electronics have encouraged the growth of ancillary and small scale units, directly and indirectly.

• There is a renewed realisation in the 90s about the opportunities for food, processing units both within the country and abroad. This had given a boost to the growth of small scale food processing units across the country.

.


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• The devaluation and depreciation of rupee in the 90s would have encouraged the growth of export oriented small scale units particularly in garments, leather products and handicrafts sectors.

• Further, there is an emerging trend of Multi National Corporations (MNCs) sourcing products from small and medium enterprises in India.

• The setting up of Small Industries Development Bank of India (SIDBI) which has been assuming more and more development responsibilities of SSI, directly and indirectly has led to a qualitative change in the credit flow to SSI.


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SMALL SCALE INDUSTRY : PROBLEMS AND

PROSPECTS:

All these have resulted in sickness in SSI. Sickness in SSI is defined, according to Reserve Bank of India, as a unit which has:

i) Incurred cash loss in the previous accounting year and is likely to incur loss in the current accounting year leading to erosion of net worth cumulatively by 50 per cent of more.

ii) Defaulting to pay quarterly installments of interest four times or two half-yearly installments of principal on term loans


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Some of the following measures would go a long way in curbing sickness and promoting 'healthy' growth of SSI:

• The role of vast network of technical institutions needs to be assessed and reoriented for SSI technology development.

• Linkages between Council of Scientific & Industrial Research (CSIR) laboratories and small industries need to be developed and strengthened.

• 'Industry specific R&D centres may be set up in small industry clusters already identified. SIDBI, SFCs and respective State Governments along with small industry associations could set up such R&D Centres


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• SIDBI can set up district-wise branches to promote credit flow to SSI.

• Exclusive investment banks for SSI must be permitted to come up.

• SIDBI along with NSIC may study the ways and means to promote international sub-contracting for the benefit of SSI units.

• Visits of inspectors should be monitored and curtailed to the minimum.


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UNIT 9

SICKNESS IN INDIAN INDUSTRY


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Sickness may arise due to a multitude of reasons. The effects, however, are the same, e.g., financial hardships and unemployment of labour engaged in the industrial units falling sick, and wastage of national resources. It is, therefore, considered essential not only to devise suitable measures for dealing effectively with sick industrial undertakings but also to make suitable arrangements for monitoring and detecting industrial sickness at an early stage. ?-his calls for a clear understanding of different aspects of sickness.


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• Taking into consideration the above definition of a sick industrial unit, the following features may be identified with such a unit:

• A sick unit is one that has incurred cash losses in the immediately preceding two years and in the judgment of credit institutions, is expected to incur losses during the current year. This may be called the loss criterion.

• A sick unit is one whose net-worth (i.e;. paid-up share capital plus reserves) has been eroded to the extent of at lease 50 per cent. This may be called the net-worth erosion criterion.


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• A sick unit is one whose working capital advance account with the bank was irregular and this persisted over a period of time, say 12 to 18 months, and likely to become more persistent. This may be called working capital criterion.

• A sick unit is one which has defaulted in paying four consecutive half-yearly (or two consecutive annual) installments of principal and interest on tern loans, if any. This may be called the loan- repayment failure criterion.

• A sick unit is one which operates below 20 per cent of its installed capacity. This may be called low capacity utilization criterion.


99

• FACTORS RESPONSIBLE FOR INDUSTRIAL SICKNESS

• Lack of management expertise• Scant regard for the basic principles of business

management is another major cause of sickness.• Lack qf working capital, inadequate demand and non-

availability of raw materials


100

• Inadequate production planning and control and poor financial planning and management

• Inadequate assessment of market strategy

• Easy approval of small scale units

• Non-payment by the 'principals‘ to the ancillaries.


101

MEASURES TO TACKLE INDUSTRIAL SICKNESS:Non-SSI Sector:To tackle the problem of industrial sickness two broad

approaches have been suggested. The working group of Central Trade Unions (Report of the Working Group of Central Trade Unions 1978) recommended that the two relevant statutes, namely, the Industries (Development and Regulation) Act, 1951 and the Companies Act, 1956 should be amended to provide for:

(a) deterrent penalties to parties responsible for sickness of the units and for recovering all dues including compensation from their other corporate/personal assets;


102

MEASURES TO TACKLE INDUSTRIAL SICKNESS:

Non-SSI Sector:

b) expeditious takeover of the units likely to become sick or already sick;

c) simultaneous financial and management restructuring of the unit; and

d) preparation and implementation of a revival plan for the unit with provision of the requisite funds, barring reversion of the unit to the erstwhile management.


103

SSI Sector: The problem of industrial sickness in the SSI sector needs to be treated differently from the problem of sickness of the large units. The need is for increasing the competitive strength and viability of small units. For this purpose, the following measures may be considered.


104

The Government (through small industry agencies) can accord priority in allocation of raw materials, extending marketing assistance and granting certain rebates and concessions to small units and more so to such units which show better performance.

• Soft credit may be extended to small units to help then1 to tide over crisis situations.

• The government should take every possible measure to ensure payments by principals (large industrial units) to ancillary (SSI) units.


105

UNIT 10

PLANNING GOALS AND STRATEGIES

Block 3


106

• The main purpose of planning was to initiate the process of Industrialization and development which had remained inhibited due to an alien government. The national government was committed to raising the level of living of the Indian people by pursuing the task of development. This task cold not be completed during the short period of five years: it required sustained efforts spread over a number of plans.


107

LONG-TERM GOALS OF PLANNING: The Planning Commission, therefore, laid down

the long-term goals of planning. They were : (i) To increase production to the maximum

possible extent so as to achieve higher level of national and per capita income;

(ii) To achieve full employment; (iii) To reduce inequalities of income and

wealth; and (iv) To establish a socialist based on equality

and socialist justice and absence of exploitation.


108

PLANNING STRATEGIES ADOPTED IN VARIOUS PLANS

The First Five Year Plan (1951-56) was faced with three major problems :

(i)Influx of refugees from Pakistan and their rehabilitation;

(ii)Severe shortage of food as a result of the partition of the country and a major part of irrigated areas going over to Pakistan; and

(iii)mounting inflation due to the prevalence of shortages in economy as a result of disequilibrium caused due to the Second World War and subsequently the partition of the country.


109

Strategy in the First Plain (1951-56)

• The basic strategy was to achieve food self-sufficiency in the shortest possible time and to control inflation.

• The highest priority was, therefore, given to agriculture and irrigation.

• The strategy was successful in increasing self-sufficiency in food grains as also controlling inflation.


110

Strategy during the Second Plan (1956-61) • The strategy of the First Plan intended to give a big push to

`heavy industry’ and relatively low priority to agriculture. However, the plan was conscious about increasing the supply of consumer goods via. Small and cottage industries.


111

Strategy during the Third Plan:The planners realized that without a sharp increase in agricultural production, it was not possible to push a programme of Industrialization with emphasis on heavy industry. A two –legged strategy of development with emphasis on agriculture on the one hand and heavy industry on the other, was adopted.

Third plan gave top priority to agriculture with eh development of heavy and basic industries. Main aim of the Plan was establishment of self-reliant and self-generating economy.


112

Strategy during the Fourth Plan (1969-74)

• Two objectives : ‘Growth with stability’ and Progressive achievement of self-reliance.

• To achieve growth with stability seed water fertilizer technology was started to boost production in assuredly irrigated areas.


113

Strategy during the Fifth Plan (1974-79)

Main objectives : removal of poverty and attainment of self-reliance. Main elements of the strategy : (i) 5.5% average growth rate of GDP, (ii) National minimum needs programme, (iii) Emphasis on agriculture, key and basic industries producing goods for mass consumption, (iv) A good public distribution system (PDS) to supply essential commodities to the poor at reasonable prices, (v) Vigorous export promotion and import substitution, and (vi) Restraint on inessential consumption.


114

Strategy during Janata Party’s Sixth Plan (1978-83)

Direct attack on the problem of unemployment, under-employment and massive poverty.

Elements of strategy adopted :

(i) Enlargement of employment in agriculture and allied activities;

(ii) Encouragement to household and small industries; (iii) Fostering area planning for integrated development;

and (iv) Revised minimum needs programme.


115

Strategy of Seventh Plan (1985-90):

• Food, work and productivity – the focus of the Plan. • GDP growth rate (average) was 5.5% per annum and GDP

per capita by 3-3.5% per annum. • Agricultural production grew at an annual average rate of

3.9% and industrial production at 8.6%.


116

Planning Strategy during Eight Plan (1992-97)

Planning Strategy redefined the role of the public sector. a) public sector investment to be limited toad reaps of

infrastructure development for facilitating growth; and

b) public sector to concentrate on areas to meet social needs like health and education as also to undertake public distribution system to protect the weaker sections of the society.


117

THREE MAJOR STRATEGIES ADOPTED SINCE 1956 :

1. NEHRU-MAHALANEOBIS MODEL OF GROWTH

• The model emphasised rapid development of heavy industry so as to create an industrial base so that India becomes self-reliant in the capital goods sector.


118

Reasons fro adopting this strategy : • a) British rule deliberately denied the development of heavy

industry; • b) Indian industrial structure had a narrow base mainly

dependent on consumer goods industries; • c) An industrial economy will raise per capita productivity;

and • d) Rapid Industrialization was essential for agricultural

development as well as the development of other sectors of the economy.


119

2 GANDHIAN MDOEL OF DEVELOPMENT

Gandhian Model emphasises : • 1. Employment-oriented planning to replace

production oriented planning. • 2. on agriculture as a means of enlarging employment

experience of Punjab and Haryana a shinning example.

• 3. On small industries as against large industries • 4. that heavy and basic industries to be developed by

the public sector.

Gandhian model intended to tackle the problem of distribution of income at the production and not at the consumption level.


120

3. RAO-MANMOHAN MODE OF DEVELOPMENT

Initiated in 1991, it emphasized privatization and globalization of the economy.

i) Although the government failed to transfer ownership of public sector undertakings, it did success in opening hitherto reserved areas to the private sector.

ii) It abolished licensing in all industries except a small list of 18 industries.


121

iii) It freed MRTP companies from the ceiling limit of assets

iv) Foreign direct investment was facilitated. Automatic approvals upto 51 per cent of equity. Proposal requiring more than 51% equity could be considered on a case-by-case basis.

v) Functioning of public sector companies to improve by granting more autonomy and making management more professional.

vi) Reducing imports barriers to globalize the economy.


122

UNIT 11

EVOLUTION OF INDUSTRIAL POLICY


123

Industrial Policy of 1948


Industrial Policy Statement 1977


Industrial Policies


124

INDUSTRIAL POLICY OF 1948

The industrial policy of the British Government in India was motivated by considerations of using India as a colony of the British empire. The British were, therefore, not interested in the industrialization of India.


125

The 1948 Industrial Policy Resolution envisaged :

• i) Mixed economy for India in which the public and private sector can co-exist.

• ii) The resolution announced `no nationalization for next 10years’. Later, if nationalization is considered necessary, compensation would be paid.

• iii) The Resolution recognized the need for foreign capital but insisted that majority interest in ownership and management will remain in Indian hands.


126

INDUSTRIAL POLICY OF 1956Industries were classified into three

categories

Schedule A : Industries which are to be the exclusive monopolies of the State – 17 industries listed in this category were : Arms and ammunition, atomic energy, iron and steel, heavy castings, heavy machinery, heavy electrical industries, coal, mineral oils, iron ore, and other important minerals like copper, lead and zinc; aircrafts, air transport, railway transport, shipbuilding, telephone, telegraph and wireless equipments, generation and distribution of electric energy.


127

Schedule B : Those which re to be progressively State owned and in which the State would gradually setup new undertakings – Twelve industries were included in this category : Other mining industries, aluminum and other non-ferrous metals not included in Schedule A; machine tools Ferro-alloys and tolls steels, the chemical industry, anti-biotic another essential drugs, fertilizers, synthetic rubber, carbonization of coal, chemical pulp, road transport and sea-transport.

Schedule C : All other remaining industries and their development was left to the private sector.


128

INDUSTRIAL POLICY STATEMENT, 1977:

Industrial Policy Statement, 1977 - Policy drafted by the Ghanaians in the Janata Party. The main aim of the policy was to correct the distortions in the implementation of the Industrial Policy (1956). Major distortions :

(a) Unemployment has incre4ased; (b) rural-urban disparities have widened; and (c) rate of real investment has stagnated.


129

Chief features : (i) Major thrust on the development of small

industries. Small sector classified into three categories : (a) cottage and household industries to provide self-employment; (b) tiny sector having investment in plant and machinery upto Rs. 1 lakh; and (c) small industries with an investment upto Rs. 10 lakhs and ancillaries with an investment upto Rs. 15 lakhs.


130

Measures undertaken : i) Reservation list increased from 180 to 807 items. ii) District Industries Centres to be set up so that the

services and support required by SS & Is be availed under one roof.

iii) Khadi and village Industries Commission to be strengthened. Nay Khadi or Polyester Khadi to be introduced.

iv) Appropriate technology to be developed for small and village industries.


131

UNIT 12

REGULATORY AND PROMOTIONAL POLICY FRAMEWORK


132

The regulatory policy framework had four major objectives :

1. The promotion of heavy industry with an emphasis on the public sector.

2. Economic self-reliance, which translated into broad efforts at import substitution and restrictions on technology imports to promote indigenous innovation.

3. Protection to small industry sector 4. Balanced regional development


133

The regulatory policy framework comprised a variety of policy instruments :

• Reservation of vast areas of industrial activities for the public sector;

• Industrial licensing to regulate and control investments in industry and locations;

• Legislation to control large and dominant firms; • Legislation to control foreign investment and technology

inflow;


134

• Comprehensive policies and incentives to protect small scale industry;

• Restriction on location of industrial units and incentives to move into backward regions;

• Price administration of infrastructural inputs; and • Taxation.


135

INDUSTRIAL LICENSING

The salient features of the IDR Act 1951 are : - Existing undertakings need to be registered with the

Government within the prescribed time limit - New units are permitted only through an industrial

license - Government has the power to conduct an

investigation, assume management control provide relief or control supply and distribution of products of certain industrial undertakings.


136

As per the IDR Act 1951 industrial licensing is mandatory :

1. To set up a new manufacturing unit for substantial expansion. Upto 1966, substantial expansion meant expansion of production by more than 10 per cent of the licensed capacity. Since 1966, substantial expansion means increasing production by more than 25 per cent of the licensed capacity.

2. To change the location of the unit.3. To manufacture a new product, apart from the one fro

which license is already obtained by an existing manufacturing unit.


137

CONTROL OF LARGE OR DOMINANT FIRMS

The control over monopolies and restrictive trade practices in exercised through

(i) setting up Monopolies and Restrictive Trade Practices Commission as a permanent body,

(ii) regulation of substantial expansion, establishment of new undertakings, mergers, amalgamations, take-over, appointment of directors and registration of dominant undertakings, and

(iii) registration and control of agreements relating to restrictive trade practices.


138

• Thus, the MRTP Act provided the Government an additional instrument for controlling large firms. In other words, large firms faced additional barriers to entering new lines of manufacturing or expanding through the MRTP Act.


139

FOREIGN INVESTMENT CONTROL : Foreign Exchange Regulation Act (FERA) 1973 put

further restrictions on foreign investment. FERA, with certain exceptions, put a general ceiling on foreign equity participation in the country.

• FERA forced foreign equity to come down to 40 per cent or less or else withdrawal from the country altogether.

• FERA emerged as a major barricade or discouraging/restrictive factors for fresh foreign investment.


140

PUBLIC SECTOR ENTERPRISE PREFERENCES

• Vast areas of industry and infrastructure were exclusively reserved for the public sector. These included railways, telecommunications, air transport, defense, minerals, coal etc. The objective was to enable public enterprises to reach the “commanding heights” of the economy.


141

SMALL SCALE INDUSTRY:Principal measures of protection for SSI comprised :

- Reservation of products for exclusive manufacturing in SSI sector. - Restrictions on the growth of output and capacity in the large scale

industry sector producing items reserved for SSI sector - Concessional credit from the banks - Excise and sales tax exemptions/concessions - Exemption from many labor legislations - Exemption from licensing - Preferential access to raw materials, both domestic and imported - Purchased support through Government procurement and price

preferences for SSI products etc.


142

Services

ADMINISTRATED PRICES:Administered price policy had three major objectives :

1. To provide certain products at concessional prices to favored groups such as Government, public sector units and the poor;

2. To provide subsidies through the pricing mechanism to encourage production of items such as fertilizer; and

3. To control inflation by limiting price increases that might have arisen as a result of shortages of items such as steel.


143

TAXATION • High rates of tax structure, both direct and indirect, formed

another significant aspect of the regulatory framework.


144

• Manufacturing Value Added (MVA) : The difference between the value of total manufacturing output and the cost of raw materials, services and components purchased.


145

UNIT 13

INDIA’S FOREIGN TRADE

Block 4


146

INTERNATIONAL TRADE

IMPORTEXPORT


147

• The high growth rate of India’s exports in the 70s were mainly due to:

• The increase in the unit value index of exports• The increase in the quantum index of exports• New markets for India’s exports in oil producing countries

with the boom in oil prices• Increase in the price competitiveness of Indian exports as a

result of a rise in the world prices of all commodities• Boom in the value of agro-based exports such as oil cakes,

marine products and sugar; and• Increase in project exports to the Middle East countries.


148

In 1990-91, export growth once again declined but only marginally to about 18 percent. This deceleration in exports was attributed to:

(1) A slow down in the expansion of world trade. The volume of world trade decelerated from 7.3 percent in 1989 to 4.2 percent in 1990 and further to 0.9 percent in 1991.

(2) Loss of export markets in the Middle East due to the Gulf crisis.


149

(3) Political and economic upheavals in Eastern Europe, which earlier provided a sheltered market to Indian exports.

(4) Import curbs introduced during 1990-91 in response to foreign exchange shortage and intensified after the Gulf crisis, affecting export-related imports.

(5) Movement in the exchange rate which was broadly supportive of exports since 1986-87 becoming adverse thus affecting competitiveness of exports; and

(6) Internal law and order problems in some states.


150

However, in the ’90s agricultural development has been gaining increased attention from the policy markers:

• 1. The Government of India has brought out an Agricultural Policy which lays more thrust on agricultural development and exports.

• 2. The food processing industry has been accorded a ‘sun rise industry’ status for its promotion, in order to prevent the wastage of fruits and vegetables due to lack of processing facilities and to promote exports of processed foods.


151

• 3. The export obligation of Export Oriented Units (EOUs) related to agriculture and allied products has been brought down to 50 percent. This enables these EOUs to sell the remaining 50 percent of the production in the domestic market thereby enabling them to settle down quickly.

• 4. Some of the state governments have taken policy decisions to enable food processing units to acquire agricultural land for cultivating the required raw materials for in house consumption.

• 5. Even ‘contract farming’ is encouraged to promote agriculture industry linkages.


152

The destination of India’s exports and imports has some important implications:

• Despite relative decline in importance, OECD countries are the major destination for Indian exports and major source of imports.

• Among the OECD countries, the USA has emerged as the leading trade partner of India.

• The importance of developing countries, particularly Asian countries as trade partners is growing gradually.


153

• The trade relations with East European countries including Russia have declined drastically since 1990-91.

• Due to P.O.L. imports, the OPEC is an indispensable trade partner but its importance in terms of trade exports is not too significant.

• India’s trade relations with South American and African countries are negligible.


154

UNIT 14

INDIA’S BALANCE OF PAYMENTS


155

INDIA BALANCE OF PAYMENT

CAPITAL ACCOUNT RESERVE FUNDCURRENT ACCOUNT


156

IMPORTANCE OF BALANCE OF PAYMENTS:• The balance of payments is the economic barometer which

can be used to appraise a nation’s short-term international economic prospects, to evaluate the degree of its international solvency, and to determine the appropriateness of the exchange rate of country’s currency.


157

• Balance of payments: The balance of payments of a country is a systematic record of all economic transactions between the residents of a country and the rest of the world. It is composed of all receipts on account of goods exported, services rendered and capital received by residents and payments made by them on account of goods imported, services received and capital transferred to non-residents or foreigners.

• If the balance on current and capital accounts is negative, it would represent balance of payments “deficit”.


158

• Table 14.7: Balance of Payments : 1995-96 to 2001-02• (in US $ million) 1999-00 2000-01 2001-021. Exports 37542 44894 449152. Imports 55383 59264 57618of which: POL 12611 15650 140003. Trade balance –17841 –14370 –127034. Invisibles (net) 13143 11791 14054Non-factor services 4064 2478 4199Investment income –3559 –3821 –2654Pvt. Transfers 12256 12798 12125Official transfers 382 336 384


159

1999-00 2000-01 2001-025. Current account balance –4698 –2579 13516. External assistance (net) 901 427 12047. Commercial borrowing (net) @ 313 4011 –11478. IMF (net) –260 –26 09. NR deposits (net) 1540 2317 275410. Rupee debt service –711 –617 –519


160

1999-00 2000-01 2001-02

11. Foreign investment (net) 5117 4588 5286of which:(i) FDI (net) 2093 1828 3266(ii) FIIs 2135 1847 1505(iii) Euro equities &Others 889 913 51512. Other flows (net) + 3940 –2291 282813. Capital account total (net) 10840 8409 1040614. Reserve use (–increase) –6142 –5830 –11757


161

• EXCHANGE RATE AND BALANCE OF PAYMENTS : RUPEE CONVERTIBILITY

• In the Union Budget, 1997-98, the Finance Minister has proposed to constitute a Committee of experts to recommend a fixed time period to introduce capital account convertibility. The achievement of:

• Sound economic growth (in the range of 8 to 10 percent per annum)

• Efficient macro-economic management, (with negligible fiscal deficit)

• Controlled current account deficits, if not surplus; and steady and consistent increase in foreign exchange reserves (in the range of US $ 40 to 50 billion)


162

UNIT 15

INDIA’S EXPORT-IMPORT POLICY


163

• Export-Import (EXIM) Policy alternatively known as Trade Policy refers to Policies adopted by a country with reference to exports and imports.


164

A developing country may adopt commodity specific trade policies such as the following:

• 1. Primary Outward Looking Policies: Aimed at encouraging agricultural and raw material exports.

• 2. Secondary Outward Looking Policies: Aimed at promoting manufactured exports.

• 3. Primary Inward Looking Policies: Objective is to achieve agricultural self sufficiency.

• 4. Secondary Inward Looking Policies: Objective is attaining manufactured commodity self-sufficiency through import substitution.


165

Indian Policy incentives to promote exports can be broadly classified as under :

• 1. Special facilities to make the material inputs needed by exporters available, at reduced cost.

• 2. Free Trade Zones and Export Oriented Units.• 3. Facilities for making capital equipments available, at

reduced rate.• 4. Incentives for and assistance with export marketing.• 5. Profit tax and credit subsidies and• 6. Subsidies on domestic raw materials.


166

• 1. Special Facilities for Material Inputs Availability of qualitative raw materials in sufficient

quantity and at the right time, at competitive prices, is crucial for export growth. In India this was ensured through special import licences for exporters (known as replenishment (REP) and imprest licences) combined with duty drawback and cash compensation.


167

1. Special Facilities for Material Inputs

4. Export Marketing

3. Availability of Capital Equipments

at Reduced Rates

2. Free Trade Zones and Export

Oriented Units (EOU)

5. Profit Tax and Credit Subsidies

6. Subsidies on Domestic Raw Materials

EXPORT POLICIES AND INCENTIVES


168

EXPORT-IMPORT POLICY (1997-2002)

Some of the major features of the new EXIM Policy are:

• The policy shifted 542 items out of the restricted list to the Special Import License (SIL) and OGL lists.

• About 60 items shifted out of SIL to OGL.• About 150 items can now be imported against SIL.


169

• The policy has done away with the Value Based Advance Licence Scheme (Vabal) and passbook scheme and introduced a new duty entitlement Pass Book scheme.

• Under this scheme, the exporters will be issued a Pass Book. If he seeks this on pre-export basis, he would be given ad-hoc duty entitlement calculated at 5 percent of average f.o.b. value of exports in the preceding three years. This entitlement would enable him to import required inputs duty free.


170

To a large extent, these objectives have been met :• In 1991, imports were regulated by means of a

positive list of freely importable items. Since 1992, imports are regulated through a limited negative list, which has been consistently pruned year by year.

• Quantitative restrictions on imports of most intermediate inputs and capital goods have been eliminated.


171

• In July 1991, out of 5021 Harmonized System (HS) tariff lines (6 digits), 4000 lines were subject to import licensing restrictions. As of December 1995, more than 3000 tariff lines covering raw materials, intermediates and capital goods are free of import licensing requirements.


172

• A large number of items covering 1487 tariff lines whose import is otherwise restricted, are now allowed to be imported under freely tradable Special Imports Licences.

• Customs duty rates have been substantially cut down across the board, from a peak of 300 percent in 1990 to a peak of 40 percent in 1997.


173

Broadly, India’s trade policy can be aggregated into essentially two categories:

• (i) Those that are associated with inducing import substitution as well as those that are import repressive or import rationing, and

• (ii) Those that influence the level and composition of exports of goods and services.


174

India’s import regime had two major kinds of protective barriers:

(i) Non-tariff controls and

(ii) Tariffs.


175

• Non-Tariff Controls: Non-tariff controls were the principal means of regulating imports and protecting local industries. These controls till the 90s included the

(a) Import licensing system,

(b) Canalization,

(c) Actual user policy and

(d) Phased manufactured programmes.


176

Tariffs: The tariffs consist of:• (a) basic customs duties, mostly ad valorem, applied

to the c.i.f. price of the import.• (b) an auxiliary duty applied to the c.i.f. price, and• (c) additional duties equivalent to excise taxes

imposed on locally produced products, applied to the c.i.f. price plus the basic customs duty and auxiliary duty.


177

UNIT 16

FOREIGN CAPITAL AND COLLABORATIONS


178

MERITS OF FOREIGN CAPITAL An industrializing economy like India can greatly benefit in

different ways by welcoming foreign capital into the country:

• 1. India can have better technology to exploit the unutilized and under utilized national resources.

• 2. Foreign investment and technology will enable technology up gradation and modernization of industry to improve quality and productivity.

• 3. Foreign investment will supplement domestic savings and capital formation towards accelerating the rate of investment for economic development.


179

• 4. Foreign investment and technology will help to build up the much needed infrastructure for the development of agriculture and industry

• 5. Foreign investment will bring marketing expertise which would enable Indian goods to penetrate the international market on a larger scale.

• 6. Foreign investment will promote employment generation by absorbing the relatively economical, particularly skilled labor force.


180

• FERA Act 1947 is an act to consolidate and amend the law regulating certain payments, dealing in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interest of the economic development of the country.


181

Table 16.7 : Foreign Direct Investment Inflow : 1990-91 to 2002-03.

(US $ Million)

Year Amount

1990-91 97

1991-92 129

1992-93 315

1993-94 586


182

Year Amount

1994-95 1314

1995-96 2144

1996-97 2821

1997-98 3557

1998-99 2462


183

Year Amount

1999-2000 2155

2000-01 (R) 4029

2001-02 (R) 6131

2002-03 (P) 4660


184

UNIT 17

INDIA’S EXTERNAL DEBT


185

• India has been borrowing both from internal and external sources since Independence. The borrowings of the Government is called Public Debt.

• Borrowing from internal sources is referred to as internal debt whereas borrowing from external sources is called external debt.


186

External

Debt

(i) Multilateral

Debt(ii) Bilateral

Loans

(iv) Export Credit

(v) Commercial

Borrowing

(iii) Loans from the

International

Monetary Fund (IMF)

(vi) Non-Resident

Deposits

(vii) Rupee Debt

(viii) Short-term

Debt

External Debt


187

The major factors which led to a sharp rise in India seeking external assistance were:

• Steep rise in the international prices of crude oil and petroleum products,

• Increase in the prices of food and fertilizers in the world market.


188

SOURCES OF EXTERNAL ASSISTANCE FOR INDIA

• 1. Consortium Members: Comprising Austria, Belgium, Canada, Denmark, France, West Germany, Italy, Japan, Netherlands, Norway, Sweden, UK, USA, the World Bank, and International Development Association.

• 2. East European Countries: Which include Bulgaria, Czechoslovakia, Hungry, Poland and Yugoslavia.

• 3. Others: Consist of Australia, European Economic Community (E.E.C.), Oil Producing & Exporting Countries (O.P.E.C.), etc.


189

The Government of India and the Reserve Bank of India have introduced a number of measures to contain the growth of expensive external debt. These include:

• Moderation in the interest rates on non-resident deposits,

• Discontinuation of some high cost forms of non-resident deposits where the Government bore the exchange risk,


190

• Encouragement to the corporate sector to prepay expensive external debt.

• Limits on external commercial borrowings and prioritization of such borrowings in favor of infrastructure, term lending institutions and exporters.

• A more open and pragmatic policy for non debt creating foreign direct investments.


191

• Soft Loans: A loan bearing no rate of interest or an interest rate which is below the true cost of capital lent. The International Development Association (IDA) gives soft loans to developing countries for long term capital projects.


192

UNIT 18

INDUSTRIAL POLICY OF 1991

BLOCK 5


193

INDUSTRIAL LICENSING: Industrial licensing is the most important instrument, which has been used by the Government for directing allocation of resources between industries and region. But in dynamic global market, enterprises must be enabled to swiftly respond to the fast changing external conditions.


194

Keeping these objectives in view the following changes are introduced:

1. All areas of industrial activity excluding areas of security and strategic importance (Annexure 1) are thrown open to private investments.

2. Industrial licensing has been abolished for all industries including those (a) which either strategic and environmental concerns dominate or the import content is exceptionally high (Annexure II) and (b) which are reserved (836 items, reduced to 749 by 2001-02) for small industry manufacturing.


195

3. Industrial licensing is not needed in location other than cities having a population of more than one million, as per the 1991 census (Annexure-III).

4. Industrial licensing is not required not only for new units but also for new products, as also substantial expansion and change of the location for existing units.


196

FOREIGN INVESTMENT

• Accordingly the Foreign Exchange Regulation Act (FERA), 1973 has been amended to read as Foreign Exchange Management Act. The salient features of the new policies towards foreign investment are:

• 1. Automatic approval for foreign equity participation upto 51 per cent is granted in high priority industries (Annexure IV).

• 2. Foreign trading companies can have majority equity (51 per cent) participation in trading houses engaged in export activity.


197

• 3. Foreign investment in hotel and tourism related industry upto 51 per cent equity is permitted.

• 4. Foreign investment upto 50 per cent in the Mining sector is allowed.


198

Foreign Technology Agreements (FTA): R.B.I. accords automatic approval to foreign technology agreements within prescribed monetory limits:

• Lumpsum payment upto Rs. 10 million.• Royalty payments upto 5 per cent of domestic sales

and 8 per cent of exports over a period of 10 years from the date of the agreement or over a period of 7 years from the date of commencement of production.

• These payments are subject to an overall ceiling of 8 per cent of total sales over a period of 10 years from the date of agreement of commencement of commercial production.


199

PUBLIC SECTOR POLICY:• However the performance of public sector enterprises

has been far from satisfactory. Its protected growth over a period of time, has resulted in many shortcomings:

• insufficient growth in productivity• poor project management• inadequate attention to research and development• low rate of return on investment


200

In 1991 set the future priorities for public enterprises as follows:

• essential infrastructure goods and services• exploration of and exploitation of oil and minerals• manufacture of goods of strategic importance such as

defense equipments etc.• development of technology and manufacturing

capabilities in crucial areas for long-term economic development.


201

• MRTP ACT

The principal objectives of the act were:• Prevention of concentration of economic power and

control of monopolies.• Prohibition of monopolistic, restrictive and unfair

trade practices


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• IMPACT OF INDUSTRIAL POLICY 1991• An interesting feature of foreign investment inflow is

that it has flowed into different segments of industry such as:

• a) basic goods industries comprising of aluminium, cement, chemicals, fertilizers, metallurgy, power generation etc.

• b) capital goods industries comprising of engineering, telecom, machine tools, computer hardware, textiles machinery, etc.


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• c) intermediate goods industries consisting of paper and paper pulp, petrochemicals, plastics, refineries, rubber, glass, industrial gas, electrodes etc.

• d) consumer goods industries which include, among others, detergents, domestic appliances, electronics, food processing, textiles, pharmaceuticals, etc.

• e) automobiles, consisting of auto ancillaries, automobiles, tyres and tubes.


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• LIST OF INDUSTRIES RESERVED FOR THE PUBLIC SECTOR

• 1. Arms and ammunition and allied items of defence equipment, defence aircraft and war ships.

• 2. Atomic Energy• 3. Coal and Lignite• 4. Mineral Oils• 5. Minerals specified in the schedule to the Atomic

Energy (Control of Production and use.) Order,1953• 6. Railway Transport


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LIST OF INDUSTRIES FOR WHICH INDUSTRIAL LICENSING IS COMPULSORY

• 1. Coal and Lignite• 2. Petroleum (other than crude) and its distillation products• 3. Distillation and brewing of alcoholic drinks• 4. Sugar


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• 5. Animal fats and oils• 6. Cigars and cigarettes of tobacco and manufactured

tobacco substitutes• 7. Asbestos and asbestos-based products• 8. Plywood, decorative veneers and other wood based

products such as particle board, medium density fibre board/block board

• 9. Tanned or dressed fur skins, chamois leather


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• 10. Paper and News print except biogas-based units• 11. Electronic aerospace and defense equipment: all types• 12. Industrial explosives including detonating fuses, safety

fuses, gun powder, nitrocellulose, and matches• 13. Hazardous Chemicals• 14. Drugs and Pharmaceuticals (according to drug policy)• 15. Entertainment Electronics (VCR, Color TVs, C.D.

players, Tape Recorders.)


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UNIT 19

ECONOMIC REFORMS : LIBERALISATION, GLOBALISATION AND PRIVATISATION


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• LIBERALISATION: The main aim of the liberalization was to dismantle the excessive regulatory framework that curtailed the freedom of enterprise.

• The major purpose of liberalization was to free the large private corporate sector from bureaucratic controls.


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• GLOBALISATION: Globalization is primarily economic phenomenon, involving the increasing interaction, or integration, of national economic systems through the growth in international trade, investment and capital flows.


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• Globalization is considered to be an important element in the reforms package. It has four parameters :

• (i) Reduction of trade barriers so as to permit free flow of capital and services across national frontiers;

• (ii) Creation of an environment in which free flow of capital can take place;

• (iii) Creation of an environment permitting free flow of technology among nation-states;


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To pursue the objective of globalization, the following measures have been take:

(i) Reduction of import duties:

(ii) Encouragement of foreign investment:

(iii) Encouragement to foreign technology agreement:


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• PRIVATISATION:

Privatization is, therefore, a process of involving the private sector in the ownership or operation of a state owned or public sector undertaking. It can take three forms:

(i) Ownership measures;

(ii) Organizational measures; and

(iii) Operational measures.


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Ownership

measures

Total

decentralization Joint Venture

Workers’

co-operativeLiquidation


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Organizational

measures

Multilateral

DebtA holding

company

Restructuring Leasing


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Operational measures are aimed at improving the efficiency and productivity of an organisation. They include:

• a) Grant of autonomy in decision-making• b) Provision of incentives for workers and executives• c) Freedom to acquire certain inputs from the market• d) Development of proper criteria for investment

planning• e) Permitting public enterprises to raise resources

from the capital market.


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Liberalization, globalization and privatization are all means to achieve certain ends of the society, just as nationalization and regulatory frame work were intended to achieve certain goals. These are:

• 1. To achieve high rate of growth of national and per capita income;

• 2. To achieve full employment;• 3. To achieve self-reliance;


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• 4. To reduce the inequality of income and wealth;• 5. To reduce the number of people living below the

poverty line;• 6. To develop a pattern of society based on equality

and absence of exploitation.


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UNIT 20

FINANCIAL SECTOR REFORMS


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“Not even love has made so many fools of men as the pondering over the nature of money.”

—W.E. Gladstone, (1844)


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• The four broad functions of money may be described briefly as follows:

• I. Primary Functions– Money as a Unit of Value:– Money as a Medium of Exchange:

• II. Derivative Functions– Money as a Standard of Deferred Payments:– Money as a Store of Value:


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• Kinds of Money• Ordinary money M may be narrowly defined as the

sum of currency, C, and demand deposits, DD of banks held by the public. M = C + DD

• High-powered money H• H = C + R

currency held by the public, C

cash reserves of banks, R


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INDIAN FINANCIAL SYSTEM


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• The balance sheet identity for the RBI is as follows:• Monetary liabilities (ML) + Non-Monetary liabilities

(NML) = Financial assets (FA) + other assets• If net Non-monetary liabilities (NNML) = NML –

other assets, then ML = FA–NML


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The role played by development banks is of two broad types.

• 1. Quantitative Role• 2. Qualitative Role


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• Cash Reserve Ratio (CRR): The ratio of cash required to be maintained from time to time with the RBI by the banks against their total net demand and time liabilities (deposits).

• Statutory Liquidity Ratio (SLR): The proportion of deposit liabilities to be maintained by a bank in the form of specified liquid assets.


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• Investment Institutions: All institutions making investments for commercial or industrial purposes. This includes commercial banks, development banks (or institutions) cooperative banks and non-banking institutions including LIC, GIC, UTI, and private finance companies.

• Development Banks: Specified finance institutions performing the twin functions of providing medium and long term finance and performing various promotional roles for economic development of the country.


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• Commercial Banks: Banks accepting deposits from the public and lending money for short term requirements of industrial and commercial enterprises.

• Cooperative Banks: Banks registered under the provisions of Cooperative Societies Act and providing credit mainly for agricultural purposes.


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• Public Sector Banks: Commercial banks owned and managed by the Government (after nationalization), banks not falling in this category are called private sector banks.

• Monetary Policy: Policy of the Government concerned primarily with the maintenance of stability in domestic prices and exchange rate stability. The subsidiary objectives may be social justice, growth etc.


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UNIT 21

FISCAL SECTOR REFORMS


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• Major Functions of Fiscal Policy• There are three major functions of a fiscal policy:• i) The allocation function of budget policy, that is, the

provision for social goods. It is a process by which the total resources are divided between private and social goods and by which the mix of social goods is chosen.

• ii) The distribution function of budget policy, that is distribution of income and wealth in accordance with what society considers at ‘fair’ or ‘just’ distribution.


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• iii) The stabilization function of budget policy, that is maintaining high employment, a reasonable degree of price stability and an appropriate rate of economic growth, with due consideration of its effects on trade and the balance of payments.


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UNIT 21

FISCAL SECTOR REFORMS


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DOMAIN OF PUBLIC FINANCE

A.C. Pigou began his classic volume, Public Finance with the following passage: “In every developed society there is some form of Government organization which may or may not represent the members of society collectively but certainly has coercive authority over them individually.”


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• Public finance is the study of the financial activities of governments and public authorities. It is a part of the study of economics and is, therefore, concerned with the allocation of scarce resources.


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• Fiscal Policy• the Seventh Five Year Plan (1985-90), “through it

(i.e. fiscal policy) the Government creates, sustains the public economy consisting of the provision of public services and public investment; at the same time it is an instrument for reallocation of resources according to national priorities, redistribution, promotion of private savings and investments, and the maintenance of stability.”


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• Major Functions of Fiscal Policy• There are three major functions of a fiscal policy:• i) The allocation function of budget policy, that is, the

provision for social goods. It is a process by which the total resources are divided between private and social goods and by which the mix of social goods is chosen.


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• ii) The distribution function of budget policy, that is distribution of income and wealth in accordance with what society considers at ‘fair’ or ‘just’ distribution.

• iii) The stabilization function of budget policy, that is maintaining high employment, a reasonable degree of price stability and an appropriate rate of economic growth, with due consideration of its effects on trade and the balance of payments.


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• Theory of Social Goods• The allocation function of the budget policy is

provided a rationale by the theory of social goods. This is of prime importance to the economies of the public sector. The market economy, if certain conditions are met, enables an efficient use of resources for providing private goods.


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A good tax structure has the following requirements:• 1. Tax burden must be equitably distributed among

citizens. Each should pay his or her fair share.• 2. Excessive tax burden (which may interfere with the

economic decisions in otherwise efficient markets) should be avoided.

• 3. The cost of administration and compliance should be kept at the lowest possible level.


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• 4. The tax structure should facilitate the objectives of fiscal policy of stabilization and growth.

• 5. Where tax policies are used to achieve other objectives such as encourage investment in certain sectors of the economy, interference with the equity of the system should be minimum.


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INDIA’S FISCAL POLICY:

Fiscal Reforms in India: Policy Measures and Developments

• Fiscal reforms in the States were, inter alia, necessitated by:• Growing fiscal imbalances• Sluggishness in Central transfers resulting from falling tax

to GDP ratio.


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• Introduction of reform –linked assistance as a part of Medium-Term Fiscal Reform Progamme on the basis of the recommendation of the Eleventh Finance Commission and

• Adjustment programme undertaken in some of the States, which was linked to borrowings from multilateral agencies.


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• TAX REFORMS• In formulating its recommendations the Tax Reforms

Committee (1994) headed by R.J. Chellaiah enunciated the following goals which formed the blueprint for tax reforms:

• i) reduction of rates of all major taxes viz. customs, income tax, and central excise;


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• ii) widening of the bases of all taxes by removing or curtailing exemptions and concessions, drastic simplifications of the laws and procedures;

• iii) replacement of the existing taxes on domestic production and trade by a value added tax (VAT);

• iv) a thorough revamping and modernization of the administration.


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Terms: • Direct Taxes: Taxes imposed on individuals or

householders who also bear the burden i.e. the impact and the incidence of tax is on the same person e.g. Income tax, wealth tax, etc.

• Excess Burden: Burden placed on the economy of a country which is in excess of the revenues received by the Government.


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• Fiscal Crisis: Crisis resulting from excessive fiscal deficits, caused mainly by excessive public expenditure.

• Fiscal Deficit: The excess of Government expenditure over its revenue.


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• Fiscal Policy: Policy of the Government concerned with allocation, distribution and stabilization functions.

• Horizontal Equity: The Principles that tax payers with equal ability to pay should be required to contribute equally.

• Income Tax: Tax imposed on incomes viz. individuals, Hindu Undivided families, firms, companies and cooperatives etc.


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• Indirect Taxes: Taxes imposed on an entity at some point in the chain from production of goods to their distribution e.g. sales tax, excise and customs duties. Since the burden of the tax can be passed on to others, the impact and incidence of tax is not on the same person.

• Merit Goods: Though not purely public goods, the provision of such goods is supposed to be the moral responsibility of the government, e.g., health care services, primary education, sanitation etc.


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• Multiplier Effect: Ratio of incremental increase in aggregate expenditure in the economy to one unit of increase in government expenditure.

• Personal Taxes: Taxes imposed on tax payers’ income and borne by individuals/householders.

• Public Debt: The debt of the Government plus the debt of the departmental public enterprises, e.g. Railways.


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• Public Expenditure: Expenditure incurred by the Government for public welfare and maintenance of public systems.

• Public Finance: The study of the financial activities of Government and public authorities. It represents an aspect of the Government concerned with revenue, expenditure, budgeting and resource allocation with the overall objective of promoting economic well being of the citizens and ensuring distributive justice.


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• Social Goods: The goods provided by the Government free or at subsidized rates in the form of public services or utilities e.g. parks, roads, bridges, educational facilities etc. Available to all citizens, such goods are required for the welfare of the society as a whole, but the market often fails to provide them.

• Tax Incidence: The effect of a budgetary tax measure on individuals, output or employment. It refers to distributional effects of budgetary measures.


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• Vertical Equity: The principle that tax payers with unequal capacities to contribute should be required to pay different amounts agreeing to their capacities.

• Value Added Tax: Tax imposed on the value addition made/contributed by a taxable entity.


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UNIT 22

ECONOMIC REFORMS AND SOCIAL JUSTICE


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As per the World Development Report/indicators 2000-01, India was the tenth fastest growing economy in the world in terms of GDP per capita. Only China (8.0%), South Korea (6.6%), Hong Kong (6.0%), Thailand (5.5%), Singapore

(5.1%), Indonesia (4.5%) and Pakistan (4.2%) grew faster than India (3.8%). Last five years have witnessed a GDP growth rate of average 6 percent in a scenario of depressing growth rates of America, Europe and several Asian countries barring China.

ECONOMIC REFORMS AND GROWTHRATE OF GDP:


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ECONOMIC REFORMS AND FOREIGNINVESTMENT


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Foreign Direct Investment refers to investment made by foreigners in terms of fixed asets as well as working capital.

Inflation is a general increase in prices and fall in the purchasing power of money. It is measured by a rise in the wholesale price index. To have an idea of its impact on the common man, inflation is measured by consumer price index.


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Multinational corporations are business organisations operating in several countries.

Portfolio Investment is a range of investments held by a person or a company in the form of equity or shares.

Poverty Ratio indicates the proportion of total population living below the poverty line.


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THANKS

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