Professional Documents
Culture Documents
BUSINESS ENVIRONMENT
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REFERENCES : Mohinder Kumar Shartna - Business Environment in India
Adhikary M, Economic environment of business
Amarchand, D. Government and Business Francis
Cheunilam : Business and Government Maheswari & Gupta
: Government, Business and Society Kuchal, S.C :
Industrial economy of India Fredrick Davis : Business and
society.
CHAPTER I
Business environment - Dynamic factors of environment - Importance of scanning
the environment - Fundamental issues - Economic environment of business - Socio
- cultural environment - Political / Legal environment -Cultural environment
This chapter focuses on the following aspects of Business environment:
Definition of business, meaning of business environment, the classification of
business environment, need to study environment in business decisions, the
methods of scanning the business environment, issues that are to be addressed
while scanning the environment, various types of factors that influence
business environment, non-economic environment and its impact on business
decisions.
To highlight the importance of the Business environment, three case studies
have been appended at the end of this lesson.
Definition of business
The term business is understood and explained in different ways by different
people. For some, business is an activity, for some it is a method of transacting,
for sonic others, it is a method of money making and some people argue that
business is an organized activity to achieve certain pre-determined goals or
objectives. Dictionary meaning of business is: the act of buying and selling of
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goods and services, commerce and trade. Based on all these meanings of
justness, we may define business as: gainful activity through which various
elements of society conduct exchanges of the desirable things.
In the olden days, the people engaged in different activities in a society were
classified into four groups : Brahmnas, Shatriyas, Vysyas and Sudras, Of these
our fold classification of social activities, the activities of vysyas included
basically, facilitating exchange. Hence, business as an exchange activity
remained since the days of exchange started. It could also be recalled that
business as a social activity became popular only when the wants of different
people in a society were to be met with the available resources. In other words,
whenever there was a scope for producing something, which is wanted, then
business activity automatically emerged.
But now a days, business is viewed more as a profession or occupation. From
the days of family owned business, we have reached a stage of professionals
and experts starting and running business. It could also be noted that business
administration and business management have emerged as the most
prospective field of study and occupation. Persons with educational background
in business, enter business or join business organizations to make them
successfully function. Unlike the olden days, a number of interests are involved
in business today, viz. owners, investors in business, suppliers, customers,
employees, government, stake holders, administrators, managers, strategists,
executives, and so many others. Hence, every business activity has to meet the
goals or aims or objectives of these various groups of people. That in fact, has
made business a most complicated activity.
Modern business has a number of features. Understanding of these would help
to appreciate and organize business activities in a highly professional way.
1. Business is an economic activity :
Business involves organizing activities to satisfy human plants. These activities
may result in the manufacture or production of a commodity or extension of a
service. When a good or service is produced, resources are involved. Resources
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like human resources, physical resources and financial resources are all
required to realize output to meet human needs. These resources are limited in
supply, and so business involves identification of resources, evaluation of
resource qualities, buying these resources and utilizing these resources. These
resources being scarce in relation to their demand, the resources carry some
value [i.e., price]. They cannot be procured at any cost to produce anything to
meet human wants. So automatically selection among various resources come
up which is made on the basis of requirement and cost. Once they are
procured, then they are used in a very judicious manner so that there is no
waste. That is optimal utilization-of resources is to be achieved. In this context,
several decisions like resource selection, resource procurement, resource mix,
resource utilization, etc. are all involved. As in all these stages, choice among
alternatives is involved, every business activity is to be treated as economic in
nature. Depending upon the business activity, the approach to selection among
alternatives would differ. For example, in a manufacturing business, the choice
is about input selection to supply quality output, in a service organization the
choice is about-inputs and delivery process, in a government organization it is
about production and equitable distribution of output, in an institution like
bank, provision of various investment opportunities of short term and long term
to the public, etc.
2. A business organization is an economic unit
Every business organization is engaged in transforming inputs into output to
meet the requirements of the people. The selection of input and size of
procurement will depend upon, the size of the organization. This would also
depend upon the nature or product or service extended/by the business unit.
All these are attended with the objective of making profit or surplus. Only when
there is surplus achieved, can the business units grow. Hence creation of
surplus in a business becomes the focal point and this is best achieved through
optimal utilization of resources. That way, all business units have to achieve the
maximum output with minimum inputs which in other words is the effort to
achieve economic efficiency. Only economic efficiency can enable firms to be
efficient in every other sense. Therefore, business organizations are only
economic units in nature.
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3. Business decisions making is essentially an economic process
All business decisions involve selection from alternatives. In other words, the
rational choice of inputs is implied in every business decision. Hence, to be
rational, a business unit goes through the process of : determining objectives,
identifying opportunities, generating alternatives, classifying these alternatives
as feasible and infeasible alternatives, then rank the feasible alternatives on
some criteria and then select those alternatives fulfilling the constraints. For
example, if the objective of a business unit is to maximize profits, then this
would call for minimizing cost and maximizing revenue. On the cost side, the
business unit have to identify, procure and utilize resources in the optimal way
and on the revenue side, the business unit should determine the price which
would facilitate maximization of revenue. Price determination again would
depend on various factors like demand, supply, competitive scenario,
government interference, statutory compulsions, conflicting interests of the
stake holders of the business, etc. Therefore, every decision made in a business
would automatically depend on the economic process.
Changing concept of business
It has been stated already that the concept of business has undergone a vast
change. From a producer driven stage business has become consumer centered
and driven stage. While the earliest concept was * sell what is produced' the
modern concept is 'produce what is wanted' So every business depends on
consumers and their ever changing needs. Any business unit which has
successfully understood its customers and offer the product or service meeting
their requirements alone is successful. But in this process, business units have
to manage pressures from its owners and other stake holders. It should take
into account the requirements of the workers and the trade unions. It should
abide by the rules and regulations of a number of government agencies and
institutions. It should meet the challenges and threats from competitors. Most
important, it has to fulfill its social obligations. To survive every business unit
has to also consider: the revolutionary changes in technology, market
expansion, information explosion, competitor strategies. These are days when
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the consumers are better informed and so no business unit can afford to ignore
consumer awareness and preferences. Technological development has brought
with it the compulsion to use modern methods and techniques. Social
obligations have made business units to meet pollution norms, etc. Trade union
pressures have made them to design satisfactory service conditions for the work
force. Then there is compulsion to provide for development of human resources
in the organization to achieve organizational development. All these have made
modern business tight rope walking.
BUSINESS ENVIRONMENT
Business involves activities, which links an organization with outside world.
Within an organization, a business is governed by the behaviour of its
employees, management or decision makers. But externally a business is
influenced by a score of factors, which range from customers to competitors and
government. Therefore, a business cannot be independent of (he influence of
these external factors. It should also be noted that a business has absolute
control over all the internal factors, it has no control over the external factors.
So often it becomes necessary for business houses to modify their internal
decisions and policies, on the basis of the pressure from external factors This
highlights the need to be ever- cognizant of changes and influences of external
factors so as to conduct business on healthy lines. It is in this context that
business environment assumes all significance. Business environment therefore
refers to the influences and pressures exerted by external factors on the
business. The following Figure would help to understand the various factors
which constitute the business environment.
From the Figure: 1, it would be clear that business organizations function in an
environment subject to the influence of various constituents. Earh one of the
constituents have in turn a number of factors influencing them. For example,
economic environment has micro and macro environmental factors affecting it.
To develop a right perspective about business environment, let us discuss
briefly about each one of the external environment constituents.
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1. Demographic environment : This refers to the size and behaviour of
population in a country. Suppose a country has a huge size of
population, then, the country would provide extensive business or
marketing opportunities for all types of business organizations. On the
other hand, a country with low size of population would force the
business organizations to seek external market for their products or
services. Similarly, if the population in a country is well - tuned to 'use
and throw concept [like most of the Western countries] then there would
be limited scope for repair shops and employment scope in that segment
would be almost nil. But alternatively this would give wide marketing
opportunities for manufacturing organizations. On the other hand, if the
population is averse to 'use and throw' concept, then the business
opportunities would be limited for manufacturing organizations but the
repair shops, self-employed technical persons and spares manufacturers,
would have roaring business. Hence, the size and quality of population
emerges as a vital factor influencing business environment.
2. Economic environment: Economic environment refers to the overall
economic factors like economic philosophy of the country, economic
structure, planning, economic policies, controls and regulations, etc. All
these have a serious impact on the functioning of business organizations
in a country. For example, in a Capitalistic economic system, business
organizations would be subjected to limited government regulations and
controls. They would be more governed by market forces [demand and
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supply] rather than by other factors. On the other hand, in a Socialist
system, the government would determine everything on behalf of the
country. In a Communist set up, the government has absolute control
over every aspect over production that private enterprises may not exist
at all. In a Mixed economic system, government would be selective in
allowing die presence of private enterprises in certain activities, reserving
some spheres completely for governmental operations. Hence, the
economic philosophy of the country directly determines the scope and
functions of business organizations in that country.
3. Geographical and ecological environment: Geographical environment
refers to climatic conditions and natural resources, which determines flu
manufacturing scope and the nature of the products that could be
marketed. For example, a country like Kenya has to manufacture more of
products based on forest resources, while the Gulf countries can produce
only crude, Japan can have business in fish, fruits, etc., Countries in the
tropical region would have organizations specializing in products from
geographical resources available in abundant in that region, while
organizations in Mediterranean countries have a Different business
scope, Scandinavian countries have scope for dairy product
manufacturing, etc. Similarly ecological imbalance is taking place at an
alarming rate in the world today, that deforestation and hunting of rare
species of animals for food are all prohibited now. Hence, while
identifying the business opportunities, business organizations have to
be conscious of the limitations posed by the geographical and ecological
considerations.
4. Legal environment: It is well known that every country has a number of
legal regulations to ensure that the interests of business organizations do
not run counter to national interests. Right from the stage of
incorporation of organizations, their listing in stock exchange, reprisal of
customer complaints, payment of tax to government, manufacturing
practices, human resources development to pricing of products and
services, a number of legal regulations have to be fulfilled. For example,
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in USA and several western countries, consumer protection is very active,
that even a medical practitioner is subjected to huge liabilities in limes of
deficiency in services. In India and other countries, very rigorous legal
provisions arc in place to prevent hunting of rare species, that any
organization, which manufactures products based on such species, have
lo get legal sanctions. In case of failure to honor cheques
issued, organizations are now a days made to pay hefty compensations.
Hence, the deterrence in terms of legal provisions has become the order
of the day. All organizations have to first of all address these provisions
become coming in to steam.
5. Technological environment: This is a very significant external factor
determining the destiny of business organizations. Supported
by computerize operations, modem business organizations have
succeeded in analyzing customers, minimizing the defects in products,
ensuring service at the right time and place, etc. While communications
use to take unduly long time in those days, business communications
are instantaneous these days, thanks to modem satellite technology.
Modern organizations have recognized that research and development
alone can ensure organizational growth and stability. They have become
more and more pro-active and remain as change agents of the economy.
Governments have also become more technology conscious that right
from police controls to registration of title deeds, computerizations has
been adopted. Customer servicing through call centers is the latest
necessity of organizations. Manufacturing activities have become more
and more technically sophisticated. Therefore business environment
has become highly dynamic.
6. Social environment: Social environment today has brought compulsions
on business organizations to adhere to certain business ethics and
morals. Social responsibility of business is an important force that
modern business organizations cannot wriggle out of their duties and
responsibilities towards the society. For example, every leather
manufacturing or process unit is made to install pollution prevention
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system. Similarly, the expectations of various interests in the society
have undergone a sea of change. The shareholders, promoters and
owners expect a reasonable return on their investments. The workers
expect security of service, terminal benefits, accident relief and various
other compensations from the organizations. Government expects the
business units to pay tax regularly and participate in social
improvement. The distributors and agents expect the organizations to
ensure smooth delivery process and demand more commission and
compensation. Suppliers expect the organizations to give them
continuous business and prompt payment of bills. Therefore each social
group has a specific interest, the combination of all these, exerts
enormous pressure on the business unit. A business unit which
succeeds in meeting the interests of all these groups remains successful
and grows.
7. Educational and cultural environment: Educational environment in a
country determines the quality of population. A country with very high
illiterate population would always experience political and economic
instability. Similarly, lack of education may also give scope for the
existence of superstitious beliefs, fatalistic attitude, etc. People's choice of
goods and services would be more governed, by their religious faiths and
beliefs. For instance, in the colonial days, the Indian population was a
victim of the Britisher's divide and rule tactics. The economic
development of a country completely depends on the literacy level which
alone can pave the way for improvement in science and technology,
modernization, industrialization, etc. In such a country, the business
opportunities are plenty.
Cultural environment refers to the values, norms, customs, ethics, goals
and other accepted behaviour pattern of people in a country. In olden
days, religion was the basis of all activities in a society. The religious
leaders and institutions determined what business should do and what
people must consume. In India, the existence of caste system has done
more damage than any good. Caste based politics has become the order
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of the day. Under the pretext of working for backward and downtrodden
people, several persons have amassed fortune. This is worsened by
political support and policies. A modern organization does not have the
liberty to recruit people on merit but it has to follow strictly die
reservation policy of the government. Another serious aspect of the
cultural environment is the attitude and behaviour of the people in
urban and rural areas. The urban - rural divide has created enormous
problems for administrators and specifically business organizations
prefer urban educated person to persons from rural areas.
8. Political environment: Political stability is one important factor winch
determines the business growth or downfall. A country with relative
political stability would witness inflow of foreign capital and
collaboration. By political stability we mean that the policies of
government remaining consistent. As the business decisions arc based
on government policies, frequent changes in these policies would force
business organizations to change their policies too which, makes
functioning very difficult. Sometimes, when the policies determined by a
party in power are reversed by the succeeding party forming the
government, there would be far reaching changes in business
environment For example, India was following a policy of protectionism
till late" 1908's. Hence, the industrial development and economic
development could not take place at a rapid rate. In the absence of
competition, the business organizations, made people to accept inferior
quality goods and services. Once, the liberalization policy is adopted, the
scene has completely changed. Today, no business can survive unless it
provides quality goods or services on par with the multinational
corporations. Another aspect of political environment is the political
ideology with which a party is wedded to, would make the government
tow the lines of countries with similar ideologies. Until the disintegration
of USSR, India was simply following USSR's lines, but after the
disintegration, India has to literally fend for itself. With the pressures
mounted by the Western countries, India had to accept various trade and
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monetary policies. This has brought about a complete change in
business environment.
NEED TO SCAN ENVIRONMENT
Having discussed very briefly the features of each one of the constituents of
business environment, let us discuss why the environment should be analyzed
by the business organizations.
It is well known that business enterprises cannot remain independent of the
society and the institutions. So whatever decision they take as to be in tune
with the requirements of society and the dictums of the institutions. A business
organization has to continuously monitor the environment so as to identify the
business opportunities and threats. By exploring its strengths and minimizing
its weaknesses, if the organizations can capitalize these opportunities and
effectively thwart the threats, then it would be able to grow. Let us elaborate
this with an example.
Suppose an organization wants to introduce a new consumer durable product
in the market. Then it would study whether there would be demand for this
product and the product would be accepted by the society. At the outset, the
organization would examine whether the product would suit the culture in the
society. Suppose the product is 'use and throw' type. Then people would
certainly be influenced by this feature of the product while evaluating the price
of the product. In India, such a product would never be accepted as the culture
here is to lengthen the life of every product by repairing it. Similarly suppose
the product requires some critical component from abroad. Then unless the
government policy is favourable the component has to be imported at a very
high cost, which in turn would drive the price up. .Suppose the product is only
one of its types, the organization would then emerge as a monopoly supplying
the product. This may not be tolerated by the government. Suppose the
manufacturing of the product involves advanced technology, then the type of
human resources required would be well educated and trained. Obviously this
will rule out the job 'opportunities for persons educated in rural areas. Further,
if the manufacturing process involves scope for pollution, then the organization
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has to address it in relation to the provisions of the pollution control norms.
Hence, in every decision of the organization, the external environment has an
important role to play. Any future plans of expansion and forecasting of demand
will depend upon the changes in the business environment. These changes may
include both the current and expected changes. Unless these changes are also
foreseen, decisions taken would turn out to be suicidal. In the case of
organizations which have been pro-active, the changes in the environment do
not affect them much. But those which fail to understand from their own
experience or that of the other changes would remain challenges for ever.
Among the various constituents of business environment discussed above
briefly, we will focus on the following constituents and discuss them in greater
detail. The constituents now elaborated are: Economic environment, political
environment and cultural environment.
1. Economic environment
The economic environment is composed of various set of economic policies,
economic system, strategy of economic growth and development, resource
endowment, size of market and status of infrastructural facilities in a country.
All these affect the business environment one way or the other. To understand
the impact of these on business environment, let us discuss each one of these
components in detail.
Economic policies: Economic policies include fiscal policy, monetary policy,
foreign trade policy, licensing policy, technology policy, price policy, etc. These
policies lay the framework within which every organization has to function.
A] By fiscal policy we mean, the government's tax efforts, public expenditure
and public borrowing. Through these the government can effectively encourage
consumption, investment and savings habits and also restrict them. For
example, suppose there is inflation in a country. Inflation implies that the
people have high purchasing power and so they demand goods. To curb this,
the government may raise the personal tax and also the corporate tax.
Consequently, individuals will be left with lesser disposable income and to
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minimize tax, they may start saving through various tax -saving schemes. As
far as the corporate are concerned, they have to part with more by way of tax to
the government and this would bring down the rate of profit and dividend
declared. As a result the corporate would resort to upward price revision, which
might lead to further fall in demand for their products and services. During
deflationary period, the government would reduce the tax so as to encourage
more spending and investment. Even in tax policy, the government can be
selective in taxing more of rich and exempting the poor completely. This would
facilitate income re-distribution and improve the conditions of poor.
Similarly, by altering its expenditure on various public projects, the government
would be able to influence the prevailing economic condition. Government
expenditures are incurred on infrastructural development, public utility
services like hospitals, new industrial units of very huge size, etc. For instance,
suppose there is inflation in a country. The government would reduce its level of
expenditure, thereby reducing the income of the people. With lesser income, the
demand would, go down and so the price. At the time of deflation, the
government would expand its public expenditure by investing in a number of
public projects, so that there will be income generation find demand generation
which will revive the economy.
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Public borrowing is one more instrument in the hands of the government to
influence the economic condition in a country. This involves government issuing
bonds and encouraging common public and other institutions to buy them. By
this, the government would be able to bring down the level of purchasing power
in the economy and control the inflation. During deflation, the government
would redeem the bonds and so with more purchasing power, the economy
would be able to revive.
B] Monetary policy refers to the set of policies determined and implemented
by the central bank of a country to control the economic condition. The central
bank of a country has the basic responsibility to maintain the price level and
money supply in a country. This is possible only when the central bank has
certain instruments. These instruments available with the central bank to
control the money supply and price level are called monetary policy
instruments. They are called Credit control policy. Credit controls can be of two
types: Quantitative credit controls and Qualitative credit controls. The former
aims at limiting the money supply, while the latter is used to channelize the
available credit in the country.
Quantitative credit control policy includes three tools: bank rate, open market
operations and variable reserve ratio. Bank rate refers to the rate at which the
central bank would re-discount the eligible bills already discounted by the
commercial- banks. By revising the bank rate upwards, the central bank
would be able to make the discounting by business organizations with
commercial banks costly. This would discourage discounting and thereby
money supply in the economy, would come down. Alternatively, by lowering the
bank rate, the central bank makes credit available at a cheaper rate, and so the
business organizations would go for a larger discounting of eligible bills with
commercial banks. This liberal credit policy would have expansionary effects on
the economy. Similarly, using open market operations, the central bank would
buy or sell the securities in the open market and through that increase or
contract money supply in the economy. For example, suppose there is inflation
in an economy. To bring down the money supply, the central bank would sell
the securities it has which will be bought by the commercial banks and other
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institutions. In this process the excess money with these institutions would be
siphoned off, there by they have to restrict credit. Alternatively when there is
deflation, the central bank would buy the securities and the money equivalent
transferred to the banking system would facilitate adoption of liberal credit.
Variable reserve ratio refers to the increase or decrease in the quantum of
Statutory liquidity ratio and the Cash reserve ratio which the commercial banks
have to maintain as a proportion of their total deposits. By increasing the
ratios, the commercial banks would be left with lesser volume of funds and so
they can lend less. By reducing the ratio, the commercial banks would be left
with more funds with which they can make lending liberal. All these policies
would have a direct impact on the business organizations and their operations.
Through qualitative credit controls, the central bank can : regulate consumer
credit, alter the margin requirements, resort to persuasive efforts, take direct
action on erring commercial banks, etc. Through these policies, the central
bank would be able to regulate and direct the available credit to the priority
sector and discourage credit for less priority or no priority sector. Hence,
business organizations, which fall under priority sector, would be able to
expand their business with cheap funds and assistance
C] Foreign trade policy: The foreign trade policy determines the scope for
trade between countries. It would directly affect the business prospects of the
business organizations. A liberal policy would extend the scope for exports and
imports, while a restrictive policy would narrow the scope. Similarly, if
protectionism is favored, then the business organizations will have lesser
market threats from multinational corporations. Alternatively if liberalization is
the policy, then every domestic business organization has to tune itself to every
type of challenge posed by the business giants from abroad. Foreign trade policy
also includes the exchange rate policy and exchange controls and customs
duties. All these are fundamental to the growth of a business organization. For
example, suppose there is full" convertibility, then the business organizations
would be able to export and import and make payments with lesser restrictions.
On the other hand, if there is only partial convertibility, the scope for trade is
correspondingly less and the business organizations have to go through a
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sickening process of getting licenses for export or import and route all their
payments through proper channel. Customs duties also play a vital role in
determining the volume of external trade. A rise in customs duties would
discourage domestic demand because the price of imported goods and services
would go up find remain at a high level compared to the domestically produced
goods and services, A reduction in customs duties would encourage imports
and be favourable to the domestic manufacturers.
Government frequently changes the foreign trade policy, keeping in view the
requirements of the country and the economic condition. To tide over the
Glance of payments difficulties, government may resort to various policy
measures like devaluation, exchange clearing agreements, tariffs and duties,
exchange control regulations, etc. These tools would be suitably modified to
achieve the desired goals. For example, to encourage exports and discourage
imports, the government may devalue the currency, by which the imports of
Indian goods abroad become cheaper and the imports of foreign goods in India
become costlier. Hence the business organizations have to continuously
monitor the changes in the trade policies so as to position themselves
accordingly.
D] Licensing policy: In the pre-liberalization days, India adopted licensing
policy in regulate the growth of industries in India. Since the days of
independence, India adopted licensing policy, which in effect made the
government control the growth of independence in accordance with the national
priorities. For example, in India, till 1985, the industries in India were classified
into four categories: industries completely owned by public sector, industries
where both public and private sector participation was permitted, small scale
industries and collage industries. Except the first category in all the other
categories, private sector presence was permitted through licensing. This was
resulted in several adverse effects, which were all explained in detail by the Dutt
committee report. But till 1985, liberalization was never accepted as a part of
growth strategy. But after 1985, the situation slowly changed
that by 1991
India adopted a policy of liberalization. Consequently, the business scope and
prospects of the Indian business organization changed since 1991. As has
been already pointed out they were exposed to market competition and threats
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after liberalization. Performance has become a necessity for survival. By about
the end of 20
th
century, the government also proceeded to disinvest several
public sector units thereby opening up the challenges all the more for Indian
industries. Therefore, the licensing policy and its direction have a lot of impact
on the business organizations.
E] Technology policy: One of the most important economic policies is the
technology policy. Improvement in technology is a condition for growth and
survival in any organization. From a stage of man-dependent environment, the
business organizations are all fast becoming machine-dependent
[computer dependent]. Right from the stage of enquiries down up to planning
the logistics, computers are widely used. Only from the mid -1990's the
government started adopting a favourable technology policy. Apart from
permitting free imports of computers and components as well as
telecommunication equipments, the government has devised a number of
schemes like Software Technology Park, to give a Phillip to the technology in
India. Computerization has come to stay in telecommunication, railways,
roadways, postal services, educational services, medical services, engineering,
financial services, etc. This liberal technology policy has resulted in the growth
of new industrial segment, viz., and information technology. Millions of
youngsters get trained and are gainfully employed. Indian software engineers
are considered as the best in the world and several of the multinational
corporations depend on Indian supply of trained software and hardware
professionals. The business environment has completely transformed over the
past five to six years that unless organizations also accordingly change
themselves, their survival will become a serious question.
F] Price policy: This refers to the controls that government has on the price
in a country. This is necessary, because, unless price is controlled, there is
bound to be inflation and then economic instability. Further in Indian context,
nearly 35% of the population is living below the poverty line. They do not have
any permanent employment. Especially the rural poverty is very serious. To
overcome this situation, the government resorts to price control policy. All the
essential and basic necessary goods are subjected to price control. While the
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poor and downtrodden are provided the essential goods at a controlled and
subsidized rate through public distribution, the others are expected to meet
their requirements through open market. Through demand and supply
management, the government makes all the efforts to keep the prices under--
control. For instance, by building up buffer stocks, the government overcomes
the shortage of food commodities during adverse period. Similarly, specific
concessions are given to industrial units located in backward regions and rural
areas. This helps them to run on sound basis. As regards the manufactured
products, the government adopts the administered price mechanism to control
the prices. For example, the cooking gas is supplied to the public at one price,
to the commercial establishments at a different price. This helps to minimize
the strain of the population using LPG as cooking media. Similarly till April,
2002, petrol and diesel were subjected to administered price controls. Sugar,
cement, etc., are also subjected to administered price. Hence, through price
policy the government protects the interests of the people and this policy has a
direct impact on the functioning of the business organization in our country.
2. Political environment
It is well known that the business environment in a country is very much
interlinked with the political environment. The political environment simply
means the political ideology which is adopted by the government. In a
democratic country like India, this political ideology changes as and when there
is a change in the party ruling the country at the Centre and the State level. A
number of examples could be cited to prove how the political ideology has
influenced the business environment of the country.
Before independence, under the guidance of Mahatma Gandhi, India was
wedded to the policy of Swadeshi. That is, Gandhi advocated the use of only
Indian made goods and to completely abstain from imported goods, specifically
British goods. As a result immediately after independence, Indian government
followed a restrictive, trade policy imposing very heavy customs duty on
imported goods. This was thought that such a policy would help to achieve both
the political commitment as well as protection of domestic producers from the
invasion of foreign-manufacture-s and traders. A deeper look into such a policy
19
would reveal that India never wanted to entertain a policy of allowing foreign
trading activities on Indian soil as this would lead to colonization. After all the
British East India Company entered the Indian shores under the pretext of
trading with India in 1600 AD and the country had to pay a heavy price for the
next 350 years being a colony. Hence, a restrictive trade policy was very much
favored by every one and in such an environment the business environment
was such the domestic producers could operate under the umbrella protection
of the government.
This is also evident from the Industrial policy of the government in 1948, which
clearly posed a threat to foreign interests in India. At the same time, the Indian
government was very much influenced by the Russian type of planning. Being a
declared democratic socialist country, India adopted planning as the strategy of
economic development. The First Five Year plan was formulated and
implemented without relying much on industrial development, when at the end
of the I Plan it was realized that growth is impossible without industrial
development, a shift focus was necessitated that the government gave emphasis
on industrial development. But here again, the government approached the
issue with caution. It felt that a controlled and guided industrial development
would yield better results than a free unrestricted industrial development. The
consequence was the Licensing policy. Though imports were permitted,
industrial development through collaborative efforts with entrepreneurs abroad
was subjected to a very critical scrutiny. When the Licensing policy led only to
concentration of economic power in the hands of a few private sector units like
TATA, Birla, and others, the government brought in the Monopolies
Restrictive Trade Practices Act, in 1970. This has on the one hand put a check
on growth of monopolies in India, on the other hand the industrial development
was not taking place at a desired pace. The seeds for liberalization were sown
in 1985, when the government felt that India could achieve miraculous growth
through this liberalization course, it proceeded in that direction. This
culminated in the introduction of Liberalization policy in l99l. This resulted in a
peculiar scenario in which democratic socialism with capitalistic ideologies
existed. Throughout the four decades after independence, India's policies
were more governed by the political factors rather than economic necessities or
20
compulsions. Hence, at the beginning Indian government adopted a purely
socialistic pattern of development strategy while by 1990s development by
subscribing to capitalistic pattern has become the reality. This shift has a great
impact on the business environment that domestic business today has to
realign itself to survive and grow, in a competitive atmosphere.
Having discussed the effect of political environment on business environment
let us examine how far the economic system is an important factor influencing
business environment. Economic system refers to the organizations and
institutions created for the purpose of satisfying the wants of human beings. In
a country, available resources have to be utilized to manufacture and distribute
goods and services, which would meet the needs of the people so that they are
satisfied. These institutions and organizations function with their own rules
and regulations. The economic system has certain broad characteristic.
1. The economic system always functions with scarcity of resources. How the
system effectively and efficiently uses the resources will determine the
extent to which the needs of the people are met.
2. An economic system comprises people. That is, a society of human beings
alone can constitute economic system.
3. A set of institutions are created and used for the purpose of smooth
functioning of an economic system. For example, banks, money,
technology, government, price mechanism, planning etc., are all
institutions through which the systems operate.
4. The basic objective with which an economic system functions is to satisfy
the wants of the people. Unless there is want for a commodity or service,
nothing can be produced. Hence, the economic system allocates the
resources in such a way that the wants of the people are satisfied.
5. On the basis of the above characteristics of an economic system, it should
be clear that the economic system is very dynamic in nature. That is, the
21
economic system undergoes changes with every change in the
institutions, though the rate of change would differ from institution to
institution.
The economic system functions to answer three vital questions:
a] what to produce
b]how to produce and
c] for whom to produce.
Answering these questions assumes enormous significance as that would
determine every activity within a country.
The first question 'What to produce' depends on what is wanted. The economic
system would throw signals through which the requirements of the people could
be understood. But not all wants could be satisfied. This is because; a country
may not be gifted with all the necessary resources to produce all the goods.
Hence, depending upon the resource endowment a country would decide what
it could produce. Then there is a problem of prioritizing the available resources
among the goods to be produced. Resources should not be used for the
production of unwarranted goods. The production of goods, which are harmful
to human beings, like narcotic drugs, should be prevented. Hence, considering
the availability of resources, the economic system should opt to produce only
goods that would satisfy the wants of human beings. In this context it is also
necessary to weigh the individual requirements and the national requirements
for goods. The latter should be given preference over the former.
The second question How to produce addresses basically, issues relating to
selection of right strategy, technology and investment. For example, a country
like India, with very huge population should not prefer capital -intensive
technology, as that would lead to more unemployment of human resources.
Similarly, while selecting the technology, a country should weigh a number of
considerations like relevance of technology, cost of technology, support in case
of failures, consequences of the technology used, etc. Another vital aspect is the
investment that a country has to make while selecting the strategy and the
22
technology. A very important question is whether the available funds should be
invested in sophisticated research and development or meeting the basic needs
of the people. Hence, the second question would ultimately determine the
efficiency with the available resources are utilized.
For whom to produce implies that based on the resource utilization, the
country as a whole should benefit and not a few segments. Hence, having
produced the goods and services, how they could be equitably distributed is an
important aspect. The distribution of national product would differ from country
to country depending upon the economic system in vogue.
It has been already pointed out that the way in which the above three questions
are answered depends on the economic system which functions in a country. To
understand how these answers differ among the economic systems, we should
understand the different types of economic systems. In the next section, the
details of different types of economic systems are discussed.
Types of Economic system
Economic systems may broadly be classified into three categories: Capitalism,
Socialism and Mixed economy. A number of other types also emerged but all of
them came close to any one of the above three types of systems. Such systems
include: communism and Marxism Let us now discuss the features, strengths
and weaknesses of each one of these systems.
1. Capitalism
Capitalism is an economic system based on the principle of free enterprise.
Individual ownership of resources is an important feature. With control and
command over resources, individuals can conduct any type of business. The
object in such a system is to maximize private gains. Any type of enterprise or
production of any commodity or service is permitted, so long it is wanted by the
society. In such a system the market forces determine the resource allocation
and price. That is, the demand and supply forces together determine what to
produce, how to produce and for whom to produce. Price mechanism is the
nucleus of the capitalistic society. The price mechanism clearly reflects the
23
wants of the people. Once this is known, the producers would allocate the
resources to manufacture and sell the products in great demand. While doing
so, there is no control or regulation over production. In other words, oligopoly
environment prevails. But each producer differentiates his product that he
would be able to stay in the market. Technology and innovation ensure the
stability and growth of organizations. As a result only efficient organization
would survive. The resources would be fully utilized. The system is so flexible
that it can adjust itself for any economic condition. The workers get equal
opportunities and those with skills would be able to command better wages and
salaries. On the whole capitalism offers scope for growth of efficient individuals
and organizations.
But capitalism has a number of weaknesses. The important ones are discussed
below.
1. Economic inequality is invariably found in capitalistic societies.
Individuals and organizations with ownership of resources and hold over
the market for (heir product or service, would be able to maximize their
gains. Those who have no such property would remain poor and become
poorer. So it is said that under capitalism, rich becomes richer and poor
becomes poorer. The inequality in wealth and income widens over a
period under capitalism.
2. The scope for the emergence of monopolies in capitalistic societies is very
high. Organizations by virtue of their economic power would be able to
easily eliminate rivals and competitors in the market. There is also
possibility of such monopolies influencing the government in policy
making and intervention.
3. Though it is said that capitalism would always lead to ideal allocation of
resources and fuller utilization of resources, in reality the experience is
that resources are held by individuals and organizations and under
utilization is the result. Sometimes, products which are not really
24
national priority are produced and forced on the public, through
advertisements and sales promotion techniques.
4. Though it is expected that in capitalistic societies the output would
increase to optimal level, in. practice this is never found. Producers
always restrict output to maintain a high price and also maximize profit.
So excess capacity would exist in many industries.
5. In a capitalistic society the divide between the haves and have-nots widen
that over a period. Existence of poverty among the sophisticated sections
of people is also seen. This results in built up of frustration in the
society. Over a period this might lead to revolution and social upheaval.
2. Socialism
Socialism refers to an economic system ir which the following features
predominant:
The resources are owned by the State or state owned institutions.
Production takes place in the interest of the society and not for
maximizing profits of individuals or organizations. Government decides
the type of productive efforts to be permitted. In other words, in a
socialist country, government can adopt licensing system and other types
of regulations to prevent the emergence of monopolist and exploitative
tendencies. Maximization of Community welfare is the objective than
profit maximization. Another very important feature is the government
ensures equitable distribution of national product. Public distribution
system assumes enormous significance in such an economic system. On
the whole, the socialistic society differs from capitalist society in every
sense. In the broad spectrum of economic systems, socialism and
capitalism occupy two extremes. In the world today, pure capitalistic
society is not seen in any country. Even in USA, government interference
in various economic activities is found. For example, in the field of
national defense, atomic energy, space technology, social security, etc.,
the presence of government is almost complete. Government also retains
25
the right to interfere in the market system, whenever there is deliberate
and intentional attempt to monopolize the resource ownership or the
market. Similarly, in the erstwhile Soviet Union, socialistic principles
were followed. But even here, there were instances of private ownership
of property, enterprises, etc., were reported. That is why it is very
difficult to come across pure capitalistic or socialistic societies.
The merits of socialism includes: 1. Collective ownership eliminate
emergence and existence of monopolies. 2, Resources utilization is
planned and achieved in the interest of the society. 3. Government with
its control over the resources is able to use resources fully utilized and
avoid wastage and production of unnecessary goods. 4. As equality in
distribution is the fundamental feature of socialism, there is no scope for
widening inequalities rind the government takes steps to narrow the gap
between the rich and the poor through various measures.
However, socialistic states suffer from the following limitations: 1.
Excessive dependence on government decisions often result in delay in
offering any public service. 2. Bureaucratic control becomes an integral
part of the socialistic principles. As a result the benefits and its direction
of flow is determined by the bureaucrats. 3. Government by undertaking
excessive responsibility on its shoulders, abets inefficiency and
corruption in the society. 4. No incentive and motivation for individual
excellence or achievements is possible in such a society and so
innovations and inventions do not really lake place in large scale in such
a society. 5. With governmental presence in every walk of life, efficiency
and productivity suffer. 6. Lack of support for individual liberty kills
initiative.
3. Mixed economy
Evolution of the concept of Mixed economy:
There was no reference to the mixed economic system in Economic literature in
the past. Economists were mainly familiar and advocated the Laissez faire or
26
free enterprise system, as several countries could develop fast following the free
enterprise system, in which there was no or little government intervention. The
entire economic system operated with the price mechanism at its center point.
The producers produced what the consumers wanted and this provided very
little scope for the government to intervene in the system. The Classical
economists and their ardent supporters believed that the invisible hand will
direct the economy and with private initiative and enterprise, every country
should be able to record a faster growth as proved in the case of UK, USA,
Europe, Australia, and other countries.
But over a period under the leadership of Karl Marx, a new economic system
was developed called socialism, in which there is no scope for any private
enterprise as everything owned and controlled by the government. The
government decided the type of developmental activities and me requirements of
the society and used the available resources in the provision of these
requirements. Several countries like USSR, Communist China, Vietnam, Cuba
and others preferred this socialist system in which government is made the
custodian of the society. The main reason for Die emergence of this new
economic system was the failure of capitalism during the 1929 depression to
revive every economy from depression. Keynes himself thought that capitalism
without some of its evils could certainly help economic recovery. Hence, a time
came when economists felt that cent per cent free enterprise or cent per cent
government governed economic development cannot work satisfactorily. A
compromise between these extremes was thought of as an ideal economic
system. The new system called 'mixed economic system' contained the merits of
both the capitalism and socialism and appeared to be full of promise. This
mixed economic system is adopted by India as indicated by the First Industrial
Policy Resolution 1948.
Characteristics of mixed economy:
i. Co-existence of public and private sectors:
In a mixed economy, one will find the existence of both the private and public
sectors. In such a system, the government will undertake the responsibility to
27
build and develop certain sector activities and leave the other activities for the
private initiative. In India, the government announced the adoption of the mixed
economy system through its 1948 Industrial Policy Resolution. The government
clearly earmarked the industries to be completely under the state control, the
industries which are to owned and controlled by the state as well as the private
sector and industries which are completely left for the private sector. In this
way the Resolution provided for the simultaneous existence of both private and
public sectors.
ii. State participation in economic development:
This is the second feature of mixed economy, according, to which the state
reserves its right to design and decide the type of development to be achieved.
In such a set up, the government strives to promote the welfare of the country
by ensuring social order, social justice and establishing all the necessary
institutions which are required to achieve the desired pattern of growth and
development.
iii. Distribution of ownership and control of resources:
This is the next feature of mixed economy. In this system, the government itself
enters the field of production so that the available resources are fully utilized.
This will also help to avoid concentration of wealth in the hands of a few and
enable distribution of ownership and control of productive activities. As a result
there is no scope for exploitation of any group, say labor, by any other group. In
this way the weaker section of the community is well protected and taken care
of. Only the mixed economy will enable the government to attain the objectives
of the Directive Principles of the Indian Constitution.
iv. Directing the investment in socially desirable projects and channels:
Mixed economy facilitates the flow of investment into channels which confers
the society with several benefits. For example, the Indian government has
invested huge amount in several projects to develop the infrastructural
28
facilities. This forms the basis for the development of other sectors. The
investment in these infrastructural areas will not come forth from the private
sector as the return is nil. Hence, the government in a mixed economic set up
provides the thrust by developing the necessary background and strength
which will encourage the private sector to invest in profitable opportunities. In
this way the government plays a key role in a mixed economic system.
v. Scope for achieving balanced economic development:
I Left to itself, the private sector would establish its enterprises only in urban or
sub-urban areas and that too in already well developed states. This will mean
other areas will have no scope for development. But in a mixed economy, the
government will itself undertake the initiative to set up industries in backward
areas and encourage the private initiative to set up industries in such areas by
offering several concessions and exemptions. In the absence of nixed economy,
several states in India would have remained industrially backward.
vi. Ultimate control and regulation in the hands of government:
This feature of mixed economy clearly spells out that in every activity affecting
the economy, the government will be the ultimate authority. Though the private
sector is assigned its role to perform, the government will still monitor and
control the way in which the private initiative is performing its role. Infact,
according to the 1948 Industrial Policy Resolution, the government made it
clear that the industries already established by the private sector belonging to
that category in which new industries will be established by the government
alone, the government would undertake the review of the working of these
industries in private sector after a period of ten years and if found not
satisfactory, they would be taken over by the government. Though this was
criticized as a threat of nationalization, yet through such a provision the
government underlines its authority. Similarly in the banking and insurance
sectors, the government nationalized banks emphasizing its powers to control
and regulate any sector.
29
vii. Co-operation in the field of economic development:
According to this feature of mixed economy, the government formulates the
design for development and invites the private sector to participate in the
development. It clearly spells out the guidelines which would govern such co-
operative efforts and the limits of freedom granted to the private sector. In
Indian case, the government prepares the plans for development and spells out
the areas left for the private initiative and the areas that will be under state
control. Hence, there is scope for the development of private sector, though only
according to the design developed by the government.
Planning process under mixed economy:
As has been already stated, in a mixed economy there is a need to achieve a
compromise between self-interest and social interest This is a very difficult task
as the government has to carefully foresee the type of development it wants to
achieve and closely monitor the activities of the private sector to ensure that the
social interest is never at stake. Obviously, planning is a very difficult exercise
in a mixed economy set up. The success of planning will depend upon; i) the
extent to which the public sector is able to rise to achieve the social gains aimed
for, ii) the success of the state in guiding and regulating the private sector
activities towards social goals and iii) the extent lo which (lie state is able (o
check the distortions taking place in investment by private sector affecting (he
interest of the public sector. Hence in the planning process the state has taken
up the following steps to ensure the accomplishment of the objectives of the
mixed economy,
a. By holding complete ownership of defense and heavy industries, the
government has provided an industrial base with which the private
sector is expected to plan its investment activities.
b. The state also has made huge investments in economic infrastructures
so as to help the extension of market for goods, raising the productivity
in agricultural and industrial sectors, encouragement of further
productive investment
30
c. The government has complete control of the financial institutions
including banks so that it can ensure that the banks and other
institutions play a key role in the development activities of the state.
The government could also realize the expected gains by encouraging
the priority activities in every sector. The economic institutions are
made to support the weaker sections of the community.
d. Through powerful legislations like MRTP Act, FERA, etc., the
government could ensure that there is no scope for exploitation of the
common people by the private enterprise. Such a legal framework lays
down the rules of the game and ensures fair play in a mixed economic
set up.
e. As a method of protecting the weaker and downtrodden people, the
government has policies like rationing, price controls, etc. Such
regulations are built in the planning mechanism itself, so that the
private sector cannot exploit the community.
f. Towards the improvement of welfare in the economy, the state has
undertaken several specific programs aimed at specific target groups.
For example schemes aimed at the backward and schedule tribe
providing them reservation in educational, employment and other
opportunities, rural oriented schemes for the rural folks, health for all
schemes, provision of free educational and medical facilities up to a
certain level, etc. All these schemes aim at improving the social welfare.
In all these activities the private sector is also welcome to play its role.
g. The government makes effective use of the tools of fiscal policy viz.
taxation and public expenditure, so as to achieve the objectives of
economic planning.
Distortions in the planning process :
31
We have explained above that the fundamental objective of the mixed economy
is to subordinate the self-interest for the national-interest whether this has
been achieved in Indian situation is a moot question. In spite of various types of
regulations and controls, the fruits of mixed economy have not appeared to
have reached the common men. Even after four decades after the adoption of
mixed economy principle, we come across glaring distortions which go to prove
that mixed economy in practice has not been very effective. This is mainly
because of the influence exercised by the private enterprise through political
influence, corruptive activities, dishonest bureaucrats, powerful national and
international lobbying, etc. The extent of distortions could be understood if we
study the following points:
1. One of the basic objectives of Indian planning is to eradicate poverty,
but five decades after the adoption of planning strategy, the proportion
of population below the poverty line has not significantly changed.
2. The planning mechanism has failed to check the rise in price level.
Inflation has come to stay in India with no policy being effective. When
double digit inflation is controlled and results in single digit inflation,
the country boasts of having achieved something very great.
3. The emergence and existence of black money is yet another yardstick to
prove the failure of the mixed economy. The high level of taxation has
only resulted in effective tax evasion and tax avoidance. As a result the
distance between the rich and the poor remains wide.
4. Till date there has been no effective method to prevent the
concentration of economic power in the hands of a few. The rich
becomes richer and the poor, the poorer.
5. In spite of five decades of planning, unemployment is very much on the
increase and the backlog in every plan is assuming dangerous
proportions. This is mainly because of the failure to control fee growth
32
of population and the adoption of capital intensive production
techniques.
6. The failure to achieve re-distribution of income is yet another glaring
distortion. All the efforts to bridge the gap between the wages of rural
and urban workers or increase the real wage of the working class has
not succeeded.
When we study the above points, it is clear, that mixed economy has not carried
us in the desired direction. This is mainly because of the inability of the
government as it is frequently yielding to the pressure exerted by the vested
interests. Even the recent liberalization measure could be viewed from this
angle. But a country cannot remain independent of the international pressures,
especially when India is depending upon the IMF and EBRD, all its internal
policies are indirectly governed by these lending agencies: Whether this is right
or wrong is a question that could be answered only after we evaluate the gains
of liberalization policy. But on the whole, the expected benefits of mixed
economy have not been realized as is clearly proved by the distortions discussed
above.
4. Marxism
Marxism is essentially socialism in different garb. The pure socialism is proved
to be impractical and it made role of government the center point. Most of the
government could not fit in this role effectively. Further capitalism with its
explicit goals threatened the success of socialism. It was at this juncture that
Karl Marx came up with his ideology, which led to the evolution of Marxian
socialism. Marx succeeded through his logical reasoning that economics
dominates every activity of a society. This leads to class struggle. When one
struggle is tackled another one crop up. The continued onslaught of the
capitalist on the society would result in the creation of haves and have-nots.
This division of the society would widen with the continuance of capitalism,
which ultimately will result in class struggle. Marx explained through his theory
of value that every product should be valued in accordance with the value of
33
labor contained in it. But the laborers are rewarded at a very much lesser rate
than what they create. That is,, every laborer contribute more by way of his
work to produce the product but he is paid a very low wages. The difference is
the gain realized by the capitalists. The capitalists would accumulate profits
this way at the cost of worsening labor condition. Over a period the divide
between the proprietary class and the labor class would widen that much, that
there would be social upheaval. Karl Marx predicted class war and argued that
unless the capitalist class realizes this, there would be severe impact on
production and economic condition of a country. His argument came true in
the case of France that the French revolution broke out in 1789. There were
similar problems in different parts of the globe, like in erstwhile USSR [Scissor's
crisis], and China. China, especially remained a closed economy till early
I990's. But in China, the Marxism led to the emergence of communism. This is
discussed in detail below.
Though Marxism held sway over a number of countries for some time, yet it has
inherent defects. Firstly, Marx's view that all activities in all countries are
basically economic in nature is not true. Secondly, his argument that class
struggle continuously takes place in every country did not hold water. A
number of other reasons of economic, social and cultural nature led to the
struggle and not the way Marx predicted. Thirdly, the theory of surplus value
could not be applied in practice in service industry. Fourthly, Marx never took
into the interference that a government could make in case of exploitation of
society by the capitalists.
5. Communism
Communism is Marx's prediction at the fall of capitalism. Marx argued that the
widening inequalities in a society coupled with class struggle should ultimately
sound the death knell of capitalism. He is of the view that when capitalism falls,
the communism will emerge in which, the laborers will lead the country. The
government will own all the resources and determine the needs of the society. It
will also decide various other issues of macro and micro importance.
Government will turn out to be the custodian of the society and in a pure
34
communistic society; people will lead a life where basic necessities are provided
by the government. Unemployment will be very low as every one is occupied in
some avocation or other.
But the way in which communism was practiced in China created an
impression that the government would be oppressive in its approach that the
people will lead a life of slavery. One has to work to earn his bread. Military type
of regimentation was enforced that common people were subjected to absolute
control and regulation by government. The economy remained closed without
any international relations, both economic and social. There were no two party
systems that the nominated representatives of the Communist party attended to
all the governmental responsibilities. Market mechanism is completely absent in
such a system, as government determined everything on behalf of the country.
As has been already pointed out depending upon the economic system, the
business environment will change. In a capitalist system, the environment
provides opportunities for every one who wants to maximize gains. In a socialist
system, the government undertakes the responsibility of providing everything to
the citizens. In a Marxist economy, it is ultimately the laborers who will hold the
reins. In a Communist economy, it is the group of administrators who run the
economy in the interest of the economy.
4. Cultural environment
Culture refers to the behaviour, attitude, way of living, belief, faith, law and
custom of people in a country. It; could be immediately understood that these
aspects would differ from country to country and also in different regions of the
same country. It is always said mat the culture determines the people's
preferences, which directly determines the success or failure of business.
Hence, cultural, environment has a direct impact on business. A number of
examples could be cited to prove this.
In olden days, eating in hotels was considered unhygienic and majority of the
people never used to accept food from outside. But today, even the orthodox/
35
people freely take their requirements from fast food restaurant. This change has
come about, because of the changing culture in the society. For instance, with
the presence of a large of multi national corporations, the executives working in
such organizations are very well paid that they rarely find time to spend on
food. Such executives prefer working lunch rather than lunch. So provision of
such working lunch should not take time and if food is made available readily
without any time loss, then the executives would be able to save their time.
Further when executives leave home very early, it is impossible for them to
prepare some food and get for their lunch. So when their working lunch
requirement is met nearby by their work Spot in am ambient atmosphere it
would be welcome. This has given a fillip to the growth of Fast food restaurants.
In this manner, certain new cultural practices are transmitted to the society.
Similarly, regarding the requirement of clothes, people are slowly switching on
to ready made garments of different varieties and design. Sensing this, several
international brands in ready garments are entering the market. This is how the
business adapts itself to the cultural environment in a country. Business also
conducts research continuously for the purpose of innovating and inventing
new products and uses for the existing products. It is through this process that
several consumer durable products like wet grinder, mixer, washing machine,
geysers, etc., have been introduced in the market. Having created them, the
business impress upon the people to use them as time saving devices.
Hence, cultural environment can create business opportunities. Any
organization which is able to sense the business opportunity and capitalize it,
would be able to succeed and grow. But it should be noted that changes in
culture do not affect every part of the country or people in the same way or at
the same time. It is possible to observe certain^ regions/people lag in adopting
a particular culture. This is what is referred to as cultural lag. For example,
even to day in rural areas, certain practices like untouchability is found, though
it is a crime. Such cultural lag is found mainly because of illiteracy, ignorance,
conservatism, sentimental factors, political factors and vested interests.
Business should be aware of this while addressing the requirements of people
in different regions and nations. One more aspect of cultural is the change.
While some of the changes are accepted very fast the others are resisted. While
36
in some families divorce is accepted as a common feature, in others, divorce is
viewed very seriously and extreme efforts are taken to pacify the parties in
conflict. Another important example is the women's employment. While in olden
days women were destined to domestic works, today women entrepreneur lead
several fields. Attitude towards work is yet another area when Indian culture
lags much behind the Western and Japanese culture.
In the light of the above discussion, the following case studies would make
sense and prove how business environment can either give a boost to an
organization or cause a doom.
37
CASE STUDY: 1
WILLIAM HENRY GATES, III AND THE MICROSOFT
MONEY MACHINE
Several years ago, when his fortune was a mere several hundred million dollars,
a weekly magazine labeled Bill Gates as Americas richest nerd.' In 1992, at age
36, he had passed Donald Trump, Ross Perot and others to be listed as
America's wealthiest person by Forbes magazine; the value of his holdings had
grown to an estimated $ 6.3 billion. How did the free enterprise system help
him to attain such phenomenal wealth?
After graduating from high school in Seattle in 1973, Gates went to Harvard.
While there, he learned that the personal computer [PC] was in the development
stage. He dropped out of school and threw himself completely into designing an
operating system [the program that coordinates the hardware and software of
the computer] for the PC. His system, [S - DOS the Microsoft Disk Opening
System] was so good that IBM agreed to use it in their line of, personal
computers. With IBM setting the industry standard, other computer
manufacturers quickly adopted MS DOS as well. Today it is estimated that
more than 80 per cent of all personal computers in the world use this system:
Gate's firm, Microsoft, Inc., makes money on every computer sold with MS-DOS
as the operating system.' In the 1992, the firm recorded $2.8 billion in revenue
and $ 708 million in net profit. It ranks third in size in the industry, behind
IBM and Hewlett - Packard. Gate's personal holdings of some 90 million shares
of common stock represent about 33 per cent ownership share of the company.
Microsoft also produces programs for word processing, spreadsheets, and a
variety of other applications. One of Gate's latest ventures has been to purchase
the electronic reproduction rights to thousands of art and photographic works
from museums and libraries around the world. These will be used as a part of
his plan for interactive home entertainment systems.
38
With extremely hard work, a creative mind, and a willingness to take risks,
Gates has demonstrated how the market rewards the successful entrepreneur.
He was able to produce what consumers wanted at a price they were willing to
pay the result was that both and they are better off ! This is the essence of free
market economic system.
From the above case study, it would be clear how a pro-active, imaginative and
innovative entrepreneur can, carry the business with him. Though a school
drop out. Gates has climbed the pinnacle of business world, merely by his
ability to anticipate the changes, in the personal computer industry.
Failure to read the business environment and initiate appropriate steps to
protect the business, can lead to a serious threat to existence itself. This would-
be clsar from the following case on Maruti Udyog of India and Doordarshan.
Case study : 2
MARUTI UDYOG LTD.,
When Indian car market was opened for new private players, Maruti Udyog
limited, which had till then enjoyed an enviable position in the market,
suddenly faced severe market erosion. Even though Maruti is the market leader
and has the largest range of products, cheaper cars, good service network and
better cost structures, it has been steadily losing its market share for the last
three years and the valuation of the company has halved in 4 years time from
Rs. 80 bn in 1996 to Rs. 40 bn in 2000.
A Marjti udyog rival: What MUL did to Premier Automobiles and Hindustan
motors is now being done lo it.
Empire under siege
Jagdish Khattar, MD MUL was a man in trouble. He was facing what was the
biggest setback ever for the company. With all strategies backfiring, he seemed
to be fighting a losing battle.
39
Problems were aplenty - the Maruti 800 segment was facing demand - erosion,
Zen and its arch-rival Santro were very close in terms of volumes, Esteem was
losing ground, Baleno, Wagon R and Alto were yet to prove themselves, while
Gypsy was snugly ensconced in its niche. [Gypsy was not generating many
volumes needed for MUL]
Despite the fact the fact that MUL had the biggest range of products, the
cheapest cars in the market and a service network and cost structures that
were better than anyone else, it had steadily lost market share - down from
82.62 percent in 1998 to 52 per cent in 2000. With the impending
disinvestments, [Government's. policy of disinvestments in Public sector units
includes MUEL also along with other profit making PSUs.] MD was facing flak
from the government as well. With market share declining, MULs valuation had
also come down drastically. While it was valued at Rs. 80 bn in 1996, by
December, 2000, the figure had touched Rs. 40 bn.
The building blocks
MUL was the largest car manufacturer in India with a market share of over 52
per cent. It was a joint sector corporation set up by the government of India and
Suzuki Motor Corporation, Japan. MUL was incorporated in 1981 to take over
the assets of the erstwhile MUL set up in June 1971 and wound up by a High
Court order in 1978. The assets of MUL were then acquired buy the
Government under MUL Acquisition and Transfer of Undertakings Act, 1980. In
1982, the Government signed a joint venture agreement with Suzuki of Japan.
Suzuki's stake increased from 26 to 40% in 1987, and to 50.25% in 1992. The
company was a significant exporter with exports to over 50 countries.
The company manufactured passenger cars at its factor in Gurgaon, Haryana,
with an installed capacity of 350,000 vehicles. The first product, Maruti 800
was launched in 1984, followed by the all-terrain vehicle Gypsy in 1985. Over
the years, MUL expanded its portfolio with the launch of the Maruti 1000
40
[1990]; the Zen and the Esteem [1993]; Zen Diesel [1998]p Baleno, Wagon R
and the Alto [2000].
MUL was known for its value for money pricing strategy, which had been made
possible due to the high levels of indigenization of its vehicles. While the Maruti
800, Zen, Esteem, and Omni were indigenized to the extent of over 90%, the
Gypsy was indigenized to the extent of 82% and the Alto to the extent of 76%.
The company had a network of about 375 vendors and had several joint
ventures with some of them to source its raw material requirements It's sales
[comprising 112 dealers and sales outlets in 86. locations] and service
[comprising 1010 service workshops covering 412 locations] network was one of
the largest in the country.
The Stumbling blocks
Till October 1998, MUL enjoyed a market share of 83.6% reacting to the
increasing number, of players, its-MD commented, Obviously, our market
share will decline with the entry of new manufacturers and models in
percentage terms, but not in actual volumes.
With cars ranging from Rs. 0.21 mn to s. 0.67 mn, problems associated with an
ever-expanding product portfolio constantly plagued MUL. Besides the
declining market share, cannibalization was another issue the company could
ill-afford to ignore. Forced to take stock of what went wrong, MUL realized that
it was dependent to a large extent on a single product - the Maruti 800.
The 800, along with the Omrii [build on the same platform accounted for 75% of
units sales in the car. market in 1998; it had always been the 'breadwinner' for
MUL. One of the biggest success sagas in Indian automobile history, the 800
started losing its sheen in the 1990s as newer players emerged in the market.
The entry-level segment ceased to be the center of action as easy car finance
availability and the lure of new cars made the Rs. 0.3 inn to Rs. 0.4 mn
segment the most attractive one. The fact that MUL made only minor changes
41
in the models over the years led to the perception that MUL was selling old
models.
To tackle these problems, MUL adopted a two-pronged strategy. One, to
introduce new models; two, it decided to increase the number of variants
rapidly, offering a new model with every increase of Rs. 25000. MUL also
revamped its engines and took the 800 to semi-urban and rural areas, to
compensate for the declining urban sales. The company was aiming to move
entry-level prices up without losing out on volumes by launching cars in the
segment just above the 800. As part of this, Baleno, Wagon R and Alto were
launched in quick succession. [Alto was launched in the same league as the
800. Industry observers contended that Alto's launch in the 800-cc category
signaled the beginning of a gradual phasing out of the 800. However, MUL
sources were quick to deny this- and-asserted that the 800 would be retained:]
However, despite favourable reviews, these cars did not go on to become the
saviors of MUL was hoping for.
The engine-revamp exercise for the 800 had pushed its price close the base
model of rival Daewoo's Matiz, eroding the price advantage on which the model
survived. As a final resort, MUL decided to play what it thought was its trump
card - price reduction. The move was also justified on the gorunds that the
company was following Product Pyramid Profit model. [The Product Pyramid
incorporated the distinct customer segments and their varied purchase -
behaviour in terms of style, colour, feature and price preferences. The base of
the Pyramid was occupied by low price, high volume product s. like the 800,
where the margins were slim. The apex of the Pyramid was occupied by high-
price, low volume products such as the Maruti Esteem VX. Although -profits
were concentrated near the top, the base played a crucial role as it created an
entry-barrier for competitors, and insulated the profitable area near the top
from competition. In the specific case of cars, the most common model was the
new product profits model. Thus, the profits associated with a car followed the
"s" curve of its life cycle, and declined as the product neared the end of the
42
maturity. phase. MUL's decision to drop the prices of all the versions of the
Maruti 800 came at this stage].
MUL reduced the prices of Maruti 800 and Zen by about Rs. 24000 and Rs.
51000 respectively in December, 1998, This resulted in a drop of Rs. 3 bn in net
profit for the year 1998-99. The MD justified die price cuts, saying that MUL
wanted to make up for the increase in the 800s price due to higher sales tax
figures for the period. The move was described as an attempt to "redefine the
price-value equation." MUL sources claimed that they expected lower prices to
bring an incremental growth of 25% over the next 12 months. However, despite
the price cuts, by March 1999, the company's market share decreased to
54.57%
In early 2000, MUL announced that it would pass on the cost of installing Euro-
II compliant engines with Multi-point fuel Injection [MPFI] to its
customers. There was a rush in the market for the 800. as many first-time
consumers who did not want to bear the hike, hastened their purchase. MUL
had to increase the price of the 800 from. Rs. 0,18 mn to Rs. 0.22 mn. Around
the same time, MUL decided to meet the competition head-on by having a model
or variant with every increase of Rs. 25000. The idea was to give the customer
the widest choice possible. By mid-2000, the company offered 43 models in a
market, which had only 127 models.
In June 2000, sales of the 800 stood at 5296 cars compared to the 11000 plus
cars it had been selling per month for the previous few years. MUL had no
option but to again slash prices of various models by Rs. 25000 to Rs. 30000, to
bring back the sales to normal levels. Other changes initiated by the'-company
included a transformation in its customer - interface and a revamped branding
strategy with the new cars [Wagon R and Baleno] coming with the Suzuki prefix.
The price cuts, however, only added to the declining bottom line problem. MUL
reported a loss of Rs. 6792. II on every car sold between April and October
2000. MUL sources, however, attributed this to the fact that MUL had not
passed on the cost of up-gradation to meet the Euro;I and Euro II emission
norms to its customers. '
43
The industry strikes back
The Indian car market of the early 21
s1
century was a burgeoning one with over
127 models on the roads, and many more in the pipeline. Increased competition
had radically transformed the market, manifested clearly in carmaker's pricing
strategy overhaul. Manufacturers were breaking the conventional rules of auto
pricing by moving from cost-based to value-based pricing and the market soon,
became a buyer's market.
When the new players entered the market, there were no doubts that the main
artillery for the companies in the car-wars would be the pricing strategies. It
was not just a case of competition forcing a downward revision; the players were
even ready to forego profits in the short run. Brand building and technology /
feature driven campaign were to be add-ons to the above plan. Industry
observers were quick to point out that MUL would have to get entangled in the
price reducing game.
A Business India report pointed : No one is better equipped to fight a price war
than Maruti. Its phenomenal profitability, cash reserves and efficiency in
manufacturing will allow it to slash prices on all its models without feeling the
pinch as much as others.
However, Hyundai was the first company to introduce what came to be known
as, pricing based on customer's value perceptions. It introduced the base model
of Santro at Rs. 0.29 mn, while two other versions were priced at Rs. 0.34 and
Rs. 0.37 mn. The basic version was targeted at buyers of the 800, and the other
at the Zen. Thereafter, hunches in the Rs. 0.2 mn to Rs. 0.6 mn segment by
Ford and Hyundai showed highly innovative pricing strategies being adopted.
Soon after, Ind Auto dropped the price of the Fiat Uno Diesel by Rs. 64867 and
Premier Automobiles Ltd lowered the prices of the four versions of the Premier
Padmini by Rs. 5000 to make it Rs. 53000.
44
MUL had adopted a skimming strategy for Esteem. Launched in 1993, it was
positioned as a luxury car. This continued till the arrival of Daewoo's Cielo in
1996, which started eating into Esteem's share. In 1999, the segment saw the
arrival of Fiat Siena, Opc-1 Corsa, Ford lko.n and the Hyundai Accent. MUL
resorted to price slashing and brought the prices down. While the top end
version's price was reduced to Rs. 0.52 mn, from Rs. 0.59 mn, the basic version
was brought down to Rs. 0.44 mn from 0.46 mn. However, this was possible
only because it enjoyed substantial margins over costs, being the first mover in
the market.
MUL also followed the- same modus operandi for Zen, albeit in a different
manner. The company increased the number of Zen variants to 10, with prices
ranging hom Rs. 0.3 mn to Rs. 0.43 mn. The price stood reduced for the Rs. 0.3
mn variant in terms of stripping down the models features.
The competition responded with similar moves. Daewoo offered price-variants
for Matiz, Ind Auto offered seven variants of Fiat Uno, ranging from Rs. 0.27 mn
to Rs. 0.41 mn. Hyundai's Santro offered six variants between Rs. 0.29 mn and
Rs. 0.37 mn; Telco's Indica came in the range of Rs. 0.25 mn to Rs. 0.38 mn
with four models. NK Goila, VF Honda - Sicl cars, aptly summed up the
situation : It is important to be present with grade - variation and a range to
cover the range of potential customers being targeted. The price - points in the
car market were replaced by price bands. The width of a price band was a
function of the size of the segment being targeted besides the intensity of
competition. The thumb rule being, the higher the intensity, the wider the price-
band.
Fords research, before the launch of the Ikon, a car made for the/Indian
market, revealed that over the previous two three years, the 800 segment had
graduated to the next level of Zen, Santro, Matiz, Uno and Indica. Ford's
research on the existing market segments and the consumer response to new
cars revealed that beyond the Zen segment, the choice of the consumer was
limited. Models like the Esteem and Cielo had had a long innings outside the
country and were not exactly contemporary. The other options were Escort,
45
Lancer and Honda, which were priced above Rs. 0.7 mn Between them and the
Rs. 0.45 - 0.5 run range of the Esteem and Cielo, thee was a vacuum. The gap
was identified by General Motors' Corsa and Fiat's Siena as well. All three
competitors plugged the gap by offering several versions at various price points.
Ford first launched Ikon 1.6 but later came up with a lower engine capacity
Ikon I.3CLXI at a lower price. GM and Fiat also followed the same approach.
About price reduction
The fact that 82% of the Indian market was accounted for cars priced below Rs.
0.43 mn, proved how strongly price influenced volumes. Moreover, with
domestic car sales dropping by 15.01% in November 1998 over November, 1997
manufacturers had to turn towards price to resuscitate demand.
In the prevailing conditions, the 'Second P of aulo marketing' price reduction,
seemed to be (he only factor able to rejuvenate the stagnant demand.
However, not every player had the financial-muscle to play the price card.
Instead of cutting the price of Matiz, Daewoo Motors introduced an enhanced
version with product features like power steering, and product-plus features
like better service and customer-care. Players like Hyundai and Telco did not
opt for price reduction, as they simply did not have the economies of scale to
profit from such moves. Such strategies worked best for companies with offering
in several segments of the market. Higher volumes from the combined sales of
products across segments enabled them to drive harder bargains with their
suppliers; unit marketing and distribution costs decreased; and the higher
margins on products positioned near the top compensated for the pared
margins on the basic product.
The players who chose to stay out of the race to cut prices had to convince their
customers that the higher prices they charged were justified by the greater
value they offered. A product and promotional mix had to be specifically
designed to convey the above message. Most manufacturers of mid-size cars,
including General Motors, Ford, Honda-Siel, adopted this strategy rather than
46
cut costs to increase sales. They argued that because of the 'snob-value' of a
costlier car, buyers in this segment were not that susceptible to be swayed by
price cuts.
They cited the Cielo price reduction fiasco as an example. When sales of
Daewoo's Cielo went down from a peak of 2260 cars in September 1956 to 314
in December 1997, the company slashed the price of its base model Rs. 0.13
inn in January, 1998. Daewoo also introduced zero-interet finance schemes and
its dealers gave unofficial discounts ranging from Rs. 0.08 mn to Rs. 0.10 mn,
Sales increased by 300% to 906 and 1102 by March, 1998. However, this was
far below the company's capacity of 6000 ears per month. Daewoo launched an
upper end version, Cielo Executive and an upgraded versions, Nexia at higher
price points. However, the market had discounted Daewoo by then and sales
did not pick up further, falling to a low of 148 by February, 1999.
Companies realized that only when competing brands were perceived to be
equal in all other aspects, would price be a deciding issue. As the target
segment became more affluent, upgrades as well as first time buyers did not
necessarily start at the lowest price level. Applied as a brand level strategy,
price helped the auto marketers win over only the entry level customer.
The biggest price a manufacturer would have to pay for playing the price game
continuously was undoubtedly the loss of customer loyalty. The world over,
automobile brands succeed on the basis of their relationship with fiercely loyal
customer communities, built around sharp brand images and unique value
proportions. By choosing to shift the focus to price, MUL risked the loss of
damaging its customer relations and brand valuation, as it ended up
antagonizing the buyers who had bought MUL cars just before the price
reduction. This led to a feeling of betrayal among MUL loyalist. When these
customers replaced their cars, it was doubtful whether they would turn back to
MUL or go in for a rival car with a vengeance.
Much ado about nothing ?
47
As the Indian automobile market moved from monopoly to free competition,
market share comparisons from the old era seemed to have lost relevance. The
alarm over MUL's declining market share somehow did not seem fully justified.
In its heyday, huge waiting lists for its products ensured that Marutis market
share was directly linked to the supply side of the equation. In other words, if
MUL had an 80% share of the market, that was also its share of the total
industry capacity. By the late 1990s, things changed radically with over 12 car
manufacturers having a presence in the country, with a total capacity of about
1,250,000 cars, of which MUL produced about 400,000 [33%]. Khattar
commented tell me, if we have market share of 50% out of a capacity that is
33% [of the industry], are we doing badly? Why don't you ask the others who
together have a capacity of 800,000, but cannot match our sales? All said and
done, MUL was still the leader in early -2001. It still had its early mover
advantages. Provided Khattar plays his cards right, MUL can still rule the roost
for years to come. Whether this will happen for real, is a question too early to be
answered.
Case study: 1.3
DOORDARHSAN: BROADCASTING BLUES
[DD India's national television network is one of the world's largest
broadcasting organizations with respect to the infrastructure it possesses. It
present telecasts programs on 19 channels. Over the years, DD has been losing
its advertising revenues to its competitors [private channels]. The continuously
falling Television Viewers Rating added to the problem. DD has also been facing
many problems regarding its managements, right from the time when Prasar
Bharati was created. In mid-90's, cable television reached many Indian homes
and several private channels, were launched. All of a sudden DD had to
content with a host of channels whose programs were better produced. Poor
quality of transmission and program content prompted viewers, to switch to
48
private channels. The case provides an overview of the problems faced by DD
due to mismanagement and competition from private channels.] "DD needs an
owner" - CEO, Carat Media Services India.
IS DD DEAD?
After years of falling revenues, in 1999-2000 DD had a revenue growth of 50%.
In 1999-2000, DD earned revenues of Rs, 6.1 bn compared to Rs. 3.99 bn in
1998-99. DD showed signs of revival with the launch of DD Worlds [a channel
for NRIs] and had a certain measure of success with some of its regional
channels [Table-1 DD Channels: A snapshot]. However, by the end of 2000-01,
DD's revenues were projected to grow at 6 - 15 % while private channels such
as Zee T V, Star and Sony had a projected 40 -50 % revenue growth.
According to some analysts, DD's sagging revenues were only the tip of the
iceberg. DD was plagued by several problems. By the late 1990's, most private
producers and advertisers and a good part of the audience had deserted DD.
Not even one car company advertised on DD and even two wheeler
manufacturers kept away. Advertisements of Pepsi and Coca - Cola were found
only during sports telecasts. Only FMCG companies stuck to DD, because its
terrestrial network would help them to reach the rural and semi urban
audience. Despite having over 21000 employees, DD outsourced 50 % of its
programs from private producers.
In the late I990's, DD faced allegations of large scale scams and irregularities.
Under-utilized infrastructure, improper investments and poor financial
management adversely affected DD's performance. In 1992, when the
Government opened the airwaves to private players, HD had to face competition
from private satellite channels. In Cable and Satellite [C & S] homes it was
found that DD programs had hardly any viewers. The depleting Television
Viewer Ratings [TVRs] of the DD programs was also a cause of concern as
advertisers deserted due to its low viewer ratings.
49
According to analysts, DD would need a budgetary support of Rs. 5 bn during
fiscal 2000-01 to sustain itself, as its revenues would not cover its expenditure.
Many analysts felt that privatization would be the only solution.
DD : THE INSIDE STORY
DD was launched in 1959 as the National Television Network with a modest 21
community sets in Delhi. In the year 1982, with the introduction of regular
satellite link between Delhi and different transmitters, DD began the
transmission of national programs. In the same year, DD switched to colour
transmission. Soon it had penetrated every nook and corner of the country,
cutting across demographic and geographic barriers.
DD had a three-tier program service - national, regional and local. The national
programs focused on the national culture and included news, programs on
current affairs, and science, cultural magazines, serials, music and dance
recitals, plays and feature films. At the regional level the programs were similar
to the ones broadcast at the national level, the only difference being that they
were broadcast in the regional language.
In 1984, DD introduced a second channel [DD2] in cities like Delhi, Mumbai,
Kolkata and Chennai. DD2 was targeted at urban viewers, particularly the
young viewers.
In 1995, DD launched DD - India, its international channel to cater to the NRI
population. This service covered SAARC countries.. Gulf countries, West Asia,
Central Asia, North Africa and Europe. In the same year, DD entered into an
agreement with the Cable News Network [CNN] and launched a 24 - hours news
and current affairs channel : DD News. In 1999, DD launched a separate
channel for sports.
In the early 1990s, about 479 mn people in Indian homes viewed DD and an
additional 1.5 mn watched DD on community sets. DD was ahead of the private
channels in terms of viewership with a 90% reach. However, in the late 1990s,
50
it could not maintain the lead and phase channels were catching up in terms of
revenue even though they lagged behind in viewership and reach.
Cable onslaught
In 19S4, cable television entered India. For local entrepreneurs, cable television
provided a good business opportunity, as investments required to install a cable
network were low. In the early 1990s, many-private television channels were
launched. Zee TV launched in 1992 led the pack. During 1992-94, there was
rapid increase in the number of cable connection in Western and Northern
India. In Tamil Nadu and Andhra Pradesh, a number of Tamil and Telugu
channels came up in the mid-1990s.
Though by 2000, DD had an incredible reach of 70 mn homes, in comparison to
C & Ss reach of only 30 mn homes. It could not turn this network into an
advantage [Table II for growth of cable and satellite penetration in India]. In
urban households, DD programs had hardly any viewers. DD was also behind
the private channels in terms of ad revenues, as its TVRs were very low
compared to the TVRs of programs on private channels.
Falling Revenues
During 1996-99, the TV advertisement market grew by 76%, but DD's revenue
from advertisement registered a negative growth [Table III for fall in revenues of
DD]. Though DD continued to be number one in overall audience share, it lost
out on viewership segments that had the highest purchasing power.
In 1998-99, DD's revenue from advertisements was Rs. 4 bn [25.8% of the
market], Zee TV was close with Rs. 3.85 bn, Sony had Rs. 2.53 bn and Star
channels grossed Rs. 2 bn. But the ad revenues of private channels have grown
significantly, when compared to those of DD. During the period 1996-99, Zee
registered a growth of 122% in ad revenues, Sony 299% and Star channels
206%. During the same period, DD's ad revenues went down by 70.17 %. DD's
falling TVRs were a matter of concern for clients like Hindustan Lever - DD's
51
largest advertiser. Said Ashutosh Srivastava, VP, HTA-Fulcrum, the media-
buying arm of HLL, Our only source of reaching 40% of this country is going
down. Till 1998-99, 70% of HLLs ad spend went to DD but by 2000-01, due to
tailing TVRs HLL's ad spend to DD had gone down to 50%.
During 1999-2000, producers and distributors stopped giving films to DD when
it began to demand a minimum guarantee of Rs. 10 mn to broadcast a film.
This forced DD to repeat the same old films that it had aired several times, and
the RVRs went down further.
According to some analysts, DD's revenues were going down because
advertisers considered it a down market channel, which catered only to the
lowest socio-economic groups, whose purchasing power was limited. The
revenues earned by DD showed a negative growth during 1997-99. In 1999-
2000, DD saw its revenue grow by 52.8%, but in 2000-01, it was projected to
grow only at 6% [Table III]
Identity Crisis
DD's problems were largely attributed to what Kiran Karnik, former CEO,
Discovery Communications; India called 'its loss of identity. Said Karnik, The
channel has lost its identity, What is Doordharshan : Is it a public broadcaster
or a commercial entity? Initially, DD officials had envisaged that the national
channel would play the role of public broadcaster, while DD Metro would be the
commercial channel. Private producers and advertisers pointed out that this
attitude increased the confusion. They argued that no other network had two
channels competing against each other.
With the launch of the Star News Channel, [the first independent news channel]
in 1998, DD News lost its viewers to Star news. The in-depth analysis of news
itemsby Star News caught the imagination of the viewers [Table IV Comparative
study of different news channel]. DD's image of being the propaganda
machinery of the Government also went against it.
52
Some analysts said politica
1
interference and corruption were another reason
for DD's poor performance. In 1997, The Indian Broadcasting Bill was
introduced in Parliament. The Bill was not passed, but it was enforced through
an ordinance nearly a decade after it was enacted. DD was brought under a
holding company called the Prasar Bharati. In 1998, the Government sacked
Prasar Bharali CEO SS Gill and the Government made DD answerable to a
parliamentary committee. Political interference at the top level made matters
worse for DD.
There were allegations that members of the Central Commissioning Unit of DD
look bribes from producers to air their programs. In 1998, the CBI arrested two
DD officials for taking bribes from a serial producer. This, incident focused
attention on the rampant corruption in the organization and forced
management to issue guidelines regarding acceptance of gifts by employees.
DD had a poor track record in both payments to and collections-from private
players. Over 50 companies owed Rs. 18.2 mn to DD, 45 on July 2001, Amitabh
Bachchan Corporation Limited was DD's highest debtor with outstanding dues
of Rs. 330 mn.
Another allegation that DD faced was that it had allowed International Cricket
Council's [ICC] ex-chief Jagmohan Dalmiya and World Tel's Mark Mascarenhas
to defraud it of Rs. 160 mn over the telecast of 1998 tournament in Dhaka.
The exorbitant prices that DD charged for advertisements slots also contributed
to its poor performance. DD charged the producers around Rs. 1 lakh for 10
seconds, while some of the highest rated soaps on private channels charged half
that price.
DD did not have a marketing team, which could market the advertisements
slots as a package. Private channels like ZEE and Star had their own marketing
teams/ which provided the advertisers with a package of advertisement slots on
their programs. But DD had 5o different producers with 56 different half-hour
programs slots for four hours of prime time each week. Each producer sold
53
commercial time separately, to the advertisers. But advertisers preferred
package deals, which, would give them airtime across the programs for a whole
week.
Breathing fresh life into DD
After SS Gill was sacked in 1998, Rajeeva Ratna Shah was appointed as new
CEO of Prasar Bharti. Shah began overhauling the programs of the two DD
channels and weeding out corruption in the network. He stopped
commissioning programs on DD1 and DD2. He decided to auction programming
hours to the private players who produced the programs for DD and market
them. Shah also announced the setting up of a board comprising eminent film-
makers, actors, poets, writers and people from different walk of life. This board
was to be entrusted the task of revamping DD.
In 2000, the government appointed a committed headed by Shunu Sen [CEO,
Quadra Advisory, a strategic marketing Consultancy], NR Narayana Murthy
[CEO, Infosys] and Kiran Karnik to work out a program for reviving DD. The
committee considered three options. : Privatizing of DD, continuing to run it as
a Public Service .Broadcaster [PSB], and running DD on both PSB and
commercially viable lines. Of the three options, the committee recommended the
third option. The committee felt that there was no need to privatize DD, but
recommended drastic steps for reviving it.
Some of the important steps suggested by the committee were :
Downsizing 25 % of DD's 21000 strong staff
Getting into new media
Setting up its own marketing department
Developing a sharper programming focus.
One of the recommendations was to improve the quality of broadcast. DD
sought the help of BBC to digitize its channels. Modi Entertainment Network
began distributing the five DD channels via satellite. DD went in for a revenue
sharing deal with B4U for showing movies, arid auctioned the 7:10 pm slot on
54
DD Metro to the HFCL - Nine networks. In addition to Rs. 1.21 bn that DD got
from this deal, the move helped DD to penetrate urban homes as well as C & S
homes to some extent. DD also entered into an agreement with Direct to Home
platforms like Echostar and Astra to distribute DD - World in 79 countries. DD
employed Accenture to advise it on how to go about revamping its financial,
management and administrative systems. The National Institute of Design was
employed to redesign the logo.
In 2000, DD announced that it would start its own people meter project
through a separate corporate entity in partnership with a few private channels
and some advertisers. DD felt that its programs were not getting enough
viewership ratings because the viewer samples used by the two firms doing the
ratings -IMRB - AC Nielsen and ORG MARG were largely from C & S homes.
Their ratings did not accurately reflect the viewing habits of the Indian
populace.
According to most, these steps were bound to have a positive effect on revenue.
However, for real growth DD had to be freed from political interference.
TABLE I :DD CHANNELS : A SNAPSHOT
DD 1 Primary channel with national, regional, local and
educational programs on a time sharing basis
DD2 Metro entertainment channel targeted at urban
viewers, particularly the young viewers. Programs
relayed by the terrestrial transmitters in 47 cities
DD4 to DD 13 Ten separate regional language channels :
Malayalam, Tamil, Oriya, Bengali, Telugu, Kannada,
Marathi, Gujarati, Kashmiri and Assamese
DD 14 to DD 17 Networking of the regional services of the four Hindi
55
speaking states : UP, Bihar, MP and Himachal Pradesh
DD18 Punjabi Regional Service
DD India
[DD World]
International channels
DD Sports Sports channel
DD News 24 hours news channel
TABLE : II ; CABLE TV GROWTH IN URBAN INDIA
YEAR NUMBER OF HOUSEHOLDS WITH
CABLE TV [IN MILLION]
1992 1.20
1993 3.30
1994 11.80
1995 15.00
1996 18.00
2000 22.00
2001 30.00
TABLE III: FALL IN REVENUES OF DD
YEAR REVENUE
[RS. BN.]
GROWTH OVER PREVIOUS
UYEAR [%]
1995-96 4.30 8.10
1&96-97 5.72 33.20
1997-98 4.90 - 14.30
1998-99 3.99 - 18.50
1999-00 6.10 52.80
2000-01 [Estimate] 6.50 6.00
TABLE: IV COMPARISON OF THE NEWS CHANNELS
56
STAR NEWS ZEE NEWS DD NEWS
Channel encrypted Channel not encrypted Channel not encrypted
Decoders are required Can be freely aired Can be freely aired
Content caters to the
premium segment
Content caters to the
mass market
Content caters to the
mass market
English predominant
language
Hindi predominant
language
Hindi predominant
language
Only premium brand's
ad taken. Very selective
regarding ads
All brands accepted.
Not selective regarding
ads.
No ads. Only social
messages were
broadcast
REVIEW QUESTIONS :
1. Discuss the features of modern business
2. What is business environment ? What are the constituents of business
environment ?
3. Write a short note on : a] political environment b] social and cultural
environment c] economic environment d] religious environment
4. Why should the environment be scanned? What purposes would it serve?
5. Explain in detail (he features and elements of economic environment.
6. What is an economic system? Discuss various economic systems with
their merits and limitations.
7. What are the features of mixed economic system ? Explain in detail the
working of mixe-1 economy in India.
8. What type of distortions could take place in planning in a mixed
economic system?
9. Analyse the strengths and weaknesses of capitalism and socialism.
10. Distinguish between Marxism and communism. Trace their evolution.
57
.
58
Chapter - II
Political economy- Government and business - Public control of business - Trends
and structure of Indian economy - Socio - economic problems of India
Political economy Government and business
The question of government interference in economic activities has been
debated for a very long time by the economists. While the early economists
considered economics as a handmaid of politics, the modem view is that politics
is the handmaid of economics. With the growing importance of the role of
government in economic welfare, the modem economists firmly believe that the
sphere of government in economic development has no boundary. However,
there is no unanimity among the economists about the extent and mode of state
intervention in the economic sphere. Hence, we can identify the following
political ideologies regarding the government intervention in an economy.
i. The earliest opinion was that the government has nothing to do in an
economy as the society will regulate itself. This opinion also stated that
the government will wither away over a period of time. These ideologists
are called ANARCHISTS.
ii. Opposing the anarchists view is the COMMUNISTS view. According to
them, the individuals cannot do anything on their own and there is a
need for government to supervise and regulate individuals. The state will
own everything and it is the fundamental duty of the government to
organize and direct all economic activities. Hence, government becomes
the custodian of the society and it has a very wide role to perform.
In between the above two views, there are two more views about the extent of
government intervention in an economy. While one view highlights the
individuals, the other lays emphasis on the need for the government. According
to the individualists view, the government a necessary evil. Even Adam Smith
advocated very limited functions for the State and to him the government
should confine to the maintenance of law and order. This view was holding good
59
in the case of Western countries while in most of the under developed countries
the economists themselves argued for larger intervention of the state.
Individualism was found to be exploitative and against the welfare of the
society. Hence, another ideology that emerged was COLLECTIVISM. According
to collectivism, interest of the society is more important than the individuals.
They considered that state has a very useful and desirable role to play in an
economy. So they assigned unlimited powers on the State and argued that the
state intervention is necessary to promote social welfare. The State should
therefore, play a very vital role in economic development. These two limits about
the role of government are often referred to as CAPITALISM and SOCIALISM.
The modern view is that state must play a significant role in an economy that
all the essential services should be State owned and controlled. According to the
modern view the role of government includes maintenance of law and order,
achieving equality and social justice, protecting the weak from the economically
strong, fighting against poverty, etc. The areas of government intervention in
modern state may be broadly discussed under the following heads :
1. PROTECTIVE FUNCTIONS :
By performing these functions, the modem government creates the necessary
atmosphere for performing productive activities. Protection from external
attacks and maintenance of internal peace are necessary so that economic
activities will be performed to maximize the welfare of the society. Some people
argue that this function of the government is unproductive, but without this
function, no economy can ensure performance of productive activities.
2. ADMINISTRATIVE FUNCTIONS
Government activities include a host of administrative works. All these works
are performed through various departments and so the government maintains a
large number of officials and agencies who implement the government policies.
Works of routine nature are performed by these officials and the efficiency in
the administration is a must for rapid economic growth.
60
3. PROVISION OF SOCIAL SECURITY
This is a major function of the modern government as it is concerned with the
improvement in public welfare. Maintenance of public health, provision of
unemployment insurance, free medical and educational facilities, granting old-
age pensions, provision of decent housing facilities, maintenance of public
perks, libraries, museums, etc., have become part of the government functions.
Though these functions are not in any way productive, yet they are necessary to
encourage and promote productive activities.
4. ECONOMIC FUNCTIONS
One of the basic economic functions of the modern government is to ensure
optimal utilization of the available resources. This involves both identification
and proper use of the resources. Especially these days every country needs to
put the available resources to the best use so that the society gets the
maximum benefits. Further if the resources utilization is left in the hands of the
private enterprise, they will under utilize the resources as they have only profit
maximization as their objective. There are also possibilities of the emergence of
monopolist tendencies, concentration of wealth in the hands of a few, etc.
hence, every modern state should interfere in resources utilization. Another
important function of the government is to maintain economic stability. This
means protecting the economy from the influence of business cycles. In the
process of growth, boom and depression are inevitable. But they must be under
check, as otherwise, there will be uncertainty affecting the business prosperity
and through that industrial development. Hence, the modern governments
control and regulate the working of the economic forces so as to achieve
economic growth with stability.
Another very important economic function of the government is price control
and rationing. This measure aims at preventing escalation in prices of essential
commodities and controls the price of other commodities. By resorting to retail
and wholesale price maintenance policies, the government can strive to bring
down the price level. This calls for buffer stock operations as well as efficient
61
demand and supply management of commodities which the country is badly in
need of. This is achieved by introducing rationing of essential commodities
through well designed public distribution mechanism. All these mean,
enormous efforts are required on the part of the government apart from the
willing cooperation from the traders and businessmen. In practice it is found
that price control and rationing are very difficult to be implemented during
inflationary period due to the exploitative and monopolistic attitude of the
businessmen and traders.
Yet another area where government intervention is needed is the removal of
inequality in a country. This inequality arises because of the mal-distribution of
the economic wealth and prosperity. Though national income increases, the rich
becomes richer and the poor the poorer. This tendency should be changed
through legal and political steps. For this purpose government in several
countries have enacted legislations and announced concessions in favour of
poor people. Implementation of these legislations and concessions involve a lot
of difficulties and they have to be periodically revised. The object of the
government in this connection must be to prevent concentration of economic
power and wealth in the hands of a few. Another important economic function
of the modem government is to achieve economic growth. For this purpose the
government has to plan for economic development and in this task the
government part from deciding the targets, planning process, resources
identification and allocation, etc., It should also arrange for financing the plans.
It should be noted that planning has become important in both developed
countries as well as under developed countries. In the developed countries
planning is used to achieve stability in development, while in under developed
and developing countries it is used for accelerating economic development.
The government intervention in an economy is a must for the following reasons:
1. In developing economies the vicious circle of poverty impedes the
economy from developing faster. This vicious circle can be broken only
with the government intervention. In the absence of it, any amount of
planning will fail to bring about the necessary impetus to growth in such
economies.
62
2. In the process of economic development, instability should be avoided at
any cost. Even in developed countries, such instabilities are avoided
with government intervention. In developing countries, therefore, the
government should plan for proper allocation and utilization of
resources as well as economic stability. Allowing the market forces to
operate has certainly some advantages. But in under developed
countries market forces do not operate smoothly because of external
rigidities and structure bottle-necks. To overcome these forces pinning
down economic development, government intervention is needed.
3. The basic requirement for rapid economic development is the economic
and social infrastructure. The investment requirement for the provision
of such infrastructural facilities runs to crores of rupees. This can be
provided only the government and not the private sector. Further such
investments are not income or profit yielding and so private enterprises
may not come forth to undertake such investments. So government has
a concrete role to play in inventing on such social and economic
infrastructures.
4. Investment in social overheads is undertaken by the government by
mobilizing financial resources from various sources. These sources of
government include taxation, public borrowing and deficit financing and
these sources cannot be resorted to by the private enterprises. It is also
well known that private enterprises lack comprehensive approach to
economic development.
5. Government intervention is indispensable in under developed economies
because in such economies, there are several obstacles to economic
development which can be overcome only by the government. As Mir and
Baldwin observed every under developed economy needs a critical
minimum of government intervention to reduce indivisibilities and
discontinuities in the economy, to overcome diseconomies of scale and
63
offset certain other forces that arise to depress development, once
development begins.
Public control of business
In a mixed economic set up like India, the government retains control over
strategic and key industries and operations. This is done through the creation
of public sector units. The role of public sector units is explained below.
Discuss the role of Public Sector in India
Since 1948, the public sector in India has been playing a significant role in
every sphere along with the private sector. These two sectors have been
functioning as complementary to each other, though the government policies
have been usually more favourable to public sector than to the private sector.
Inspite of this, the private sector has also emerged victorious in several fields
and since the announcement of Liberalization polices in 1991, we can
reasonably expect the private sector to reach its potential and the public sector
would also strive its best to withstand .he domestic and international
competition. Hence, the future offers excellent scope for both the sectors, but it
is clear that only the most efficient sector can survive, so how the private and
public sectors are going to react to this challenge will be known in due course.
However, let us now discuss the role of public and private sector in India in
detail.
1. Role of public sector:
First of all it is necessary to understand that the public sector includes the
autonomous corporations, the departmental enterprises owned and controlled
by both the State and Central Governments. The role of public sector would be
discussed with reference to various indicators like employment, investment,
output, national income contribution, savings, coital formation, capital stock,
etc.
a) Public sector and employment generation:
64
One of the important contributions of public sector to the Indian economy is
that it has generated huge employment opportunities and this has reduced the
problem of unemployment to a large extent. The employment opportunities in
public sector includes government administration, defence, health, education,
research and development, enterprise owned by Central and State governments.
It offered employment for 107 lakhs of people in 1971 which slowly increased to
154.8 lakhs in 1981 and it has touched 190 lakhs in March, 1991. This
constituted nearly 71% of the total employment generated in the economy, in
1991. As regards the sector-wise employment opportunities created by the
public sector, in 1989 public sector accounted for 47,8% of the total
employment generated by it through employment in government administration,
community, social and personal services, followed closely by transport, storage
and communications with 16.1% and manufacturing 10.1%
Hence, it is clear that with the growth of public sector, the country is benefited
with more and more employment opportunities.
b) Public sector and income of the public sector:
The share of public sector income in the net domestic product has been
increasing consistently from 7.5% in 1950-51 to about 25% in 1987-88. In a
matter of about 35 years the public sector contribution to net domestic product
has risen appreciably and constitutes one fourth of the total net domestic
product This is mainly because of the rapid expansion of the public sector since
1951. This 25% of contribution in net domestic product is certainly better than
9.6% of contribution by the public administration. However, the private sector
income constituted 75.1% of the total net domestic product. It should be noted
that the public sector units are run on service motive and very little commercial
motive.
c) Public sector and saving and capital formation :
This is yet another crucial yardstick to evaluate the contribution of public
sector. The percentage share of public sector in total domestic savings increased
65
from 1.7 to 2.3 of Gross national product at market prices. But in absolute
terms it increased from Rs. 169 crores in I Plan period to Rs. 7815 crores in VII
Plan. When we consider the percentage share in total sayings, the contribution
of public sector has actually gone down from 17 in I Plan period to 11 in the VII
Plan. However, the contribution of public sector in capital formation (gross
domestic) is really commendable. It increased from a modest figure of 3.5% of
Gross national product at market prices in I Plan period to 10.7% in VII Plan.
As a result the ratio of percentage contribution by public sector and private
sector in total domestic capital formation changed from 33 : 67 in the I Plan to
47 : 53 in the VII Plan. From this it is clear that the contribution by the private
sector during the same period has declined from 67% to 53%
d) Public sector and capital stock:
Capital stock refers to the total stock of plant and machinery, equipment and
tools and other capital goods available at a point of time for further production.
Based on the data available up to 1979-80, it was found that the percentage
share of public sector in total capital stock between 1960-61 and 1979-80
increased from 26 to 37 while that of private sector declined from 74 to 63
during the same period. In absolute terms, the capital stock increased from Rs.
16,377 crores in 1960-61 to Rs. 68,478 crores in 1979-80 in public sector (i.e.,
an increase by over Rs. 52,000 crores) but in the private sector the increase was
from Rs. 46,583 crores to Rs. 1,16,089. crores (i.e., an increase by over Rs.
65,000 crores). The increase is less pronounced in public sector because of the
following reasons:
1. Public sector investments are mostly in economic infrastructure which
does not contribute any output.
2. Public sector is mostly concerned with high capital intensity projects
like railways, iron and steel, power, irrigation, etc.
3. The gestation period of public sector projects are very long.
4. The capacity utilization is very much less in public sector units.
5. Most of the projects of public sector are having higher capital-output
ratio.
66
e) Public sector and infrastructure:
The economic development of a country depends on the development and
maintenance of infrastructural facilities. The essential requirement is provided
by public sector. The industrialization is accelerated only through
infrastructural development. Investment in power, roads, bridges, irrigation,
etc., is non-income yielding, long gestation period oriented, and heavy
investment projects. Hence these are not attractive for private sector. But
without them the country cannot develop faster. Therefore it is apt to state that
the public sector units are responsible for the creation of infrastructures which
constitute the backbone of economic development and industrialization.
f) Public sector and industrial base:
There is no denying the fact that public sector has provided a strong base for
our industrialization. Our industrial policy has clearly assigned a significant
role for public sector, till the end of the third five year plan; industrialization
was taking place at a slower pace because only the important public sector
units were established till then. Since the private sector could not really rise up
to meet the task, since the IV Plan the establishment of public sector units
started on a brisk rate and the industrialization has been accelerated to a
commendable level. Further private sector with its commercial objectives could
not undertake several of the projects and investment requirement of these
projects was also beyond the potential of the private sector. Hence, if at all India
today is having a strong industrial base; it is mainly due to the contribution of
the public sector.
g) Public sector and export promotion:
Public sector has responded well to the needs of the nation by taking up the
task of exporting our products and finding market for them in other countries.
In this respect the contribution of State Trading Corporation, Minerals and
Metal Trading Corporation, Hindustan Steel Limited, Hindustan Machine Tools,
67
etc., are worth noting. Infact, these units are primarily responsible for exploiting
the captive market for our goods abroad. The foreign exchange earnings of the
public sector has gone up from a modest figure of Rs. 35 crores in 1965-66 to
Rs. 170 crores in 1969-70, to Rs. 5,831 crores in 1984-85 and then to Rs.
9,198 crores in 1991-92. The increase has been more than 300 times
comparing 1965-66 figures with that of 1991-92. Though there may be
criticisms about the performance of the public sector units, yet there can be no
dispute about the export achievements of public sector units within a period of
25 years.
h) Public sector and saving of foreign exchange through import
substitution:
India's balance of payments has been a cause for worry since Independence, the
main reason being increasing imports. This trend had to be reversed and the
government rightly selected public sector to establish units to produce
domestically the goods imported so as to conserve the foreign exchange and
also utilize more the domestic resources. Units like Hindustan Antibiotics
Limited and Indian Drugs and Pharmaceutical Limited, have together effectively
checked the inroads attempted by the multinational corporations in the field of
drugs and pharmaceutical. Similarly Indian Oil Corporation Limited and Oil
and Natural Gas Commission have succeeded in bringing down our dependence
on other countries for crude to some extent. They are very active in identifying
oil deposits and natural gas. Their efforts are supplemented by research and
development to invent methods of using the natural gas and reduce the imports
of crude. In this respect the public sector works towards achieving self
sufficiency. With concerted efforts it should be possible for India to achieve self-
sufficiency in the near future. However, the poor performance of the public
sector is causing concern, as unless steps are taken to improve their
performance, the achievement of self-sufficiency' may be delayed.
68
i) Public sector and generation of internal resources :
A close scrutiny of the public sector performance will certainly make one to note
the contribution towards internal resources made by the public sector. For
example, the internal resources generated by the public sector during V Five
year plan was Rs. 3,439 crores, during VI Five year plan Rs. 11,721 crores and
during the period 1985-86 to 1989-90, the generation was Rs. 37,678 crores. In
1990-91 and 1991-92 also the public sector undertakings together generated
Rs. 24,376 crores. This indicates that the public sector units have turned the
corner and with the measures taken up already to spruce up their working we
should be able to realize still greater generation of internal resources.
j) Public sector and contribution to exchequer:
Public sector contribution to the Central Exchequer is, in terms of dividend,
corporate tax, excise duty, customs and other forms. These contributions add to
the mobilization of resources for our planned development. It is interesting to
note that the contributions totaled Rs. 27,570 crores in the VI Plan period, Rs.
70,893 crores during the VII Plan and Rs. 19,520 crores in 1990-91 and Rs.
20,366 crores in 1991-92. It may be noticed that the annual contributions
during the VII Plan period is nearly 75% of the contributions during VI Plan.
Among the different forms in which these contributions are made, Excise duty
and Customs alone constituted more than 82% of the total in the VI Plan
period, while this was 76% during the VII Plan. Subsequently, in 1990-91 these
two accounted for 82% of the total contributions and in 1991-92 it was almost
83% indicating that public sector units do make a valuable contribution to the
Exchequer. Since the performance of the public sector is poor, their
contribution in terms of dividend is very insignificant and this has to be
changed at the earliest so as to make them contribute sizably even in this form.
k) Public sector and growth of ancillary units:
Public sector also makes a valuable contribution by helping the growth of
ancillary units and small scale units. The Bureau of Public Enterprises have
69
undertaken the study to find out the public sector units which could transfer
their production and other facilities to small scale sector. Under this scheme
about 1800 units were set up till 1986. The public sector also enters into
regular contracts for purchasing the entire production or 50% of the production
of small scale and ancillary units. Such purchases from ancillary units
amounted to Rs. 451 crores in 1985-86.
I) Public sector and development of states and backward regions:
One of the objectives in establishing public sector units is to facilitate the states
and the backward region to develop faster. In this connection, public sector has
certainly creditable performance. Public sector contributes to the State
government's resources in terms of sales tax and other state level taxes. Public
sector investments are directed towards the projects in the backward regions
and industrially poor districts. In this way the public sector works in its own
way to eliminate the industrial imbalance in states and districts.
So far we have explained in detail the contributions made by the public sector
towards Indian economic development. It is often said, that even when their
performance is poor, the public sector contributions have been so much, and by
improving their performance, we should be able to make them contribute their
full potential to achieve a higher rate of economic development. It is satisfactory
to note that efforts in this direction to improve the public sector performance
have been initiated and by the turn of the century public sector will emerge as
the main contributor to our economic development.
TRENDS AND STRUCTURE OF INDIAN ECONOMY Features of India as an
under developed country
To classify a country as developed or under developed, one should study the
features of an under developed country. There are several indicators of under
development. Let us discuss each one of them with reference to India to
ultimately answer the question whether India is a developed or under developed
country.
70
1. Existence of low per capita income:
It is customary to compare the per capita income of a country with other
countries to determine whether the country in question could be categorized as
under developed or developed. The IBID is also adopting this method and it has
classified the countries as i. low income countries, ii. Middle income countries
and iii. high income countries. According to the World Development Report,
1993, the annual per capita income of these three types of countries is
estimated as under:
Low income countries $ 350
Middle income countries $ 2480
High income countries $ 21050
It is clear from the above figure that any country with just 1.5% of the percapita
of the high income countries can be categorized as low income country and as
under developed country. In these under developed countries, the per capita
income is very low because i. net national income is very low or ii. Population is
very high or iii. the national income is very low and the population is very high.
Though this used to be the basis for categorizing the countries, "recently the
IMF has measured the value of each country's national income in terms of the
purchasing power of its own currency at home, instead of the currency's value
on international exchanges. Following this India's per capita income in 1991
was assessed as $ 1150 as against $ 330 calculated following the old basis.
Hence, on the basis of the new methodology India can no longer be considered
as an under developed economy.
2. Existence of very heavy population:
The size of population is one more index of development status. It is found that
a country with low population is developed and that with a small size of
population is under developed. It should be noted that in the case of former the
annual growth rate of population is very low, compared to the growth rate in the
later. According to the World Development Review, 1993, the annual growth
71
rate of population in the low income countries was 2.0 between 1980 and 1991
while in middle income countries it was 1.8 and in the high income countries
the rate was 0.6 during the same period. Hence, it is clear that with a higher
rate of growth, the low income countries will experience population explosion
over a period of time. This population explosion will have serious impact on the
economy and impede every effort to achieve higher rate of development. For
example, the population explosion will result in increased poverty, high rate of
unemployment, scarcity for essential goods, etc.
3. Predominance of agricultural sector;
This is another important characteristic of the under developed economy. In
such economies, the percentage of population depending upon agriculture for
livelihood will easily be 70%. The contribution of agricultural sector to national
income will be high and it is estimated to be over 35%. The nature of exports
will be mainly primary goods like agricultural raw materials. In the case of India
nearly 70% of the population depends on agriculture sector (both directly and
indirectly) whereas in a developed country this used to be only about 20% The
contribution by agricultural sector to national income will be around 4 to 5% in
developed countries and the composition of exports will be mostly
manufactured goods and high-tech products. It may also be noted that in under
developed economies, the productivity in agriculture will be abysmally low due
to the use of out-dated technology, conventional method of cultivation, poor
quality seeds and fertilizers, illiteracy of farmers, very high rural indebtedness,
etc. The result is agricultural production will be low and so the contribution to
national income will also be low. Added to this, the sector depends on the
success of monsoon and failure of monsoon directly affects the economic growth
and development.
4. Existence of large scale unemployment:
In under developed country there exists very large scale unemployment due to
various factors. Further the unemployment will continue to increase over a
period of time. The unemployment is due to factors like, huge population, low
72
level of economic activity, poor technology, lack of investment, large illiteracy,
etc. Even those who are employed may not add anything significant to
production. That is there will be disguised unemployment too. The problem is
worsened by the existence of under employment, which means the available
labour power is not fully utilized. The overall effect of all these is that the labour
productivity will be very poor. The efforts to improve the productivity may rot
succeed due to resistance by labour unions and organizations. The economy
will remain under developed so long as the unemployment remains high.
5. Existence of widespread poverty:
Poverty exists in every country. But the difference is that in developed
countries, poverty exists only in certain pockets, while in under developed
countries, poverty is widespread - almost 3/4 of the country lives below the
poverty line. In under developed countries, the preponderance of agricultural
sector, large scale unemployment, income disparities, high illiteracy, etc.,
account for widespread poverty. Added to these, the lack of investment
opportunities, low productivity, primitive technology, etc., also result in poverty
as any amount of production will not generate income. The wage level is so low
that the people have very low saving. Any amount of efforts to alleviate poverty
does not bear fruit due to maladministration, corruption, etc.
6. Primitive production condition:
The excessive population pressure leads to heavy demand for land. The
available land is not put to productive use. There is very high capital deficiency,
one because of low saving and second the conspicuous consumption is very
high. In other words, the little saving is used in unproductive ways. With poor
capital formation, the government would invest heavily in capital intensive
projects as well as welfare projects. The return is very poor and prolonged. The
technology is so backward and primitive that the input output ratio is very
high. The obsolete technology also results in poor return and low productivity.
Another major weakness is that there is lack of entrepreneurial ability. Hence,
investment opportunities are not easily identified and risky ventures are never
73
undertaken. The size of market is small, the market information is absent,
market intelligence is very poor, the administrative ability is at lowest level and
there is lack of investment opportunities. All these culminate in poor utilization
of the available entrepreneurial ability and talent
7. Foreign trade composition:
The composition of foreign trade in under developed country is very much
influenced by its historical relations with other countries. Most of the under
developed countries were colonies in the recent past and naturally their foreign
trade composition clearly reflects this. They export unfinished, agricultural raw
materials and import heavy capital goods. Obviously, their terms of trade will be
unfavorable. Further there exists heavy geographic concentration in their trade.
Any failure of agricultural sector worsens the foreign trade position. With heavy
reliance on the imported machineries, these countries lack latest production
technology. The poor balance of trade and balance of payments deficits force
them to borrow heavily from the developed countries and international financial
institutions. They are caught up in the debt trap and outgo of interest on
international debt is so heavy that the county will struggle to maintain the
exchange rate. The increases reliance on other countries for manufactured
goods will subject the countries to economic and political subjugation of the
exporting countries.
8. Existence of wide disparity in income and poor standard of living:
These countries are also noted for very high income disparities because of
concentration of productive factors in the urban areas, very low mobility of
labour from rural to urban, low rate of employment in the rural areas in
relation to urban areas, high wage rate in the urban and poor wage rate in the
rural areas, etc. The income disparity is further widened by deteriorating terms
of trade between agricultural and industrial sectors. As a consequence, the
standard of living will be very poor in the rural areas than in the urban areas.
Even in urban centers, there will be growth of urban slums. As already pointed
out in these countries the population depending on agriculture is very high and
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so the employment opportunities as well as income generation is very low
compared to that in the industrial sector. As in the initial stage of development
the industrial growth will be confined to urban centers, the standard of living
will be on the whole very poor.
9. Existence of dualistic economy:
Dualism refers to the existence of a developed sector side by side with an under
developed or undeveloped sector. We will come across the co-existence of
sophistication and primitive characteristics in every walk of life. For example, in
the urban areas, one will find the use of modem technology in the production
field as well as households, while in the rural areas, the age old, antiquated
techniques will be used in the production as well as in households. This
dualism retards economic growth. That is, the subsistence sector in the rural
areas will pull down whatever little economic progress is achieved with the
developed and modem sector. Further in the urban areas, one can come across
the existence of dualism, in every activity. For instance there will be modern,
technologically sophisticated industries existing side by side with industries
with labour intensive and poor technology. There will be high wage executives
existing with poorly paid slum dwellers. Firms with international collaboration
producing ultra modem products will be found along with the domestic firms
using inferior technology. In the rural areas also the dualism can be found. We
can find the co-existence of farms with vast expansive areas using modern
production technology along with small farms where such technologies can
never even be dreamt of. The bigger farms will be using trained and skilled
laborers whereas the small farms will mostly be depending on the family labour
and untrained, semi-skilled labour. While the capital investment by the big
farms will be several times higher than those of the small farms, the rural
indebtedness will be found more with the small farms than the large farms. The
marketing strength, holding power, storage facilities, processing facilities,
bargaining power, etc., will all be very much different between large farms and
small farms. From the above explanation, it could be understood that every
effort to develop the economy should be designed so as to make it applicable to
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both the modern sector as well as the undeveloped one. Hence, the overall
growth will be more determined by the contributions of the undeveloped sector.
10. Existence of weak and inefficient administration:
Under developed countries always evince this feature. The political and social
factors influence to a large extent the efficiency of administration. In these
countries, the administrative system is noted for lethargy, red tapism,
bureaucratic interference, delay in decision making, partiality, political
influence in decision making process, bending the laws for favourable people,
etc. The result of this is inefficiency. An efficient employee never gets his due as
the rules and regulations do not permit this. The accountability at the higher
levels is very much less. The responsiveness of the administration in a critical
situation is more rules ridden or ritualistic rather than realistic. There is lack of
managerial and administrative talents in these countries. The lack of know how,
the resistance to change, lack of motivation, etc., are responsible for this
administrative inefficiency.
SOCIO ECONOMIC PROBLEMS OF INDIA
1. Discuss the features of Indian Population
The Demographic features of India can be discussed in terms of the following
ideas:
i. Trend in population
ii. Growth rate of population
iii. Life expectancy
iv. Infant mortality rate
v. Density of population
vi. Age and sex composition
vii. Rural-urban distribution and viii. Literacy and levels of development.
Let us now discuss each one of these features in detail.
i. Trend in population:
As the country with second largest population .in the world, India has been
handicapped with very large population found in a small area. It is said that
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India has 16% of the total land area of the world. This situation has been
remaining for decades as shown by the Table 1 below. It could be seen from the
table below that till about 1931, the size of population was not increasing at an
alarming rate. Specifically between 1911 and 1921, the population size almost-
remained stagnant. There was a slight increase in the size between 1921 and
1931. The decade 1931 to 1921 probably was the only period when Indian
population almost remained the same. This probably was due to the epidemics,
wars, etc., which took a heavy toll during the decade. After 1941 we find a
consistent increase in our population cruising ail concern. More specifically the
increase in population was by : about 4 crores between '41 anc. '51, 11 crores
between '61 and '71, about 15 crores between '71 and '81 and about 16 crores
between '81 and '91.
Hence, after the decade 1921-1931, we find the increase in population
remained almost the same during the decade '71 -'81 and '81-'9l. In the past
nine decades, i.e., since 1901 the addition to our population has been by about
60 crores. But with the slowing down of the population growth since 1981, we
may expect the population to grow at a slower rate in the corning decade.
TABLE 1 : SIZE OF POPULATION (in crores)
YEAR POPULATION
1901 23.8
1911 25.2
1921 25.1
1931 27.9
1941 31.9
1951 36.1
1961 43.9
1971 54.8
1981 68.3
1991 84.6
In 1993, Indias population was estimated to be 88.5 crores.
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ii. Growth rate of population:
The growth rate in population is measured as the difference between the Crude
birth rate and Crude death rate. Of course, the migration and population
should also be taken into account. But in Indian experience, the migration as a
percentage of the total population is very insignificant. Hence, ignoring
migration, we should lake the difference between the crude birth rate and crude
death rate as the normal growth rate in our population. The Table 2 below gives
the normal growth rate in our population.
TABLE : 2 NORMAL GROWTH RATE OF INDIAN POPULATION
PERIOD CRUDE
BIRTH RATE
CRUDE
DEATH RATE
NORMAL
GROWTH RATE
1901-1911 49.20 42.60 6.60
1911-1921 48.10 48.60 0.50
1921-1931 46.40 36.30 10.10
1931-1941 45.20 31.20 14.00
1041-1951 39.90 27.40 12.50
1951-1961 41.70 22.80 18.90
1961-1971 41.20 19.00 22.20
1971-1981 37.20 15.00 22.20
1981-1991 35.20 11.40 21.10
From the Table:2 above, it could be observed that the normal growth rate of
population was very low from 1901 to 1921 mainly because both the crude
birth rate arid crude death rate were high. But ever since 1921, there has been
quite notable decline in crude death rate but not such a pronounced decline in
birth rate. As a result the: normal growth rate of population has remained high
and Infact has been increasing. One sign of consolation is that during 1981-
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1991, the crude birth rate has declined by 2.00 points and the normal growth
rate has also declined by about 1.00 point. This trend, if continued, by the turn
of this century India may have lesser addition to population which is a good
sign. It is estimated that our birth rate would fall down to 27.5 during 1991-
1996 and the death rate would go down to 9.4 during the same period thereby
the normal growth rate would be 18.1 for this period. Based on this the
projection for the period 1996-2000, birth rate will be 24.9, death rate will be
8.4 and the normal growth rate will be 16.5.
iii. Life expectancy:
Life expectancy is usually used as a measure of gauging the health condition of
population of a country. A country with a high death rate and with death
occurring at early age, the life expectancy will be low and a country with a low
death rate and with death occurring at an advanced age, the life expectancy will
be high. Hence, a high life expectancy is a yardstick for health condition of the
population of a country. In Indian case, there has been a significant fall in
death rate since 1951 and so our life expectancy which was just 23 years
during 1901-1911 increased to 46.4 years during 1961-71 and further to 58.2
years during 1991. However, this is very much low compared to some of the
countries like Sri Lanka and Thailand, another interesting feature is that in
India the average life expectancy is more for female population than for the
males. The reason for this could be that the number of male deaths at early
stage is more than that of the females. The increase in life expectancy is
certainly ^ welcome sign, but i; carries with it some social problems like, the
increase in number of joint families, multi-generation families, unemployment
due to extension of service for those who retire lead to unemployment for
youngsters, increase in dependents per family, etc.
iv. Infant mortality rate:
This refers to the number of child death, from birth before reaching the first
birth day. This is measured as number of children that die before completing
first year after birth per 1000 children born. The infant mortality rate was very
high in India during the early part of this century and it was 204. But thanks to
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the development in science and concerted efforts taken by the government, the
mortality rate has come down to about 80 per 1000 in the 90's. However, there
is a variation between urban and rural areas. As on date the mortality rate is
about 50 per 1000 in urban areas and 86 per 1000 in rural areas. It is also
found that there is variation among the states in mortality rate. As for example,
in Kerala it is only 17 per 1000 while it .is 122 in Orissa. Comparing other
countries, the mortality rate is very high in India. For example, in Srilanka it is
only 32, in Philippines it is 49 and in Thailand it is 44. With improvement in
science and extension of medical facilities to rural areas, the infant mortality
rate is coming down rapidly in India, but there is much to achieve in this
direction.
v. Density of population:
This measure helps to determine the extent of burden on land area in a
country. It is measured as the ratio of number of persons per square kilometer
of land area. India's density is one of the highest among the countries in the
world with 267. This is very high compared to countries like Canada. Though
density is high, Japan has a very high per capita income of $ 25430. It is well
established that there is no relationship between density of population and the
economic development. Countries like Canada with very low density of 2.5
persons/sq. km. has very high per capita income of $ 20470 and as already
indicated Japan with very high density has also a very high per capita income.
Among the Indian states also we come across wide variation in density as for
example the Union Territory of Delhi has 6319 as density against Arunachal
Pradesh with just 10 persons/sq.km. It is said that countries which are
industrially advanced will have higher density and wherever the climatic
conditions, rainfall, etc., are good the density will automatically be high.
vi. Age and sex composition :
This information helps to determine and answer certain questions relating to
employment, dependents, birth rate, etc. Age composition in India is such that
(he young persons (0 - 40 years of age) constitute more than 65% of our total
population. Hence, even if the birth rate declines, yet the addition to our
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population because of the predominance of younger aged persons will be more
for some more years to come. The immediate implication of this feature is that
the dependency ratio will be very high. On an average it works out to be 50%.
But when the birth rate declines, this would also decline and the proportion of
working population would go up leading to increase in claimants for
employment.
As regards sex composition, in India it has come down over the decades from
962 females per 1000 males in 1901 to 930/3000 in 1971 and then to
929/1000 by the turn of this century. It is found that this sex ratio is one of the
lowest among the countries in the world. The reasons for this lowest sex ratio is
the deliberate termination of pregnancy of female child, legislation on abortion,
increasing infanticides of female children, lesser care for female children
resulting in their early death, etc. But with the spread of literacy, improvement
in medical facilities, change in social attitude, etc., the sex ratio is likely to
increase. Even now in some of the states like Kerala, and Tamilnadu the sex
ratio is high.
vii. Rural-urban distribution:
This is yet another feature of population which clearly indicates the extent of
change in the concentration of population in rural and urban areas. In the past,
the rural concentration was very high and slowly this is changing that the
urban concentration is increasing. While this is a good sign of development, yet
increasing urbanization has led to several social problems like urban poverty,
increasing number of urban slums, congestion, lack of social amenities,
artificial demand for important facilities like transport, health, education,
entertainment, etc. The proportion of population in urban areas has
consistently increased from 14.1% in 1941 to about 26% 1991. It is likely to
touch 32% by 2000. The rural-urban distribution is not even among the states.
While in advanced states, the urban concentration is high, in less developed
states the rural concentration is still continuing to be high.
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viii. Literacy level:
Literacy level refers to the number of people in the population who can read,
write and understand arithmetic. The literacy rate determines the economic
development. Any country with low literacy rate is bound to be less developed
than countries with high level of literacy. In India the literacy level was very
poor before independence and since then with all the positive steps taken the
literacy rate has gone up. This could be understood when we compare the
literacy rate of males and females in 1951 and 1991. In 1951 the literacy rate of
males was 25% and that of females was just 8% and in 1991, the literacy rate of
males increased to 52.6% and that of females 32.38%.
The substantial increase in literacy level is due to schemes like compulsory free
education for children upto 14 years of age, noon meal scheme, increasing
opportunities for educated in employment, especially among women, increasing
self-employment opportunities for women, etc. It is also to be noted that the
literacy level is high in both males and females in urban areas than in rural
areas. This is obvious because in the urban centers the facilities are more than
in die rural areas. It is also a good signal that over the period the gap between
literacy rate in males and females is narrowing down. In 1991 the female
literate formed about 61.56% of male literate as against just 33% in 1951. As in
the case of other features discussed so far, literacy rate is not uniform in all the
states. Economically developed states report a higher percentage of literacy
among males and females than the less developed states. With the increase in
allocation of fund for education with a thrust to primary education,
establishment of more and more correspondence course institutes, formal arid
non-formal education spread, etc., the literacy level is bound to pick up still
before 2000 A.D.
Nature of population problem in India and the effects of population growth
on Indian economic development
The population problem in India is a basic problem faced by the economy. The
population explosion is due to various factors. We will discuss these causes for
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population explosion first and then understand how this affects our economic
development.
Causes:
It is convenient for us to classify the causes for population explosion by
identifying the causes for high birth rate and the causes for declining death
rate.
1. Causes for high birth rate:
It has been already discussed that birth rate in India has not shown any
significant decline over the decades. This slow fall in birth rate is one reason
why the country has population explosion. The following are the reasons for
high birth rate in India :
i) Climatic factors:
Unlike the other countries, India has a climatic condition which affects the
maturity age of girls. An Indian girl matures at an early age of 13 years which
means the reproductive span or the child bearing span is very high. In Western
countries the climate is cool that the maturity age is not so low. Obviously the
reproductive span is much shorter.
ii) Social institutions:
a) Marriage is a social compulsion in India. That is, once a girl matures, the
social opinion is that she should get married at the earliest after maturity. The
age of maturity being 13 years, the number of women in the reproductive age
group is very large. This means females in the age group of 15 to 49 years can
bear child. Once the marriage takes place at the age of 13, every woman can
bear child, at least theoretically for 30 to 34 years. This age group constitutes
47% of the total female population in India. It is also found that the percentage
of women in this reproductive age group is very high i.e., 81.44% in 1981.
However, this proportion is slowly falling over the period. One more reason for
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high population is the practice of child marriage. Though this practice incoming
down, yet the average age of marriage among females was below 19 years even
by 1987-88.
b) The prevalence of JOINT FAMILY SYSTEM is another reason for high
population growth in the country. The main belief in a joint family system is
that the married couple should have babies. People who do not have babies are
looked down and there is a social stigma attached in such cases. Further there
is a specific preference for male babies. So until a couple gets a male baby they
tend to encourage child bearing. This preference for male baby is due to various
reasons like old age security, labour value of male child, laws of inheritance,
social customs like death rituals, getting dowry, etc. However, with the spread
of education and increased employment of women in various occupations in the
society, the tendency is to have lesser and lesser babies and the specific
preference for male babies is also on the decline. The Joint family system is
slowly disintegrating and giving place to independent small family due to
increasing cost of living, preference for remaining independent, increasing
employment after retirement, encouraging use of contraceptives replacing the
conventional techniques of birth control, etc.
iii) Economic factors:
The most important factor under this category is poverty. The poor people prefer
to have a large number of children Inspite of poverty due to the following
reasons:
(i) Whether the family size is small or big, poverty is all pervasive, hence,
an average family prefers to have more children than a few.
(ii) Children are treated as an asset in poor families as more children can
help the family in work, even at very young age, thereby raising the
income earning capacity of the family.
(iii) As the condition in the poor families is very poor, the infant mortality
rate is very high. To neutralize this every family prefers to. have more
children as this
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(iv) Would be in a way an insurance against high infant mortality rate.
(v) A large number of children in a family can look after the aged better
with large earnings and so the preference for more children,
(vi) The failure of family planning programme to convince the poor people,
as the consider the number of children as the best way to get more
income through odd jobs.
(vii) Indirect government support and subsidies for poor families like ration
quantity based on the size of family, etc
(viii) Possibility of getting pecuniary benefits on occasions like election,
philanthropic functions, free distribution of basic necessaries, etc.,
from the political parties is yet another reason for a big family size.
On die whole the economic factors indicate that Inspite of being poor, there are
several reasons for maintaining a large family size than small ones.
Let us now discuss the impact of population explosion on economic
development of India.
1. The size of population has a direct impact on the size of national income
of a country. In Indian experience, the net national product at factor
cost went up by 215% between 1961 and 1991 but since the population
increased at a rate of 92% during the same period, the percapita income
increased only by 58% during the period. As the population increases,
the increase in national income, even if it is substantial, will be spread
over a larger number of persons thereby the percapita income is low.
With lower percapita income all the other dependent variables of income,
viz., saving, consumption, investment, etc., will also be lower.
2. The most important effect of population growth is on the food supply. In
the - past, Malthus has explained this in terms of his geometrical ratio
and arithmetical ratio. He pointed out that the population increases at a
slow arithmetical ratio. Consequently over a period of time the rate of
growth of population will exceed that of food production. This leads to
food problem. In the case of India, Inspite of a spectacular achievement
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on the food front, the scarcity for food continues as explained below. The
net availability of food grains between 1956 and 1992 increased by
140% but the population during the same period recorded an increase of
118% and so the percapita availability of food grains increased only by
10% . With ever increasing population, there is a need for the
government to maintain the public distribution system with all its
malpractices at a phenomenal cost to the exchequer.
3. Another vital aspect of impact of population on economic development is
that with rising population, the percentage of dependents also increases
apart from the increase in non-working population deteriorated between
1961 and 1981. In 1961 the number of unproductive consumers was
256 million but it increased to 464 million by 1981, which in percentage
terms is 57% and 62% respectively. The unproductive consumers are
those who do not contribute anything to national income. Hence, with
every addition to population the absolute number of unproductive
consumers increases who make no contribution to national income, but
claim a substantial share of national income. As a result the economy is
impoverished. It should also be noted that with 40% of our population in
the age group of 0 to 14 years of age and 6% belonging to aged group of
above 60 years of age, there is increase in dependency with every
addition to population. This is clearly a drain of savings of every
household and the society is denied of precious savings and the capital
formation.
4. A very significant effect of population growth is on employment. It is very
simple idea to understand. With increase in population there is sizeable
addition to the labour force, but when the employment generated is less
than the addition to the labour force, the result is unemployment and
underemployment. For instance during the VI plan period the number of
unemployed was 20.7 million accounting for 7.74% of the labour force,
while by 1990 this has increased to nearly 23 million. Inspite of eight
five year plans and generation of employment, it is proved that the
number of employment generated is clearly less than the addition made
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to the population. This means that a valuable resource is unutilized or
under utilized. This is a national waste. If we consider among the
unemployment, the educated unemployed, then the gravity of the
situation will be easily understood.
5. The increase in population makes a heavy demand on the community
facilities like education, health, housing, etc. In the case of education, in
India primary education is made free of cost and the expenditure
incurred by the government on this account alone is Rs. 2,246 crores.
Since the number of children in the age group of 6 to 14 years is about
156 million and expenditure at the rate of Rs. 144 per year per child will
mean a heavy drain on the financial resources. In the case of medical
facilities the number of people depending on public hospitals and other
medical facilities is increasing day after day causing a heavy drain on
resources for the government. Apart from the availability of education
and medical facilities being threatened by the growing population, the
quality of service rendered is also found to be very poor. The rising
population has made housing a major problem. The result is up coming
of slums in every part of the country. Leading a life of abject poverty, the
poor people neither have access to education, medical or housing
facilities. Added to these is the expenditure of the government on
populist welfare schemes like noon meal scheme, free books and note
books, free chappals, etc. All these political compulsions have denied the
economy the crucial financial resources for developmental purposes.
6. Rapid population growth affects capital formation in a country. With
rising population, it is already pointed out that the national income is
shared by a larger number of people and so the per capita income is low.
Consequently, the saving potential of the people is also low. In order to
achieve rapid economic growth, there is. a need to at least maintain the
growth in national income. But India with 2.2% growth rate (annual) of
population, national income must rise at the same rate so that the per
capita income remains the same. For this purpose capital investment
should take place at least in the order of about 12% whereas in India
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the capital investment growth is poor because of poor saving.-Even
though it is said that our annual saving rate is about 23%, majority of
saving is used for unproductive purposes like marriage, on jewels, etc.
Hence, the capital formation is very poor and the population growth eats
away whatever increase in national income is possible.
7. Population growth has impact on environment. This was explained by
Anne Ehrlich in terms of a formula I = PAT, where I refers to
environmental impact, P stands for population, A refers to per capita
consumption and T refers to environmentally harmful technology that
supplies A. The three factors PAT have multiplicative relationship and so
their combined effect is very serious. Further with every significant
addition to population, there is misuse of resources like water,
electricity, land, etc. The result of this misuse is that a huge quantity of
waste is generated in different forms which directly affect the
environment. For example, the demand for fuel will go up with
increasing.
8. Population, then people will start cutting trees to get the cheapest fuel
available. Slowly this leads to denudation of forests leading to ecological
imbalance affecting the environment. Substitutes used also affect the
environmental purity as in the case of atomic power or plastics, etc.
9. Population explosion carries with it severe social problems. When the
population increases, we will find migration of workers from, rural to
urban centers seeking employment which directly means additional
pressure on the urban facilities. Apart from mushrooming of urban
slums, several problems like communal riots, thefts and other such
anti-social activities are committed. The crime rate goes up disturbing
the peace and mental strain, causes a change in attitude and social
values get eroded. People become more and more self-centered and such
an environment is not good for shaping the future generation.
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10. There is a direct impact on quality of population due to population
explosion. By quality of population we mean the work potential, mental
make up, work culture, etc. With ever increasing population, every
individual family is unable to maintain the standard of living and this
affects the health and mental conditions of people. Automatically these
would affect the productivity of workers. The work force is so weak
physically and mentally. With pressure of family, the workmen demand
for more wages and salaries. They try to earn maximum by carrying out
inferior quality work or working in more places with lesser efficiency.
The work culture is tampered that every person wants to minimize work
and maximize leisure. The effect of all these is the productivity is very
low and the country loses.
11. In an agricultural oriented country like India, the increasing population
exerts a heavy pressure on limited land resources. With millions
depending on agricultural sector, the pressure would be more and this
leads to sub-division and fragmentation of land holdings making them
unfit for adopting modem methods of cultivation. This affects the
productivity of land. Though this is neutralized through scientific
methods like using high yielding variety of seeds, application of
fertilizers and pesticides, multiple cropping, etc. All these depend on
availability of water. With environmental degradation, the monsoon fails
and the increasing demand for drinking water, etc., will result in
scarcity of water for multiple cropping: Further more frequent use of the
same land even with application of fertilizers, would result only in the
operation of law of diminishing returns.
Therefore, without controlling population growth it is not possible for any
country to achieve rapid economic growth, and maintain it if achieved. For this
a suitable population policy is very much needed.
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Population policy of government since independence
During the first five year plans, the government was not sufficiently
concentrating on a sound population policy. It was merely allotting funds
through every five year plan for family planning. From a modest sum of Rs. 65
lakhs during the I Plan, the amount increased to Rs. 5 crores in II Plan, Rs. 25
crores in III Plan, Rs. 277 crores in the IV Plan. With such a serious problem on
hand viz., control of population, the amount allocated till the IV Plan was
sufficient enough to sustain the family planning programs but not for extending
it to the rural areas in a big way. During the V Plan the allocation touched Rs.
409 crores which was increased to Rs. 1,448 crores in the VI Plan, hence, only
V Plan onwards, was there any concrete attempt to control the population. Till
the IV Plan the government was focusing on the following lines of action to
control population:
1. Spreading knowledge of family planning technique.
2. Supply of contraceptives to all in the rural and urban areas.
3. Financial incentives for people who undergo family planning operations.
4. Conducting a large number of camps for sterilization operation for both
males and females.
After the lifting of emergency the government seriously considered the following
for controlling population:
(ii) raising the minimum marriageable age of males and females
through legislative provisions
(iii) raising the level of education among the females
(iv) raising the monetary compensation for sterilization operation
especially in the rural areas
(v) making sterilization operation compulsory for couples with two
children etc.
But such coercive tactics failed to yield the fruit, as in most of the cases, the
officials were more concerned about the target fixed for them than the public
sentiments and reaction.
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The VI Plan fixed the target for net reproduction late as one to be achieved by
1996 against the present level of 1.67. The target for sterilization operation, IUD
insert ion and CC usage, could not be reached due to the following reasons:
absence of infrastructural facilities, political compulsions, cultural values,
religious sentiments, high infant mortality rate, etc.
During the VII Plan certain basic understandings about our population as given
below made the government to approach the problem from a different angle.
(i) It was understood that the majority of Indian population is living below
the poverty line and it is this group which has a very high birth rate.
(ii) In a democratic set up it is necessary to set the minimum age for
marriage and also the prescription of sterilization operation through
legislation.
(iii) To increase the acceptance of sterilization operation, the infant
mortality rate should be brought down.
(iv) Using other incentive like priority in housing, increase in salary,
preference in employment, adult ration for child, etc., as followed by
China, which could successfully bring down its birth rate significantly
in a decade.
The VU Flan accordingly fixed the following targets :
(Current level given in brackets)
i. Population growth rate 1.2% (2.03%)
ii. Crude birth rate21/1000 (30.6/1000)
iii. Crude death rate 9/1000 (10.3/1000)
iv. Infant mortality rate 60/1000 (91/1000)
With these targets, the Plan formulated the Family planning and maternity and
child health strategies. Through this the Plan also aimed at reducing the
maternal mortality rate. .The family planning programs were re-oriented to
make them family welfare programs, thereby giving emphasis on every aspect of
the family than on'/ the birth rate and reproduction rate. However, mere was a
heed for orientation of everybody concerned in order to achieve that target set.
The government on its part made a hefty contribution through plan allocations.
91
Population policy in the VU Plan :
With the findings of the Census conducted in 1991, the government has
decided lo formulate an Action plan on following lines :
i. To extend the family welfare services to more areas and improving the
quality of service.
ii. To give more autonomy for States to manage these programs so as to
avoid the target focused action.
iii. To introduce innovative programs for achieving higher level of family
welfare especially among the urban slums.
iv. To identify the districts with birth rate above 39/1000 and develop
special programs for these districts.
v. To invite and appreciate the involvement of voluntary and non-
governmental agencies to these programs.
vi. Relating the grants to the village panchayats and the State
government for rural development with the achievement in bringing
down the birth rate.
vii. To encourage small family concept.
viii. To dispel the son-preference attitude.
ix. Devising schemes for post-retirement period so as to discourage
unnecessary issue of children.
x. To improve the political will in implementing all these programs.
92
With these policy options, one may expect that during the VIII Plan, the rate of
growth of population would slow down so as to bring down the net reproduction
rate to 1 as targeted already.
Balance of payments position since 1991 and critical evaluation of the
New export-import policy 1992 - 1997.
The balance of payments position, which had reached a point of near collapse in
June, 1991, slowly stabilized during the course of 1991-92. Although new
policies to deal with the situation were quickly formulated by the new
government and implemented within a few months the external payments
situation took time to stabilize primarily because it had been allowed, to
deteriorate to a state of near bankruptcy in June 1991. Foreign currency
reserves had declined to $ 1.1. billion despite heavy borrowing from the IMF in
1990-91 and a substantial part of this was held in illiquid deposits which could
not have been easily mobilized if needed. International confidence had all but
collapsed, commercial borrowings had dried up-and even letters of credit
opened by Indian banks were being generally rejected unless accompanied by
confirmation by foreign banks.
The strategy for the management of the balance of payments outlined in the
Budget for 1991-92 which was presented in July, 1991 relied upon a
combination of macro economic stabilization and structural reforms industrial
and trade policy. It was recognized that in the medium term, the solution to the
balance of payments problem would have to come from a much stronger export
performance, but in the shorter run the strategy had to be underpinned by
mobilization of external financing from the multilateral agencies and from
bilateral donors. Restoration of access to imports through liberalization had to
depend initially upon additional financing since the export efforts would take
time to show results. Since access to external commercial borrowing was
constrained the only other sources of funds were the bilateral and multilateral
agencies. Visible support from the multilateral agencies was important for
restoring international confidence.
93
Accordingly, the government negotiated a standby arrangement with the IMF in
October, 1991 for $ 2.3 billion over a 20-month period, a Structural Adjustment
Loan with the IBRD of S 500 million and a Hydrocarbon Sector Loan with the
ADB for $ 250 million. Parallel with the effort to draw on multilateral sources,
the government also launched the India Development Bonds aimed at
mobilizing NRI sources of funds.
With the assurance of external support through these efforts, there was a
gradual stabilization of the balance of payments position in the course of 1991-
92. Foreign exchange reserves were restored to more normal levels increasing
from $ 1.1 billion in June, 1991 to $ 5.6 billion at the end of March, 1992, The
entire amount of drawls from the IMF in 1991-92 with the accretion from India
Development Bonds together amounted to an inflow of $ 2.87 billion. This was
less than the increase in reserves of $ 4.51 billion from June 1991 to end
March, 1992. In effect, the exceptional financing mobilized in 1991-92 was used
primarily to build up reserves.
Import restrictions were gradually lifted in the course of 1991-92 as the balance
of payments stabilized. By the end of 1991-92 the new Liberalized Exchange
Rate Management System introduced in the Budget for 1992-93 eliminated
import licensing in most capital goods, raw materials, intermediates and
components and introduced a dual exchange rate system with one rate
effectively floated in the market. The Budget for 1992-93 also reduced the
customs duties in line with declared Government policy in order to make the
Indian economy more competitive and gradually exposing Indian industry to
external competitive pressure. The trade and exchange rate policy regime for
1992-93 was therefore characterized by major progress in eliminating
unnecessary administrative and discretionary controls over foreign trade which
were contributing to making our economy uncompetitive.
The year 1992-93 saw a revival of imports to more normal levels. The total value
of imports in US $ in the period April-December 1992 increased by 16.5% over
the level in the corresponding period of 1991-92. The increase appears large
94
only in comparison with a highly depressed level prevailing in 1991-92. In fact
the level of imports in 1992-93 as a whole is expected to be around $ 25 billion
which is somewhat lower than the level in 1990-91.
Exports in 1992-93 performed far better than in 1991-92. Total export growth
in the period April-December was 3.4% in dollar terms compared with an
observed decline of 1.5% in 1991-92, The performance of total exports is
depressed by the decline of more than 60% in exports to Russia and other
States of the former Soviet Union in 1992-93. The growth of exports to the
general currency area in the period April-December was 11.4%. The average
growth rate in April-December, 1992 has been adversely affected by a decline in
exports of I2.5%
!
in December, reflecting the disturbed conditions prevailing in
that month, figures for January are also likely to be depressed by the riots US $
19 billion. But it is hoped that the export performance in subsequent months
will return to the high growth rates of 15 - 16 per cent observed during
September-November.
The current account deficit in 1992-93 is expected to be around $ 7 billion,
reflecting the revival of imports to more normal levels. This deficit is being
financed through a combination of traditional financing sources and exceptional
financing.
However, there are important uncertainties in the balance of payments. The full
impact of the disturbances in December, 1992 and January, 1993 on exports
and-imports is difficult to assess at this stage. Clearly, the receipts on account
of tourism would be less than anticipated. The inflow of NRI deposits has in any
case been small this year. The inflow of external assistance is also subject to
some uncertainties consequent upon constraints that affect the rate of
utilization. A step up in commercial borrowings was, in any case, not
envisaged. Finally, there is the uncertainty arising from leads and lags.
Interest rates and, exchange rate expectations do affect the timing of receipt
of export proceeds and payment of import costs. However, while these
uncertainties justify a measure of caution in assessing prospects, the balance of
payments in 1991-92 has performed more or less as expected.
95
New export-import policy 1992 -1997 :
On March 31, 1992, the Government announced a new export-import policy for
the period 1992-1997. This policy has the following objectives:
1. To institute the required framework for globalization of the India's
foreign trade.
2. To improve the export capabilities of our industry, the policy aims
at promoting the productivity, modernization and competitiveness.
3. To facilitate improvement of image of our products in foreign
markets, the policy encourages the attainment of high quality in the
export products.
4. By allowing liberal access to raw materials, intermediates, components,
consumable and capital goods etc., in the international market, the
policy wants to achieve higher exports.
5. The policy provides for deregulation to achieve self-reliance so that
the domestic producers can improve their efficiency and become
competitive internationally.
6. The policy also lays emphasis on research and development as
well as technological advancements so that the domestic producers
will benefit from globalization.
7. A significant object is to simplify the procedure for exports and imports.
Subsequently, the government announced further modification to the above
policy by April 1, 1993. The important features of this modified policy are:
(i) The duty-free export benefit given to the Export oriented units
and the units in Export Processing Zones is extended to units
engaged in agriculture and allied activities provided they export
50% of their total production.
(ii) The government removed 144 items from the negative list of
exports leaving only prohibited items, items requiring license
and canalized items.
96
(iii) As a step to tap the potential of farm sector, professionals,
hotels, travel agents and diagnostic centers, the government
extended the Export promotion capital goods scheme to them.
(iv) For more than 2200 items, standard input-output norms are
fixed to enable the issue of license under the duty exemption
scheme.
(v) The criterion for recognizing export houses is now based on the
foreign exchange earning to FOB values of physical exports.
(vi) The procedure relating to export and import has been further
simplified.
(vii) Compensation would be given for unutilized import licenses for
duty free license scheme and exam scrip holders.
These provisions in the latest export-import policy would certainly enable India
to improve her exports and bring down imports. This has been experienced
during the first half of 1994 itself.
Structural composition of national income in India. The limitations of
National income estimation in India.
According to the First report of the National Income Committee, "National
income estimate measures the volume of commodities and services turned out
during a given period, counted without duplication." This means the total
volume of goods and services produced in a year in a country is valued in
monetary terms to obtain the National income of the country concerned.
Regarding the measurement of National income, it could be done in three
different ways depending upon the interpretation of concept of national income.
If National income is considered as a flow of goods and services, then the
method used is called Product method. If National income is treated as a flow of
income then the relevant method of measuring it is called Income method.
Alternatively, if National income is treated as a flow of expenditure, the method
used is called the Expenditure method. Apart from these traditional methods of
measuring National income, one more method is evolved and it is called the
97
Value added method. Let us now look into the contents of each of these
methods.
i) Product method: In this method, the value of goods and services
produced in an economy during a year is found at the market prices,
to obtain the gross national product at market prices. By subtracting
indirect taxes and adding subsidies, we obtain the Gross national
Product at factor cost. By deducting from Gross national product the
depreciation, we obtain the Net national product.
ii) Income method: When we aggregate the income received by various
factor services, like rent, wages/salaries, interest and profit we obtain
the National income at a factor cost. By deducting depreciation from
this we obtain the Net National income at factor cost.
iii) Expenditure method: By classifying expenditure as consumption
expenditure and investment expenditure, and then adding them will
get is the National income. This could be calculated at market prices
or at factor cost as in the other methods.
iv) Value added method : .In all the above methods, there is a possibility
of double counting and to avoid this the best method is to sum up
only the value added to the product or services at every stage. In that
manner only the net accretion in value of a product or service will be
taken into account to arrive at the final value of all goods and services
produced in a year. This method is by far considered as the best
though it bristles with certain problems and-difficulties.
In India we adopt a combination of the product method and income method for
measuring National income.
98
Trend in National income since 1951 :
The growth of National income in India since 1951 can be understood from the
Table given below.
RATE OF GROWTH OF NATIONAL PRODUCT-IN INDIA
(Figures in percentage)
PLAN ACTUAL TARGET
FIR5T 3.6 2.1
SECOND 4.0 4.5
THIRD 2.4 5.6
FOURTH 3.3 5.7
FIFTH 5.0 4.4
SIXTH 5.4 5.2
SEVENTH 5.7 5.0
EIGHTH --- 5.6
Analysis of the National income in India has yielded the following trends :
1. There has not been a consistent increase in our National income as
revealed by the growth figure given in the table above. Our real national
income was going up at an annual average rate of 3.9% while the
population was also increasing at an average annual rate of 2.13%
Consequently the per capita income increased at an annual rate of only
1.8%
2. It could be observed that the rate of growth declined over the decades.
While it was around 3.8% during 50's, it came down to 3.5% during
60's and then further to 3.1% during 70's. I980's witnessed a reversal of
the trend by recording 5% per annum. But again in the first three years
of 90's the rate came down to 3.5% , A similar movement was also
observed in the per capital income.
99
3. Changes and fluctuations in the growth rate of National income was
very nigh between years. The main reason for this is that we continue to
depend on uncertain monsoon to succeed every year. A successful
monsoj3fi boosts up the rate of growth while an adverse monsoon
brings down the rate. In Indian experience, the failure of monsoon is a
regular feature and so the growth rate in National income has been
declining over the decades.
4. As years rolled, it was observed that the fluctuations in growth of
national income also widened. For instance during the first decade the
fluctuation was between - 1.7257 and + 8.1568 while it widened in the
second decade lying between - 4.7565 and + 9.2071. Fortunately there
was negative growth rate in the eighties and the fluctuations were
ranging between + 2.2 to + 11.2 but early nineties repeat the earlier
performance with the growth rate varying between + 1.5 and + 5.8. The
fluctuations widening over the decades clearly indicate that our
planned efforts are not really bearing fruits and that we still depend on
uncertain monsoon.
5. An interesting observation is that this overall fluctuations over the
period is quite consistent with the fluctuations recorded by the primary,
secondary and tertiary sectors. In other words, these basic sectors were
not free from fluctuations and in a way the fluctuations in them cause
the over all fluctuations. Among the sectors, the primary sector
understandably recorded wide fluctuations followed by the secondary
and then the tertiary sectors. This observation is more confirmed when
we study the sectoral contribution.
6. Composition of Net Domestic Product (NDP): The contribution by
different sectors to the NDP will vary from country to country and even
for a country from time to time depending upon the stage of economic
development. It is usual that in the initial stage of development the
contribution by primary sector will be very much higher than in the
100
other sectors and over a period this would change. In Indian case also
this has become true. For example in the table given below the;
contribution of the three sectors underwent a change over a period of
four decades.
It would be clear from the table below that the contribution by the tertiary
sector is on the increase over the period followed by the secondary sector and
then the primary sector. This is because the rate of growth of the tertiary and
secondary sectors has been more than double that of the primary sector. The
secondary sector which accounted for a higher growth rate till the end of the II
Plan started receding and the tertiary sector has retained the lead in growth
rate.
1. COMPOSITION OF NET DOMESTIC PRODUCT
(In percentage)
SECTOR 1952-53 to 1955-56 1985-86 to 1989-90 1991-92
PRIMARY 56.06 34.58 27.00
SECONDARY 15.63 26.57 29.00
TERTIARY 28.31 38.95 41.30
2. When we study the compound growth rate of commodity and non-
commodity sectors, we find that the rate of growth is higher in the case of latter.
This tendency is welcome because the primary and secondary sectors can only
generate limited employment opportunities while the service sector or the
tertiary sector or the non-commodity sector has greater potential in respect of
employment. With economic development, the share of transport,
communication, energy, banking and insurance to the national product would
automatically increase as is experienced in India.
3. The study of per capita distribution of GDP in agricultural and non-
agricultural sectors indicates that over four decades the per capita distribution
is more in the case of non-agricultural sector than the agricultural sector. The
reasons for this are that:
101
a) the growth rate is high in the non-agricultural sector than in the
agricultural sector and
b) as the population increases, there is no significant shift taking place
from the agricultural to non-agricultural sector.
This is clear from the table given below:
PER CAPITA DISTRIBUTION OF GDP
(Amount in Rs.)
SECTOR 1950-51 1960-61 1970-71 1980-81 1990-91
AGRICULTURAL 860.83 956.17 955.60 940.48 1143
NON-AGRICULTURAL 1886.52 2573.32
3302.69
3506.47
5189
4. Share of the rural and urban sector to NDP is also used to understand
the composition of NDP. In Indian case, the contribution by the urban sector to
NDP is very much higher than that of the rural sector. Similarly the per capita
income in the rural and urban sectors in terms of ratio shows that the per
capita income was high in the urban sector and low in rural sector. The ratio
increased from 1: 208 in 1951 to 1 : 241 in 1970-71. But subsequently it
declined because with the increase in population, the size of urban population
increased and that of rural population declined. Hence, in 1980-81 the ratio
was 1 : 232 and 1 : 246 in 1989-90.
5. The analysis of the share of organized and unorganized sectors in the
NDP in terms of the factor income revealed that the share of factor income in
the organized sector increased consistently over the last three decades, but that
of the unorganized sector remained dormant even in 1990. This is because the
size of unorganized sector consisting of agricultural sector, corporate sector and
service sector. The share of factor income in the organized and unorganized
sector is given in the table below.
102
SHARE OF ORGANIZED AND UNORGANIZED SECTORS IN NDP
(In percentage)
SECTOR 1960-61 1970-71 1979-80 1989-90
UN-ORGANIZED 74.40 72.28 64.81 63.35
ORGANIZED 25.60 27.82 35.15 36.65
6. To study the share of public and private sectors in-the GDP let us look
into the table below:
SECTORS 1960-61 1970-71 1980-83 1990-91
PUBLIC 10.56 14.49 19.80 26.40
PRIVATE 39.34 85.51 80.20 73.60
The table above clearly indicates that the share of private sector in GDP
remains high and constitutes nearly 75% of GDP even in 1990-91. But the
share of private sector has declined from about 90% to about 74% between
1960-61 and 1990-91. On the other hand, with the emphasis on public sector,
its share in GDP has shown a consistent increase in the past three decades and
it is constituting more than 25% by 1990-91. The reason for the low share of
public sector in GDP is mainly because that it started developing late, and that
the agricultural sector is mostly in private sector.
Based on the above indicators we may come to a conclusion that over the past
four decades, the secondary and tertiary sectors have emerged as important
sectors with the tertiary sector occupying the top position. The urban sector is
continuing to hold a more important place than the rural sector. The
unorganized sector still remains in the predominant position and the public
sector is yet to make a significant leap in contribution to GDP.
103
Limitation of national income estimation in India :
The conceptual confusions associated with national income estimation have not
been cleared satisfactorily and so the estimation process is subjected to various
interpretations. Apart from these the following limitations are also found in the
estimation:
1. The existence of non-monetized sector and the output flowing from it has
remained outside the computation of national income. In Indian case, in
the agricultural sector the barter system still continues that a sizeable
quantity of produce does not enter into the market system at all. For
example, the wages paid in kind itself is substantial quantity and it is
not included in the valuation process.
2. Lack of data relating to the income of small producers and household
enterprises is yet another serious limitation. Most of the households
engage in alternative occupation and the income earned through that is
never accounted for. For example, the services of cook, household
preparations of edible items, etc., are valuable but the income earned
through such occupations is never known, similarly in the rural areas,
the small producers never maintain details of income, expenditure and
other data relating to their production. It is reasonable to expect that the
income generated through these sources is substantial and when it is not
included in national income the estimate of national income is very much
less.
3. Difficulty in differentiating (he economic functions performed is yet
another limitation in. the estimation of national income. For example, an
agricultural peasant during the season may work in his own field, and
also in the farm yard of the neighbour, during the off-season he may
work at a match factory, or just rear cattle of others, etc. Then how to
classify his income? The usual practice is to classify the income earned
under industry origin. but with a sizeable section of the people depending
104
on agricultural sector where the occupation is seasonal, it is very difficult
to estimate the income earned from various occupations.
4. Existence of black money and unaccounted money is another major
hurdle in the estimation of national income. Of course this problem is
experienced by every country. In India the National Institute of Public
Finance and Policy h:ts estimated in 1983-84, the size of beck money to
be around 18 to 21% of the total income. With every possible increase in
this category of income over the period, the estimation of national income
is bound to be very much less.
5. The compilation of data for national income estimation is taking place in
a very loose manner. Usually the data at the village level are compiled by
the village head man who may not collect these data in the scientific way
in which it should be collected. Obviously the aggregation of these data
will involve lot of inaccuracies. Further there is more than one official
agency supplying the data which rarely tally. Another bad practice is to
round off the data in an unscientific manner. All these have serious
implications on the data base for national income estimation.
On the whole, the national income estimation is subjected to the above
limitations. Efforts are being taken at every stage to improve the estimation
process, computerization of data, has been started only recently and with tins a
reasonable j level of accuracy in the data can be expected. Further centers like
Center for Monitoring the Indian Economy have been established and their
work is integrated. With these, national income estimation should become
satisfactory in future.
PROBLEM OF POVERTY
1. Distinction between absolute and relative poverty. Poverty line in
Indian context. The causes for poverty in India and
evaluate the various poverty eradication programme.
105
Absolute poverty is a state in which a person lacks resources even to meet or
his family's biological needs,-lives in a condition of isolation with a high degree
of insecurity. This condition is likely to be hereditary.
Further the person may neither be educated nor have anyone to care for him
and may live in poor or inadequate housing and work in inhuman conditions.
Basically such persons may not be able to meet the fundamental costs of living.
Relative poverty is a state in which the position of a person or a family can be f
expressed in relation to others in the society, especially in terms of the living
and f working conditions. This clearly picturises the inequalities in the society.
The poverty of a person or a family is always explained and understood with
reference to the average level of the society. Those people who are found to live
with low income, less remunerative employment, poor living conditions, etc
compared to the average determined for the society are said to be living under
poverty.
In Indian context, we examine absolute poverty to understand the extent of
poverty and also the causes as well as the eradication programs undertaken by
the f government. In order to estimate the poverty and the number of poor
people in the country, the concept of poverty line' is used. In defining the
poverty line usually three important factors are considered viz., i) minimum
nutritional level for subsistence, ii) cost of this minimum diet and iii) per capita
consumption expenditure. .While using these factors, care is taken while
making inter-year comparison of poverty by using appropriate deflators to
neutralize the effect of inflation. Most of the studies on poverty have used the
data supplied by the National Sample Survey. But all these studies have been
able to make only a rough measure of Indian poverty. Hence, for our purpose
we will consider the measure adopted by the Planning commission.
The Planning commission has used the nutritional requirement as the basis for
computing the poverty line. According to the Commission, there is a need to
define poverty line for rural areas and urban areas separately. Accordingly,
interms of calorie requirement per person per day, the Commission fixed 2400
106
calories for rural areas and 2100 calories for urban areas. In terms of monetary
unit, it works out to be Rs. 10,890 for rural areas and Rs. 12,570 for urban
areas (at 1991-92 prices).
On this basis the Economic survey 1992-93 estimated the percentage
population below the poverty line as shown in the table below :
AREA 1987-88 1989-90
RURAL 33.40 28.20
URBAN 20.10 19.30
ALL INDIA 29.90 25.80
The estimate of poverty given in the above table by the Planning Commission is
contradicted by various studies undertaken by research scholars. For example,
while the Planning Commission estimated about 22% points fall in poverty
between 1972-73 and 1987-88, Prof. Minhas and others have pointed out that
the decline during the above period was only by 12% points.
Another aspect of the poverty estimate is that there is a significant regional
difference as well as inter-state difference. For example, in 1988, the percentage
population living below the poverty line in different regions is as given below:
REGION 1970 1983 1988
SOUTH 61.0 46.2 43.2
EAST 61.8 57.3 51.3
CENTRAL 46.9 40.2 37.2
WEST 46.1 38.2 34.9
NORTH 12.6 9.8 8.3
Based on the above tables, it could be understood that "the poverty has
declined over a period and significantly during the 80's. This is attributed to
the following reasons :
107
i. The GNP increased by 5J% during the 80's compared to about 3.5%
increase till the 70s.
ii. The poverty eradication programs undertaken by the government has
started yielding the fruits.
iii. The increasing urbanization has resulted in the increase in income,
especially the urban migrants remit sizeable amount of money to their
relatives in the rural areas resulting in improved standard of living in
rural areas.
iv. The spread of education and impact of education together have
contributed to the reduction of poverty.
v. The development of non-farm activities in the rural areas has also
helped to improve the status of the rural poor.
Causes of poverty
1. The ever increasing population: This is one of the basic reasons for
poverty, especially the rural poverty. It is well known that the annual
addition to population was more than the rate of economic growth.
The quality of our population, especially the productivity and health
condition, is so poor that population growth merely adds only the size
of claimant to the available resources without making any significant
contribution to the output.
2. The large scale unemployment is the next factor which is both a
cause for poverty as well as the effect of poverty. It is a cause in the
sense that when millions of people remain without employment, their
contribution to output is nil but they claim a share in the output.
When the claimants to the limited output is high, then the per capita
availability -is so low which causes poverty. Unemployment is the
result of poverty in the sense that when the poor people, mostly
unskilled, want employment, they do not get employment Even if they
manage to get the employment is purely seasonal and temporary.
3. Another important reason is the under utilization of the available
resources. Inspite of technological advancement, scientific
108
improvements, etc., the utilizationis very much far from satisfactory.
As a result the total output is less whereas the claimant is more
which causes poverty.
4. The growth strategy adopted by the country through Five year plans
has not yielded the desired or the targeted results. Most of the
schemes of poverty
5. Eradication has touched only a small segment of the population. The
agricultural sector is still remaining in the same position that it is
unable to contribute significantly through increased production and
productivity to our national income.
6. The existence of inequalities in income is yet another reason for
poverty. The inequalities are mainly due to the concentration of
wealth and property in the hands of a few. As a result the percapita
income is very low resulting in poverty.
7. Ecological degradation and deforestation are also causing poverty.
The urban poor reed forest based resources mainly wood for fuel
purposes. This they obtain by indulging in indiscriminate felling of
trees and denudation of forests. This directly affects the earning scope
for the rural poor, as they depend mostly on the forest resources and
agricultural lands for their livelihood. With the fast denudation of
forests, the rural poor become poorer.
8. The distribution of resources in the country is not even and this is
evident from the inequalities existing among the states. For example,
even in the 90's Orissa remains a backward state while Maharashtra
is in the forefront like Punjab, Haryana, Uttar Pradesh, etc. This is
one of the reasons for the prevalence of poverty in certain states.
109
Measures to alleviate poverty
1. The first step towards eradication of poverty is to achieve fast economic
growth. It is realized that poverty in India is more due to institutional
factors and so there is a need to attack directly poverty through
programs aimed at particular group of people. That is why programs like
Integrated Rural Development Programme, Jawaharlal Rojgar Yojana, etc
have been introduced.
2. The large scale producers have to be oriented towards v/elfare of the
community and the small scale industries should be Moro employment
generating and help in the removal of unemployment, especial in the
rural areas.
3. At the national level, the country should improve the rate of surplus
generation by increasing resources mobilization. But this will be difficult
when the propensity to save and invest is very low among people and the
tax rates are very stiff. This could be achieved by achieving better
utilization of resources, using better techniques, improving the
technology, etc. All these will help to generate the income in the economy
and the percapita income will also go up.
4. With the application of improved technology, use of high yielding variety
.seeds, fertilizers and insecticides, it should be possible to increase the
production and productivity in the agricultural sector which directly will
increase the income of the farmers. This in turn means higher per capita
income for the rural folks thereby reducing poverty in the rural areas.
5. It is well known that nearly 70%, of Indian population is depending on
agricultural sector and the agricultural sector is completely depending
on monsoon, Monsoon is most uncertain that the famous saying is
Indian agricultural is gamble with monsoon. There is a need to improve
the irrigation facility .and relieve the dependence on monsoon so that the
agriculturists will have good production and achieve a higher level of
productivity with which they can be relieved from poverty.
110
6. Several other measures like a forestation, massive rural employment
generation, improving soil conservation, adopting latest technology in
production process, improving the allied occupation to provide
alternative employment opportunities for the farmers during the off-
season, etc., can certainly bring down the level of rural poverty.
7. As recommended by the World Bank, the rural employment schemes
should be more oriented towards women as it is found that in nearly
35% of the rural family womens share in the family income is quite
significant. Special schemes could be devised to improve the employment
opportunities for women so as to supplement the income of the family
with womens earnings.
8. The rural credit system needs review, especially after nearly 25 years
after nationalization of banks. The banks should be involved more in the
rural schemes and new employment oriented schemes have to be
identified and liberal financial assistance should be provided for such
schemes so as to help remove poverty in the rural areas.
9. Efforts should be made to discourage conspicuous consumption among
the people and encourage them to make productive investment. This,
calls for a change in life style of the people and their consumption
behaviour. Though it would fake a long time to achieve this, yet steps
should be initiated at the earliest in this direction.
10. Encouraging co-operative efforts in various fields, improving and
spreading educational opportunities, creating the awareness among the
people that the poverty is only a stage and it could be overcome with
consistent efforts, devising new schemes targeting specific group and its
peculiarities, rigorous implementation of land reform policies, etc are all
other measures which would bring down poverty in India.
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All the schemes were in operation for quite some time and an evaluation of
these schemes has brought out certain deficiencies of them. Efforts have to be
taken up to overcome these deficiencies so that these schemes would help to
eradicate poverty in India.
(i) The first deficiency is that these schemes are weakly integrated with
other plans for area development.
(ii) The community assets created through various schemes has not been
employment generating in nature.
(iii) The welt to do farmers and people in the rural areas are found to be the
beneficiaries of the schemes aimed at eradicating poverty.
(iv) The delay in the implementation of the schemes and the allotment as
well as release of funds for these schemes is robbing the expected
benefits of these schemes.
(v) Politicians interfere in the process of identification of the beneficiaries
that the fruits of these schemes do not reach the targeted group of
people.
(vi) Failure to provide adequate training to the persons: in-charge of
implementing various schemes is also another reason for the schemes
not being effective.
(vii) Poor flow of communication and details about the various schemes to
the rural folks is one more reason for the deficiency of these schemes.
There is a need to strengthen the publicity for these schemes so that
the needy will be benefited.
As has been already stated, the government has introduced various schemes
aimed at eradicating poverty, especially in the rural areas, but the above
mentioned deficiencies should be viewed seriously so that the efforts to
eradicate poverty will start bearing fruits.
Problem of unemployment in India
Unemployment is of different types. Every type of unemployment is found in
India. Before we analyse the nature of unemployment, we should understand
the types of unemployment
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1. Structural unemployment: This is a type of unemployment caused
'mainly by the change in the development strategy adopted by an
economy. For example, suppose a country basically agricultural in
nature, plans to adopt industrialization as a strategy. This will result in
displacement of labour in agriculture and not all of them can be
accommodated in the industries. This type of unemployment caused is
called Structural unemployment.
2. Cyclical unemployment: Every economy goes through the ups and downs
in the process of development. This type of economic fluctuations is
studied through the behaviour of business cycles. Hence, during the
period of inflation, the unemployment will be less and during the period
of depression unemployment will be more. Such type of unemployment is
caused mainly because of the deficiency of effective demand. Keynes has
discussed this type of unemployment in his theory. Such unemployment
is caused due to the economic fluctuations and every country will
experience this type of unemployment.
3. Frictional unemployment: This is another type of unemployment which is
caused by shift in the productive effort. For example, during war time,
workers are absorbed in war-time industries. Once the war is over, these
workers are rendered unemployed as the war-time industries and
production do not continue. Such an unemployment is called factional
unemployment. An economy which is flexible can quickly solve this type
of unemployment.
4. Seasonal unemployment: This type of unemployment is very closely
linked with the seasonality in production in any sector. For example, in
the agricultural sector, during the harvest season, there is heavy demand
for labour. All unemployed laborers will get work. But once the harvest
season is over, these laborers remain unemployed.
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5. Under-employment or disguised unemployment: This is the type of
unemployment which is never practically seen, but only experienced.
Suppose a job which can be performed by just 10 worker, has in reality
has 20 workers, then the excess 10 workers who are not actually
required are said lo be under employed or disguised unemployed. In
other words, the surplus labour do not make any addition to the output.
Technically, their marginal product is zero. Such a situation is called
wider-employment or disguised unemployment. In India this is the type
of unemployment which is found in large scale in agricultural sector and
public sector. Alternatively, when a Post-graduate qualified person is
employed as a peon, then he is said to be under employed as his true
potential is not really put into use.
6. Educated unemployment: This type of unemployment is found among the
educated persons. Though there are different levels of education, at any
level, if a qualified person is unemployed, then he adds to the number of
educated unemployment.
7. Rural and urban unemployment: Depending upon where there is
unemployment, we may classify unemployment as rural an.1 urban
unemployment.
TREND IN EMPLOYMENT IN INDIA
When we analyse the growth rate of employment by sex and residence we
observe the following trend:
1. The employment on the whole has been growing at the rate of 2.21 per
annum during the 15 year period (1972-73 to 1987-88).
2. The rate of growth in urban employment was found to be more than that
of the rural employment, the respective rate being 4 per cent and 1.75
per cent. As a result, the share of employment in the total employment
had gone from 16% to 22% during the 15 year period studied.
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3. It is of interest to note mat unemployment among male and female
increased more or less at the same rate and their share in total
employment also remained the same over the 15 year period.
4. However, the rate of growth of employment had been declining when we
divide the 15 years into three 5 year period.
5. As regards the growth rate of employment in organized and unorganized
sectors, it was found that in both the rate of employment was on the
decline, though the rate of employment in the unorganized sector was
greater than that of the organized sector during the 15 years studied.
6. Among the sub-sectors in the organized sector, the rate of employment
was more in public sector than in private sector. While in public sector
the rate of employment was growing at the rate of 3% per annum the
employment in private sector increased at a lower rate of 0.5% per
annum.
7. The study of growth rate of employment in major sectors of our economy
indicated that in terms of growth rate of employment the sectors could be
listed in the following order: Construction, Electricity, gas and water
supply. Mining, Transport, storage and Communication, Manufacturing,
Services and Agriculture.
NATURE OF UNEMPLOYMENT IN INDIA
Even before we discuss the extent of unemployment in India, it should be
noticed no accurate estimate of the problem is available. This is mainly because
of various types of unemployment and lack of data base on unemployment even
agencies like Directorate General of Employment and Training or Census or
National Sample Survey or the Employment exchanges can give accurate
information on unemployment. However, the available estimates could be used
to understand the magnitude of this problem.
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Looking into the Plan documents one can get the information about the backlog
of unemployment at the beginning of each Plan. This is given in the Table
below.
BACKLOG OF UNEMPLOYMENT DURING FIVE YEAR PLANS
PLANS I II III Annl VI VII
Back log - at the start of
the Plan
3.3
5.3
7.3
9.6
11.3
7.8
Addition to the labour
force during the Plan
9.0 11.8
17.0
14.0
32.1
36.3
Total (1+2) 12.3 17.1 24.1 23.6 43.4 44.1
Additional employment
generated
7.0
10.0
14.5
11.0
35.6
40.4
Back log - at the end of
the Plan
5.3
7.1
9.6
12.6
7.8
3.7
From the Table it could be seen, that the unemployment at the end of every
Plan has gone up to the Annual Plans and after that the Backlog had come
down during the VI and VII Plans, This implies that efforts taken to generate
employment have yielded the desired result, though the entire backlog could
not be erased completely.
It may be noticed that this reduction in backlog need not be taken as an
indicator of the problem being solved.
It is necessary to study the unemployment sex-wise, and residence status-wise
to understand the problem in right perspective. This are being studied below.
The analysis of unemployment rates sex-wise and residence status-wise
indicated that:
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(i) The current daily status unemployment rates was found to decline
both in urban and rural areas for both males and females
(ii) A current weekly status unemployment rate was found to increase for
males whereas among the urban females this rate was almost
constant while in the case of rural females it was found decline.
(iii) The usual status of unemployment was found increasing among
males and females in both the rural and urban areas.
CAUSES FOR UNEMPLOYMENT
The problem of unemployment in India is caused by various causes. Let us now
discuss the main causes for this problem:
1. The first cause for unemployment is the steady increase in population.
The rate of population growth is around 2.2% per annum while the rate
of employment growth is hardly matching with it. Hence, the
unemployment situation worsens with every addition to population.
2. The rate of labour absorption in the organized sector in India is very
limited as most of the segments in this sector are already full with
labour force. Hence, the best way to absorb the surplus labour is by
expanding the small scale units which are highly labour intensive.
3. The low productivity in agricultural sector is another reason for
unemployment. With a large scale under-employment and disguised
unemployment in the rural sector, there is limited addition to the
output. As a result majority of the rural folks remain unemployed and
they cannot also be absorbed by the industrial or other sectors as they
do not have training.
4. The indiscriminate increases in the number of graduates coming out of
the universities and the lack of link between the curriculum and the
actual requirement by the industries are the next set of reasons for large
scale unemployment among the educated persons.
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5. The mushrooming of technical institutions throughout the country is yet
another reason for the unemployment among the technicians.
6. The large scale failure and sickness among the small scale units in the
country is another reason for unemployment.
7. The failure of several schemes for generating employment is itself a
reason for the existence of large unemployment.
8. The lack of co-ordination among various agencies engaged in generating
employment also results in unemployment prevailing.
9. The delay in identifying the potential sectors for generating employment
has resulted in the building tip of huge backlog of unemployment.
10. The lack of training facilities and the lacunae between the training
institutions and employing agencies is another reason for unemployment
among the trained persons.
11. The inherent resistance to mobility among the laborers itself is a reason
for unemployment For example; laborers do not prefer to go to places
where jobs are available even if it amounts to remaining unemployment
otherwise.
Solutions to solve the problem of unemployment:
The unemployment problem needs solution at different levels. The solution for
this problem at the urban level is different from those at the rural level. Hence,
steps are to be taken at both the levels to bring this problem under control. We
discuss below the solutions for this problem under urban level and rural level
separately.
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Suggestions for solving urban unemployment:
1. The foremost step is to make education relevant to the society. Instead
of continuing with the purely academic orientation, efforts should be
made to spread vocational education.
2. Industries with low capital intensity should be started in large scale so
that they can generate more employment. Though the small scale units
have come into existence in large scale, yet the failure rate among them
is very high. Steps should be taken to minimize this sickness among
small scale units so that they can generate employment in large scale
and help to solve this decades old problem.
3. The import of technology should be discouraged and the domestic
technology should be updated so that it can generate more
employment.
4. Industrial units with short gestation period should be encouraged in
large scale.
5. Decentralization of units and incentives for location outside the urban
limits to industries, would help to relieve the urban unemployment to a
large extent.
6. Financial assistance to self-employed persons should be made more
liberal that such types of employment will help to minimize the
intensity of the unemployment problem.
7. Considering the potential of the service sector, organized and co-
coordinated efforts are required to encourage establishment of units in
the service sector which can take the load to a large extent.
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8. Productivity in industrial sector should be improved that more
opportunities arc automatically created.
Solutions for rural unemployment includes the following points :
1. Establishment of small scale units to utilize the locally available
resources is one important step.
2. Providing training facilities for the rural folks in various areas will help
them to improve their skills so that they can get employment in
various sectors.
3. Extension of rural oriented jobs will also help to solve the problem.
4. Large irrigation schemes with excellent capacity to generate large scale
employment should be started
5. Community development projects should be initiated with guidance to
effectively tap the rural man power.
6. Several agricultural oriented small units like dairy farm, poultry farm,
beekeeping, etc., should be set up in large scale so as to provide off-
season employment and also supplement agricultural income.
7. Spreading vocational education among the rural folks will also help
them to improve their skills with which they can get employment.
8. Liberal financial assistance, managerial and technical guidance will go
a long way to minimize rural unemployment.
9. Effectively monitoring the rural employment schemes to
prevent malpractice and wrong diversion of funds will, help in
realizing the objectives of these rural employment schemes arid
projects.
10. Establishing links with the urban market to ensure ready market for
the products from the rural areas will help to ease the unemployment
among the self-employed rural folks,
The problem of rural unemployment Measures to solve this problem
The agricultural sector offers livelihood for millions of people in India. One
segment of these dependents is the agricultural laborers. There is no parallel to
the sufferings of these agricultural laborers. This is a unique group of laborers
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with certain peculiar characteristics. Infact it is because of these peculiarities of
agricultural laborers that they remain always in object poverty.
One of the peculiarities is that these agricultural laborers remain unorganized.
Unlike the laborers in industrial sector, the agricultural laborers have no
opportunity to come together. They remain independent that once a laborer gets
the work on a day he does not bother about others. When he remains
unemployed no other laborer takes any interest or shows any concern. Being
illiterate these laborers have not understood the importance of collective
bargaining.
Another peculiarity of the agricultural laborers is that they mostly remain
unskilled. This is because of their nature of occupation, which is seasonal and
mostly temporary. Further there is no specific work that any laborer
concentrates and every laborer is prepared to do any type of work connected
with cultivation. Hence, no specialization or skill is acquired by them. The
extent of illiteracy among them also stands in their way of improving their skill
through training.
The agricultural laborers are highly migratory in nature unlike the industrial
workers who are more stable in their jobs. This is a peculiarity that could be
found only with agricultural laborers. The nature of their occupation is such,
that these agricultural laborers get temporary job wherever they go. Being
unskilled they go in search of job and accept any offered to them. Further,
unlike the industrial workers who do more specialized and specific work, the
agricultural laborers have several, odd jobs that they need not stick on to a
particular job or employer for ever. It is because of this migratory nature of their
work, that they are unable to command any remunerative reward for their work
and get organized.
A very important peculiarity of the agricultural laborers is that their employers
in most of the circumstances also are poor and so they do not offer
remunerative wages. Further the employer and his family members also involve
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themselves in every work along with the hired workers. This results in very
close contact between the agricultural laborers and their employers. Till very
recently, there is no codified rule or regulation for protecting the interest of the
agricultural laborers. In the case of industrial workers, several legislation are
enacted at various points of time to protect their interest. In the absence of
such well defined rules and regulations, agricultural laborers are subjected to
various types of exploitations and they are denied of their dues. Further these
workers have no appellate authorities to appeal and get their grievances
redressed. Mostly, the disputes relating to agricultural laborers are settled at
the village level where the money power is found to be final. In other words, the
rich farmers and landlords always decide cases against the interest of the
workers and the latter also do not react to such one-sided judgments, lest they
should remain unemployed for ever.
With all the above peculiarities explained it is not a surprise that the
agricultural laborers lead a .life of misery. This is clearer when we study their
economic condition.
(i) Majority of the agricultural laborers do not own any land. Even those
owning land, the average size of landholding is just 1.33 acre.
(ii) The employment that the laborers get is temporary and purely
seasonal. It is well known that on an average an agricultural worker
gets employment only for about 4 months per year and this too not at
one stretch. Obviously, the laborers borrow heavily and remain in
debts forever.
(iii) With no fixed hours of work and regular wages, these laborers lead a
life of penury and they are never able to balance their income and
expenditure. It is estimated that more than 52% of the agricultural
workers are in debts which range between Rs. 244 in West Bengal
and Rs. 1808 in Rajasthan. Inspite of the minimum wages legislation,
the wages of the laborers remain abysmally low as in most of the
places the legislation has no relevance. Further, the agricultural
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wages do not go up on par with the industrial wages due to the
absence of collective bargaining, exploitation by landlords, illiteracy of
laborer, etc.
(iv) A very significant feature of the agricultural laborers is that most of
them come under bonded laborers. This means, when a laborer is
unable lo meet his family expenditure with his meager income, he
borrows from the money lenders or landlords at very high rate of
interest. The repayment does not arise with his income level. Hence,
the entire family is indebted to the money lender or the landlord, who
uses these laborers through generation for cultivation and other
purposes. This if, how the agricultural laborers families become
bonded laborers.
(v) With very poor economic back ground, the agricultural laborers lead a
life of misery. Naturally, their productivity is very low. This affects not
only their ability to command better wages, but also the country with
lesser productivity in the sector.
So far we have discussed the peculiarities and the economic conditions of
agricultural laborers. What are the reasons for this? The causes; for the poor
position of the agricultural workers are as follows:
1. The excessive growth of population is the basic reason for this
condition of agricultural laborers. With sizeable addition every year, the
dependence on agricultural sector increases which in turn increases
the unemployment. As a result the laborers arc prepared to work even
for very low wages. The employment that they get is not permanent and
purely seasonal. They migrate from place to place in search of good
employment but not permanent employment. With large scale
unemployment, they lead a poor life and they have very little strength
to be productive. Another outcome of this dependence on land is
indebtedness.
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2. It is well known that the agricultural laborers are paid poor wages and
the wages are paid even today in kind. This affects the purchasing
power or the capacity of the workers. Immediately after the harvest,
when the laborers are paid their wages in terms of the crop, these
laborers try to dispose of this in the market, or the village shops and
they realize lesser money value much less than what they would get if
they are paid in cash. Hence even if the agricultural laborers get their
wages", their purchasing power is relatively low.
3. The tenure of employment is highly uncertain in the case of agricultural
workers. In the absence of any rule or regulation the employment of
laborers is subjected only to the personal likes and dislikes of the
employer. They are exploited to the maximum extent by the land lords.
There is no bargaining power in the absence of any organization to
protect their interest. This in turn has encouraged bonded laborer
system. The laborer? Always live in poverty and in the absence of
alternative occupation work under suppressing conditions. This affects
their productivity as well as initiative to get organized. They remain
unskilled being satisfied with what they get.
4. One more important reason for the pathetic condition of the
agricultural laborers is that they do not get any protection from the
government also. Whatever legislation are there, they all only help the
powerful landlords who are able to circumvent the legislation finding
loopholes. Further, State is a silent spectator to the exploitations of the
laborers, as without the aggrieved protesting, there is no scope for the
government to intervene. The poor laborers also do not have any other
alternative source of income. Another problem is even if the
government is able to relieve the bonded laborers from their bondage;
the expenditure on their rehabilitation is very huge that States hesitate
to accept this burden. Once the laborers are free to work, they do not
get job as they mostly are unskilled. There is also no scope for
accommodating, them in any other productive sector as they do not
possess any other skill. Assuming that the government is able to allot
124
them land so that they can cultivate it and survive, these laborers do
not have the wherewithal to use the land and survive. In several cases,
these laborers who are given land, are found to pledge the land with
the money lenders and once again remain agricultural laborers.
Hence, when we consider the above explanation, we find that the agricultural
laborers have no scope for leading a normal life. However, we may suggest the
following ideas with which their problems may be solved at least to some extent.
The National Commission on Rural Labour has also made certain
recommendations to improve the position of these laborers. Let us now discuss
these in detail.
1. On its part the government has passed the Minimum Wages Act to
ensure that the agricultural laborers are not exploited. While the Act has
provisions to pay minimum wages, it has no teeth. In other words,
though the Act has been passed, it remains ineffective, in the sense that
the government is not able to enforce this Act. The main reason for this
is that agricultural laborers are highly unorganized unlike the industrial
workers. In the absence of unions, the provisions of this Act are not
effectively implemented. Further the laborers are in debts and in certain
cases these debts have been incurred in the past by their forefathers.
They do not come forward to rise against their employers for fear of
losing their occupation. Hence, mere passing of Minimum Wages Act
would not help the workers, unless the government follows it up with
measures for effective implementation.
2. In order to protect the interests of agricultural workers, the government
has launched several special programs like Small Farmers Development
Agency, and Marginal Farmers and Agricultural Laborers Development
Agency. These are specific programs to protect a particular group of
laborers falling in small farmers, marginal farmers and agricultural
laborers category. These programs are implemented to start with in
certain areas so that slowly they could be extended to other areas. In the
past the government launched community development programs to
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protect the weaker sections in the agricultural sector. With such
programs, the benefits ma^ flow to the target group, but there is a need
to extend these programs to others in other areas and also to come up
with corrective steps wherever these programs do not reach the targeted
group.
3. Another important step taken to mitigate the condition of the
agricultural workers is land reclamation and settlement. The
government as well as service organizations are engaged in the process
of reclaiming lands from the big farmers .and rich land lords. These land
are pooled and then* redistributed among the agricultural- workers and
landless peasants. Bhoodan movement was started by Vinoba Bhave
mainly to encourage philanthropic land lords to donate voluntarily lands
which were redistributed among the landless peasants and workers.
These efforts met with very little success and the lands mobilized in this
way either were found to be not fit for cultivation or in litigation. Further
there were several problems in the redistribution process. For instance,
proving die identity and domiciles bf agricultural laborers were main
problems. In several cases after the lands were redistributed, the
laborers either retained the lands uncultivated for want of funds for
cultivation or pledged them for raising funds for running their families.
Hence, there is an urgent need to attend to this problem of reclamation
and resettlement and eliminate all the obstacles and hurdles in the
process.
4. Several new rural employment programs have been launched by the
government-at different points of time. Certainly these programs have
helped to bring down the problem of unemployment in the rural areas
and divert the surplus manpower in the agricultural field to the of her
closely related occupations. These programs range from laying of roads
to minor irrigation, canal construction, soil conservation, social forestry,
etc. As lakhs of people are involved in these programs, to some extent
there is scope for using the idle manpower in the rural areas. However,
these schemes themselves cannot eradicate poverty or unemployment in
126
the run
areas. Apart from the shortage of funds for implementing such
schemes the government has to monitor several such schemes at the
same time which adds to the administrative burden of the government.
Possibility of making the local rural agencies responsible for the
administration and operation of these schemes would help to make the
benefits flowing from such schemes to reach the targeted group.
5. A very significant improvement in this connection is the passing of The
Bonded Labour System (Abolition) Act, 1976. This Act has completely
liberated all the bonded laborers at one stroke. But the effectiveness of
this Act is still in doubt, because laborers themselves have preferred to
stay with the landlords or their employers for fear of losing their
livelihood and the difficulty for the government to find them alternative
employment. Hence, Inspite of this Act, the bonded labour system is still
found in several parts of the country. The government should now
seriously think of implementing this legislation and simultaneously
create agencies which will arrange for the rehabilitation of the released
bonded laborers. The contribution of the voluntary organizations can
also be invited as government alone cannot attend to this task. As a step
towards rehabilitation these agencies can train the displaced bonded
laborers in simple works like printing press, book binding, stitching,
carpentry, etc., so that the released laborers can start with a new
occupation instead of once again coming into the fold of agricultural
occupations.
6. Another positive step in this direction has been the Central government
coming out with the insurance scheme for ails-the agricultural laborers.
The premium of Rs. 10 per year is paid by the government and the
insurance cover is for Rs. 1000. Every head of a family is insured, and
this is a small beginning. This scheme should be slowly extended so that
the family of agricultural laborers will have some tort of protection after
the death of bread winner.
127
7. With the establishment of the National Backward Classes Finance and
Development Corporation recently, the government has shown its
determination to attend to the problems of the poor and downtrodden
agricultural laborers. This Corporation will help to generate self-
employment' opportunities, provide concession in finance and assist to
improve the technical skill of laborers belonging to Backward Class.
8. A major development in alleviating the problems of agricultural laborers
is the setting up of the National Commission on Rural Labour by the
government, which submitted its report in July, 1991. The Commission
has gone into the depth of the conditions of the small fanners, marginal
farmers and the agricultural laborers and made a number of
.recommendations. Basically the Commission felt that the level of living
of the agricultural laborers should be improved and they should be
involved in the development process.
In this connection the following are the recommendations made by the
Commission:
(i) Free and compulsory education for all children in the rural areas upto
the age of 14.
(ii) Prohibition of child labour in every form in any industry.
(iii) To provide collateral - free loans to women, a separate National Credit
Fund has to be set up from which loans could be given to women.
(iv) Fixation of minimum wages as Rs. 20 per day with a provision to
change it by linking the wages with Consumer Price Index.
(v) Provision of liberalized credit to laborers through co-operative banks.
These suggestions are being examined by the State governments and
the Central government and when they are accepted, then we may
expect the condition of the agricultural laborers to improve.
THE INFLATIONARY TREND IN INDIA AND THE STEPS TAKEN BY THE
GOVERNMENT OF INDIA TO CONTROL INFLATION IN INDIA.
128
Immediately after independence, the inflationary pressure was controlled by the
government by taking the following measures:
1. The government imposed new taxes and increased the rate of old taxes
to absorb the surplus purchasing power in the hands of the people.
2. The government also simultaneously reduced the money supply.
3. The public expenditure was also reduced to some extent.
4. The government announcement of increase in bank rate from 3 to 31/2
per cent in November, 1951 had a good impact.
5. Government also simultaneously took several steps to increase the
volume of production. In spite of these efforts during the period five year
plans the inflationary pressure continued.
During the I Plan period in spite of the increase in agricultural and industrial
output, the inflation set in mainly because of the failure of monsoon in 1955
and a heavy dose of deficit finance to the tune of Rs. 420 crores. In the II Plan,
the increases in prices of ail commodities continued to be experienced. There
was very limited success on the control inflation. However, the government
could resort to a lower level of deficit finance to the tune of Rs. 948 crores
against a target of Rs. 1200 crores. The III Plan witnessed further spiraling up
of prices. During this plan several factors contributed towards the inflationary
pressure. Specifically the Chinese aggression, increased money supply, increase
in government expenditure and acute shortage of foreign exchange fuelled the
inflation. The actual deficit finance was Rs. 1133 crores much above the
provision of Rs. 550 crores. The reliance on deficit financing continued during
the annual plans the government resorted to nearly Rs. 682 crores of deficit
financing. The IV Plan period witnessed some efforts on the part of the
government to bring down the inflationary pressure. For instance, the
government decided to finance its public expenditure through non-inflationary
means as far as possible, the bank rate was raised from 6 to 7% The cash
reserve ratio was jacked up from 3 to 5%. The minimum rate of interest to be
charged by the commercial banks on their loans and advances was fixed at 10%
But all these steps failed to bring the desired result as the government resorted
to a huge dose of deficit financing to the tune of Rs. 2150 crores against the
129
original target of Rs. 850 crores. During the V Plan period there was no let up
on the price front. The inflation rate was so alarming that the government had
to introduce several measures. Through several ordinances, the government
froze all profits and wages at current levels and through the third ordinance,
the compulsory deposit scheme for the income tax payers was introduced.
So prices slowly started declining. By March, 1976 the price level in India rose
by 11 % To control this high rate of inflation, the government resorted to supply
management policies. It curbed further increase in money supply and the effort
was to increase the supply of wage goods. But the policies failed because the
government gave a greater emphasis on controlling credit rather than
controlling money supply. During the VI Plan the deficit finance was to the tune
of Rs. 5000 crores and so the inflationary pressure continued to build up. the
government came up with its anti-inflationary policy by laying emphasis on:
increasing the production, better capacity utilization, imports of essential
commodities in short supply, regulated exports of those needed domestically,
curbing the activities of hoarders and black marketers, constant monitoring of
the prices of essential good and making permanent the Compulsory Deposit
scheme and enhancing the rate of this deposit. The RBI increased the Bank rate
from 9 to 10% and it also increased the CRR to 7% from 6% and the Statutory
liquidity ratio from 34% to 35% It raised the minimum margin for the food
credit to 10% inspite of all these tasks the inflationary pressure not only
continued but became more aggravated. During the VII Plan period also the
government continued with most of the above mentioned measures with greater
seriousness. But even at the end of the VII Plan period the inflation rate was
hovering above 10% which taken is really high. It is to be noted that there is
nothing wrong with the measures taken up by the government of India to curb
inflation in India. The main problem is the implementation of these measures.
In practice there is no co-operation from the public and other financial
institutions especially in the unorganized sector. As a result all the efforts of the
RBI are nullified. Large scales smuggling, hoarding, black marketing, etc
continue to take place in the economy without any check. Further large scales
tax evasion and existence of black money and the working of the parallel
economy, etc., have also posed serious challenges to the effective
implementation of the policies of the government. On its part the government is
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unable to brig down the size of deficit finance due to its commitment to the
welfare activities. Hence, the time has come to take a drastic decision in the
interest of economic stability to put an end to all the evils nd evil practices in
the economy.
THE PRICE MOVEMENTS IN INDIA SINCE INDEPENDENCE AND CAUSES
FOR RISE IN PRICE IN INDIA
Price movements in a country can be analyzed only when the wholesale price
index is available. In India, though this wholesale price index was computed
after independence, yet the price quotations were not complete as they did not
include all the commodities. Further the government had been changing the
base year frequently with an anxiety to prevent people from really comparing
the purchasing power over a period of time. Hence, in India the base year
originally was 1950-51, which was changed to 1960-61 and then to 1970-71
and finally to 1980-81.
Of course, now the wholesale price index is more comprehensive as it includes
almost all the commodities traded. We will discuss the price movements in four
phases: phase I : 1951 to 1971, Phase II : 1971-1980, Phase III : 1981-1990
Phase IV : l990s.
Phase I (1951-1971) :
In this phase, roughly we study price movements through the first three five
year plans and the annual plans. During the I Plan, the price movements were
very much less and the wholesale price index was 99 (base year 1952-53 =
100). As regards the food articles, the price index was hovering around 90
which indicated a very comfortable position during this Plan. But encouraged
by this trend, the government undertook various new projects by resorting to
deficit financing. The result of this was that during the II Plan the price level
went up by 20 per cent. The price position worsened during the III Plan as this
was the time when there was Chinese aggression and Pakistan invasion. As a
consequence the defence budget went up leading to soaring up of prices. For
instance, between 1961 and 1966, the prices of foodstuffs went up by 40 per
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cent, the price of cereals was up by 45 per cent and in the case of pulses it went
up by 70 per cent. There was inflationary spiral. Fortunately in 1967-68, with
the sudden spurt in food production (Green Revolution), the price level came
down and in 1968-69, there was a marginal fall in prices by one percent.
Phase II (1971-1980) :
This is a very crucial period as far as Indian price situation is concerned. It was
during this period that India witnessed a very steep rise in price level. Though
the rate of increase in price level was very much less (around 5 to 7 per cent) in
the first three years of the III Plan, it soared up by 19 points in the fourth year
and by 47 points by the last year The reasons for this were: heavy influx of
refugees from Bangladesh and the expenses incurred on them, the failure of the
kharif crop in 1972-73, the failure of the take over of the wholesale trade in
wheat and the rise in crude oil price. For the first time in India, the wholesale
price index touched a peak of 331 in September, .1974. The government
initiated a number of measures like compulsory deposit scheme, nabbing of
black marketers, smugglers and hoarders invoking the provisions of the
Maintenance of Internal Security Act (MISA), etc., which together resulted in the
decline" in the price level. The wholesale price index stood at 309 by March,
1975 and then further dropped to 283 by March, 1976. Though immediately
after the pronouncement of-emergency the price level declined, it once again
started increasing at the September, 1974 level by March, 1977. After the
emergency period, the Janata government came to power and following various
policies it succeeded in arresting the price rise. It could maintain the price at
185 points applying the demand - supply management, higher buffer stock,
high foreign exchange reserve, increased food production as well as industrial
production. But the inflationary budget of 1979, contributed to the reversal of
trend in price that by January 1980, the wholesale price index stood at 234.
Phase III (1980-1990)
In January, 1980, the Congress (I) government came back to power and it kept
controlling inflation as the prime objective. The government tried to achieve this
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through demand and supply management. All the anti-inflationary policies were
brought in to contain inflation. The temporary price stability found by the end
of 70's did not continue as the inflationary spiral resulted in the alround
increase in prices. The whole sale price index increased from 218 in 1979-80 to
338 by 1984-85. The demand side adjustments announced by the government
included altering the cash reserve ratio of commercial banks, ceiling on lending
by commercial banks, ban on recruitment by government, reduction in the
money supply, etc. On the demand side, the government attempted to increase
the supply of goods and services using short term and long term measures.
With all these measures the annual increase in price was around 7 to 8 per
cent.
However during the later part of 80's, the situation did not continue to be the
same. The wholesale price index which came down to 125 by 1985-86 started
increasing and by 1989-90 it was around 166. The annual rate of inflation
which was just 4.7 per cent by 1985-86, shot up to 8.1 per cent by 1989-90.
The main reasons for this was the serious shortfall in the production of
essential agricultural goods like edible oils, cotton, pulses, etc. Government
resorted to tightening of selective credit control policies, and also used the
supply management side by side. Specifically, it used the buffer stock built up
over the previous years effectively and even imported edible oils, introduced
employment schemes, relief programs, etc.
Phase IV (po.st-1990) :
This phase was marked by hefty increase in price right from 1990. Several
reasons could be attributed to this viz.: high administered prices, gulf-
surcharge on petroleum products, high dose of deficit financing, high indirect
taxes, etc. The combined effect of all these was that the wholesale price index
stood at 180 by 1990-91 and increased to 229 by 1992-93. The annual rate of
inflation, however, came down from 12.1 per cent in 1990-91 to 13.6 per cent in
1991-92 and then to 9.9 in 1992-93. Having experienced a decline in price rise,
the government announced reduction of excise duties, customs duties, etc., in
1993-94 budget to achieve a further fall in price by 1993-94.
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DEMAND-PULL FACTORS THAT CAUSED INFLATION IN INDIA.
The demand-pull factors which caused inflation in India are : Demand-pull
factors:
The demand-pull factors are responsible for increase in price, because, when
the demand for goods and services increase at a higher rate than the rate at
which the supply of these goods and services increase, there will be shortage
which results in price rise. Under demand-pull factors we may mention the
following factors to be very important:
a) Heavy government expenditure :
The administrative expenditure of the Central and State governments increase
from a mere Rs. 740 crores in 1950-51 to nearly Rs. 2 lakhs by 1991-92. Added
to this was the increase in; government investment on several welfare schemes
and programs from Rs. 1000 crores in 1950 to Rs. 50000 crores by 1990. Apart
from the plan expenditure, the non-plan expenditure of the government
increased at a greater speed. With higher government expenditure, more money
entered into circulation of the economy which fuelled inflation.
b) Deficit financing:
Deficit financing-is one basic reason for the drag in our development and the
inflation prevailing in the economy. The justification that in the initial stage of
development every country is bound to have deficit financing is no longer
reasonable in Indian case, as the time has come that our Five year plans should
lead us to generate more resources from other sources instead of depending too
much on deficit financing. The amount of deficit financing has increased from
Rs. 330 crores during the I Five year plan to a huge amount of Rs. 20,000
crores during the VIII plan. This implies that our planners have started using
deficit financing as the main source of funds for meeting our plan expenditure.
It should be noticed, that over the five year plan period since I plan there has
been an increasing reliance on deficit financing that the peak is found during
the VII Plan. With consistent efforts, the planners are hoping to bring down this
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quantum of deficit financing to around Rs. 20,000 crores during the VIII Plan.
Whether this is going to be achieved or not can be found out only in future.
c) Existence of black money :
One of the reasons for the existence of too much money supply in the economy
is the circulation of black money in -the economy in very large quantity. There
is no reliable estimate of the extent of black money in circulation in India.
According to one estimate the quantum is about the same size as that of the
legal tender money. The large scale tax evasion, tax avoidance, black marketing,
hoarding, corruption, buying and selling of real estate in the urban centers,
etc., are the reasons for the existence of black money. While the source of this
type of money cannot be easily found out, it is very difficult to bring to book
those who are indulging in such illegal activity. With uncontrollable volume of
black money in circulation, the price level continues to rise, and any measure to
control the price will not be effective. So inflation will continue to remain in the
economy.
d) Population explosion :
Ever since independence the growth of population has eaten away all the fruits
of development. With the annual rate of population increase hovering above 2
per cent, the scarcity for foodstuffs and essential commodities will persist. As a
result the prices continue to spiral up inspite of efforts to check the price level.
Basically the size of population will work on (he demand forces and so the
available quantity of output is proved to be inadequate always. As a result the
prices continue to soar.
THE COST-PUSH FACTORS CAUSED INFLATION IN INDIA.
There are factors which act on the cost of production. These factors push the
cost upwards and once the cost of production is high, the producers and
manufacturers have to raise the price to recover the cost of production. As a
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result the price level will go up. There are several reasons for the operation of
the cost-push factors. They are:
a. Erratic fluctuations in the supply of goods
In Indian situation, as agriculture is a gamble with the monsoon, die food
production depends on the successful monsoon. Except a few years, there had
been failure of monsoon. The shortage in agricultural output affects the supply
of not only the food grains but also the raw materials to agro-based industries.
Added to this are the power shortage, fuel shortage, labour problems, strikes
and lockouts, transport bottlenecks, etc., The end result is that both the
agriculturists and the industrialists experience rise in cost of production. They
recover this by fixing a higher price for the finished product The position is
worsened by the operations of the black marketers, smugglers, hoarderers,
middlemen and others.
b. Imposition of heavy taxes
Taxation in India is itself a reason for the inflationary situation. There has been
all-round heavy taxation on individuals, corporate bodies as well as
commodities. With higher taxes, the cost of production only increases leading to
rise in price. Whenever a fresh tax is imposed, the manufacturers simply pass
this on to the consumers by raising the price more than the amount of tax.
Added to this is the heavy allocation of funds by the government to public
sector which added a precious little to the coffers of the government.
Considering the investment in the public sector units, the return from them is
meager that even the available funds are fritter away that the government
simply imposes new levies to augment funds. This in turn affects the cost and
the price.
c. Administered prices
In a socialist economy like ours, the market forces are intervened by the
government in terms of administered price policy. As per this policy the
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government stipulates the minimum price for most of the essential commodities
and raw materials. For example the railways have been revising their freight
rate and passenger fare that the cost of transportation is going up adding
significantly to the cost of production and in turn the price level. In the case of
steel, cement, coal, etc., the government fixes a higher price which inflates the
cost of production in almost every sector indirectly contributing to the
inflationary spiral.
d. Rising oil price
The heavy import bill on petroleum crude itself makes a significant addition to
our price level. The international price has been going up and to meet the
import commitment, the government raises the internal price of petrol, diesel
and petroleum products. One argument given for the stiff rise in the price of
these products is that it would discourage the consumption of these products.
But the increasing sale of two wheelers, three wheelers, cars, trucks and Lorries
prove that there has infact been an increasing demand for oil. Further the
major consumer of oil is government. As a result the overall rise in price cannot
be controlled with any measure. Any change in international oil price
immediately affects the domestic price of oil. For instance in 1980 alone, the oil
price went up by 130 per cent in the international market followed suit by the
domestic price. The gulf surcharge which was imposed also caused the rise in
price of petroleum products. On the whole the fuel price adds fuel to fire.
METHODS OF CONTROLLING INFLATION
Inflation has to be controlled, otherwise the extent of damage done to the
economy will be something substantial and the economy would take a long time
to recover from the effects of inflation. In this direction of control of inflation,
the following are the theoretical measures available. These measures could be
classified into three groups viz., 1. Monetary measures, 2. Fiscal measures and
3. Other measures.
I. MONETARY MEASURES :
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Monetary measures are steps taken by the Central bank of a country as the
head of the monetary system. These measures are usually refereed to as the,
quantitative credit controls and qualitative credit controls. The former include
bank rate, open market operations and the variable reserve ratio. The, latter
include margin requirements, moral suasion, direct action, control through
directives, Consumer credit regulation or rationing, publicity, etc.
a) Quantitative credit controls : Bank rate is the first, measure to curb
credit creation activity of the commercial banks, as during inflationary
period the volume of money supply has to be reduced. Bank rate is the
rate at which the central bank of a country re-discounts the bills already
discounted by the commercial banks. When the central bank wants to
control credit creation by commercial banks, it would simply increase the
bank rate. Correspondingly the commercial banks would increase the
discount rate which acts as a disincentive for the businessmen and
others to approach the commercial banks for discounting their bills.
However, the success of this policy depends on the co-operation of the
commercial banks. Open market operations are another quantitative
credit control measure. In this, the central bank would buy or sell
securities in the open market which are sold or purchased by the
commercial banks for cash. During inflationary situation, the central
bank would sell securities;
in the open market, and when the commercial
banks purchase them, for cash then capacity of the commercial banks to
create credit will be very much restricted With less credit created, the
money supply in the economy will come down bringing down the
pressure of inflation. The third: policy is variable cash reserve ration. As
per statute, every commercial bank should maintain a certain percentage
of its total deposits in terms of cash reserve with the central bank. The
percentage of reserve to be maintained, called as cash reserve ratio, is
determined by the central bank. By increasing the cash reserve
requirement, the central bank can reduce the cash available with the
commercial hanks thereby controlling their capacity to create credit.
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b) Qualitative credit controls : Qualitative credit-controls aim at
channelising the available funds in the most productive uses or
applications. In terms of various measures the central bank can govern
the credit policies of the commercial banks. The first of these control
measures is the margin requirements. According to this policy, the
central bank specifies the amount of margin that each commercial bank
should maintain while lending on securities to the common public. By
increasing the margin requirements, the central bank can discourage
borrowings on certain securities. If the central bank wants to help the
priority sector it can accordingly instruct the commercial banks to
maintain a lower margin on securities offered for borrowing for priority
purposes. Moral suasion refers to the persuasive technique adopted by
the central bank with; the commercial banks in making the later
understand the need to pursue a particular type of credit control policy.
Though the central bank is empowered with statutory powers to regulate
the commercial banks, yet the central bank believes persuasive policies
rather than using its statutory authority. Central bank can also issue
directives to the commercial banks outlining the details of the objectives
of the various credit control policies, the need to follow them, the
expected result of them, etc. This will help the commercial banks to
understand and co-operate with the central bank in times of financial
crisis. Central bank also regulates the flow of credit towards consumer
requirements. This called as regulation of consumer credit The central
bank can even specify the types of consumer credit which could be
encouraged and those that could be discouraged. On receipt of directions
from the central bank, the commercial bank act accordingly, either by
liberalizing consumer credit or restricting consumer credit. Direct action
may also be taken by the central bank to control the commercial banks.
This can range between issuing warning to cancellation of license. But in
practice central bank never resorts to this measure as all the commercial
banks invariably follow the policies of the central bank.
2. FISCAL MEASURES
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By fiscal measures we refer to the steps taken by the head of the fiscal system
viz., the government. The fiscal measures include .
a) government expenditure b) taxation c) public borrowing and d) debt
management e) Over valuation of currency.
a) Government expenditure : This is also known as public expenditure. It
is well known that in a socialist country like India, the government undertakes
several activities ranging from defence to welfare activities. All these mean that
government pumps in a lot of money into the economy which ultimately adds to
the money supply and fuel inflation. During the period of inflation, the money
supply is high, the purchasing power of the people is also high and so the
private consumption and investment expenditures will be of the high order. If
the government also continues to invest heavily then the inflationary spiral will
be worsening. To avoid this the government should slowly reduce its
expenditure during inflation so that at least to that extent, the money supply in
the economy will be reduced. But in practice such a policy is not at all possible
as with ever rising prices, the poor and downtrodden needs protection from the
inflation and this will be lost if the government reduces its expenditure.
However, this is considered as one of the measures to control inflation by
combining it with the other measures.
b) Taxation: Taxation is a well conceived measure against inflation. Under
this the government will be able to achieve two purposes at the same time.
Firstly, it will be able to augment the revenue of the government and secondly it
will be able to curb unwanted consumption expenditure of the people by
bringing down their purchasing power and disposable income. During inflation
the government should increase the taxes so that it can achieve both the
purposes mentioned above. Further the government can also design its tax
policy in such a way that the lax burden is more on the rich and less on the
poor. This is achieved by imposing heavy direct taxes which will directly affect
the rich people. By imposing moderate indirect taxes, the government will be
able to collect more from those who spend more. The rich as well as poor will be
contributing towards the exchequer. However, it is often said that imposition of
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indirect taxes will only add to the increase in prices, especially when the
producers shift the burden of tax to the consumers. But the object of indirect
taxes is to curb the consumption of unwanted commodities. Hence, with the
direct and indirect axes, the government should be in a position to redistribute
the income in the economy which is a must during inflationary period.
c) Public borrowing : Public borrowing or public debt is one more method
of controlling inflation. According to this policy, the government aims at
siphoning-off the excess purchasing power in the economy by encouraging
people to lead to the government. This can be done either making lending
voluntary or compulsory. Under the voluntary lending, the government
educates the people of the need to lend to the government especially during the
inflationary period. However, sometimes compulsory lending is to be resorted to
because, the people may not respond to the calls of the government.
Compulsory lending can be i different forms. But it is often said that such
compulsory lending will affect only the salaried class and not the rich people. In
that case, the salaried class is worst affected during inflation and making them
to surrender whatever little surplus that they have with them amounts to
double taxing them. Further compulsory saving or lending may also encourage
people to find ways of evading Such policies. In general, economists have
favored only the voluntary saving or lending by the public.
d) Debt management : Debt management refers to the way in which the ,
government deals with the retirement or repayment of the public debt. This has
to be done in such a way that brings down the money supply in the economy.
So when there is inflation, the government should retire or refund the debt to
the commercial banks by encashing the securities only out of the budget
surplus. This will help to curb the commercial banks' ability to create credit.
But a major problem with this policy is that during inflation budgetary surplus
is not so easily created. Alternatively, the central bank can retire the debt by
sales of bank ineligible bonds to non-bank investors like insurance companies,
savings bank individuals, etc. This will take away the spend-able money from
the public thereby reducing the inflationary pressure. But even this method
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can fail as the non-bank investors can always refuse to exchange the spend-
able money for these bonds.
e) Overvaluation of currency : This is another method used to control
inflationary pressure in an economy. According to this method, the value of the
currency is revised upwards so that exports will be costlier and imports
cheaper. This will help in increasing the stock of domestically produced gods
and encourage more imports. This will mean the availability of goods int he
country will increase [hereby the price level of them will have to come down. But
this measure has to be cautiously adopted as it carries with it seeds of
deflation.
3. OTHER MEASURES :
Apart from the measures discussed above, the government can also implement
the following policies :
a) Increase output : This policy may appear to be very easy one but in
practice this involves several difficulties. To make the producers increase their
output, they should be assured of their profit as otherwise they will not be
inclined to increase the output. Further the increase in output can be brought
about by fuller utilization of the existing resources, prevention and settlement of
industrial disputes, updating the technology, lending liberally to expansion and
new establishment purposes of the industry, maintaining industrial peace by
activating all the machineries of settlement of industrial disputes, etc. Mere
increase in output will not bring down the inflation, it has to be followed by
increased availability of products for the consumers. This calls for curbing and
punishing black marketing, hoarding and smuggling activities so that the
benefits of increased production will be enjoyed by the economy.
b) Wage policy : This is another important control measure. This is often
misunderstood as wage freeze policy. This means that the government should
not stand in the wage increase sanctioned to the employees if their productivity
is very high. The government can encourage the employees to make
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voluntary contributions and reduce their expenditure. Simultaneously,
through other measures, the government should bring down the cost of living so
that the laborers will not demand higher wages. Wage policy cannot be effective
unless it is coupled with several other policies.
c) Price controls and rationing: This is one of the most popular policies
applied in every country while they face inflation. Under this measure, the
government should prevent escalation in prices of essential commodities and
control the price of other commodities. By resorting to retail and wholesale price
maintenance policies the government can strive to bring down the price level.
This calls for buffer stock operations as well as efficient demand and supply
management of commodities which the country is badly in need of. This is
achieved by introducing rationing of essential commodities through well
designed public distribution mechanism. All this mean, enormous efforts are
required on the part of the government apart from the willing co-operation from
the traders and businessmen. In practice it is found that price control and
rationing are very difficult to be implemented during inflationary period due to
the exploitative and monopolistic attitude of the businessmen and traders.
However, with stringent penal measures the government can make this policy
effective in controlling inflation in a country.
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Review questions
1. Assess the need for government intervention in an economy.
2. Discuss the role of public sector in India
3. Comment whether India is an under developed country
4. Discuss the features of Indian population
5. Examine the nature of population problem in India and the effects of
population growth on Indian economic development
6. Outline the population policy of the government since independence
7. Analyse the Balance of payments position since 1991 and critically
evaluate the New export-import policy 1992-1997.
8. Discuss the structural composition of national income in India. Explain
the limitations of National income estimation in India.
9. Distinguish between absolute and relative poverty. Discuss the concept
of Poverty line in Indian context. What are the causes for poverty in India
and evaluate the various poverty eradication programme.
10. Analyse Problem of unemployment in India.
11. Discuss the problem of rural unemployment and the measures to solve
this problem.
12. Examine the inflationary trend in India and discuss the steps taken by
the government to control inflation in India.
13. Discuss the causes for inflation in India and suggest measures to arrest
inflation.
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CHAPTER III
Government controls and regulations - Regulating economic and industrial
activities- Industrial Licensing policy- Control of monopolies - Capital issues
control - Government control over FDI and collaboration - Distribution and price
control - New EXIM policy - Foreign exchange flow regulation -Technology transfer
GOVERNMENT CONTROLS AND REGULATIONS
Since independence, Government of India introduced a number of controls and
regulations so as to lead the country on the path of progress. Originally these
controls and regulations were considered to be a part of development strategy.
But subsequently, they emerged as the need of the society. While the 1948
Industrial policy resolution did not lay much emphasis on the controls and
regulations, in 1951 the government brought in the Industrial [Development
and Regulations] Act. This Act made licensing a part of industrial development.
The objectives of licensing were stated as:
Facilitate desired pattern of industrial development
Provide for development of backward regions
To encourage broad based ownership of industries
To prevent concentration of power in the hands of a few
To offer protective environment for the small scale industries
To regulate inflow of foreign capital and technology
To provide for the use of appropriate technology
To eliminate industrial pollution
To encourage more of exports and adopt import substitution
measures
To ensure conservation of foreign exchange resources and to ensure
proper allocation of the exchange resources
To achieve high growth in employment opportunities
With the above objectives, the government passed the Act. Consequent to this
Act, the following categories of industries were required to obtain license:
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New undertaking
Manufacture of new article
Expansion of existing capacity substantially
Continuation of certain category of business in certain areas
Changing the location of the industry
This licensing policy continued for a long time till 1991 Industrial policy
adopted the policy of liberalization. The licensing policy has resulted in a
number of malpractices among the large industrial houses. This was brought to
light by the Dutt Committee report in 1967 The revelations of the Dutt
committee led to the enactment of Monopolies and Restrictive Trade Practices
Act in 1970. In 1991, the government changed the contents of the Licensing
policy and the important provisions are spelt out hereunder.
The Dutt committee identified 20 larger industrial houses, 53 large industrial.
houses and 60 large independent concerns through its study. Some of the
important findings of the Committee are given below:
1. a] 73 large houses accounted for 56 % of the total proposed
investment on machinery by the entire private corporate sector
b] 60% of the value of import of capital goods by the entire private
corporate sector was accounted for by these 73 large industrial houses
c] 20 larger industrial houses accounted for 41 % in the total
proposed investment on machinery and for 40 % in the total approved
import of capital goods.
2. The percentage of unimplemented issued licenses was the highest for
the large independent companies and other foreign companies. The
largest number of unimplemented licenses was for the house of Birlas
[168] followed by Tatas [41J. The Birlas were also leading on charges of
preemption.
3. The private sector was allowed to participate in areas reserved
exclusively for the public sector,
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4. The four industrially advanced states namely Maharashtra, West
Bengal, Gujarat and Tamilandu were able to acquire 62 % of the J0tal
licenses issued. This was against the spirit of balanced regional
development.
5. There was no indication as to which industries could be treated as
specifically reserved for the small and medium sector.
6. Foreign collaboration was allowed even in non-essential consumer
goods. The Committee observed that: as a matter of fact, by permitting
foreign collaborations sometimes in multiple numbers, and thus
permitting capacities to be created, an inevitable demand for import of
various components and raw materials for feeding plants is set up.
This, combined with the allocation of other scarce materials, helps to
satisfy the demand of the higher income groups, but it is not
necessarily a contribution to economic growth nor is it the best way of
utilizing the scarce foreign exchange resources of the country.
7. Financial institutions showed a distinct preference to the large
industrial houses over the public sector.
All these would help to judge that industrial licensing system failed to achieve
the objectives of planned economic development as well as of preventing
concentration of economic power.
The Dutt committee made the following recommendations
To set up a core sector consisting of industries of basic, critical and
strategic importance to the economy
To adopt the concept of Joint Sector or undertakings where both the
public and private sectors acted as partners in a project. The Joint Sector
could have collaborations with foreign concerns as well as with the
private sector in India
To change the basis of financial assistance by nationalized banks and
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public sector financial institutions i.e., away from the large industrial
houses
The government to have the right to convert its loans and debentures
into equity
The middle sector to be kept open for new entrepreneurs
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90s a
number of changes in the system of industrial approvals have been brought
about. The domestic producers will be able to withstand the competition in the
country as well as abroad only through procedural reforms. Hence, the role of
government will be changed from that of exercising control to one of providing
help and guidance. Changes in the policy towards public sector in the last few
years have clearly indicated that private sector enterprises will be allowed to
compete in many areas hitherto earmarked for public sector. Consequently, the
new policy has completely reclassified the Indian industries as below:
a) Eight industries have been completely reserved for the public sector.
They are: i. Arms and ammunition and allied items of defence
equipment, defence aircraft and warships, ii. atomic energy, iii. coal and
lignite, iv. mineral oils, v. mining of iron ore, manganese ore, chrome
ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead,
zinc, tin, molybdenum and wolfram, vii. mineral specified in Schedule to
the Atomic Energy Order, 1953 and viii. railway transport
b) Eighteen industries have been listed as industries which require
compulsory licensing. However, this provision would not apply in
respect of the small scale units taking up the manufacture of any of the
items reserved for exclusive manufacturing in small scale sector.
Compulsory licensing would be required in the following industries:
i. coal and lignite, ii. petroleum other than crude and its distillation
products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v.
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animal fats and oils, vi., cigars and cigarettes of tobacco and
manufactured tobacco substitutes, vii. asbestos and asbestos based
products, viii. plywood, decorative veneers and other wood based
products such as particle board, medium density fibre board, block
board, ix. raw" hides and skins, leather, chamois leather and patent
leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and
newsprint except bagasse based units, xiii. electronic aerospace and
defence equipment of all types, xiv. industrial explosives, xv. hazardous
chemicals, xvi. drugs and pharmaceutical xvii. entertainment
electronics and xviii. white goods like domestic refrigerators.
As regards the provisions of the industrial licensing policy,
i) Industrial licensing has been completely abolished for all projects except
for the industries classified above, i.e., the area reserved for public sector
,and the list of 18 industries and the areas reserved for small scale
industries will continue.
ii) Public sector will continue to maintain monopoly in industries coming
under the areas of security and strategic considerations.
iii) In projects where imported capital goods are required, automatic
clearance will be given provided the foreign exchange availability is
ensured through foreign equity. Or alternatively if the value of imported
goods does 1101 exceed 25% of the total value of plant and equipment
subject to the ceiling of Rs. 2 crores, automatic clearance will be given.
However, this would come into effect only from April, 1992 in view of the
current balance of payments position. In all the other cases, the prior
approval and clearance from the Secretariat of Industrial approvals in the
Department of Industrial development will be required.
iv) Except the list of industries requiring compulsory licensing, the other
industries will not require any approval from the Central government for
their location in ares other than cities of more than one million
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population. In cities with more than one million population, non-
polluting industries like electronics, computer software and printing will
be permitted outside 25 kms. of the periphery. If such cities require
industrial re-generation policies will be made more flexible. However, the
existing zoning and land use regulation and environmental legislation
will continue to regulate industrial locations. All efforts will be made
through incentives and other methods like infrastructural development,
to disperse the industry to rural and backward areas.
v) New Broad banding facility will be provided to the existing units so as to
enable them to produce any article without additional investment. The
exemption from licensing will be applicable to all substantial expansion
of existing units.
vi) The mandatory convertibility clause will no longer be applicable for term
loans from the financial institutions for new projects.
vii) A very significant step is to abolish all the existing registration schemes.
viii) In case of substantial expansions and new projects, it is enough if the
entrepreneurs file the information memorandum.
ix) The list of industries requiring compulsory licensing and industries for
automatic approval of foreign technology agreements will be notified in
the Indian Trade Classification (Harmonized system).
As a result of the wide changes in the Licensing policy, the government also
brought about changes in the MRTP Act. The following is the summary of the
changes effected in that Act.
MRTP ACT
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A major deviant of the new policy is in respect of the MRTP Act. The new policy
aim at removing the unnecessary bureaucratic controls and allow the industries
to breathe in an atmosphere of freedom. The efforts of the government in the
past intervening in the investment decisions of the MRTP companies; have been
proved to be counter-productive. Hence, the newly empowered MRTP
Commission will enquire into complaints received from individual consumers or
classes of consumers. The following is the essence of the provisions in the new
policy regarding MRTP Act.
i. The limits of assets in respect of the MRTP companies and dominant
undertakings have been removed and suitable amendment in the
MRTP Act will be made in due course.
ii. The need to obtain the prior approval of the central government for
establishing new units, expansion of existing units, merger,
amalgamation and take over as well as appointment of Directors have
all been removed.
iii. The MRTP Act will be used only for controlling and regulating
monopolistic, restrictive and unfair tarde practices. As a follow-up the
MRTP Commission will be authorized to inquire suo moto or
complaints lodged by individual consumers or classes of consumers
regarding monopolistic, restrictive and unfair trade practices.
iv. All the necessary amendments will be made in the MRTP Act to give
more punitive and compensatory powers to the MRTP Commission.
Control of capital issues
Since independence, capital issues in India have gone through different types of
control mechanism. Initially control of Stock exchanges was contemplated and
accordingly Securities Contracts [Regulation] Act was passed in 1956. It aimed
at centralization of control, regulation of the stock exchanges and the
transactions entered therein, the avoidance of illegitimate and manipulative
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speculation and the protection of genuine investors, The Act applied to all
transactions whether forward or ready and it prohibited or regulated factors,
which facilitated speculation in stock exchanges. But the Act could not abolish
forward trading which ultimately caused erratic behaviour of the Stock
exchange. The government basically depended on two institutions to control the
capital market viz., the Controller of Capital Issues [CCI] and the Directorate of
Stock Exchanges. CCI gave consent to the issue of non-government companies
consisting of equity and preference shares, partly and fully convertible
debentures, bonus shares and right shares. It also gave consent to the issue of
bonds of public sector undertakings. But on the recommendations of the
Narasimham committee, the government abolished the office of CCI and freed
the primary capitol market from the government regulations.
The recommendations of Narasimham Committee II on financial sector
reforms
The main recommendations of the Narasimham committee are:
1. Phased reduction of Statutory Liquidity Ratio to 25 % over a period of
five years
2. Progressive reduction in Cash Reserve Ratio
3. Phasing out of directed credit programs and redefinition of the priority
sector.
4. Deregulation of interest rates so as to reflect emerging market
conditions
5. Stipulation of minimum capital adequacy ratio of 4% to risk weighted
assets by March 1993, 8% by March 1996 and 8% by those banks
having international operations by March, 1994.
6. Adoption of uniform accounting practices in regard to income
recognition, asset classification and provisioning against bad and
doubtful debts.
7. Imparting transparency to bank balance sheets and making full
disclosures
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8. Setting up of special tribunals to speed up the process of recovery of
loans
9. Setting up of Asset Reconstruction Fund to lake over from banks a
portion of their bad and doubtful advances at a discount
10. Restructuring of the Banking system so as to have three or four large
banks which could become international in character, 8 to 10 national
banks and local banks confined to specific regions and rural banks
including RRBs confining to rural areas.
11. Setting up one or more rural banking subsidiaries by public sector
banks
12. Permitting RRBs to engage in all types of Banking business
13. Abolition of branch licensing
14. Liberalising the policy with regard to allowing foreign banks to open
offices in India
15. Rationalisation of foreign operations of Indian banks
16. Giving freedom to individual banks to recruit officers
17. Inspection by supervisory authorities based essentially on the internal
audit and inspection reports
18. Ending duality of control over Banking system by Banking division and
RBI
19. A separate authority for supervision of banks and financial institutions
which would be a semi-autonomous body under RBI
20. A revised procedure for selection of Chief Executives and Directors on
Boards of Public Sector banks
21. Segregation of direct lending functions of IDBI to a separate institution
22. Obtaining resources from the market on competitive terms by DFIS
23. Speedy liberalization of capital market by removing restrictions on
premia dispensing with prior government approval etc.
24. Supervision of merchant banks, mutual funds, leasing companies, etc.,
by separate agency to be set up by RBI and enactment of separate
legislation providing appropriate framework for mutual funds and
laying down prudential norms for such institutions.
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After the abolition of CCI, the government set up the Securities and Exchange
Board of India [SEBI] in 1988 which became a statutory body since 1992. SEBI
has the following objectives:
Regulating the business in stock markets and other securities market
Registering and regulating the working of the stock brokers, sub-
brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, bankers to an issue,
trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers and other intermediaries associated
with the securities market
Registering and regulating the working of collective investment
schemes including mutual funds
Promoting and regulating the self regulatory organizations
Prohibiting fraudulent and unfair trade practices relating to securities
market
Promoting investors education and training of intermediaries of
Securities market
Prohibiting inside trading in Securities
Regulating substantial acquisition of shares and take over of
companies
Performing such functions and exercising such powers under the
provisions of Capital Issues [Control] Act, 1947, and Securities
Contract [Regulation] Act, 1956, as may be delegated to it by the
Central government
Since its inception, SEBI has achieved the following: guidelines to suing
companies, regulation of portfolio management services, regulation of mutual
funds, action for delays in transfers and refunds, action for delays in transfers
and refunds, issue of guidelines to protect investors, ensuring proper
functioning of the Stock exchanges, regulation of foreign institutional investors
and periodical review of the working of the capital market.
FOREIGN CAPITAL AND THE POLICY OF GOVERNMENT REGARDING THE
USE OF FOREIGN CAPITAL
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Foreign capital or investment has become significant part of sources of funding
for various projects in every country. This source of funding has received the
attention of both the government as well as the corporate sector that there has
been increasing reliance on this source for planning and execution of projects
by the government as well as the corporate sector. Foreign capital can come into
a country in different forms. Let us first understand these forms of foreign
capital before discussing the need for foreign capital.
Forms of foreign capital:
(a) Direct entrepreneurial investment: In this form of foreign capital, the
foreign investors can start a company abroad mainly for the purpose of
establishing its branches and subsidiaries in other countries. For
instance an American business group may invest in a new project in
India directly and start its own affiliate or branch or even a subsidiary.
Sometimes, the investors abroad may participate in the stocks or share
capital of Indian companies. Whenever the Indian companies go for
public issue of shares or debentures, the foreign investors may respond
by participating in such public issue. This is also called foreign capital.
In the past external business group used to invest in new companies
and that form of foreign capital used to flow much, but now-a-days
participation in the equity or debenture of companies by foreign
investors and non-resident Indians is becoming more predominant.
(b) Foreign collaboration: Foreign collaboration is another form of foreign
capital. Under this a domestic company may join with the foreign
company, mostly the reputed one in the industry, and start with the
joint operation in India. Usually this type of effort is undertaken to get
the state of the art
1
or the latest technology available abroad in the
Indian companies. Foreign collaboration may be only for technology or
for funding or both. Accordingly we may have technical collaboration,
financial collaboration or mixed collaboration. The collaboration may be
between private parties or companies in the two countries, or the
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foreign company with Indian Government or between the foreign
government and the Indian government.
(c) Inter-government loans: This type of foreign capital refers to the loans
granted by the government of one country to that of the other for a
specific purpose or for general economic reconstruction. For example
under the Marshall plan, USA gave loans to various European
governments to help them in the reconstruction of their war-shattered
economies. The developed countries also grant loans and grants to the
under developed countries to help them in economic development
programme.
(d) Loans from international institutions: This source of foreign capital has
emerged as a very important source in the recent years. Most of the
developing countries get sizeable quantum of funds from this source.
International institutions like International Monetary Fund (IMF),
International Bank for Reconstruction and Development (IBRD), Asian
Development Bank, Aid India Consortium, and others have all become
very important providers of funds for developing countries. The role of
IMF and IBRD in tiding over the balance of payment difficulties and
execution of power and irrigation projects, cannot be exaggerated. The
Asian Development, Bank has also been a major provider of funds for
development in Indian case.
(e) External commercial borrowing: Another source of foreign capital is the
borrowing in the capital market of other countries. This can be done
either directly or indirectly by the government. In both ways, the inter-
government understanding and political relationship apart from the
domestic investment climate are all important. Such capital is normally
used for international trade purposes and specifically for export credits.
Agencies like US EXIM bank, Japanese EXIM bank, ECGC of UK, etc.,
are all playing vital role in this segment of foreign capital.
Need for foreign capital:
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No country can be self-sufficient today. Even developed countries have to
depend on the developing countries for certain purposes and also for marketing
their products. Further the specialisation in finance has become world wide,
that every investor wants to maximise return on his investments and minimize
the risk. This is applicable both to government investment as well as corporate
and private investments. These are days of multi-national corporations and
giants that closed economic system can no longer be realistic. In this situation,
flow of capital from one country to another in different forms takes place for
several reasons. From the view point of a country, there is a need to execute
their plans for economic development. Specifically in Indian case, the need for
foreign capital cannot be exaggerated. This could be explained in terms of the
points given below:
(a) The availability of funds for execution of plans and achieve rapid
economic development determine the objective of such plans. Domestic
availability of funds, especially in the developing countries is becoming
difficult with the government in these countries undertaking increasing
responsibility for the welfare activities. Hence, these countries have to
tap the source lying outside to get the funds required for their
development purposes. In this respect the foreign capital should be
attracted at any cost and in any form.
(b) Domestic investors and managers of funds available, may not have the
required expertise or entrepreneurship in identifying the right and
profitable avenues for investment. This may be due to lack of
experience or inability to identify opportunities. When foreign capital is
allowed to flow, the benefits of the experience of the foreign
technicians, finance specialists, production specialists, marketing
wizards, etc., are made available to the domestic ventures. This will
improve the efficiency of the domestic projects which is directly
benefitting the country. On this count foreign capital should be
welcomed.
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(c) One of the basic requirements for achieving rapid economic
development is mobilising savings. Savings depend upon income and
income depends on the level of economic activity. Hence, any attempt
to increase savings should start with attempts for increasing income
which necessitates increasing investment If the domestic rate of
savings and the purpose for which savings is used is unproductive,
then efforts should be made to obtain the necessary investment from
abroad. This would accelerate economic development leading to income
generation and increased savings. Hence, in the process of economic
development foreign capital becomes an essential ingredient.
(d) Foreign capital is necessary for one more reason. In every developing
country, the economic development requires investment in certain
projects relating to infrastructural development, basic industries, etc.,
which are long gestation projects, low income yielding, but accelerating
economic development. No private investment or corporate investment
in these projects will come about in the early stage of development
either because the investors have no inclination or because the capital
market in such a situation is not developed. But the government has
to initiate development activities, for which foreign capital becomes
essential. Once the economic engine is activated, in due course, the
economic development will start taking place. Until then foreign capital
is needed.
(e) Foreign capital can be in different forms as has been already explained.
Countries like India having high rate of savings, but low investment in
productive projects, with large human force but with less employment
opportunities, have to seek technical know-how and technology
available abroad. These can be slightly modified to suit the domestic
conditions so that the production can take place in large scale, cost
can be minimized and employment opportunities can be generated in
large scale. Further there are areas like atomic energy, automobile
industry, management, marketing and others where we do not have
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the best of experts or expertise. The best available talent or technology
available abroad can be imported so that we can improve our strength
in these areas and become a force to reckon with. This will also help us
to achieve higher level of economic development.
(f) One of the methods of achieving higher levels of development is
through mutual co-operation with other countries through bi-lateral or
multi-lateral agreements which provide excellent scope for transfer of
technology, etc., between countries. Political wisdom warrants use of
such agreements for mutual benefits which leads to flow of foreign
capital from one country to another.
Problems of foreign capital:
So far we have discussed the need for and role of foreign capital in Indian
economic development. Let us now study the problems that are associated with
the foreign capital.
1. The foreign investors are choosy in extending their funds to projects
floated in our country. It is found that foreign capital flows easily
towards the private sector projects but with a lot of hesitation to the
projects of public sector. While there is justification for hesitant flow
towards public sector, our government has been giving pride of place
only to pubic sector in achieving rapid economic development Hence, it
is clear that there is no lack of investment opportunities, but there is
difference in ideology. Therefore, flow of foreign capital is not uniform to
all sectors. This trend has to be observed so that corrective measures
can be taken to attract more foreign capital to public sector projects.
2. Another serious problem of foreign capital is the domestic technology is
simply duplicated due to over indulgence and dependence on external
assistance. There are several areas where India has achieved excellence
as in electronics industry, but there are collaborations with foreign
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products in this field. Such duplication is in no way beneficial to the
country. This has to be corrected.
3. One more experience is that under the pretext cf transferring
technology, foreign countries simply Jump their obsolete technology in
India. Apart from importing inappropriate technology, there are also
situations when the technology not required is imported. Further, there
are tie-up agreements with such imported technology which are
unfavourable to India. But such agreements have been approved much
against the interest of our domestic manufacturers and technologists.
4. Often me complaint about foreign capital is the restrictive conditions
imposed by the exporting country. It may be relate to spares or
technicians or repatriation of profits, etc. An increasing number of such
agreements would only be against our own interest
5. Heavy remittance of profits, dividends, etc., is yet another problem
under foreign capital. In Indian experience, there were cases when the
inflow of foreign capital was less than the remittance of profits, the
classic examples being ESSO and CALTEX, the two oil companies of US
origin. Such remittances cause severe strain on our already strained
balance of payments and foreign exchange reserve position. Even if the
agreement provides for such remittances, the country cannot afford to
lose the hard earned foreign exchange resources under this type of
remittances.
6. One more consequence of foreign capital is that it causes serious
balance of payments problem. When foreign capital in different forms is
permitted, with the preference of the foreign investors, the private sector
is able to attract more than the public sector. As a result the private
sector indulges in importing heavily their requirements which results in
heavy outflow of earned exchange reserves on the one hand and leads to
balance of payments deficits on the other. Even if the government has to
ultimately approve of such imports, yet the private sector is able to
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appease the officials through liaison officers and get the necessary
approvals.
7. One of the essential conditions laid by the government while approving
the foreign collaboration is that in due course there should be
Indianisation of personnel. This policy is easily defeated in practice. In
the past under the provisions of Foreign Exchange Regulations Act,
every foreign multinational company is made to dilute their ownership
to 74% and in case of branches of foreign companies their total holding
should not exceed 40%. It is found that these foreign companies have
very high profitability, as in the case of Colgate Palmolive with 89% of
profit rate, are able to very easily raise capital from the Indian capital
market. Their shares are being quoted at very high rate that they raise
the necessary funds easily. The shareholders of these companies
indirectly support the company through political lobbying. The
Indianisation of personnel is easily by-passed as these companies retain
the powers to appoint their own Chairmen and Managing Directors.
Obviously even with a holding of only 26% of the shares, these foreign
companies have control over the companies easily by-passing the policy.
Whenever the multinationals become Indian companies they stand to
gain. So long they remain multinationals they are subjected to heavy
taxes. But once our Indianisation of Personnel policy is invoked, these
multinationals become Indian companies and pay less tax. Hence, our
policy is in no way affecting the foreign companies, in tact, the policy is
turning out to be unfavourable to India itself
Government policy:
Since independence, the government has been declaring its policy towards
foreign capital of different types. The policy declared in April, 1949 has
remained the main framework for the subsequent policies. The salient features
of the 1949 policy are:
(i) Foreign capital will have the same treatment as given to domestic
capital.
(ii) The investors will be allowed to remit the profits earned.
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(iii) The ownership and control of the foreign companies should in due
course be in the hands of Indians.
(iv) In case of take over of the undertaking, a fair and equitable
compensation would be paid.
(v) In case a foreign company wants to have control for some time, the
government may examine this in each individual case before giving
permission.
This policy in nut shell means that there will be no discrimination against the
foreign companies or their investments in India. This remained as the basic
framework of foreign policy all through. With this policy, the government
pursued its foreign policy making minor changes at times. Broadly we may refer
to three phases through which our foreign policy relating to foreign capital and
investments evolved. In the first phase which lasted from 1951 to 1965, the
government was liberal in its attitude towards foreign capital. This included
concessions and incentives to foreign capital which helped us to achieve
industrial development. The second phase which started from 1965, is a period
in which the government was very strict and imposed several restrictions and
regulations. Once again in Phase III, starting from 1991, a liberal policy is
introduced. The salient features of the latest policy towards foreign capital
(199i) is given below:
Foreign investments:
Foreign investments carry with it the benefit of technology transfer, marketing
expertise, modern managerial techniques and new possibilities for promotion of
exports. As this requirement is felt in this world of industrial change and co-
operation, the New Industrial Policy (NIP) has clearly contained the following
provisions relating to foreign investments:
1. In high priority industries approval will be given for direct foreign
investment upto 51% foreign equity and all the bottlenecks in this
process will be removed. Clearance in such cases will be given if the
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foreign equity covers the foreign exchange requirements for imported
capital goods. The necessary amendments to the FERA will be made.
2. The general policies governing the domestic units in regard to import of
components, raw materials and intermediate goods and payment of
knowhow fees and royalties will also be applicable to the high priority
industries in which foreign investment is limited to 51% However, the
payment of royalty will be routed through the RBI to enable it to
monitor the outflow of foreign exchange on payments are balanced by
export earnings over period of time.
3. All the other foreign investments not included in the category 1 stated
above will require prior clearance.
4. Trading companies primarily export oriented will also be permitted
under the foreign equity proposals as indicated in 1 above. However, the
provisions of his export-import policy applicable to the domestic units
will also be applicable to such trading companies.
5. To encourage substantial inflow of foreign investment, a Special
Empowered Board would be constituted. This Board would negotiate
with the large international firms and approve direct foreign investment
in select areas. This is expected to fetch foreign technology and open the
industries in India to wider world market. Such investments will be
subjected to favourable treatment based on the merits irrespective of
the rules, regulations and procedures in practice.
As regards foreign technology agreement, a welcome change in the outlook of
the government is the realisation that the sophisticated technology from abroad
can be brought in only through liberal and less restrictive procedures and
policies. The interference of the government in this regard is to be reduced so as
to enable the domestic industries in achieving a high rate of industrialization.
As a result of this liberalization, automatic approval for technology agreements
related to high priority industries will be made with respect to certain specific
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parameters. Other industries which can enter into such agreements without
incurring the expenditure of foreign exchange will also be extended liberal
treatment. The industrialists are left to themselves to decide and enter into
foreign technology agreements depending upon the commercial viability of their
enterprises. In due course this measure is expected to pave the way for
exchange of superior technology from India with other countries. With the
overall liberalization, the competition will be high and it is expected that
industries will invest much more in research and development activities.
Keeping in view all these expectations, the government has announced the
following changes in regulation governing foreign technology agreement:
1. No prior permission is needed for hiring foreign technicians, foreign
testing of indigenously developed technologies. Such activities involving
payments will be governed by the guideline of the RBI and such
payments can be made through blanket permits.
2. Automatic permission will be given for foreign technology agreements,
relating to the high priority industries. The royalty payments through
such agreements will be subjected to certain provisions. Upto the
payment of Rs. 1 crore royalty will be at the rate of 5% for domestic sales
and 8% for foreign sales or exports. However, the total royalty payment
should not exceed 8% of the sales over a 10 year period from the date of
agreement or 7 year period from the date of commencement of
production.
3. In case of industries not covered in the high priority list automatic
permission will be given for technology agreement provided it does not
entail any foreign exchange payment commitment.
4. In all the other cases, the general procedures in practice will be adhered
to and such industries will require specific approval.
Foreign assistance and Indian five year plans:
In the Table given below we find that the external assistance is playing a vital
role in the financing of our five year plans. Right from the I Five Year Plan, we
find that in absolute terms the inflow of foreign assistance is very much on the
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increase. While it was a modest figure of Rs. 190 crores in the I Plan, it was Rs.
15,139 crores by VII Plan and during the VIII Plan it rose to nearly Rs. 28,700
crores. Hence, it is clear that the external assistance or foreign capital has
become a major component of financing of Indian five year plans. In terms of
percentage, the external assistance went up from a mere 9.6 in the I Plan to
28.2 in the III Plan, 35.9 during the Annual plans. From the IV Plan onwards,
the percentage of external assistance declined from 13 to 8.2% during the VIII
Plan, but this decline should not be misunderstood as declining importance of
external assistance in the financing of our five year plans. The table given below
will clarify this aspect
FOREIGN ASSISTANCE AND INDIAN FIVE YEAR PLANS
PLAN AMOUNT
(Rs.crores)
Percentage
FIRST 190 10
SECOND 1,090 24
THIRD 2,390 28
FOURTH 2,090 13
FIFTH 5,830 15
SIXTH 10,930 11
SEVENTH 15,139 8.4
EIGHTH 28,700 8.2
POLICY ON FDI
The government policies on Foreign Direct Investment [FDI] have been changing
since 1991 - 92. Analysis of these policies would help to place in proper
perspective the prospects and problems of FDI. This was also taken into
consideration while suggesting methods of improving the inflows of FDI.
As apart of the structural adjustment policies introduced in the Indian economy
by Government of India since July 1991, policies relating to foreign financial
participation in Indian companies and those relating to foreign technology
agreements have also undergone a radical charge. Briefly stated, three tiers for
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approving proposals for foreign direct investment in this country were
introduced: (1) the Reserve Bank's automatic approval system; (2) Secretariat
for Industrial Approvals for considering proposals within the general policy
framework but outside the powers delegated to Reserve Bank; and (3) Foreign.
Investment Promotion Board, specially created to invite, negotiate and facilitate
substantial investment by international companies that would provide access to
high technology and world markets. The foreign investment policy was further
liberalized during the period under review. Fully owned foreign enterprises will
hence forth be allowed to set up giant power projects without the requirement
to balance dividend payments with export earnings.
The general permission granted by the Reserve Bank under the provision
of.: the Foreign Exchange Regulation Act, 1973 has brought the FERA
companies (i.e. those having more than 40% foreign equity) on par with the
Indian companies and thus provides a level playing field to all. The existing
FERA companies have also been extended the facility of 51% equity. Also, the
use of foreign brand names and trademarks on goods for sale within the
country has been permitted. Significant amendments to the FERA for relaxing
several of its restrictive provision have been contemplated.
The following measures were introduced in the recent period to further
liberalise the foreign investment policy:
(1) Except for 22 industries in the consumer goods sector, the earlier
stipulation that dividend remittances of companies receiving approval
under the foreign equity up to 51% scheme, must be balanced by
export earnings over a period of 7 years, was scrapped in respect of all
foreign direct investment (by non -NRIs) in June 1992. The measure
was extended to investment by NRIs /Overseas Corporate Bodies
(OCBs) in September 1992.
(2) For the purpose of investment in oil refineries and development of
discovered oil fields, foreign private equity participation to the extent of
26 per cent is considered as sufficient. For making investment in
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Indian companies, NRIs/OCBs have been granted automatic approval
by the RBI to invest, with full repatriation benefits, up to 100% in the
issue of capital or convertible debentures of a private/public limited
company engaged in or proposing to engage in high priority industries,
subject to certain conditions.
The existing scheme of 100% NRI investment in cent per cent export oriented
units and also for the revival of sick units will continue cent per cent NRI
participation in power generation has also been permitted. In the context of
such revisions, the earlier 74% scheme has been discontinued.
The Government has set up a Bureau, officially known as the Interface for NRI
Scientists and Technocrats (INRIST), that will bring NRI scientists and
technocrats in contact with Indian industries which would benefit from the
expertise of NRIs.
The Department of Industrial Development has set up an investment
promotion and project monitoring cell popularly known as facilitation ceil, to
provide pre and post investment services for different industrial approvals and
respond to queries relating to various ministeries / departments.
RBI has granted general permission to foreign citizens of Indian origin, whether
resident in India or not, to acquire / hold and transfer by scale or inheritance,
residential properties situated in India subject to certain stipulations.
General permission has been granted to Non-resident Indian citizens and
foreigns citizen of Indian origin to let out their residential properties acquired
for their bonafide residential purpose but which on account of their residence
abroad, are not required for their immediate residential purpose. The rental
income or proceeds of any such income shall both be repatriable outside India
at any time in future and such funds should be credited to the owners
Ordinary Non Resident Rupee account maintained with an authorized bank in
India.
167
In order to simplify and remove regulations which hinder free flow of foreign
capita! in to India as also investment by Indian companies in joint venture
overseas, restriction imposed on FERA companies (i.e. companies incorporated
in India in which the non-resident interest is more than 40%) under sec 26 (7),
28, 29, and 31 of FREA, 1973 have all been removed as outlined below, there by
placing them on par with other Indian companies in regard to their operations
in India. FERA companies are now permitted.
a. To borrow money or accept deposits from persons resident in India.
b. To accept appointment as agent or technical or management advisers
in India, of any person or company.
c. To allow their trademarks to be used by any person or company.
d. To carry on in India any activity of trading, commercial, or industrial
nature except agricultural and plantation activity.
e. To acquire any undertaking in India carrying on any trade, commerce
or industry or purchase the shares of any such company, and
f. To acquire, hold, transfer or dispose of by sale, mortgage, lease, gift,
settlement or otherwise any improvable property in India.
Person of Indian nationality or origin and others (returning home after a
minimum stay of immediate preceding 6 months abroad) have been granted
general permission to bring into India as part of their baggage, gold, in any
form, up to 5000gms, provided duty is paid at the rate of Rs220 / per 100 gms.
(earlier Rs, 450/- per 10 gms ) in any convertible foreign currency (I).
168
As part of the continuing efforts to provide an investment friendly environment
in India for foreign investors, the following policy initiative were undertaken
during the year 1992-93.
(I) To keep pace with the ever expanding global technological revolution
in the field of computers, an Electronic Hardware Technology Park
(EHTP) scheme was set up allowing for 100% equity participation,
duty free import of capital goods and a tax holiday i.e. exemption from
corporate income tax for block of 5 years commencing from the date
of the starting of commercial production.
(II) In the new National mineral policy, the ceiling on foreign .equity
participation in Indian companies engaged in mining activities was
hiked to 50%. In the area of non-captive mines, equity participation of
over 50% by foreign partners could be considered on a case by case
basis.
(III) Authorized dealers were delegated powers to allow remittance of
dividend (including interim dividend) on equity/preference shares to
non-resident shareholders of all Indian companies, as also those in
which investments have been made by NRIs/OCBs under the 40%
scheme or any other scheme with repatriation benefits.
(IV) NRIs were allowed to invest up to 100% on non-repatriation basis, in
any partnership / proprietorship concern or in private / public
limited companies (expect in agricultural / plantation activities)
without seeking prior approvals of other RBI. However, OCBs are not
permitted to invest-In proprietorship / partnership concerns (2).
In keeping with the objective of attracting funds from the NRIs in the form of
deposit and foreign investment several steps were taken during the year 1993 -
94, such inflows, even while adhering to considerations of cost effectiveness and
dampening of volatility. Major policy initiatives undertaken during the year were
as follows:-
169
(I) Deposits Under Foreign Currency Non Resident Account (FNCRA) scheme
proved to be volatile during the payments crisis, of 1990-92. They were also
relatively costly given the spread above international interest in the prescription
of interest rates for these deposits as also the cost implicit in the provision of
exchange guarantee for such deposits. In this regard, the Bank's Annual Report
for 1992-93 had observed: "attempts have been made in the recent period to
restructure the existing FCNRA scheme and to put in place new schemes which
(a) reduce the reliance on the FCNRA scheme, (b) make exchange risk cover a
commercial proposition, and (c) reduce volatile components of deposits under
the existing FCNRA scheme. In pursuance of this objective deposits of four
different maturities i.e. 6 months and above but less than one year", one year
and above but less than two years two years and above but less than three
years, and three years only" were completely withdrawn effective from May
15,1993, Oct. 12,;993, Feb 15, 1994 and August 15, 1994 respectively.
Furthermore, interest rates prescribed on FCNRA of various maturities were
fine-tuned from time to time to secure alignment with movements in
international interest rates. Interest rates on Non Resident (External) Rupee
Accounts (NR (E) R) deposits were also revised downwards effective Oct 18,1994
while the interest rate on savings deposits was brought down from 5% to 4.5%
those on term deposits are not allowed to exceed 8%.
(II) In consonance with the move toward full convertibility in the current
account, the interest accruing on deposits under Non Resident (Non -
Repatriable) Rupee Deposits (NR (NR) RD) was rendered eligible for repatriation
effective from Oct 1, 1994. The principal amount under the scheme will
continue to be non-repatriable
(III) The Foreign Currency Ordinary Non-repatriable (FCON) scheme,
introduced in June J991, under which the principal as well as interest earned
were not repatriable, was suspended with effect from August 20, 1994. Interest
accruing on the existing FCON-scheme from the quarter beginning Oct 1, 1994
was however made eligible for repatriation.
170
Major policy changes were, effected with a view to ensuring that investment
flows were channelled in a manner consistent with overall Macro-economic
requirements. The following policy guidelines were drawn out in this regard:
(IV) With a considerable improvement in the external payments position and
the level of reserves, it was considered necessary to follow a restrictive policy
towards Foreign Currency Convertible Bonds (FCCBs) as they constitute a part
of the country's external debt till their conversion in to equity. As per the fresh
guidelines of the government (issued on May 11. 1994 ) for Euro issues,
companies were allowed to issue FCCBS only on merits as a part of the external
debt restructuring programme which was intended to lengthen maturity and
soften terms.
(V) Under the automatic approval scheme for foreign investments, new
guidelines were issued for determining issue price of preferential shares issued
10 foreign investors to increase their stakes up to 51% in the business of any
Indian company engaged in the high priority industries shown in the Annex-Ill
to the statement on industrial policy of July 24, 1991.
Consequent upon the abolition of the office of the Controller of Capital Issues
(CCI) and subsequent guidelines issued by the Securities and Exchange Board
of India (SEBI) on June 11 and 17,1992, existing companies wishing to raise
foreign equity were to make the issue at a price decided by the shareholders in
a special resolution. In certain proposal received from the existing companies
for enhancement of foreign equity, however, the companies were found to be
issuing foreign equities at a large discount to the market price, (set out in the
last year's Report). This mismatch in the price of shares for investment and dis-
investment could cause distortion in the inflows and outflows of foreign
exchange under the head of foreign investment.
With the objective of preventing a few shareholders from getting substantial and
undue enrichment and unearned gains, to ensure higher foreign equity flows,
and to make both investment and dis-investments market-related, It was
decided with effect from August 4, 1994 that preferential allotment of shares by
171
companies must be at market related price applicable to all foreign investment
proposals whether approved by the RBI or by the SIA / FIPB subject to the
following, guidelines:
The issue price of shares under preferential allotment (other than allotment on
rights basis), would have to be at the market value of the shares determined on
the basis of their average price during the immediate preceding six months at
the main listing center calculated on the monthly average of the high and low
rates quoted for the shares at such centres. In the absence of a market price,
however, (as in the case of Unlisted companies, Listed companies, where shares
are not regularly traded, etc) the RBI would be guided by the net asset value
and earnings per share.
(V) Indian companies engaged in or proposing to engage in housing and real
estate development, i.e. (1) development of serviced plots and construction of
built-up residential premises, (2) real estate covering construction of residential
and commercial premises including business centers and offices, (3)
development of townships, (4) city and region level urban infrastructure
facilities including roads and bridges, (5) manufacturing of building materials
and (6) financing of housing development were allowed to issue
shares/convertible debentures to NRIs up to 100% of the new issue on
repatriation basis. Repatriation of original investment in such cases would be
permitted by the RBI only after a lock in period of three years from the date of
issues of shares / debentures.
The above facilities which were not available to OCBs, have now been extended
to them on the same terms and conditions as applicable to NRIs
VII) NRIs / OCBs were so far permitted to invest in schemes of domestic
Mutual Funds floated by public sector banks / financial institutions on non-
repatriation basis. With a view to providing further incentives to NRIs / OCBs to
invest in domestic Mutual Funds, they were permitted to invest on repatriation
basis also. As a new policy measure, such investments were also permitted
to be made through secondary market.
172
(VIII) Under the Oct 1993 guidelines for issue of bonds by Public Sector
Undertaking (PSUs). Government have allowed PSUs to issue bonds under its
public issues to NRIs / OCBs through prospectus by private placement with the
facility of repatriation of both principal and interest on the bonds. No limit,
however has been specified for NRI / OCB investments in such bonds.
(IX) Besides the various investment facilities extended to NRIs / OCBs on
repatriation basis and under various non repatriable schemes, the NRIs / OCBs
were permitted to make investment in partnership/proprietorship concern,
shares, debentures of Indian companies, Indian mutual funds floated by public
sector banks/financial Institutions, deposits with Indian companies, real estate,
etc. Neither the investment/deposit amount nor the income/interest thereon,
was eligible for repatriation. Further, the investment/deposits held in India by
Indian nationals who have become non-residents on account of their going
abroad on employment/immigration, as well as income/interest earned on such
investment / deposits was not allowed earlier to be repatriated abroad. The
income /interest on such investment / deposits are, however, now permitted to
be repatriated in a phased manner over a period of three years, as indicated
below:
(I) Income accruing during 1994-95 and thereafter to the extent of US Si000
per annum is remittable with immediate effect (b) income earned over
and above US $1000 in a year would be allowed to be remitted as
follows:-
(1) One third of the annual income earned during the financial year
1994-95, (2) Two third of the annual income earned during 1995-
96 and (3) the entire amount earned during 1996-97 and onwards
Remittance of such income, However would be allowed only after
the payments of tax as per the provision of the Income Tax Act (3).
With a view to opening more areas for investment by NRIs / OCBs RBI has
decided to allow them to invest, on a repatriation basis, in all activities except
agriculture and plantation activities, subject to certain conditions during 1994 -
173
95. Accordingly, existing or new Indian companies (both private and public
limited companies) engaged/proposing to engage in any activity including
financial, hire purchase leasing, trading other services etc. (except
agricultural/plantation activities) are allowed to issue equity shares/convertible
debenture's on repatriation basis to NRIs/OCBs provided the aggregate
allocation of shares/ convertible debentures qualifying for repatriation benefits
to such non-residing investors does not exceed 24% of the new issue. Earlier
NRIs and OCBs were permitted to invest on a repatriations basis in new issues
of shares/convertible debentures made by companies engaged in industrial or
manufacturing activities and also in certain other sectors such as hotels,
hospitals, shipping development of computer software and oil exploration. It has
also been decided to permit authorized dealers to grant loans to NRIs holding
Indian passports for acquisition of a house / fiats for residential purpose
against security of immovable property proposed to be acquired by them subject
to certain conditions.
(II) As a process of further liberalization , general permission has been
granted to NRIs/OCBs to purchase the shares on repatriation basis of Public
Sector Enterprise (PSES) dis-invested by Central Government subject to the
condition that (a) the holding of share by a NRI or by an OCB, at any-time, does
not exceed one percent of the paid-up capital of the PSE concerned, (b) the
purchase consideration/bid money is received by way of remittance from
abroad through normal banking channels.
174
(III) NRIs resident in Nepal will be permitted hence forth to make investment
in India provided the funds for the purpose are remitted in free foreign
exchange through proper banking channels. Such investments will either be on
repatriation or on non-repatriation basis depending on the terms and
conditions applicable under the existing schemes under NRI investment.
(IV) In the context of on going economic liberalization, the policy and
procedures governing approvals under the schemes for 100% Export Oriented
Units (EOUS) and Export processing Zones (EPZs) were further revised. All
proposals conforming to the parameters presented vide press note No 13 (1991)
series dated Oct 9,1991, Department of Industrial Development, Ministry of
Industry, shall receive automatic approval within two weeks from Secretariat of
Industrial Approvals (SIA), Ministry of Industry (Department of Industrial
Development) in the case of 100% EOUs and from the Developments
Commissioners (DCs) concerned for units to be set up in EPZs. All other
proposals which do not conform to the parameters for automatic approvals,
shall be considered by the Board of Approvals (BOA) and disposed within 45
days from SIA
(V) Under the National Telecom Policy, 1994 which enunciates the guidelines
for the entry of private sector into Basic Telecom Services, joint venture between
an Indian and a foreign company is allowed subject to a maximum of 49%
equity participation from the latter.
(VI) It has been decided that foreign investment up to 51% and foreign
technology agreements in the cast of bulk drugs, their intermediates and
formulations thereof (except those produced by the use of recombinant DNA
technology) will be granted automatic approval subject to the parameter of RBI.
Since the second half of 1993-94, the Indian economy has experienced surges
in capital flows which took the forms of foreign investment flows both direct and
portfolio, and inflows into various deposit schemes for non-resident Indians.
With current account deficits remaining modest during 1993-94 and 1994-95,
the policy response to the capital flows was accommodative and this enabled on
175
unprecedented build up of international reserves. With the consequent
attenuation of monetary targets threatening the objective of inflation control,
the policy stance switched to one of throwing sand in the wheels in the second
half of 1994-95. Various measures put in place were progressively tightened
during the first half of 1995-96 in support of the conduct of monetary policy.
With the widening of the current account deficit and the onset of volatility in the
foreign exchange markets in the second half of 1995-96, the restrictive stance of
policy was eased and a number of measures were taken to relax controls and
allow for a larger inflow of foreign capital. As in the past, these measures were
related to foreign investment flows and deposits by NRIs and the policy objective
of attracting capital flows has been carried forward during the first half of 1996-
97.
Policy changes in 1996 - 97 were: Under the Automatic route, the ceiling for
lump sum payments of technical know-how fee was, increased from Rs. I crorc
to US $ 2 million, effective Nov 5,1996. With a view to liberalizing the existing
facility for investments by NRIs in India, it was decided to allow investments by
NRIs to establish schools and colleges in India subject to certain regulations.
With a view to expanding the coverage of investment proposals considered
under the Automatic Approval Route effective Jan 17,1997, the Government
announced the inclusion in Annexure III of the statement of Industrial Policy
1991 (i) 3 categories of industries / items relating to mining activities for foreign
equity up to 50% (II) 13 additional categories of industries/items for foreign
equity up to 51% and (III) 9 categories of industries / items for foreign equity up
to 74%
Foreign Direct Investment was allowed into sixteen non-banking financial
services (merchant banking, underwriting, portfolio management
services, investments advisory services, financial consultancy, stock
broking, asset management, venture capital, custodial services, factoring,
credit refinance, credit rating, leasing and finance, housing finance, forex
holding and credit card services) during the year 1997 98, through the Foreign
Investment Promotion Board (FIPB) subject to guidelines relating to minimum
capitalization norms, schedule of capitalization and domestic equity
176
participation. In a major drive to simplify procedures for foreign direct
investment under automatic route, the Reserve Bank dispensed with the need
for its prior approval for such proposals. In order to simplify procedures further
in respect to foreign direct investment cases already approved by the
Government of India (SIA/FIPB), the Reserve Bank dispensed with requirement
for its in-principle permission before receiving overseas investment or for
issuing shares to foreign investors. Indian companies satisfying the conditions
stipulated in the letter of approvals issued by SIA / FIPB could issue shares /
securities to foreign investors and file one copy of the application together with
required documents with the concerned Regional office of Reserve Bank within
30 days from the date of issue of shares. Expanding the scope of automatic
route for foreign direct investments, the government of India approved 13
additional categories of industries / items under services sector for foreign
equity participation up to 51% of the equity, three items relating to mining
activity up to 50% foreign equity participation and nine categories of
industries/activities up to 74% foreign equity participation.
As a part of liberalization process, Reserve Bank of India decided to permit
foreign banks operating in India to remit their profits surplus to their head
offices without the approvals of the Reserve Bank. The permission is subject to
the banks complying with the provisions of Banking Regulation act, 1949.
Financial turmoil in the world economy, imposition of economic sanctions and
sluggishness in domestic activity had some bearings on foreign investment
during the year. The Union Budget, 1999-2000 announced the establishment of
Foreign Investment Implementation Authority [FIIA] in order to rationalize and
simplify approval and implementation procedures of foreign1 investment
proposals. With a view to further facilitating inflows of foreign direct investment,
expansion of automatic list of approvals and a more dynamic role for Foreign
Investment Promotion Board were also announced.
Foreign investment recovered during 1999 - 2000 reflecting the stability of the
domestic currency, broad-based industrial revival, easing of economic sanctions
177
and return of orderliness in the financial markets coupled with strong stock
market performance.
A number of policy initiatives were taken during the year to further facilitate
inflows of foreign investment. In August 1999, a Foreign Investment,
Implementation Authority (FIIA) was established for speedy conversion of
approvals to actual flows. The Insurance Regulatory and Development Act
(IRDA) was passed in December 1999 permitting foreign equity participation in
domestic private insurance companies up to 26% of the paid-up capital.
Moreover, investments in all sectors, except for small negative list, were placed,
in February 2000, under automatic route for direct investments. Indian
companies vere allowed, subject to specified norms, to raise funds for
investments through issue of ADRs / GDRs without prior government approval
and up to 50% of these proceeds were allowed for acquisition of companies in
overseas markets. Indian companies could acquire companies engaged in
information technology and entertainment software, pharmaceuticals and bio -
technology in the overseas market through stock - swap options up to $ 100 m
on automatic basis or ten times the export earnings during the preceding
financial year as reflected in the audited balance sheet, whichever is lower.
FDI is seen as a means to supplement domestic investment for achieving a
higher level of economic growth and development. FDI benefits domestic
industry as well as the Indian, consumers by providing opportunities for
technological up-gradation, access to global managerial skills and practices,
optimal utilization of human and natural resources, making Indian industry
internationally competitive, opening up export markets, providing backward
and forward linkages and access to international quality goods and services.
Towards this end, the FDI policy has been constantly reviewed, and necessary
steps have been taken to make India a most favourable destination for FDI. The
major initiative taken to attract FDI during 2000 -2001 & 2001 - 2002 are as
follows:
In pursuance of Government's commitment to further facilitate Indian
industry to engage unhindered in various activities, Government has
178
permitted, except for a small negative list, access to the automatic route
for FDI, whereby, foreign investors only need to inform the Reserve Bank
of India within 30 days of bringing in their investment, and again within
30 days of issuing any shares.
Non-Banking Financial Companies (NBFCs) may hold foreign equity up
to 100% if these are holding companies.
Foreign investors can set up 103% operating subsidiaries (without any
restriction on number of subsidiaries) without the condition to disinvest
a minimum of 25% of its equity to Indian entities, subject to brining in
US $50 m out of which US $ 7.5 m to be brought upfront and the
balance in 24 months. Joint venture operating NBFCs that have 75% or
less than 75% foreign investment will also be allowed to set up
subsidiaries for undertaking other Non Banking Financial Company
activities, subject to the subsidiaries also complying with the applicable
minimum capital inflow.
FDI up to 49% from all sources is permitted in the private banking sector
on the automatic route subject to conformity with RBI guidelines.
In the process of liberalization of FDI policy, the following policy changes
have been made:
(i) 100% FDI permitted for B, to B e-commerce
(ii) Condition of dividend balancing on 22 consumer items
removed forthwith
(iii) Removal of cap on foreign investment in the Power Sector
(iv) 100% FDI permitted in oil-refining.
Automatic Route is available to proposals in the Information and
Technology Sector, even when the applicant company has a previous
joint venture or technology transfer - agreement in the same field.
Automatic Route of FDI up to 100% is allowed in all manufacturing
179
activities in Special Economic Zones (SEZs), except for the following
activities:
(i) Arms and ammunition, explosives and allied items of defence
equipment, defence aircraft and warships;
(ii) Atomic substances;
(iii) Narcotics and Psychotropic substances and hazardous
chemicals;
(iv) Distillation and brewing of alcoholic drinks;
(v) Cigarettes/cigars and manufactured tobacco substitutes.
FDI up to 100% is allowed with some conditions for the following
activities in Telecom Sector:
(i) ISPs not providing gateways (both for satellite & submarine
cables);
(ii) Infrastructure Providers providing dark fiber (IP Category I);
(iii) Electronic Mail;
(iv) Voice Mail.
FDI up to 74% is permitted for the following telecom services subject to
licensing and security requirements (proposals with beyond 49% shall
require prior Government approval): (i) internet services providers with
gateways; (ii) Radio Paging; and (iii) End-to-end bandwidth.
Payment of royalty up to 2% on exports and 1% on domestic sales is
allowed under automatic route on use of trademarks and brand name of
the foreign collaborator without technology transfer. Payment of royalty
up to 8% on exports and 5% on domestic sales by wholly owned
subsidiaries to offshore parent companies is allowed under the automatic
route without any restriction on the duration of royalty payments.
Offshore Venture Capital Funds / Companies are allowed to invest in
domestic venture capital undertakings as well as other companies
through automatic route, subject only to SEBI regulations and sector
specific caps on FDI.
180
FDI up to 26% is eligible under Automatic Route in the Insurance sector,
as prescribed in the Insurance Act, 1999, subject to their obtaining
licence from Insurance Regulatory & Development Authority.
FDI up to 100% is permitted in airports, with FDI above 74% requiring
prior approval of the Government.
FDI up to 100% is permitted with prior approval of the Government in
courier services subject to existing laws and exclusion of activities
relating to distribution of letters. FDI up to 100% is permitted with prior
approval of the Government, for development of integrated township,
including housing, commercial premises, hotels, resorts, city and
regional level urban infrastructure facilities such as roads and bridges,
mass rapid transit systems, and manufacture of building material in all
metros, including associated commercial development of real estate.
Development of land and providing allied infrastructure will form an
integral part of township's development.
FDI up to 100% is permitted on the automatic route in hotel and tourism
sector and for Mass Rapid Transit Systems in all metropolitan cities,
including associated commercial development of real estate. FDI up to
100% in drugs and Pharmaceuticals (excluding those, which attract
compulsory licensing or produced by recombinant DNA technology and
specific cell/tissue targeted formulations) placed on the automatic route.
The defence industry sector is opened up to 100 per cent for Indian
private sector participation with FDI permitted up to 26 per cent, both
subject to licensing.
International Financial Institutions like Asian Development Bank,
International Financial Corporation, Commonwealth Development
Corporation, German Investment and Development Company (DEG) etc.,
181
are allowed to invest in domestic companies through the automatic
route, subject to Securities and Exchange Board of India / Reserve Bank
of India Guidelines and sector specific caps on FDI (10).
FDI policies for the year 1998 -1999
Financial turmoil in the world economy, imposition of economic sanctions and
sluggishness in domestic activity had some bearings on foreign investment
during the year. The Union Budget, 1999 - 2000 announced the establishment
of Foreign Investment Implementation Authority [FIIA] in order to rationalize
and simplify approval and implementation procedures of foreign investment
proposals. With a view to further facilitating inflows of foreign direct investment,
expansion of automatic list of approvals and a more dynamic role for Foreign
Investment Promotion Board were also announced.
FDl policies for the year 1999 - 2000
Foreign investment recovered during 1999 - 2000 reflecting the stability of the
domestic currency, broad-based industrial revival, easing of economic sanctions
and return of orderliness in the financial markets coupled with strong stock
market performance.
A number of policy initiatives were taken during the year to further facilitate
inflows of foreign investment. In August 1999, a Foreign Investment
Implementation Authority (FIIA) was established for speedy conversion of
approvals to actual flows. The Insurance Regulatory and Development Act
(IRDA) was passed in December 1999 permitting foreign equity participation in
domestic private insurance companies up to 26% of the paid up capital.
Moreover, investments in all sectors, except for a small negative list, were
placed, in February 2000, under automatic route for direct investments. Indian
companies were allowed, subject to specified norms, to raise funds for
investments through issue of ADRs / GDRs without prior government approval
and up to 50% of these proceeds were allowed for acquisition of companies in
overseas markets. Indian companies could acquire companies engaged in
information technology and entertainment software, pharmaceuticals and bio-
technology in the overseas market through stock - swap options up to $ 100 m
182
on automatic basis or ten times the export earnings during the preceding
financial year as reflected in the audited, balance sheet, whichever is lower.
FDI Policies For The Year 2000 - 2001
FDI is seen as a means to supplement domestic investment for achieving a
higher level of economic growth and development FDI benefits domestic
industry as well as the Indian consumers by providing opportunities for
technological up-gradation, access to global managerial skills and practices,
optimal utilization of human and natural resources, making Indian industry
internationally competitive, opening up export markets, providing backward
and forward linkages and access to international quality goods and services.
Towards this end, the FDI policy has been constantly reviewed, and necessary
steps have been taken to make India a most favourable destination for FDI. The
major initiative taken to attract FDI during 2000 -2001 & 2001 - 2002 are as
follows:
In pursuance of Government's commitment to further facilitate Indian
industry to engage unhindered in various activities, Government has
permitted, except for a small negative list, access to the automatic route
for FDI, whereby, foreign investors only need to inform the Reserve Bank
of India within 30 days of bringing in their investment, and again within
30 days of issuing any shares.
Non-Banking Financial Companies (NBFCs) may hold foreign equity up u
100% if these are holding companies.
Foreign investors can set up 100% operating subsidiaries (without any
restriction on number of subsidiaries) without the condition to disinvest
a minimum of 25% of its equity to Indian entities, subject to bringing in
US $50 m out of which US $ 7.5 m to be brought upfront and the
balance in 24 months. Joint venture operating NBFCs that have 75% or
less than 75% foreign investment will also be allowed to set up
subsidiaries for undertaking other Non Banking Financial: Company
183
activities, subject to the subsidiaries also complying with the 3,
applicable minimum capital inflow.
FDI up to 49% from all sources is permitted in the private banking sector
on the automatic route subject to conformity with RBI guidelines.
In the process of liberalization of FDI policy, the following policy changes
have, been made:
(v) 100% FDI permitted for B to B e-commerce
(vi) Condition of dividend balancing on 22 consumer items
removed forthwith
(vii) Removal of cap on foreign investment in the Power Sector
(viii) 100% FD permitted in oil-refining.
Automatic Route is available to proposals in the Information and
Technology Sector, even when the applicant company has a previous
joint venture or technology transfer agreement in the same field.
Automatic Route of FDI up to 100% is allowed in all manufacturing
activities in Special Economic Zones (SEZs), except for the following
activities:
(vi) Arms and ammunition, explosives and allied items of defence
equipment, defence aircraft and warships;
(vii) Atomic substances; mi
(viii) Narcotics and Psychotropic substances and hazardous chemicals;
(ix) Distillation and brewing of alcoholic drinks;
(x) Cigarettes/cigars and manufactured tobacco substitutes.
FDI up to 100% is allowed with some conditions for the following
activities in Telecom Sector:
(v) ISPs not providing gateways (both for satellite& submarine cables);
(vi) Infrastructure Providers providing dark fiber (IP Category I);
(vii) Electronic Mail;
(ix) Voice Mail.
184
FDI up to 74% is permitted for the following telecom services subject to
licensing and security requirements (proposals with beyond 49% shall
require prior Government approval): (i) internet services providers with
gateways; (ii) Radio Paging; and (iii) End-to-end bandwidth.
Payment of royalty up to 2% on exports and 1% on domestic sales is
allowed under automatic route on use of trademarks and brand name of
the foreign collaborator without technology transfer. Payment of royalty
up to 8% on exports and 5% on domestic sales by wholly owned
subsidiaries lo offshore parent companies is allowed under the automatic
route without any restriction on the duration of royalty payments.
Offshore Venture Capital Funds / Companies are allowed to invest in
domestic venture capital undertakings as well as other companies
through automatic route, subject only to SEBI regulations and sector
specific caps on FDI.
FDI up to 26% is eligible under Automatic Route in the Insurance sector,
as prescribed, in the Insurance Act, 1999, subject to their obtaining
licence from Insurance Regulatory & Development Authority.
FDI up to 100% is permitted in airports, with FDI above 74% requiring
prior approval of the Government.
FDI up to 100% is permitted with prior approval of the Government in
courier services subject to existing -laws and exclusion of activities
relating to distribution of letters, FDI up to 100% is permitted with prior
approval of the Government, for development of integrated township,
including housing, commercial premises, hotels, resorts, city and
regional level urban infrastructure facilities such as roads and bridges,
mass rapid transit systems, and manufacture of building material in all
metres, including associated commercial development of real estate.
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Development of land and providing allied infrastructure will form an
integral part of township's development.
FDI up to 100% is permitted on the automatic route in hotel and tourism
sector and for Mass Rapid Transit Systems in all metropolitan cities,
including associated commercial development of real estate. FDI up to
100% in drugs and Pharmaceuticals (excluding those, which attract
compulsory licensing or produced by recombinant DNA technology and
specific cell/tissue targeted formulations) placed on the automatic route.
The defence industry sector is opened up to 100 per cent for Indian
private sector participation with FDI permitted up to 26 per cent, both
subject to licensing.
International Financial Institutions like Asian Development Bank,
International Financial Corporation, Commonwealth Development
Corporation, German Investment and Development Company (DEG) etc.,
are allowed to invest in I domestic companies through the automatic
route, subject to Securities and Exchange Board of India / Reserve Bank
of India Guidelines and sector specified caps on FDI.
Industrial policy resolutions of 1948,1956 and 1980.
Industrial policy comprises of the procedures, principles, rules, policies and
regulations which together govern the industrial sector to guide the industrial
development or the country in conformity with the objectives of five year plans
and the needs of the economy. As the economy develops, the government has to
closely study the process of economic development and make necessary
changes and modifications in the policies so as to make the policies relevant for
the situation or the environment prevailing in the country at different points of
time. A Sometimes the changes in policies are so drastic that a new approach at
the industrial development or the development of any other sector is arrived at.
When these changes are announced the reactions from the sector concerned are
studied closely by the government and necessary amendments are made to the
policies already announced. In Indian scene, the situation prevailed
immediately after independence was completely different from what is being
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witnessed today. Hence, if we study the industrial policies announced in the
later 40's and early and middle 50s we would get a background with which we
will be able to understand and appreciate the changes that have been
announced in 1991. This would also help us to understand the justifications for
the drastic changes announced at periodical intervals. Hence, we would discuss
now in brief, the features of 1948, 1956 and 1980 Industrial Policy Resolutions.
INDUSTRIAL POLICY 1948
Immediately after independence, the government had to give a guideline for the
industries in India and so it announced its policies for industries. The political
freedom attained in 1947, posed a challenge to the government, to devise its
own policies. With the production at low levels, population increasing, partition
impacts, rising price level, industries to be developed to accelerate economic
development, etc., the 1948 Industrial policy resolution was announced.
Through that the government clearly accepted its responsibility of ensuring
planned development of industries of various types. The 1948 policy laid the
foundation for a new experience as would be clear from the following features of
the policy. The industries were classified into the following four categories:
1. The strategic industries to be completely owned by the government
included manufacture of arms and ammunition, production and
control of atomic energy, ownership and management of railway
transport, etc. No private sector participation or existence will be
permitted in this category of industries.
2. The second group included the basic and key industries. Private
sector existence in this group would be tolerated for a period of 10
years after which their performance would be evaluated. New units in
this category' will be established only by the government and the
existing ones would be taken over by the government if their
performance is found to be not satisfactory after the review. The
industries included in this category include: aircraft manufacture,
coal, iron and steel, ship building, radio sets and mineral oils, etc.
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3. In this category government included the basic industries like salt,
automobiles, tractors, prime movers, electrical engineering, heavy
machinery, machine tools, heavy chemicals, fertilzsers, electro-
chemical industries, non-ferrous metals, rubber manufacture, power
and industrial alcohol, cotton and woollen textiles, cement, sugar,
paper and newsprint, air and sea transport, minerals and industries
relating to defence. Private sector will be given complete freedom to
enter into this category, but the government can intervene and
regulate any of them, if found necessary.
4. All the other industries formed the fourth category. Mainly left for
private sector, the government pointed out that progressively it may
participate but not eliminate the private sector. Both individual as
well as co-operative undertakings will be permitted in this sphere.
This policy also gave importance to small scale industries and suggested that
both the central and state governments should join together in solving the
problems faced by the small scale industries. As these industries would offer
good scope for absorbing the displaced labourers, and agricultural workers and
wee also ideal for co-operative type of organisation, the government felt that
they must be developed. As regards the foreign capital, the government clearly
pointed out that there is need for free flow of capital as well as technology. At
the same time the government also said that it should regulate; no
discrimination will be made between the Indian and foreign undertakings with
regard to the applications of the provisions of the policy resolutions. Profits and
repatriation of capital would be permitted subject to the provisions of the -
foreign exchange control. Further if any undertaking is nationalised, then fair
and equitable compensation would be paid.
Evaluation:
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The main aspect of this policy is that it laid the foundation for the introduction
of MIXED ECONOMY in India. Under this the government will encourage co-
existence of both private and public sector units in industries according to the
provisions of the policy. This paved the way-for the participation of government
and the corporate sector in the industrial building process of the country. This
also facilitated a direct comparison between the performance of both the
sectors, in terms of various indicators. Being the first policy resolution the
government had made a good beginning. But this policy was criticised for being
classificatory. It gave an impression that the private sector, even in spite of
possessing the potential was not allowed to play its due role in the industrial
development. Secondly, there was a threat of nationalisation, specifically, in the
case of industries under the second category. Thirdly, the government
intervention was present even in the case of third category of industries. Hence,
on the whole, being the first policy, the government could not make the policy
more imaginative, except, of course, introducing the principle of mixed
economy.
INDUSTRIAL POLICY 1956
A new policy was necessitated after 1951, because, India adopted a socialistic
pattern of society, the Constitution guaranteed Fundamental Rights and
Directive Principles of State policy and the First five year plan was completed by
1956. After reviewing the developments and achievements, the government
came out with the Industrial Policy Resolution of 1956. For all the later policies,
this became the basis and until 1980, the provisions of this policy remained
more or less in force.
The following are the important features of this Policy:
The industries were classified into three categories. This was indicated in terms
of Schedule A, Schedule B and Schedule C industries.
The Schedule A industries are completely slate owned and the state is
responsible for the development and growth of them.
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The Schedule B included industries which were under the control of
government, especially new units. The private sector is also permitted to
enter into this category, but it will be given only a supplementary role.
The Schedule C industries included all the remaining industries, the
future of which would be completely in the hands of private sector. Of
course, government regulation in general would be formulated and made
applicable to them as any other industries. The first classification
(Schedule A) included 17 industries, the Schedule B included 12
industries and Schedule C included all the rest.
The government clearly indicated that the above classification is not very rigid,
and private participation and presence even in the first category in the nature of
allied units, user of by-products, etc., would be permitted, similarly the
government may enters the Schedule C industries if the planning and
development warrants it. The private sector is expected to work in close unison
with the state. The government assured fair and free treatment to private sector
units and non-discriminatory treatment was also promised. The government
continued to encourage the growth and development of small scale and village
industries by extending subsidies, tax concessions, protection from large and
medium industries, and assisting them in modernisation to improve their
competitive strength. The Resolution also aimed at reducing the regional
disparities in the growth and development of industry so as to achieve balanced
industrial development throughout the country. The Resolution also highlighted
the need to protect and improve the conditions of industrial workers in the
country. Mainly several machineries for settling industrial disputes were
thought of. The government continued with its policy regarding foreign capital
without much change.
Evaluation:
This resolution assigned a major role to the public sector. It created a condition
in which the public sector units could be established and developed well. This
was fell necessary to achieve the desired rate and pattern of development of
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industries in India. The government made it clear that it had no intention to
wipe out the private sector, instead it wanted the private sector to emerge as the
supplementary sector for the public sector and join the latter to achieve rapid
industrial and economic development. After the resolution came into force, over
a period it was found that the private sector developed faster by taking
advantage of loopholes and exceptions in the Resolution. There were cases
where licenses were issued to private sector while public sector should have
been given the license. Hence, it was found that this Resolution in fact, led to
the rapid growth of private sector.
INDUSTRIAL POLICY OF 1980
As already pointed out the Industrial policy of 1956 formed the basis of this
policy in 1980. This new policy had the following objectives:
(i) to achieve the optimum utilisation of the installed edacity
(ii) to achieve maximum production and through that achieve
higher productivity and employment generation
(iii) to rectify the regional imbalance by focusing on the backward areas
(iv) giving priority treatment for agro-based industries
(v) to promote inter-sectoral relationship
(vi) to encourage the growth of export oriented and import substitution
industries
(vii) to speed up the growth of small scale units, etc.
With these objectives in view, the new policy laid down the following provisions:
1. After reviewing the performance of the public sector units the
government has decided to introduce measures for improving the
efficiency of these units so as to make them contribute more towards the
economy.
2. In order to promote economic federalism, the policy provided
for integration of industrial development in the private sector. The
government also decided to eliminate the artificial division between small
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and large scale industrial units. In each district a few nucleus plants
will be set up which would generate opportunities for a number of small,
cottage and ancillary units. This would ultimately create the scope for
faster industrial development in the industrially backward districts.
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3. To provide the scope for more and more small and cottage industries, the
government redefined these units as below:
a. the limit of investment for tiny units was to be raised from Rs. 1
lakh to Rs.2 lakhs
b. the limit of investment for small scale units was to be raised from
Rs. 10 lakhs to Rs. 20 lakhs and
c. increase the limit of investment for ancillaries from Rs. 15 lakhs to
Rs. 25 lakhs.
4. to promote industrial growth in rural areas and also to improve the
employment opportunities there and raise their percapita income, the
policy provided for promoting industries in the rural areas. This was also
expected to maintain the ecological balance in the country. Greater
attention would be given to the growth of handlooms, handicrafts and
khadi and other village industries.
5. Another important provision was that the government decided to
regularise the unauthorized excess capacity with the industrial units,
especially the FERA & MRTP units by allowing them automatic
expansion by 25% of the existing licensed capacity on a selective basis.
6. To prevent spread of industrial sickness, the government indicated that
very stringent steps would be taken against those units which are
deliberately mismanaged and indulging in financial improprieties. As
regards the existing sick units, arrangements would be explored to revive
them or to encourage their mergers with healthy units by introducing
suitable tax concessions to encourage such actions. When other methods
of revival of sick units are not found feasible, then the management of
such sick units would be taken over.
EVALUATION
This policy has several lapses. Its claim to eliminate the division between small
scale and large scale units is something contradicting the basis of such
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divisions. There was a need to treat the small scale with liberal treatment so
that in a labour intensive economy, these units can create employment
opportunities. There is nothing wrong with such specific preferential treatment
of small scale units. But this policy aimed at removing such differences.
Secondly, this policy created a precedence by regularising the unauthorized
excess capacity created by large units, instead of taking action against such
erring big units. While the big units welcomed this move of the government, yet
this has resulted in the expectation that the government would continue to have
such liberal treatment in future also. This indirectly has also affected the
growth prospects of new industries and the existing medium and small scale
units. Though the government justified its move by stating that such a move
would facilitate fuller utilisation and higher output, yet the consequence of such
a move was not thought about. However, it may be pointed out that the seeds of
liberalization were sown through this policy and the government's intention to
select capital intensive path of development.
The features of 1991 Industrial policy
The government announced its new Industrial policy in July 1991. The new
policy has outlined several changes which have together opened a new era to
the growth and development of industrial sector in India, The conventional
regulations and restrictions have been replaced with liberalization and reliefs.
Consequent to the announcement of the new policy, there has been all round
jubilation in the industrial sector. The following are the salient features of the
new industrial policy.
Even by 1985-86, the government realised the need to encourage the industrial
sector to stand on its own legs and towards achieving this a number of policies
and procedural changes have been announced. This was expected to increase
productivity, reduce costs and improve the quality with which the domestic
industries are expected to face competition with strength. There was an honest
attempt to release the public sector from a number of constraints and it was
given a large measure of autonomy. Technological and managerial
modernization programs were taking place in large scale. All these measures
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together contributed to the achievement of an impressive annual growth rate of
8.5% during the VII Five year plan. Having understood the effectiveness of all
the policy changes in the past, the new industrial policy will continue to pursue
a sound policy to encourage entrepreneurs, develop the indigenous technology
through intensive research and development activities, dismantle the regulatory
system, improve the capital market, etc. Small scale sector would get a special
attention and the government promised to come out with a new policy towards
the small scale industries. Foreign technology and investment would be
welcomed to improve the domestic production base and increase the exports.
The MRTP Act would be suitably modified to encourage competition. Public
sector will be made to run on commercial lines and play a vital role in economic
development. The essence of this new policy will be discussed under the
following heads: 1. Industrial licensing, 2. Foreign investment, 3. Foreign
technology agreement, 4. Public sector, 5. MRTP Act and 6. Small scale and tiny
sector policy.
INDUSTRIAL LICENSING POLICY
To achieve the objectives of the strategy of the industrial sector in the 90's a
number of changes in the system of industrial approvals have been brought
about. The domestic producers will be able to withstand the competition in the
country as well as abroad only through procedural reforms. Hence, the role of
government will be changed from that of exercising control to one of providing
help and guidance. Changes in the policy towards public sector in the last few
years have clearly indicated that private sector enterprises will be allowed to
compete in many areas hitherto earmarked for public sector. Consequently, the
new policy has completely reclassified the Indian industries as below:
a) Eight industries have been completely reserved for the public sector.
They are: i. Arms and ammunition and allied items of defence equipment,
defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral
oils; v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold
and diamond, vi. mining of copper, lead, zinc, tm, molybdenum and wolfram,
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vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii.
railway transport.
b) Eighteen industries have been listed as industries which require
compulsory licensing. However, this provision would not apply in respect of the
small scale units taking up the manufacture of any of the items reserved for
exclusive manufacturing in small scale sector. Compulsory licensing would be
required in the following industries;
i. coal and lignite, ii. petroleum other than crude and its distillation
products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal
fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco
substitutes, vii. Asbestos and asbestos based products, viii. plywood, decorative
veneers and other wood based products such as particle board, medium density
fiber board, block board, ix. raw hides and skins, leather, chamois leather and
patent leather, x. tanned or dressed fur skins, xi. motor cars, xii. paper and
newsprint except bagasse based units, xiii. electronic aerospace and defence
equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi.
drags and pharmaceutical xvii. entertainment electronics and xviii. white goods
like domestic refrigerators.
As regards the provisions of the industrial licensing policy,
(i) Industrial licensing has been completely abolished for all projects
except for the industries classified above, i.e., the area reserved for
public sector and the list of 18 industries and the areas reserved for
small scale industries will continue.
(ii) Public sector will continue to maintain monopoly in industries
coming under the areas of security and strategic considerations.
(iii) In projects where imported capital goods are required, automatic
clearance will be given provided the foreign exchange availability is
ensured through foreign equity. Or alternatively if the value of
imported, goods does not exceed 25% of the total value of plant and
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equipment subject to the ceiling of Rs. 2 crores, automatic clearance
will be given. However, this would come into effect only from April,
1992 in view of the current balance of payments position. In all the
other cases, the prior approval and clearance from the Secretariat of
Industrial approvals in the Department of Industrial development
will be required.
(iv) Except the list of industries requiring compulsory licensing, the other
industries will not require any approval from the Central government
for their location in ares other than cities of more than one million
population. In cities with more than one million population, non-
polluting industries like electronics, computer software and printing
will be permitted outside 25 kms. of the periphery. If such cities
require industrial re-generation policies will be made more flexible.
However, the existing zoning and land use regulation and
environmental legislation will continue to regulate industrial
locations. All efforts will be made through incentives and other
methods like infrastructural development, to disperse the industry to
rural and backward areas.
(v) New Broad-banding facility will be provided to the existing units so
as to enable them to produce any article without additional
investment. The exemption from licensing will be applicable to all
substantial expansion of existing units.
(vi) The mandatory convertibility clause will no longer be applicable for
term loans from the financial institutions for new projects,
(vii) A very significant step is to abolish all the existing registration
schemes.
(viii) In case of substantial expansions and new projects, it is enough if
the entrepreneurs file the information memorandum.
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(ix) The list of industries requiring compulsory licensing and industries
for automatic approval of foreign technology agreements will be
notified in the Indian Trade Classification (Harmonized system),
FOREIGN INVESTMENT
Foreign investment carries with it the benefits of technology transfer, marketing
expertise, modem managerial techniques and new possibilities for promotion of
exports. As this requirement is felt in this world of industrial change and co-
operation, the new policy has clearly contained the following provisions related
to foreign investment:
(i) In high priority industries approval will be given for direct foreign
investment upto 51% foreign equity and all the bottlenecks in this
process will be removed- Clearance in such cases will be given if the
foreign equity covers the foreign exchange requirements for imported
capital goods. The necessary amendments will be made in the FERA.
(ii) The general policies governing the domestic units in regard to import
of components, raw materials and intermediate good and payment of
know-how fees and royalties will also be applicable to the high
priority industries in which foreign investment is limited to 51%
However, the payment of royalty will be routed through the RBI to
enable it to monitor the outflow of foreign exchange on account of
dividend payment also to ensure that such payments are balanced by
export earnings over a period of time.
(iii) All the other foreign investments not included in the Category I slated
above will require prior clearance.
(iv) Trading companies primarily export oriented will also be permitted
under the foreign equity proposals as indicated in (i) above. However,
the provisions of the Export-Import policy applicable to the domestic
units will also be applicable to such trading companies.
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(v) To encourage substantial inflow .of foreign investment, a Special
empowered board would be constituted. This Board would negotiate
with the large international firms and approve direct foreign
investment in select areas. This is expected to fetch foreign
technology and open the industries in India to wider world market.
Such investments will be subjected to favourable treatment based on
the merits irrespective of the rules, regulations and procedures in
practice.
FOREIGN TECHNOLOGY AGREEMENT
A welcome change in the outlook of the government as evidenced by the new
policy is the realization that the sophisticated technology, from abroad can be
brought in only through liberal and less restrictive procedure and policies. The
interference of the government in this regard is to be reduced so as to enable
the domestic industries in achieving a high rate of industrialization. As a result
of this liberalization, automatic approval for technology agreements related to
high priority industries will be made with respect to certain specific parameter.
Other industries which can enter into such agreements without incurring the
expenditure of foreign exchange will also be extended liberal treatment. The
industrialists are left to themselves to decide and enter into foreign technology
agreements depending upon the commercial viability of their enterprises. In due
course this measure is expected to pave the way for exchange of superior
technology from India with other countries. With the overall liberalization, the
competition will be high and it is expected that industries will invest much more
in research and development activities. Keeping in view all these expectations,
the government has announced the following changes in regulations governing
foreign technology agreement:
(i) No prior permission is needed for hiring foreign technicians, foreign
testing of indigenously developed technologies. Such activities
involving payments will be governed by the guidelines of the RBI and
such payments can be made through the blanket permits.
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(ii) Automatic permission will be given for foreign technology agreements
relating to the high priority industries. The royalty payments through
such agreements will be subjected to certain provision. Upto the
payment of Rs.1 crore, royally will be @ 5% for domestic sales and 8%
for foreign sales or exports. However, the total royalty payment should
not exceed 8% of sales over a 10 year period from the date of
agreement or 7 year period from the dale of commencement of
production.
(iii) In the case of industries not covered in the high priority list automatic
permission will be given for technology agreement provided it does riot
entail any foreign exchange payment commitment.
(iv) In all the other cases, the general procedures in practice will be
adhered to and such industries will require approval.
PUBLIC SECTOR
The public sector was given the predominance in the industrial development
over the last four decades and the amount of investment made in this sector,
though justified from the point of view of socialistic democracy, it has been
struggling with so many problems like poor productivity, excess staffing, lack of
continuous technological up-gradation, inadequate attention to research and
development, etc. The rate of return on investment in public sector has been so
low that it has prevented the automatic growth of these assets to the
government. The main reason for this poor performance of the public sector has
been the taking over of the sick units from the private sector and the number of
units which are in the consumer goods and service sector. Hence, in the new
policy the government has rightly given the emphasis to the development of
public sector in the field of essential infrastructure goods and services,
technology development and building of manufacturing capabilities,
manufacture of products such as defence equipment. The public sector will also
enter the other areas not strengthened if they generate good profits and the
management will be granted more autonomy through a system of memorandum
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of understanding. Private sector will be invited to induce competition in these
areas. In selected industries in public sector, the government would disinvest a
part of the equity share holding to provide market discipline to the performance
of the public sector. Based on these views the new policy has the following
provisions regarding the public sector:
(i) A review of the public sector portfolio investment will be made to give
the emphasis on the role of public sector in the strategies, high tech
and infrastructure. Public sector units will be allowed entry into
areas not strictly reserved for it.
(ii) The Board for Industrial and Financial Reconstruction will be
approached to help the sick units to rehabilitate them. To protect the
interest of workers who are likely to be affected due to rehabilitation
of public sector sick units, a social security system is proposed to be
devised.
(iii) A significant policy aimed at raising the resources and encouraging
public participation in the growth of public sector units is that the
government will offer a part of its share holding in the public sector
to the mutual funds financial institutions, genera! public and
workers.
(iv) In the direction of strengthening the management of public sector
units the Board of public sector management will be made more
professional and given more powers. Further to make the
management of such units more autonomous and accountable a
system of memorandum of understanding will be adopted. Apart from
improving the expertise of the government in implementing the MOU,
the government also would place in the Parliament the MOU to
facilitate detailed discussion.
MRTP ACT
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A major deviant of the new policy is in respect of the MRTP Act. The new policy
aims at removing the unnecessary bureaucratic controls and allow the
industries to breathe in an atmosphere of freedom. The efforts of the
government in the past intervening in the investment decisions of the MRTP
companies have been proved to be counter-productive. Hence, the newly
empowered MRTP Commission will enquire into complaints received from
individual consumers or classes of consumers. The following is the essence of
the provisions in the new policy regarding MRTP Act:
(i) The limits of assets in respect of the MRTP companies and dominant
undertakings have been removed and suitable amendment in the
MRTP Act will be made in due course.
(ii) The need to obtain the prior approval of the central government for
establishing new units, expansion of existing units, merger,
amalgamation and take over as well as appointment of Directors have
all been removed.
(iii) The MRTP Act will be used only for controlling and regulating
monopolistic, restrictive and unfair trade practices. As a follow-up the
MRTP Commission will be authorized to inquire suo moto or
complaints lodged by individual consumers or classes of consumers
regarding monopolistic, restrictive and unfair trade practices.
(iv) All the necessary amendments will be made in the MRTP Act to give
more punitive and compensatory powers of the MRTP Commission.
Industrial pattern in India on the eve of planning and growth since the I
Five Year Plan
By 1950, the industrial pattern in India was completely under the shackles of
the British policy. Till independence, India was used as a market for the
finished goods of Briton and so nothing spectacular could be explained about
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the industrial pattern in India at that time. The main features of the industrial
pattern on the eve of planning (1950) were:
1. There was a conspicuous lop-sided pattern of industry found by 1950.
On the one side large industries owned by British businessmen was
existing and the other extreme the indigenous industries of small size
but in large numbers was found. There was no medium scale
industries at all. Obviously the employment pattern was concentrated
in these two extreme types of industries.
2. The capital intensity in Indian industries was very low compared to
several other Western countries. This was because of low wage level
and very small market size for the products. So there was no scope for
large scale production.
3. The composition of industrial output was such that the ratio between
consumer goods and capital goods was 62: 38. This amply explains the
under developed nature of the capital goods sector.
On the eve of the I Plan the government studied the prevailing situation and
then decided to launch the process of industrialization in India in order to
achieve a higher rate of growth. For this purpose steps were taken to design the
industrial development to accelerate growth. The plan-wise steps for achieving a
higher rate of industrial development is given below:
I Plan: During this Plan the emphasis was more on the development of
agricultural sector than the industrial sector. However, the effort was to
improve the power and irrigation facilities so as to facilitate rapid
industrialization. The target for the growth was to achieve 7% But in reality this
called for huge investment which did not come forth. Out of the total investment
planned for the industrial sector (Rs. 797 crores), Rs. 94 crores was the outlay
fixed for the public sector. The Plan also aimed at fuller utilization of the
existing capacity. However several important industries like Sindiri Fertilizer
203
factory, Chittaranjan Locomotive factory, Indian Telephone industries, etc were
set up during this Plan.
II Plan: The seeds of industrialization were sown during this Plan. During this
Plan period several important changes took place and the most notable one
being the government declared its Industrial policy resolution 1956. Heavy
industries and large scale industries were to be set up. The total investment by
the private and public sector was Rs. 1575 crores. The following priorities were
set up to achieve a desirable pattern of industrial development during this Plan.
(i) To give top priority to heavy engineering and machine building
industries.
(ii) Expanding the capacity of some of the industries producing
aluminium, cement, chemical pulp, fertilizers, etc.
(iii) To undertake modernization and re-equipment of the major national
industries like cotton textile and jute.
(v) To achieve fuller utilization of available capacity and
(vi) To expand the capacity of the consumer goods industries.
With these priorities, major iron and steel plans were set up in public sector in
collaboration with other countries. Apart from these the industrial development
also included the development of several other medium scale and small scale
units in large scale. The combined effect of all these industrial development was
during this Plan period the index of industrial production shot up to 194 in
1960-61 from a mere 139 in 1955-56.
III Plan: This Plan provided for a big leap in industrial development by raising
the rate of investment to a new peak to strengthen the industry, power and
transport and also to achieve a rapid rate of industrial progress. With this view,
the total investment ear-marked for industrial development was Rs. 3000 crores
in which public sector contribution alone amounted to Rs. 1700 crores. In fact
in this Plan the public sector was given predominant role. Apart from this the
village and small scale industries received a great impetus in the form of Rs.
425 crores of investment by private and public sector. Added to this was to set
up 300 new industrial estates throughout the country. The target for industrial
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development was" fixed at 14%, though the actual achievement was only 7.6%
per annum. There was overall industrial development and it was thought that
the country could receive the stage of self-reliance.
IV Plan: With a good agricultural output on the eve of this Plan (which coincided
with the start of Green revolution), the industrial development started picking
up. This Plan had specific objectives for industrial development as indicated
below:
1. To fulfill the commitments made for investments
2. To expand the production capacity as required by the future
3. To bring down the level of dependence on import for supplies
4. To exploit the existing internal development to lay the base for new
industries.
With a total investment of Rs. 5300 crores by the private and public sectors, the
Plan provided for the development of large, medium and small scale and village
industries. But during this Plan the achievement was well below the target due
to several factors. Specifically, operational problems in some of the basic
industries, lack of integrated planning, deficiency in design, loss of man-days
due to strikes and lock-outs, decline in demand for industrial machinery,
inadequacy of investment, stagnation in the production of commercial crops,
etc.
V Plan: This Plan started with the emphasis on the following with the objective
of achieving self-reliance and growth with social justice: i. Rapid growth of the
core sector, ii. Encourage development of industries which accelerate rapid
diversification and growth of exports, iii. Increasing the production of industries
which supply for mass consumption, iv. To curtail the production of non-
essential commodities except for export purposes.
With this emphasis the total investment by the public private sectors worked
out to Rs. 10135 crores. The Village and small scale industries received
tremendous encouragement during this Plan and the government reserved
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production of 124 items for small scale industries. Inspite of all these, the
actual achievement of industrial development was just 5.3% per annum against
a target of S.1% This was mainly because of the capacity constraints in
industries like cement, paper and fertilizer, lack of transport facilities, shortage
of fuel, electricity, low administered price, strained industrial relations,
inefficient management, etc.
VI Plan: This Plan started with a strategy to achieve structural diversification,
modernization and self-reliance. Towards this, the Plan formulated policies on
the following lines:
i. Enhancing the manufacturing capacity in a substantial way covering a
wide range of industries, ii. Giving special attention to the capital goods
industry and electronics industry in particular, iii. In order to meet the foreign
exchange requirements, the exports of the engineering goods and industrial
products would be stepped up, iv. Providing for a combination of the import of
contemporary technology and also development of indigenous technology
through intensive research and development and v. Developing a strategy for
backward regions.
The Plan provided for an overall of investment of Rs. 22187 crores, though the
actual expenditure was of the order of Rs. 30000 crores. However, the industrial
growth did not exceed the target determined due to various reasons, the
important of which are: Power shortage, poor industrial relations and continued
labour unrest, poor demand conditions, lack of concern for improvement of
efficiency failure to give greater emphasis on the technology up-gradation, etc.
VII Plan: This Plan provided for a total investment of Rs. 19708 crores by the
Public sector and Rs. 2752 crores for the development of the village and small
scale industries. Over and above this the private sector investment of a very
huge size was also forthcoming. The Plan developed an industrial strategy with
the following elements:
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(i) to completely remove the infrastructural deficiencies like power
shortage, by providing for more efficient use of the existing capacity
and also establishing new power plants.
(ii) to encourage modernization of industries especially sugar and
textile industries through up-gradation of technology.
(iii) to determine specific targets for productivity for major industries like
steel fertilizer, paper, cement etc.
(iv) to identify the industries which possess competitive advantage and
then encourage them more to improve their export by making the
export production an integral part of the domestic production.
(v) to encourage the sunrise industries which carry enormous potential
for improving productivity and quality
(vi) to reduce regional disparities in industrial development and also
ensure dispersal of industries by locating new industries in
industrially backward states and districts,
(vii) to extend the coverage of pollution control system in more industries.
An encouraging note during this Plan was that the actual achievement of
growth was very much better than what it was in other plans, against a target
of 8.5% This better growth rate was achieved mainly because of i. better
performance of infrastructural sector, changes in the area of licensing, higher
import of capital goods, higher utilization of the existing capacity, extending of
broadbanding policy to more industries, etc. The overall outlay during this Plan
was Rs. 22148 crores.
VIII Plan: At the start of this plan, the government had taken a crucial decision
to change its fiscal, monetary, trade, industrial and foreign investment policies.
In one word, the liberalization policy was announced. The continued emphasis
on public sector was dropped as it had provided the necessary momentum for
growth and so the private sector initiatives have to be encouraged. The overall
efficiency of the private sector proved that it has come off age and play a greater
role in the economic development. The competitive advantage of Indian
industries should be made full use of and so the private sector is vested with
the responsibility for improving the efficiency and productivity. An open door
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policy is adopted to facilitate the growth of private sector and also to integrate
the domestic production with the rest of the world. External collaboration, joint
ventures, etc will all be viewed with a main focus on the flow of benefits. The
overall outlay in this Plan was set at Rs. 40673 crores. The Plan has fixed 8.9%
as the annual average growth rate and with the prevailing conditions, this
target appears to be reasonable and achievable.
EXIM Bank and the functions of EXIM Bank The schemes of financing of
the Bank
The Export-Import Bank of India (EXIM Bank) established on 1st January,
1982 is a wholly owned financial institution of the government. It was
established, by an Act of Parliament, for the purpose of financing, facilitating,
promoting foreign trade of India. It is a principal financial institution for co-
ordinating the working of institutions engaged in financing exports and imports.
Chapter IV of the EXIM Bank Act provides: The EXIM Bank may grant, in or
outside India, loans and advances, by itself or in participation with any bank of
financial institution whether in or outside India, for the purpose of export or
import and shall also function as the principal institution for co-ordinating the
working of institutions engaged in financing of the export in such manner as it
may deem appropriate." The Chapter provides further: "The EXIM Bank may
also carry on and transact all or any of the following kinds of the following
business, namely:
(a) granting loans and advances to a scheduled bank or any other bank
or financial institution notified in. the Official Gazette by the
Central Government in this behalf by way of refinance of loans and
advances granted by it for purpose of export or import.
(b) underwriting the issue of stocks, shares, bonds or debentures of
any company engaged in export or import, the Export-Import Bank
of India Act, 1981.
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(c) issuing bid bonds or guarantees in or outside India by itself or in
participation with any government bank or financial institution in
or outside India.
(d) accepting, collecting, discounting, re-discounting purchasing,
selling or negotiating in or outside India bills of exchange or
promissory notes arising out of transactions relating to export or
import and granting of loans and advances in or outside India
against such bills or promissory notes.
(e) granting, opening, issuing, confirming or endorsing letters of credit
and negotiating or collecting bills and other document drawn there
under.
(f) undertaking any transaction involving a combination of government
to government and commercial credit for purpose of export or
import.
(g) granting loans and advances outside India for any Indian joint
venture.
(h) granting lines of credit to the government of any foreign state or any
financial institution or person outside India for purpose of export
and import.
(i) granting loans and advances to any person in India in connection
with his equity contribution in any joint venture in any country
outside India.
(j) financing export or import of machinery and equipment on lease
basis.
(k) subscribing to or entering into such other dealings in foreign
exchange, as may be necessary for the discharge of its functions.
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(l) subscribing to, or investing in, or purchasing of, stock, shares,
bonds, or debentures of any country outside India.
(m) opening of any account in any bank in or outside India or the
making of any agency arrangement with, or acting as agent or
correspondent of, any bank or other institution in or outside India.
(n) transferring for consideration, any instrument relating to loans and
advances granted by it.
(o) issuing participating certificate.
(p) subscribing to, or investing in, or purchasing of stock, shares,
bonds, or debentures to the extent necessary for the enforcement of
a line, pledge or other contractual right
(q) undertaking and financing of research, surveys, techno-economic or
any other study in connection with the promoting and development
of international trade.
(r) providing technical, administrative and financial assistance of any
kind for export or import.
(s) planning, promoting, developing and financing export-oriented
concerns.
(t) forming or conducting subsidiaries for carrying out its functions.
(u) acting as agent of the Central Government, any State Government,
the RBI, the Development bank or any other person as the Central
Government may authorize.
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(v) collecting, compiling and disseminating market and credit
information in respect of international trade,
(w) doing any other kind of business which the Central
(x) government may authorize.
(y) generally doing such other acts and things as may be incidental to
or consequential upon, the exercise of its powers or to discharge of
its duties under this Act or any other law of the time being in force,
including sale or transfer of any of its assets.
Financing schemes of the EXIM Bank:
The present focus of the Bank is on medium term and long term credits.
Whenever a buyer of goods or services exported from India is allowed to defer
payment, an export credit, arises. Deferred export credit is available for the sale
of machinery, manufactured goods and related services. Such credit may be in
the form of Supplier's credit or Buyers credit - Supplier's credit arises when
an Indian exporter extends credit to the overseas buyer and finances himself
through the EXIM Bank. Deferred export credit takes the form of Buyer's credit
when the EXIM Bank extends credit directly to the buyer.
The EXIM Bank operates three broad programs of financing viz. Loans,
Rediscounting and Guarantees. At present the Bank operates nine lending
schemes which are briefly described below
1. Loans to Indian companies:
Direct financial assistance to export: Funds are provided, on deferred payment
terms, to Indian exporters of plant, equipments and related services, which
enable the exporter to extend deferred credit to the overseas buyer. This
programme covers project exports, which could be turn-key
projects/construction projects. Such project exports arise when an Indian
company contracts either to set up on a turnkey basis any textile mill, sugar
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plant or contracts a construction project overseas. Financing export of eligible
goods is covered under this programme.
Consultancy and technology services: Indian companies can borrow funds from
EXIM Bank and provide deferred credit overseas buyers of Indian consultancy
of technology services.
Overseas investment financing: The bank provides financing, where an Indian
company establishes a joint venture overseas, and requires funds towards
equity participation.
Pre-shipment credit: This programme is available for companies, that have won
an export contract for the eligible goods and are seeking finance to produce the
goods which entails a production period exceeding six months.
Loans to foreign government companies and finance institutions:
This is offered directly to foreign importers for the import of eligible Indian
goods and related services with repayment terms spread over a period of years.
Lines of credit to foreign governments:
Besides Foreign Government, such lines of credit are available to foreign
financial institution. Such lines provide long term finance for import of Indian
capital goods related services.
Relending facility to banks overseas: Relending facility to banks overseas is
made available to enable them finance to importers, for import of Indian capital
goods. Banks overseas would intermediate between foreign buyer and EXIM
Bank, and the latter would intermediate with the supplier.
Rediscounting facility: Under this type of assistance, specific mention may be
made about the following schemes:
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Export Bills Rediscounting: This lending programme is available to commercial
banks, in India, who are authorized to deal in foreign exchange. Such banks
can re-discount their short term usance export bills portfolio with EXIM Bank.
EXIM Bank provides funds, under this programme, for a period of 90 days
against export bills that have equal period to run, before realization.
Refinance of export credit: Under this programme, commercial banks, in India,
who are authorized to deal in foreign exchange, can obtain from EXIM Bank
100% refinance of term loans extended for export of eligible Indian goods. Such
credit enables Indian Exporters to offer credit terms to foreign Importers. For an
export contract upto Rs. 10 million, commercial banks can obtain financing
participation under EXIM Bank's other programme, including syndication
facility.
Guaranteeing of obligation: The Guarantee programme is available in the case
of construction and turnkey contracts. Construction contracts involve erection,
civil works and commissioning.
In such contracts, an Indian exporter usually requires bid bond, advance
payment guarantee, performance guarantee, guarantee for retention money and
guarantee for borrowings abroad. EXIM Bank participates with Commercial
banks in India in the issue of guarantee.
Various facilities offered by the EXIM Bank to the exporters of different
categories
i) Facility to exporters of engineering goods and turnkey project
exporters:
Deferred payment exports arise when the export proceeds are to be received
beyond six months from the date of shipment (in case of exports to Afghanistan
and Pakistan beyond three months). Turnkey projects arc those which involve
rendering of services like design, civil construction, erection and commissioning
of plant along with supply of equipment. Typical projects include supply,
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erection and commissioning of equipment for generation, transmission and
distribution of power and plants for manufacture of cement, sugar, textiles,
chemicals, etc.
When an Indian' exporter extends deferred credit directly to the overseas buyer,
the export contract falls under the category of Suppliers Credit. On the other
hand, if a foreign buyer is offered credit by a financial institution or a
consortium of financial institutions in India and the Indian exporter is paid the
export value by the institution(s) concerned, the relative export contract falls
under the category of Buyer's credit.
Supplier's credit: Credit is provided by the EXIM Bank on deferred payment
basis, in participation with commercial banks, to Indian exporters, of
engineering goods and turnkey projects to enable them to extend credit to
importers overseas.
Where individual contract value is not more than Rs. 1 crore banks may provide
the credit and avail 100 per cent refinance from the EXIM Bank.
Overseas buyer's credit: As an alternative to Supplier's credit availed by the
exporters, credit extended by the EXIM bank to buyers abroad with a view to
enable the latter to import engineering goods and projects from India, on
deferred credit terms. Credit to overseas buyers is also available from the EXIM
Bank in the form of Lines of Credit to overseas financial institutions, foreign
governments and agencies, and relending facility to overseas banks.
Pre-shipment credit: Credit is available to eligible exporters to buy raw
materials and inputs required to produce capital equipment that has to be
exported. EXIM bank participates in the credit if the requirement is for a period
of more than 180 days.
Foreign currency loans: Foreign currency loans can be availed of from the EXIM
Bank at market rates to cover purchase/procurement of machinery from third
countries.
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Technology and consultancy services finance:
Credit is also available to eligible Indian exporters of technology and
consultancy services to enable them to extend term credit to importers
overseas.
Non-funded facilities: Exporters of engineering goods and turnkey projects
abroad arc also provided the following facilities: i) issue of Bid Bonds ii) issue of
advance payment guarantees, iii) issue of performance guarantees, iv) issue of
guarantees for release of Retention Money's and v) issue of guarantees for
raising Borrowing overseas.
ii) Facility to overseas construction project exporters:
Construction projects involve civil work, Steel structural works, as well as
design, equipment supply, erection and commissioning. Typical projects include
electrification and utility, power transmission, pipelines, water resource
management systems, airports, roads, bridges, hotels, housing and erection of
industrial plants. The EXIM Bank offers funded, non-funded and advisory
services to Indian construction project exporters.
Pre-shipment credit:
The Bank finances the exports from India and the preliminary expenses in
rupees relating to the execution of the project. Commercial banks also extend
this facility for definite periods at confessional rates of interest.
Post-shipment rupee credit:
The EXIM Bank enables financing of exports until progress payments are
received commercial banks extend this facility at confessional rates of interest.
Foreign currency loan:
The Foreign currency loan can be availed of from the EXIM Bank, at market
rates, to cover purchase/procurement of machinery from third countries.
Deferred credit:
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The EXIM Bank provides deferred credit facilities against security for a portion
of the contract covering export of selected items and technical services from
India.
Non-funded facilities:
Exporters of construction projects overseas are also provided several facilities as
explained already.
iii) Consultancy and technology service finance:
Indian companies executing overseas contracts, involving consultancy and
technology services, can avail of EXIM Bank's financing programme with a view
to offer deferred payment terms of their clients. This enlarges the market for
export of Indian consultancy services. The consultancy and technology services
for this purpose include:
a) providing personnel including skilled and unskilled workmen are persons for
rendering technical or other services;
b) Transfer of technology, know how expertise or other skills;
c) furnishing any information, blue prints, plans or advice; and
d) any other activity considered acceptable by the EXIM Bank.
Indian consultants, having corporate status or otherwise who-have secured a
contract for export of services wherein deferred payment term need to be offered
to the client, can utilize the facility.
iv) Lines of credit:
EXIM Bank extends lines of credit to overseas Government of Agencies
nominated by them to enable buyers in those countries to import capital
engineering goods from India on deferred payment terms. This facilities enables
Indian exporters to offer deferred credit terms to customers in those countries
as per terms and conditions already negotiated between the EXIM Bank and the
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overseas governments. The exporters can obtain payment from the EXIM bank
against negotiation of shipping documents, without recourse to the exporters.
v) Facility for syndication of Export credit risks:
Commercial banks, in participation with EXIM Bank provide long term credit, at
competitive rate of interest, to Indian exporter of capital goods, turnkey projects
and consultancy services, thereby enabling Indian exporters to compete
effectively in the international markets.
The facility for syndication of term export risks lends flexibility to. the export
credit mechanism by allowing banks to assume risks, without blocking their
funds -for long terms, at fixed interest rates, commercial banks can now
support export proposals without impairing their liquidity.
Commercial banks seeking enhancement in their export portfolio can avail of
this facility end participate in the syndication arrangement.
vi) Facilities for deemed exports: .
"Deemed export