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BANKING SYSTEM
The Indian money market is classified into: the organised sector (comprising private,
public and foreign owned commercial banks and cooperative banks, together known as
scheduled banks); and the unorganised sector (comprising individual or family owned
indigenous bankers or money lenders and non-banking financial companies (NBFCs)). The
unorganised sector and microcredit are still preferred over traditional banks in rural and suburban areas, especially for non-productive purposes, like ceremonies and short duration loans.
Non-Performing Assets (NPAs)
Non Performing Assets, according to the Reserve Bank of India, are those loans
advanced by the bank that have not yielded interest for 180 days and the amount of principal
that needs to be repaid is also defaulted. They are also called bad debts. To any reason as
irrational deployment of capital borrowed; agricultural disasters; willful default etc. The
Narasimham Committee reports I and II recommended the establishment
of an
Asset
Reconstruction Fund (ARF) to take up the task of recovery. ARCs for some banks have already
been set up.
NPAs are of three types:
Substandard ones are those that are bad' for less than two years
Doubtful ones are those that are 'bad loans' for more than two years
Loss making ones is those that are non-collectible.
Non-performing assets (NPAs) of the banking sector
Improved industrial climate and new options available to banks for dealing with bad
loans helped in recovering a substantial amount of NPAs in 2005-06. Such recoveries during
2005-06 were more than fresh accruals. Gross NPAs of SCBs, which had declined by Rs.5, 414
crore in 2004-05, fell by a further amount of Rs. 7.558 crore in 2005-06. Aggregate amount
recovered and written-off increased to Rs. 28,717 crore during 2005-06 from Rs. 25,007 crore in
the previous year. NPAs of SCBs, at 1.9 per cent of total assets al end-March 2006, were
substantially lower than the 2.5 per cent observed a year ago. The operations of the Assets
Reconstruction Company (India) Limited (ARC1L) during 2005-06 helped in NPA recovery.
Monetary and Credit Policy
It is the policy with the help of which the Government through its Central Bank regulates
money supply and achieves price stability. The broader objectives of the monetary and credit
policy are to promote investment to bring about greater rate of economic growth with the result
that the accompanying benefits of employment generation; inflation management, exchange rate
stabilization etc also accrue.
The RBI announced the credit policy traditionally twice a year the lean season
policy in April and busy season policy in October. In 1998, it became once a year, the October
intervention being a review. From 1999, it is being announced only in April.
Monetary and Credit Policy 2007-08

Greater emphasis on price stability and well-anchored inflation expectations while

ensuring a monetary and interest rate environment that supports growth momentum.

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Swift response with all appropriate measures to all situations impinging on inflation
expectations and the growth momentum
Renewed focus on credit quality and orderly financial markets conditions
in
securing macroeconomic, in particular, financial stability.
Bank Rate, Reverse Repo Rate and Repo Rate kept unchanged.
Scheduled banks required to maintain CRR of 6.5 per cent with effect from the fortnight
beginning April 28, 2007.
GDP growth projection for 2007-08 at around 8.5 per cent.
Inflation to be contained close to 5.0 per cent during 2007-08. Going forward, the resolve
is to condition policy and perceptions for inflation in the range of 4.0-4.5 per cent over
the medium term.
M3 expansion to be contained at around 17.0-17.5 per cent during 2007-08.
Deposits projected to increase by around Rs.4, 90,000 crore during 2007-08.
Adjusted non-food credit projected to increase by around 24.0-25.0 per cent during 200708, implying a graduated deceleration from the average of 29.8 per cent over 2004- 07.
Appropriate liquidity to be maintained to meet legitimate credit requirements, consistent
with price and financial stability.
Overseas investment limit (total financial commitments) for Indian companies enhanced
to 300 per cent of their net worth.
Aggregate ceiling on overseas investment by mutual funds enhanced to US $ 4 billion.
Prepayment of external commercial borrowings (ECBs) without prior Reseve Bank
approval increased to US $400 million.
Introduction of a credit guarantee scheme for distressed farmers

Narasimhan Committee Recommendations on Financial Reforms

The Government of India constituted a 9-member committee under the chairmanship
of Mr M Narasimhan, retired RBI Governor, on 14lh August 1991 for making recommendation
on the existing financial system and to give suggestions for improving structure. Its
recommendations were as follows:

There should be no bar to new banks being set up in the private sector, provided they
conformed to the start-up capital and other requirements prescribed by the RBI.
The Government should indicate that there would not be further nationalisation of banks
and there should not be any difference in treatment between public sector banks and
private sector banks.
The banking should evolve towards a broad pattern consisting of three or four large
banks, including the. SBI which would become international in character; eight to ten
national banks with the network of branches throughout the country engaged in universal
banking; local bank whose operations would be generally confined to a specified region
and lastly rural banks to cater to rural areas.
There should be an Assets Reconstruction Fund (ARF) which could take over, from the
banks and financial institution (FIs), a portion of their bad debts at a discount. The level
of discount being determined by independent auditors on the basis of clearly defined
guidelines. The ARF, according to committee should be provided with special powers for
recovery, somewhat broader than those contained in sections 29 to 32 of the state
financial act 1951. The capital of ARF should be subscribed by the public sector banks
and financial institutions.

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The banks and the financial institutions should be authorised to recover bad debts
through special tribunals and based on the valuation given in respect of each asset by a
panel of at lest two independent auditors.
The public sector banks with profitable operations should be allowed to tap the capital
market for enhancement of their share capital. Subscribers to such issues could be mutual
funds, profitable public sector undertakings and the employees of the institutions beside
the general public.
Licensing should be abolished and the option of opening of branches for the present
should be left to the commercial judgement of individual banks. Further, the internal
organisation of banks is best left to judgement of the management of the individual bank.
There should be phased reduction Of CRR and SLR.
A liberal view should be adopted for allowing foreign banks in the country. Both foreign
and domestic banks should be treated at par.
Primary targets for credits should be redefined and such credit should not be more than
10% of total credit.
Computerisation of banks should be promoted.
The dual control of RBI and Finance Ministry on banks should be abolished and RBI
should function only as regulatory authority for banking system in the Economy.
RBI representatives should not be included in the management boards of banks, only
government representative should be there.
Granting resources to developmental financial institutions on concessional rates of
interest should be abolished in phase within next 3 years. These institutions should be
allowed to mobilize resources from open market on competitive rates.
Review of recruitment procedures, training and remuneration policies in public Sector
Banks.
Threat of action by vigilance and other investigative authorities, even in the case of
commercial decisions create low morale. The committee wants this issue to be addressed.
Need for professionalising and depoliticising the bank boards.

Narasimhan Committee-II, Banking Sector Reforms (1998)

The major recommendations of the committee are:

Merger of strong banks which have a multiplier effect on industry. It has cautioned
against merger of strong banks with weak banks as this will adversely affect the asset
quality of strong banks.
Concept of narrow banking should be tried out to rehabilitate weak banks. If this was not
successful the issue of closure should be examined.
Two or three large Indian banks should be given international character.
Small and local banks should be combined to states or clusters of districts in order to
serve local trade, small industry and agriculture.
The committee has also commented on the governments role in Public Sector Banks by
observing that government ownership has become an instrument of management. Such
micro-management of banks is not calculated to enhance autonomy and flexibility.
Functions of the board and management need to be reviewed so that boards remain
responsible for enhancing shareholders value through corporation or corporate strategy.
Need to review minimum prescriptions for capital adequacy.
RBI Act, Bank Nationalisation Act, Banking regulation Act and State Bank of India Act
are in urgent need of review.
Integration of NBFCs lending activities into the financial system.

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Review of recruitment procedures, training and remuneration policies in public Sector

Banks.

Threat of action by vigilance and other investigative authorities, mishandling the case of
commercial decision screate low morale. The committee wants this issue to be addressed.
Need for professionalising and depoliticising the bank boards.

Proxy Banking In India

Indian villages were miles away from mutual funds, insurance and even equity trading.
Thanks to Internet Kiosk and the ATM duo which has made it possible for rural India. This kiosk
has been set up by ICICI Bank in partnership with network n-Logue Communications in remote
villages of Southern part of the country. This is known as Proxy Banking. With the help of fibre
optic cables, this kiosk works on wireless in local loop technology.
Reasons for setting-up of Proxy Banking
58% of rural households still do not have bank accounts.
Only 21% of rural households have access to credit from a formal source.
70% of marginal farmers do not have deposit account.
87% households have no formal credit. Only 1 % rural househlods rely on a loan from a
financial intermediary. The loans take between 24 to 33 weeks to get sanctioned.
Consumers bribe officials to get loans approved which varies between 10 and 20% of the
loan amount.
Branch banking in rurals is a loss-making.
Benefits to rurals
Small loans given for buying buffaloes.
Loans for setting up a tea shop.
Life and non-life insurance provided.
Weather insurance given to fanners.
Insurance policies sold to farmers like groundnut, castor, soya, paddy crop, etc.
The Proxy Banking is an innovative approach to rural lending and will add to the
governments expanding base of kisan credit cards and the good old guidelines for
agricultural lending.
The Proxy Banking is an innovative approach to rural lending and will add to the
governments expanding base of kisan credit cards and the good old guidelines for agricultural
lending.
Foreign Banks in India
The foreign banks in the private sector are branches of banks incorporated in foreign
countries. There are 24 such banks with 139 branches. These branches are in the main location at
port towns. Most foreign banks perform essentially the same range of services as local banks,
except that their focus in terms of products and customers may be different due to their limited
branch network. In addition, some banks have been introducers or providers of de novo financial
engineering products such as swaps, electronic fund transfers, etc.

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CAPITAL AND COMMODITY MARKET

BSE Sensex crossed the make of 14000 in January 2007 and 15000 in July 2007. Similarly
Nifty crossed the mark of 4000 in January 2007 and is still roaring. The pick up in the stock indices
could be attributable to (1) impressive growth in the profitability of Indian corporates, (2) Overall
higher growth in the economy, (3) Global factors such as continuation of relatively soft interest rates
and (4) Fall in crude oil prices in international market NSE and BSE retained the 3th and 6th position
interms of transactions at the stock markets globally.

Capital market is the market for long-term funds, just as the money market is the market for
short-term funds.
It refers to all the facilities and the institutional arrangements for borrowing and lending
term funds (medium-term and long-term funds).
The supply of funds for the capital market comes largely from individual savers, corporate
savings, banks, insurance companies, specialized financing agencies and the government.
The capital market in India can be classified into:
Gilt-edged Market on Government and semi- government securities;
Industrial Securities Market;
Development Financial Institutions (DFI); and
Non-banking Financial Companies (NBFC)
The Gilt-edged Market is the market for Government and semi-government securities,
which carry fixed interest rates and backed by RBI.
The securities traded in this market are stable in value and are much sought after by banks
and other institutions.
The Industrial Securities Market is the market for equities and debentures of companies of
the corporate sector.
This market is further classified into (a)
New Issues Markets: for raising fresh capital
in the form of shares and debentures, and (b) Old Issues Market: for buying and selling
shares and debentures of existing companiesthis market is commonly known as the
stock market or stock exchange.
The capital market is also classified into Primary Capital Market and Secondary Capital
Market.
The Primary Capital Market refers to the new issues market, which relates to the issue of
shares, preference shares and debentures of non-government public limited companies, and
also to the raising of fresh capital by Government companies and the issue of public sector
bonds.
The Secondary Capital Market, on the other hand, is the market for old or already issued
securities. It is composed of Industrial Security Market or the stock exchange in which
industrial securities are bought and sold, and the Gilt-edged Market in which the
government and semi- government securities are traded.

Methods of raising capital

There are three ways in which a company may raise capital in the primary market.
Public issue
By far the most important mode of issuing securities, a public issue involves sale of
securities to the public at large.
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A company making a public issue informs the public about it through statutory
announcements in the newspapers, makes application forms available through stock
brokers and others, and keeps the subscription open for a period of three to seven days.

Right issue
A right issue involves selling securities in the primary market by issuing rights to the
existing shareholders.
When a company issues additional equity capital, it has to be offered in the first instance
to the existing shareholders on a pro rata (proportional) basis.
Private placement
In a private placement, funds are raised in the primary market by issuing securities
privately to some investors without resorting to underwriting (insurance against risk by a
guarantor).
The investors in this case may be financial institutions, commercial banks,
and other
companies, shareholders of promoting companies, and friends and associates of the
promoters.
Group A and Group B shares
The listed shares are divided into two categories: Group A shares (also referred to as
cleared securities or specified shares) and Group B shares (also referred to as non- cleared
securities or non-specified shares).
For Group A shares, the facility for carrying forward a transaction from one account period
to another is available; for Group B shares, it is not.
Recommendations of Committee on Fuller Capital
Account Convertibility (Tarapore Committee II) Development of Indian debt market
Government Securities Market
i)
ii)

ii)

iv)
v)

vi)

Over time, it would be preferable to progressively increase the share of mark-to-market

category.
Promoting a two-way market
Movement would require permitting participants to freely undertake short selling. Currently,
only intra-day short-selling is permitted. This would need to be extended to short selling across
settlement cycles; this would, however, require adequate regulatory/ supervisory safeguards.
To stimulate retail investments in gilts, either directly or through gilt mutual funds, the gilt
Funds should be exempted from the dividend distribution tax, and income up to a limit from
direct investment in gilts could be exempted from tax.
In line with advanced financial markets, the introduction of Separate Trading of Registered
Interest and Principal of Securities (STRIPS) in G-secs should be expedited.
Expanding investor base would be strengthened by allowing, inter alia, entry to non-resident
investors, especially longer term investors like foreign central banks, endowment funds,
retirement funds, etc.
To impart liquidity to government stocks, the . As of holders of G-secs needs to be widened
and repo facility allowed to all market players without any restrictions on the minimum
duration of the repo; this would,
however, necessitate adequate regulatory/supervisory
safeguards. This will improve the incentive for a wide range of economic agents to hold G-

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secs for managing their liquidity needs through repose.

A rapid debt consolidation process that is tax neutral, by exempting the gains arising from
exchange of securities from all taxes, may be taken up. If necessary, a condition may be
stipulated that gains arising from such an operation cannot be distributed to the shareholders.
viii) The limit for FII investment in G-secs could be fixed at 6 per cent of total gross issuances by
the Centre and States during 2006-07 and gradually raised to 8 per cent of gross issuance
between 2007-08 and 2008-09, and to 10 per cent between 2009-lOand 2010-11. The limits
could be linked to the gross issuance in the previous year to which the limit relates. The
allocation by SEBI of the limits between 100 per cent debt funds and other FIIs should be
discontinued.

vii)

Corporate Bond and Securitised Debt Market

i)

GOI, RBI and SEBI should be able to evolve a concerted approach to deal with the complex
issues identified by the High Level Committee on Corporate Bond Market.
ii)
Institutional trading and settlement arrangements need to be put in place and investors should
have the freedom to join any of the trading and settlement platforms they find to be convenient.
iii) The issuance guidelines have to be changed so as to recognize the institutional character of the
market. Since issuers may like to tap the bond market more frequently than the equity market
and since subscribers are mainly institutional investors, issuance and listing mechanisms in
respect of instruments being placed with institutional investors should be simplified by relying
more on the assessment of a recognised rating agency rather than on voluminous and tedious
disclosures as required by the public issues of equities.
iii) Until transparent trading platforms become more popular, reliable trade reporting systems
should be made mandatory. Clearing and settlement arrangements like those offered by CCIL
in the case of Gsecs should be in place to ensure guaranteed settlement.
v)
Stamp duty at the time of bond issues as also on securitised debt should be abolished by all the
state governments.
vi)
The FII ceiling for investments in corporate bonds of US$1.50 billion should in future be
linked to fresh issuances and the present absolute limit should be retained for the year 2006-07
and be fixed at 15 per cent of fresh issuances between 2007-08 and 2008-09 and at 25 per cent
between 2009-10 and 2010-11. The allocation by SEBI of the limits between 100 per cent debt
funds and other FIIs should be discontinued.
vii) Corporate bonds may be permitted as eligible securities for repo transactions
subject
to
strengthening of regulatory and supervisory policies.
viii) In the case of the securitised debt market, the tax treatment of special vehicles that float the
securitised debt has to be materially different. Government should provide an explicit tax passthrough treatment to securitisation Special Purpose
Vehicles (SPVs) on par with tax pass-through treatment granted to SEBI registered venture
capital funds.
ix)
Securitised debt should be recognised under the Securities Contract and Regulation Act
(SCRA), 1956 as tradable debt. The limitations on FIIs to invest in securities issued by Asset
Reconstruction Companies should be on par with their investments in listed debt securities.
PUBLIC FINANCE

Fiscal Policy
Fiscal policy refers to the use by the government
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taxation, expenditure and borrowing to achieve the objectives of balanced economic

development, full employment etc.
The Budget or the annual financial statement of the government, gives expression to its
fiscal policy.
In accordance with Article 112 of the Indian Constitution, the President shall cause to be
laid a financial statement before both the Houses of Parliament at the commencement of
every financial year of the estimated receipts and expenditure of the Government of India
for that year.
The Central Government has (a) Revenue budget that is to say, the estimates of receipts
and disbursements on Revenue Account and (b) a Capital budget, which relates to receipts
and disbursements on Capital Account.
The estimates of receipts on revenue account have been grouped under two broad heading
viz. tax revenue and non-tax revenue. Tax revenue has been divided into: (a) Taxes on
income, (b) Taxes on property and capital transactions, and Taxes on commodities and
services.
Non-tax revenue has been sub- divided into: (i) Fiscal and other services, (ii) interest
receipts and (iii) dividends and profits.

Capital Account Convertibility (CAC)

Basically CAC implies freedom to convert local currency into foreign currency and vice
versa, for any purpose whatsoever, without needing any permission from the government.
The term any purpose whatsoever is important, for as of now India is convertible on the
current account. This means one can import and export goods or receive or make payments for
services rendered. However, investments and borrowings are restricted.
Tarapore II Committee Report
As per the roadmap, it detailed a road five-year time frame for government towards
fuller convertibility in three phases: Phase (2006-07); Phase II (2007-08 to 2008- 9); and
Phase 111 (2009-to 2010-11).
Apart from Indians being able to acquire property and financial assets, and open bank
accounts anywhere in the world, Indian companies will be able to borrow a billion dollars
abroad every year without taking the RBI Permission.
Indian companies will be allowed to invest four times their net worth abroad.
It recommended the meeting of certain indicators/targets as a concomitant to the
movement in: meeting RFBM targets; imparting greater autonomy and transparency in
the conduct of monetary policy; reduction in the share of Government/RBI in the
capital of Public Sector banks; keeping the current account deficit to GDP ratio under 3
percent etc.
Mutual funds and portfolio management schemes will be able to invest upto two billion
dollars in overseas stocks.
Service tax - a promising source of revenue
The gradual expansion of the service tax, introduced in 1994-95 to redress the
asymmetric and distortionary treatment of goods and services in the tax regime, has been a
buoyant source of revenue in recent years. The number of services liable for taxation was raised
from 3 in 1994-95 to 6 in 1996-97, and then gradually to 99 in 2006-07.Simultaneously, the rate
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07. Revenue from service tax, as the combined outcome of expanding tax net, creeping rate, and
buoyant service sector growth, increased rapidly from a paltry Rs. 407 crore in 1994-95 to Rs.
14,200 crore in 2004--05.

Pension reforms in India

A modern pension system will lay sound foundations of financial portfolios through
which individuals will be able to obtain income support in old age. Pension funds are natural
vehicles for long-term investment. Including in equity. A modern, well-regulated pension sector,
populated with professional pension fund managers, will also be a highly beneficial force in
Indias financial system, and improve resource flows in the form of long-term debt and equity to
sound projects, particularly in infrastructure. The pension sector can also be a major customer of
insurance companies for the purpose of converting a stock of pension wealth at retirement date
into a flow of monthly pensions in the form of annuities.
Objectives of pension reform in India
Global pension reform experience over the past 10 years has shown that no one size fits
all. However, the two main aims of pension systems everywhere remain the same, namely; (i)
reducing poverty and eliminating the risk of rapidly falling living standards post-retirement, and
(ii) the broader goal of protecting the elderly from economic and social crisis.
India needs a pension system which is: self-sustainable; universally accessible,
especially to the uncovered unorganised sector workers on a voluntary basis; lowcost. Efficient
and available throughout the country; equitable and pro-labour and does not inhibit labour
mobility; and well-regulated in order to protect the interests of subscribers. On August 23, 2003,
Government decided to introduce a new restructured defined contribution pension system for
new entrants to Central Government service, except to Armed Forces, in the first stage, replacing
the existing defined benefit system. Subsequently, the New Pension System (NPS) was
operationalised from January I, 2004 through a notification dated December 22.2003.
The main features of the NPS:
It is based on defined contribution. New entrants to Central Government service
contribute 10 per cent of their salary and dearness allowance (DA), which is matched by
the Central Government (Tier-I).
Once the NPS architecture is fully in place, employees will have the option of a voluntary
(Tier-II) withdrawable account in the absence of the facility of General Provident Fund
(GPF). Government will make no contribution to this account.
Employees will normally exit the system at or after the age of 60 years. At the time of
exit, it is mandatory for them to invest 40 per cent of the pension wealth to purchase an
annuity to provide for lifetime pension of the employee and his dependent parents and
spouse. Remaining 60 per cent of pension wealth will be paid to the employee in lump
sum at the time of exit. Individuals would have the flexibility to leave the pension system
prior to age 60. However, in this case, mandatory annuitisation would be 80 per cent of
the pension wealth.
The new system will have a central record keeping and accounting infrastructure and
several fund managers to offer investment options with varying proportions of investment
in fixed-income instruments and equity.
The new system will also have a market mechanism (without any contingent liability)
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through which certain investment protection guarantees would be offered for the different
schemes.
Public Debt
By Indias public debt we mean the internal and external debt of the Government of
India. The most comprehensive definition of public debt would include the indebtedness of all
the three levels of government and all public enterprises, to the domestic private sector and to the
external sector. Borrowing from RBI is equivalent to printing (base) money. It enables the
Government to obtain resources without incurring liability to repay loan or pay interest.
Borrowing from RBI does not in effect entail any liability to repay, but interest is paid on the
government debt held by it. Much of this interest is not re-routed to the Government of India, but
is spent in various ways by RBI as allocation of its profits. We, therefore, reckon the liabilities of
Government of India to RBI as part of public debt and including the interest on it as part of the
interest on public debt.
In the case of Government of India, the internal debts are:
i.
ii.

Market loans defined as loans with a maturity of one year or longer at the time of issue.
Treasury bills are a major source of short term funds for the Government to bridge the
Gap between revenue and expenditure with the increasing demand for funds for
Investment under the plans, the Government of India has resorted to heavy borrowing
Through the issue of T-bills, a major part of which is held by the RBI.
Special securities which comprises securities issued to International Financial Institutions
And is inclusive of such items as market loans in course of repayment, special bearer
bonds.
Small savings which are a source of borrowing for the Government are of special
Significance particularly in growth seeking, inflation-sensitive economy like India. It is the
Safest form of governmental borrowing as it taps the genuine savings of the people and
Provides the government with much needed support.

iii.

iv.

Any definition of external debt should keep the commonly accepted components in view.
Gross international debt is the amount, at any given time, of disbursed and outstanding
contractual liabilities of residents of a country to non-residents to repay principal with or without
interest, with or without principal.

Indias external debt stock stood at US$ 126.4 billion at end-March 2006, reflecting an
increase of US$3.2 billion over the year. The wise in external debt stock during this
period was brought about essentially by a wise in ECBs, NRI Deposits and short-term
debt.

Value Added Tax

Value Added Tax is a multi-point destination based system of taxation, with tax being levied on
value addition at each stage of transaction in the production/distribution chain. VAT is a
multistage sales tax with credit for taxes paid on business purchases.

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Salient features of VAT

Uniform schedule of rates of VAT for all states. This would make the tax system simple and uniform
and prevent unhealthy tax competition among states.
The provision of input tax credit would help in preventing cascading effect of tax.
The provision of self-assessment by dealers would reduce harassment. Small traders with
turnover up to Rs 5 lakhs would be exempt from the provision of VAT.
The zero-rating of exports would increase the competitiveness of Indian exports.
Sale tax/VAT is basically a stage subject, the control Government is playing the role of a facilitation for
successful. Implementation of this significant reform measure. The empowered committee of state finance
ministers, constituted by the ministry of Finance, Government of India has came up with a white paper on
state-level value added tax on January 17.

White Paper on State-level VAT

Introduction of VAT would help avoid cascading nature of sales tax. Present multiple rates and taxes
can converge into a few rates and a single VAT.
Transparency in the system of tax administration through simple self-assessments and departmental
audit.
Rationalisation of taxes to result in lower tax burden and higher tax revenues.
State VAT to have two basic rates of 4 per cent and 12.5 per cent and to cover 550 commodities.
About 270 commodities will be under 4 per cent rate.
46 items, comprising of natural and unprocessed products in unorganized sector, items legally
barred from location and items having social implications are exempt from VAT
Gold and silver ornaments subject to a special VAT rate of 1 per cent and other commodities to attract a
general VAT rate of 12.5 percent.

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EXTERNAL SECTOR
Indias external economic environment continued to be supportive of growth in output
and trade in 2005-06 and 2006-07 so far. The continued expansion in world output growth for a
record fourth year in a row in 2007, amidst rising concerns about continuing global
macroeconomic imbalances, protracted Doha negotiations, volatile international crude oil prices,
and inflation, testifies to the emergence of a new phase of the external economic scenario. This
new phase has been marked by robust and broad-based growth in emerging market economies,
particularly with China and India together accounting for about 40% of global growth measured
in purchasing power parity terms. Increasingly, India is being recognized as an important player
in the global economic scenario.
The robust phase of global output expansion in the recent past has been accompanied by
stable growth in world trade volume; reasonable stability in world trade prices; and supportive
growth in capital flows (net) to emerging market economies and developing countries. Despite
persistence of high oil prices and the higher aggregate demand, inflation, both as measured by
GDP deflator and consumer prices (2.3% in 2005 and 2.6% in 2006) for advanced economies
and consumer prices (5.3% in 2005 and 5.2% in 2006) for emerging market economies and
developing countries, has been low. While the key world economic indicators point to a virtuous
phase of global economic activity that provides a conducive environment for deepening the
process of development, some downside risks remain.
Balance of Payments
Balance of payments is the equation between the receipts and payments of a country in its
transactions with rest of the world.
BOP includes the current and the capital accounts. Current account comprises of the foreign
trade (exports and imports) and other transactions with reference to services like travel, transport,
insurance and shipping. These services are referred to as invisibles as they are not recorded at
Customs unlike the exports and imports.
The capital account consists of receipts and payments on capital transactions between
countries. These include external
assistance, investments, purchase and sale of securities,
commercial borrowings, debt servicing and repayment of capital and remittances from abroad.
The growing strength of Indias Balance of Payments (BoP) observed in the post-reform
period since the crisis of 1991 continued in 2005-06. This growing strength was in spite of a
widening of the current account deficit from US$2.5 billion in 2004-05 to US $ 9.2 billion,
equivalent to 1.1 per cent of GDP, in 2005-06. With a burgeoning trade deficit, primarily on
account of rising oil prices, the reversal from current account surpluses witnessed between 2001
-02 and 2003-04 to a current account deficit in 2004-05 appears to be continuing into 2006-07 so
far.
Rising foreign investment, both direct and portfolio, together with a sharp revival of
inflows in non-resident (NR) deposits, in spite of the large repayment of India Millennium
Deposits (IMD) under external commercial borrowing, maintained a strong balance in the
capital account, and even after financing the current account deficit, resulted in a reserve
accretion of US$15.1 billion in 2005-06. While reserve accretion in 2005-06 was lower by
US$11.1 billion relative to 2004-05, because of a higher current account deficit (US$6.7 billion)
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and a lower capital account balance (US$4.4 billion), India continued to be among the top
nations with high levels of reserves.
Foreign Investment
Foreign investment in the country is essentially of two types:
Foreign Direct Investment that is made in production and services sector
like in hotels,
advertising, banking etc and
Foreign Institutional Investment where investment takes place in the capital
market like in the primary and secondary stock market. FN inflows are
considered 'hot money' as there is no lock in period for their investment and
Withdrawal is based on profit-loss considerations only. It
is also called portfolio investment as the investment is, in a
Variety of capital market instruments. FDI is found to be
necessary and desirable since the 8th Five Year Plan (199297) for the following reasons:
the savings-investment gap, after domestic savings are factored, needs to be
filled
the FDI is preferred over debt, because debt leads to many
Adverse consequences like high interest rates. The end use
purposes are in doubt which can be wasteful and also the debt
Trap prospects cannot be ruled out.
FDI will create a competitive climate domestically and bring in the best
technology; marketing and managerial skills and culture etc. India is also
ideally placed to attract FDI as it has 300mn strong middle class; relatively
cheap skilled labour; technical personnel are in large number it can be the
export base for exports to east and west Asia; the government policies have
been conducive; sound and stable financial system; emphasis on
infrastructural development; and irreversibility of reforms. Irreversibility of
reforms.

Breakthrough in WTO talks

The breakthrough in the world trade negotiations under the auspices of World Trade
Organization (WTO), after intense and emotive sessions of bargaining between rich and poor (or
developed and developing countries), has been greeted with cautious optimism all round. The
WTO, comprising 147 member-states, has this time successfully negotiated a global trade deal
after spectacular failures at Cancun, (Mexico) in September. The current Doha round will initiate
fresh round of detailed trade talks on the basis of agreement reached. This could provide a big
boost for the world economy and could add more than $520,000 million to the world trade by
2015. According to current estimates by the World Bank, all this may also elevate living
standards of some 500 million fanners in poorer countries.
The bottomline is that the richer countries have agreed to reduce agricultural subsidies
to their farmers to enable agriculture produce from poorer countries to be marketed in the
developed countries and in return, poorer countries have agreed to reduce import tariffs on
imported goods from the developed countries. It is a delicate compromise based on consensus on
both the sides of the rich and poor fence to boost global trade.
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The concessions by Europe, America and Japan - representing key developed countries will help agriculture produce from the developing countries find new markets in rich countries.
This lobby was led by China, India, Brazil and South Africa.
The poorer countries argued that cutting rich countries tariff on leading world commodities
would be the first step in boosting their farm sectors .Earlier massive subsidies have driven down
prices of agricultural crops that are the core part of the economies of developing countries.
The developed countries have so far defended their policy of highly subsidised
agriculture to maintain prosperity and living standards of their farmers. The developed countries
have further defended their agriculture subsidy policies by suggesting that rich countries have
provided technical and financial aid to the developing countries. The more advanced developing
countries led by China, India, Brazil and South Africa have argued that they want more trade
and less aid from richer countries and this is the first milestone in that quest.
At Hong Kong, in December 2005, WTO Ministers had agreed to establish modalities for
agriculture and Non-Agricultural Market Access (NAMA) by April 30, 2006, submit the draft
Schedules by July 31,2006 and conclude the negotiations across all areas of the Doha Round by
the end of 2006. In respect of services, all Members were to file their revised offers by July 31,
2006 and submit the draft Schedules by October 31, 2006. These deadlines were missed despite
intensive negotiations.
The intensive discussions through January to July 2006 had focused mainly on
triangular issues of Domestic Support, Agricultural Market Access (AMA), and NAMA. In
light of the impasse particularly in agriculture, and ruling out the possibility of finishing
Round by the end of 2006, Members agreed to suspend the negotiations across all areas of
Doha Work Programmed, and to resume them when the negotiating environment was right.

the
the
the
the

For India, the suspension has been a disappointment. It is an avoidable delay on the
delivery of the development promises of the Round. India has welcomed the soft resumption of
negotiations on November 16, 2006 and subsequently the full-scale resumption on February 7,
2007 on the principles that it preserves the architecture of the negotiations, inclusiveness, and the
progress made so far, and leads to an outcome that is balanced,
ambitious
and
predevelopment.

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Doha round on the verge of collapse

After sitting together with developed countries to
hammer out a consensus for the early launch of the Doha
Round of trade talks to liberalize world trade for goods
and services, India today formally broke ranks to bet its
fortune on the Geneva process of negotiations of the
World Trade Organisation (WTO).
Highlights
It is the end of the day for G-4 (the US, the EU,
Brazil and India) - now it is for the full
membership of WTO to take the Doha Round
forward.
The Potsdam conclave was the second one of the
G-4 Trade Ministers since April 2007 when they
had charted out aroadmap in New Delhi for
meetings among themselves to engage on all
crucial and contentious issues relating to the
stalled Doha Round negotiations of the WTO.
India has stated stance that the livelihood security
of millions of Indian farmers would not be
compromised on any count.
India blamed the US in particular, stating that it
paid an estimated $10.8 billion last year in farm
subsidies and at this week's meeting proposed an
increase to $17 billion.
The developed countries are looking at promoting
and protecting the prosperity of their farmers,
whereas in India we are talking about protecting
the livelihood of our farmers.
G-4 meeting broke down because of the failure
of the developed world to accept effective
reductions in their agricultural subsidies while
simultaneously seeking additional market
access in the developing countries for their
Agricultural products.

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India's stand on agricultural issues in WTO

India, and other developing countries, have, therefore, been
insisting that special and differential treatment for developing
countries must be integral to all aspects, including the negotiated
outcome, on agriculture under the Doha Round in the WTO.
Mitigating the risks facing the low-income, resource-poor and
subsistence farmers associated with price declines, price
volatility and predatory competition and other market
imperfections, including the huge amounts of production and
Trade-distorting subsidies provided by some developed
countries to their agriculture sector, remains paramount.
Therefore, along with other developing countries, particularly its
alliance partners in the G-20 and G-33, India has been
emphasizing that the Doha agricultural outcome must include at
its core:
removal of distorting subsidies and protection by
developed countries to level the playing field, and
Appropriate provisions designed to safeguard food
and/or livelihood security, and to meet the rural
development needs in developing countries.
Apart from appropriate policy flexibilities to enable
developing country governments to help the low-income and
vulnerable producers absorb or insure themselves against risks,
India has also taken the stand that governments must also be able
to foster stable and remunerative prices for domestic producers
in order to increase productivity and gradually move away from
dependence on low-productivity agriculture.
To these ends, meaningful and effective instruments
(Special Products and the Special Safeguard Mechanism) are
important for developing countries like India. At Hong Kong, it
has been agreed that Special Products and the Special Safeguard
Mechanism shall be an integral part of the modalities and the
outcome of negotiations in agriculture. Moreover, developing
countries shall have the right to self-designate an appropriate
number of Special
Products, guided by indicators based on the three fundamental
criteria of food security, livelihood security and/or rural
development needs. These designated products will attract more
flexible treatment. Developing country Members will also have
the right to have recourse to a Special Safeguard Mechanism
based on import quantity and price triggers, with precise
arrangements to be further defined.

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India's Regional Trading Arrangements

India views Regional Trading Arrangements (RTAs) asbuilding blocks towards the
overall objective of trade liberalization complementing the multilateral trading system. In the
past, India had adopted a very cautious and guarded approach to regionalism. Recognizing that
RTAs would continue to feature prominently in world trade, India engaged with its trading
partners/blocks with the intention of expanding its export market and began concluding in
principle agreements and moving in some cases even towards Comprehensive Economic
Cooperation Agreements (CECAs) which covers Free Trade Agreement (FTA) in goods,
services, investments and identified areas of economic cooperation. Framework agreements
have already been entered into with a number of trading partners with specific road maps to be
followed and specified time frames by which the negotiations are to be completed.
India: Status of FTAs/ RTAs
India-Sri Lanka Free Trade Agreement
(1SLFTA)
India-Sri Lanka Free Trade Agreement, signed in December, 1998 and in operation since
March, 2000, provided for tariff reduction/elimination in a phased manner on all items except the
negative list and tariff rate quota (TRQ) items. While India has already completed the tariff
elimination programme in March 2003, Sri Lanka is scheduled to reach zero duty by 2008.
The two countries have since initiated negotiations in August 2004 on Comprehensive Economic
Partnership Agreement (CEPA) which covers trade in services and investment.
Agreement on S AFTA: The Agreement on South Asia Free Trade Area (SAFTA) was signed
during the 12th SAARC Summit on January 6, 2004 in Islamabad. Since then, negotiations on
four annexes Rules of origin, Sensitive lists, Revenue compensation for LDCs, and Technical
assistance to LDCs have been completed. The tariff liberalization programme under the
Agreement has been implemented from July 1, 2006.
Framework Agreement on Comprehensive Economic Cooperation between ASEAN and
India: Framework Agreement on Comprehensive Economic Cooperation was signed on
October 8, 2003 in Bali. The Trade Negotiating Committee (TNC) is negotiating FTA in goods.
Framework Agreement for establishing Free Trade Area between India and Thailand:
The Framework Agreement for establishing Free Trade Area between India and Thailand was
signed on October 9, 2003 in Bangkok. The Early Harvest Scheme covering 82 items for
exchange of concessions between India and Thailand has been implemented with effect from
September 1, 2004. The TNC is already negotiating FTA in goods; and negotiations on services
and investment are at a preliminary stage.
Framework Agreement on the BIMSTEC FTA: The Framework Agreement on the
BIMSTEC (Bay of Bengal initiative for Multi-sectoral Technical & Economic Cooperation) Free
Trade Area was signed in February, 2004 at Phuket by Bangladesh, Bhutan, India, Myanmar,
Nepal, Sri Lanka and Thailand. The Framework Agreement provides for implementing FTA on
Goods with effect from July 1,2006. Negotiations are being held by the TNC on FTA in goods,
services and investment.

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Comprehensive Economic Cooperation

Agreement (CECA) between India and Singapore: India-Singapore CECA, signed on June
29, 2005, came into force on August 1, 2005. The Agreement provides for Early Harvest
Scheme, fazed reduction/elimination of duties on products other than those in the negative list by
India by April 1, 2009, whereas Singapore eliminated duties on all products originating from
India from August 1, 2005. CECA also cover investment, services, Mutual Recognition
Agreement, and customs cooperation.
India-Afghanistan Preferential Trade Agreement: A Preferential Trade Agreement (PTA)
between India and Afghanistan was signed on March 6, 2003. India has granted concessions on
38 products, mainly fresh and dry fruits, in return for concessions on 8 items for exports to
Afghanistan.
India - MERCOSUR Preferential Trade Agreement (PTA): A PTA was signed between
India and MERCOSUR (Brazil, Argentina, Uruguay and Paraguay) on January 25, 2004 in New
Delhi. The annexes to the PTA were signed on March 19, 2005 in New Delhi. The PTA will be
operational after its ratification by the legislatures of MERCOSUR countries.
Bangkok Agreement: Bangkok Agreement is a PTA signed in July 1975 among Bangladesh,
Republic of Korea, Sri Lanka and India. China acceded to this Agreement in 2001. This
Agreement has been renamed as Asia Pacific Trade Agreement (APTA) from November 2,
2005. Three rounds of negotiations have been concluded under this Agreement. The Third
Round concessions have been implemented from September 1, 2006.
Global System of Trade Preferences (GSTP): Two rounds of negotiations have been held
under GSTP signed in April 1998. 44 developing countries have acceded to this Agreement.
Third round of negotiations, launched in June 2004, are expected to be concluded by the end of
2007.
SAARC Preferential Trade Area (SAPTA): Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka are participants in the Agreement signed in April, 1993. Four rounds of
negotiations have been concluded under SAPTA. Concessions exchanged during the four rounds
of SAPTA have already been implemented.
India-Chile Framework Agreement on Economic Cooperation: A Framework Agreement on
Economic Cooperation was signed between India and Chile on January 20, 2005. The
Agreement envisages a PTA between two sides. The negotiations on PTA have been concluded,
and the Agreement was signed on March 8, 2006.

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SAFTA in place from January 1, 2006

Objective
The basic objective of SAFTA is to reduce extant tariffs to less than 5 per cent
within the stipulated time frame of 2016 by all the participating countries with
due compensation to LDCs for loss of revenues on account of tariff reduction
Being undertaken by them on a phased liberalisation programme.
Highlights of SAFTA
Bowing to intense demand from domestic industries that cheap and lowcost suppliers from neighbouring countries would dump the domestic
market by piggybacking on the concessional conduits being provided by
SAFTA, it has been agreed to keep rigorous rules of origin and also two
Separate sensitive lists.
Under rules of origin, for according preferential access to member
countries under SAFTA, the goods have to undergo substantial
manufacturing process in the exporting countries.
The substantial manufacturing processes are defined in terms of twin
criteria of Change of Tariff Heading at four-digit Harmonised Coding
System and domestic value content of 40 per cent for non-LDCs and 30
per cent for LDCs. On the two separate sensitive lists India has finalised,
a longer list is for non-LDCs (Pakistan and Sri Lanka) and a shorter one
for LDCs.
Thus, India has kept 884 tariff lines in the sensitive list for non-LDCs
and 763 tariff lines for LDCs. India's sensitive lists include mainly goods
from agriculture sector, textile sector, chemicals and leathers and sectors
reserved for small-scale industries.
India has also given approval that MFN (Most Favoured Nation) applied
rate existing on January 1, 2000 would be taken as base rate for the
Purpose of tariff reduction. It has also been decided to bring out the
customs notification from July 1, 2006 in order to adopt a uniform date
Of tariff liberalisation programme.
India's total trade with SAARC countries rose from $4,816.88 million in
2003-04 to $5,205.57 million last year, registering an increase of 8.07%.

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India-Korea Joint Task Force (JTF): Based on the recommendations of the Joint Study Group
(JSG), India and Korea constituted a Joint Task Force for having negotiations on FTA in goods,
services and investment. Four Rounds of Negotiations have been held so far.
India-China Joint Task Force (JTF): A Joint Task Force between India and China has been set
up to study in detail the feasibility of, and the benefits that may derive from the possible ChinaIndia Regional Trading Arrangement and also give its recommendations regarding its content.
India-Gulf Cooperation Council (GCC) FTA: A Framework Agreement on Economic
Cooperation was signed between India and GCC on August 25, 2004. The first round of
negotiations on India-GCC FTA was held in Riyadh on March 21 -22, 2006 wherein the GCC
side agreed to include services as well as investment and General Economic Cooperation, along
with goods, in the proposed FTA.
PTA/CECPA between India & Mauritius: A Preferential Trade Agreement
(PTA)/Comprehensive Economic Cooperation & Partnership Agreement (CECPA) are being
negotiated with Mauritius which is likely to be finalized shortly.
Framework Agreement with South Africa Customs Union (SACU): A decision has been
taken to enter into a Framework Agreement with the South African Customs Union (SACU).
The Agreement will aim to promote expansion of trade and provide a mechanism to negotiate
and conclude a comprehensive Free Trade Agreement within a reasonable time.
India-Israel Preferential Trade Agreement: Negotiation process for India-Israel Preferential Trade
Agreement has commenced.

FOREIGN TRADE POLICY (2004-2009)

Objectives
(1) To double India's percentage share of global merchandise trade by 2009. 1.5% share of global
trade by 2009.
(2) To act as an effective instrument of economic growth by giving a thrust to employment
Generation, especially in semi-urban and rural areas.
Policy Highlights
Special focus on five traditional exports - agriculture, handcrafts, handlooms, leather and
footwear, and
Gems and jewellery so as to make exports employment oriented.
A new Handicraft Special Economic Zone would be established.
Absolute export sector to be exempted from service tax for cutting down export cost.
New service Export Promotion Council constituted for services.
Free Trade and Warehousing Zones under a new scheme has been established to make India a
global trading hum. FDI would be permitted upto 100% in the development and establishment
of the zones and their infrastructure facilities.
Domestic Tariff Area have been exempt from service tax and all exporters with minimum
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turnover of Rs. 5 crore and good track record have been exempted from W^ furnishing Bank
guarantee in any of the schemes so as to reduce their transaction costs.
Liberalisation of EPCG scheme.
Duty free import conditions for seeds.
Ban on old machinery imports lifted.
Biotechnology parks would be established in the country which would get all facilities of
100% Export Oriented Units.
Three new export promotion schemes had been introduced:
(a) Vishesh Krishi Upaj Yojna
(b) Served from India
(c) Target plus Scheme
(a)

Vishesh Krishi Upaj Yojna to be introduced for boosting exports of agricultural products,
export of flowers, fruits, vegetables, minor forest produce and their value added products. In the
annual supple-ment of FTP (2004-09) to meet the objective of employment generatioin in rural
and semi-urban areas, export of village and cottage industry prod-ucts were included in
Vishesh Krishi Upal Joyna, renamed as Vishesh Krishi Gram Udyog Yojna.
(B) Served from India scheme will boost export of services. Now it allows transfer of both the scrip
and imported input to the group service company while, earlier, transfer of imported material only
was allowed.
(c) Target plus scheme, under which exporters, who achieve quantum growth in exports would be entitled to duty free credit based on incremental ex-ports substantially higher than the general
annual export target.
Government would promote establishment of Common Facility Centre for use by home based
service provided.
The exports from India are likely to generate incremental employment of 21 millions between
2004-05 and 2009-10. Thus in order to give a thrust to the manufacture of industrial products
and generate employment, in the annual revision of FTP the Focus Product Scheme was
formulated. The scheme allows duty-credit facility at 2.5% of FOB value of exports on 50% of
export turnover of notified prod-ucts like added fish and leather products, sports goods,
handloom and handicraft items, fire works etc.
A number of measures announced in FTP, mid Term Review of annual policy 2006-07 to
achieve the objective of making India a gems and Jewelley hub, allowing all categories of
foreign exchange earnings in exchange earners foreign currency accounts.
A number of procedural changes have been affected to streamline the existing provisions like
enabling Information Technology enabled services to avail refund of Central Sales Tax and
Interest payments on delayed refunds.
Percentage share of India in world trade - 1%. Indias share in world merchandise exports
grew at more than double the rate of growth of world exports since 2005. For the first time in
2005 and first eight months of 2006, Indias export growth surpassed than of China.

Annual Foreign Trade Policy 2007-08

Announced on April 19, 2007.

Export target for 2007-08 at $160 billion.
Introduction of two export promotion schemes incentivising high tech exports and agro
processing.
All services rendered abroad or export oriented services delivered in India made exempted
from 12.24% service tax.

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Focus Market scheme have been extended to 16 more countries.

Duty entitlement pass book scheme extended upto March 31, 2008.
Vishesh Krishi Upaj Yojna extended to include items like coconut oil, potato flakes, soaps etc.
Duty free import of tools, machinery and equipments for handicrafts and gems and jewellery
sectors.
Norms for availing the benefits under EPCG scheme for handlooms and handicrafts sector has
been simplified by increasing the export obligations period to 12 years from the current 8
years.
Status holder scheme revamped.

BALANCE OF PAYMENTS (BOP)

Balance of payment of India is classified into - (a) BOP on current account (b) BOP on capital
account
(a) BOP on current account includes:
(i) Visible trade relating to imports and exports.
(ii) Invisible items, viz., receipts and payments for such services as shopping, insurance, banking etc.
(iii) Unilateral transfer such as calamity relief package.
(b) BOP on capital account shows the implications of current transactions for the countrys
international financial position for instance, the surplus and the deficit of the current account are
reflected in the capital account, through changes in foreign exchange reserves of country, which are
an index of the current strength or weaker of a countrys international payments position, are also
included in capital account.
BOP on current account had been position in 1972-73, 1976-77, 2001-02, 2002-03 and 200304. As a percentage of GDP - (.7%), (1.2%), (2.3%).
India went to IMF for Special Drawing Rights in 6, 5 year plan but in 2001, India became net
donor to IMF.
For the first time during last 40 years, net invisibles became negative in 1990-91 due to
outflow of investment income.
The severe drought of 1965-66 and 1966-67 compelled India to take PL480 food aid
assistance on massive scale from USA in its public law assistance programme.
Devaluation periods
(1) 1949- Devaluation was resorted to liberate the currency from colomial control as Brilithers
bad kept rupee over valued.
(2) 1966- Due to sharp rise in oil prices; stagflation entire production sector was established.
(3) 1991- Two step devaluation
(i) June 1991
(ii) Late July
Mainly due to economic crises of 1990. Gulf crises of 1989-90 had pressureved our BOP
account and forex change reserves were less than $1 billion.
Current Account
1.
Exports (X) - Indias exports (merchandise) grew at a rate of 23.88% in 2006-07. Export
performance was dominated by volume growth till 2002-03. Reversal of trend in 2003-04,
with increasing contribution of higher unit value.
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Imports (M) - Merchandise imports grew at the rate of 29.33% in 2006-07.

TRADE BALANCE (X-M)- Due to rise in both imports and exports, countrys trade deficit
got burdened to a massive $64.9 billion in 2006-07 from $51.86 in 2005-06 which shows a
growth of 25%, since the increase in trade deficit was more than nominal growth in GDP
(15.2%) in 2006-07, as a percentage of GDP the trade deficit increased further to 7.1% of
GDP from 6.4% of GDP in the year 2005-06.

2.
3.

The local trade gap widened for the first half If the year 2007 mainly due to rupee appreciation
putting pressure on exports and higher non-POL imports. Trade gap is placed at $36.92 billion
against $26.02 billion attained during April-Sept 2007.
Invisibles
(a)
Non factor services: It includes information Technology enabled services (ITES), Health
services, educational services, travel and transportation etc.
Information Technology Enabled services comprises of Business Process Outsourcing
(BPO) - Standing at$11 billion today and set to crose $30 billion by 2012. Indian BPO
industry remains buoy and.
Accounting Process Outsourcing: Outsourcing of accounting services.
Legal Process Outsourcing: Outsourcing of legal services
Tutorial Process Outsourcing: Includes international trade for tuitorial services under World
Trade Organisation norms. First contract for TPO is received by Career Launcher.
Engineering Process Outsourcing: Providing engineering services
(b) Private Transfers/remit: Includes contribution made by Non-resident Indians. Private
Traufers which remained the single largest component of invisibles (net) account till 200405, fell below miscellaneous receipts in 2005-06. As per the RBIs preliminary BOP dates
for the first six months of the year reveal that remit Hances from Indians working abroad,
which from a part of private transfers, were higher at $19 billion, up from $12.7 billion.
(b) Net Investment Income: In 2005-06, investment income continued to be negative
reflecting the servicing costs of capital inflows.
(c) Official transfers: A very small component in invisible account, continued to decline in 200405 and 2005-06.

In early 6 months of 2007 invisible receipts have in-creased at a much slowes pace mainly on
account of a deceleration in the reports of both software and business services. This ominous
development is once again partly attributably strong rupee and its impact on the margins of
leading software exporters.

In 2006-07 the software and service export is estimated at $31.3 billion which shows a robust
growth of 32%. Yagos drivers were electronic and IT exports with a growth of 35%.

Now with the rupee appreciation and slowdown in the US economy, the Indian IT industry
will have to evolve. Innovation, New delivery Model and building business beyond borders
will help the industry to survive and become a global leader.

In 2005, while Indias share and ranking in world merchandise exports were 1 percent and
29 respectively, its share and ranking in world commercial services exports was 2.3% and
11 respectively. By growing faster than merchandise exports, services grow exports
constituted almost 60% of merchandise exports in 2005-06.

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5. Current Account Balance: After remaining positive in 2001-02, 2002-03 and 2003-04 it
turned negative in .2004-05.
Due to a strong growth in invisibles, the countrys current account deficit was contained at a
reasonable 1.1% of GDP in 2006-07. Indias current account deficit during second quarter (JulySeptember) 2007-08 narrowed to $5.5 billion from $6.3 billion registered during the same period of
2006. Roughly accounted 0.5% of GDP mainly due to doubled semi Hances by NRIs despite a
widening trade deficit.
Capital Account
6. External assistance (net) - as a percentage of total capital flows it turned negative in 2002-03 (29.4%), 2003-04 (-16%) but trend got reversed in 2004-05 it EA again became poselive EA is a
debt creating flow. It is the money borrowed from outside the country at concessional rate of
interest and for longer period of time, with either an aid component or initial holiday period.
Such loans are also called soft loans.
7. External Commercial borrouring (ECB) - Also known as hard loans, it is the money borrowed
at prevailing rate of interest and terms of repayments as per outside the country.
ECB's can be divided into:
1. Short term ECB: Maturity period upto 1 year.
2. Long term ECB: More than one year maturely period Majority of ECB's is long lism.
Important ECB schemes
1. India development bond scheme- Launched in 1991-92 by State Bank of India.
Five yearly bonds were sold under the scheme mostly to Non-Resident Indians and
Around $4 m were mobilised. These bonds were reedemed (returned back) into 1995-96.
2.

Resurgent India bond scheme- Launched in financial year 1998-99 by State Bank of
India in response to economic sanctions imposed by developed countries. 5 yearly bonds
were sold to Non-resident Indians, Persons of Indian Origin Scheme could mobilise
around $5b.

3.

India Millennium Deposit Scheme- Launched in 2000 by State Bank of India. Five
yearly fixed deposit certificates were sold by State Bank of India to NRIs, PIOs &
OCBs. The scheme mobilised around $5.2b. Bond redeemed in 2006.

Net external Commercial borrowing remained negative in 2001-02, 2002-03 and 200304 after which it became positive.
In the countrys external debt front, ECBs emerged as the single biggest contributor to
capital inflavs even when FDI in the country increased nearly 80% in 2006-07. At $16
billion, ECBs accounted for over 35% of capital inflows in 2006-07.
In the year 2006-07, 56% of the increase in external debt was accounted for by ECBs.
Government disincentives to check unbridled external commercial borrowings have not
borne. Furit Capital flows in this category have almost doubted.

8. Intermational Monetary Fund (net)- India has been able to borrow from the fund from
time to time to overcome her BOP difficulties, But from a borrower, India turned a
net donor to IMF in 2001 and now she is not borrowing any more.
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IMF
IMF is one of the furins born as a result of the Brelton Woods Agreement concluded in 1944
and thus IMF founded on Dec 27, 1945. With HQs at Washington, USA it was entrusted with
the task of looking after the problems of international liquid and exchange rate stability. 31
founder members.
Main Objectives
(1)
To help member nations tide over their balance of payment difficulties of short term
and long term character.
(2)
To promote exchange rate stability and avoid competitive exchange rate depreciation.
(3)
To re-establish multilateral trade among the member countries.
(4)
To move in the direction of dismantling trade and tariff barriers which separate
member serunders through tariff, quotas etc.
Membership and subscription
Any country can become a member provide
(a) The country is willing (b) Willing to pay a subscription.
At present IMF has a membership of around 185 nations.
Article 7- If demand for a currency exceeds the available supply with the fund, fund
will declare the currency to be scarce & take steps to augment the supply of the
currency by other means.
Article 8- Countries to open their respective Balance of payment accounts, making
their currency convertible.
In 1970, IMF introduced the most ingenuous plan the Special Drawing Plan or SDRs.
It was unanimously approved by all countries (except Frame) in 1967 at Rio De
Janeiro in Brazil & came into effect in 1970
SDRs are a form of paper gold, they are first book keeping entries and created at
regular intervals by the fund and are allocated among member countries on the basis
of each countrys quota.
India and IMF
India is a founder member of IMF and was one of the largest subscribers.
India borrowed $100 million from the fund during 1948-49 but paid back the amount by
1956-57. In 1981, India borrowed a massive amount of SDR (500 million) from IMF to
overcome its external BOP problems arising basically from oil imports. This was the
single largest loan made by IMF a member country at that time.
Due to worsening current account deficit in 1990-91, Indias ability to finance the deficit
had weekened massively. India once again went to IMF for rescue. While agreeing to
come to the assistance of Indias, IMF insisted that certain conditions should be ful-filled
by Indias - the condition ability Clauses.

(a) Of IMFs member countries.

Camille Gutt of Belguim was the first Managing Director of IMF and the present one
(9th MD) is Dominigne strouess Kahn of France, who assumed office on Nov 1,
2007.

The contrd and managment of IMF rests in Board of Governors.

The Finance Minister of India is the ex-officio member of the Governing body of
IMF.

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1.

2.

10.

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Non- resident deposits (net) - Savings of non-resident Indians, Overseas corporate

bodies and persons of Indian origin deposited with resident Financial Institutions of
India are called non-resident deposits. Indian banks offer two types of accounts called
NR deposits.
FCNRB- Foreign currency non-resident bank accounts.
In such accounts rate of interest is also to be paid in foreign currency which is linked
to London inter-bank offer rate. It increases availability of foreign funds in India due
to which exchange rate of rupee remains stable.
NRERA- Non resident external rupee account. It is inverted in rupee form and rate of
interest kept in the unit of rupee, higher than the prevailing rate of interest in India.
In the last seventeen years ending 2006-07, non resident deposits remained an important
and relaluely stable source of capital flows.
If a proportion of total capital flows, it had strengland in the four year period 2000-04 to
above 20%, but such deposits became a source of negative flows in 2004-05. Resumption
of earlier trend in 2005-06, with proportion rising to 11.5%.
In the six months beginning in 2007, NRI deposits have show a trend of net outflow,
reflecting lower deposit rates. However in 2006-07, they were the second most important
contributor to external debt after External Commercial borrowings.
Foreign Investment (net):
(1) FDI (net)
(2) FIIs
(3) Euro Equities & others
(1) FDI: (a) Greenfield FDI: FDI which results in expansion in production
Capacity due to change in ownership. Eg- Greenfield airports coming up in
Shamshabad (Andhra) and Devanhalli (Karnataka)
(b) Brown Field FDI: FDI which results in change in managerial control without
addition in production capacity.

12.

Other Flows (net): The remaining items that can-not be categorized into current and
capital account categories since the full balance of payment account must be balance
there items are(1)
Errors A and Omissions: These are to take into account the difficulty of accurately
recording all the wide variety of transactions that take place in accounting period.
(2)
Other Items which are new
13.
Capital Account (net): In 2005-06 and 2006-07, capital flows into India remained
strong on overall basis with capital account surplus rising simultaneously with current
account deficit. Debt creating flows, particularly external assistance external
commercial borrowings. NR deposits, which had turned into net one flow in 2002-03
and 2003-04, became positive flows in 2005-06.
Indias capital account surplus wide wed to $33.9 billion during July-September 2007-08
from $ 8.7 billion a year earlier.
Capital inflows- The aggregate of net inflows in 2006-07 and 2007-08 has propped up the
Balance of payment and this time the increase is very substantial and it covered almost all
Categories. Increased capital inflows can import macro-economic aggregates through
exchange rates, trade & monetary variables. However the economys capacity to absorb such
capital inflow as indicated by the level of current account deficit has not rises so fast as inflows.

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Due to excess liquidity caused largely by capital inflows, the biggest challenge for monetary
policy is the management of capital flows & attendant implications for liquidity and overall
stability.
Convertibility and related issues
The term convertibility related to the right of a holder of a national currency to freely exchange it
into each and every other national currency at the prevailing exchange rate.

There are three types of exchange rate regime(1) Floating Exchange Rate Regime: There is fully convertibility on entire Balance of
Payment account and exchange rate is determined by demand & supply forces and as these
forces change, exchange rate allows changes. Eg- Foreign Exchange management Act
entails the some characteristics of this regime.
(2) Fixed Exchange Rate Regime: Exchange rate is determined and adjusted through
administrative decision, without giving any say to market forces. Thus zero convertibility.
Eg-Foreign exchange regulation Act- 1973 had the characteristics of fixed ex-change rate
regime. The called paged exchange rate regime.
(3) Mixed Regime/Managed Currency Regime: Exchange rate is allowed in a given band to
adjust in accordance with changes in market forces. But of exchange rate is Trans, gressing
levels then administrative body interferes to manage the market forces.

A popular variety at various stages of transition has been the so called crawling peg: in such
a regime, a weak and gradual depreciation of national currency against a basket of the
currencies of major trade partners was preannounce (within a permissible band) and
then unimplemented.
Dirty Float: We allow the exchange rate basically to be determined by market forces of
demand and supply for foreign exchange (clean), but we allow government intervention
into foreign exchange market to, what one may call, set right the ups and downs in
exchange rate movement (thus becomes dirty).

Current Account Convertibility

The right to convert the local currency Payments relation to imports of goods & services. For all
practical purposes, including, and most of all a international negotiations, whether a country
has or has not achieved current account convertibility is judged by the fact whether the
respective has accepted or not Article VIII status according to Articles of agreement of IMP.
Partial convertibility of rupee was introduced in 1992-93 Under this system a dual exchange
rate was
Fixed under which 40% of foreign exchange was to be surrendered at the official exchange
rate while the remaining 60% of foreign exchange was to be converted at a marked be
termined rate.
1993-94 budgets introduced full convertibility on trade account. Dual exchange rate was
dispeneed with and a unified exchange rate system introduced.
India introduced current account convertibility in August 1994 and accepted obligations
under Article VIII of IMF.
Thus Indias balance of Payment account is partially convertible with only current account
being convertible and zero convertibility on capital Account.
Capital Account Convertibility
It relates to the right to convert the local currency into foreign currencies for to purpose of capital
transactions and transfers.
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A committee on Capital Account Convertibility was set up by RBI under the chairmanship of
former RBI deputy governor S.S Tarapore to lay the road map for capital account
convertibility.
The 5-member committee recommended a three year time frame for complete convertibility
by 1999-2000.
The three crucial pre-conditions were:
(1) Fiscal Consolidation
(2) A Mandated Inflation
(3) Strengthening of Financial System
East Asian crises intervened soon thereafter leading to lack of popular enthusiasm for capital
account convertibility.

In response to Prime Ministers statement regarding laying out a road map on capital account
convertibility based on current realities RBI constituted a committee (Chairman: S.S.
Tarapore) on March 20, 2006 It detailed a broad five year time frame for movement towards
fuller convertibility in 3 phases. Phase I - (2006-07)
Phases II - (2007-08 to 2008-09)
Phases III - (2009-10 to 2010-2011)
Committee calibrated the liberalization road map to the specific contexts of prepaednessnamely, a strong macro economic framework, sound financial systems and markets and
prudential regulatory and supervisory architecture. The committee recommended imposition
of goods and services less on financial services, current account deficit to GDP ratio under 3
percent, meeting FRBM targets, Prohibiting FIIS from investing fresh money raised through
participatory notes.
Later on Finance Ministry released the 15 member expert committees report, headed by
PERCY S. MISTRY that recommended full capital account rupee convertibility by 2008.
Abolition of securities trans-action tax, slump duties, cutting down public debts, creation of
currency spot market and rupee settled exchange traded currency derivatives market are some
of the recommendations.

Foreign Exchange Reserves

Forex reserves can be classified into:
(1) Foreign currency reserve
(2) Bullion reserve (Gold)
(3) Special Drawing Right held by IMF
(4) Foreign Securities held by RBI
Reduction in these assets will be used to finance expenditures abroad. Reductions appear
as a credit item in the BOP (because their sale causes foreign exchange inflow appears as
into the country). An increase in these reserves will appears as a debit because purchasing
assets will cruse an outflow of foreign exchange.
The continuance of the robust net capital inflows not only helped financing reining
current account debit but also resulted in further accretion to exchange reserves.
External Debt
Indias total foreign debt rose by 22.6% to $155 billion in 2006-07 as compared to $
126 billion in 2005-2006 as companies went overseas to borrow on account of cheaper
credit.

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In rupee terms, Indias external debt stood at Rs. 6,75,857 crore, accounting for 16.4%
of GDP In terms of composition, 56% of the increase was accounted for by external
commercial 16% short term debt

Presently Indias foreign exchange reserves are about one and half times its total
external debt. The debt service ratio- ratio of interest charges and loan repayments to
export earnings showed a per-ceptible improvement, declining to 4.8% last year
from 9.9% a year ago.
Short term debt to GDP ration rose to 1.3%./ short term debt to total debt rose to 7.7%
short term debt to foreign exchange assets to 6.2% short term debt rose mainly due to
rising imports and import related trade credits.
World Bank & IMF developed joint by a centralised database system called Quarterly
External Debt Statistics (QEDS) prescribing certain standard formats of debt data
reporting. India joined it in November 2006.
According to Govt. Of India report on Indias external debt, India. India was seventh in
position among the to ten debtor countries in 2005 with total external debt $123.12
billion.
China > Russia > Brazil > Turkey > Mexico > Indo-nesia > India> Argentina> Polled>
Hungary ( Total external debt in decreasing order)
Dumping
With its diversified manufacturing and export base, India has been one of the major users
as well as one of the major targets of anti dumping measures in the world.
According to an investigation initiated by top ten users of anti dumping measures, 19952006. India reported the highest anti dumping initiations with 20 new initiations followed
by European Union and Australia.

INTERNATIONAL ORGANISATION

IBRD
IBRD, popularly known as World Bank, owes its birth to the deliberations of
United Nations Monetary and Financial Conference which met at Bretton woods, New
Hampshire and the World Bank and the turn IMF were established world Bank was
established in 1945 with HQ at Washington.
While the IMF provides short term loans to correct disequilibrium in Balance of
payment, World Bank
Provides long term loans(i) To assist the reconstructions and reconstruction and development of terry tones of
member nations destroyed or disrupted by wars
(ii) To assist and encourage the development of less developed member countries.
(iii)To promote private foreign investment by means of Guarantees or participation in loans
and investment made by private investors & to supplement private investment by its own
trances.
(iv) To promote long range balanced growth of international trade and maintenance of
equilibriums in the BOP of all members countries.
Any country is eligible for membership of WB if it subscribes to its charter under Banks
Articles of Agreement Only those countries which are members of IMF can be
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considered for membership of W.B.

All the powers of control and management are vested in Board of governor.

India and WB
India is a founder member of Bank. She presided at the annual general meeting of the
Bank held in Paris in 1950.
By 1958, India had become the single largest borrower of the bank.
A consortium of countries and international institutions interested in assisting India has
been formed under the auspices of WB and is commonly known as Aid India club, now
renamed India Development Forum.
Affiliates of WB
(1)
International Development Association (IDA) IDA was started in 1960 as an affiliate
of WB to make soft loans for long periods and low rate of interest. These loans were
given for creating Social Capital such as construction of roads & bridges, slum
clearance & urban development etc.
(2)

International Finance Corporation (IFC) set up in 1955 to invest in private productive

enterprises in association with private investors and without government guarantee of
repayment. IFC stimulates productive investment of private capital, both foreign &
domestic.
As per the data released by World Bank, India has become the largest borrower of World
Bank group institutors accounting $3 75 billion (15% of the total lending by all) in 200607. WB also provided $ 700 million to the health sector in India. This lending witnessed a
whopping 170% increase & highest loan sanction made by WB in the history of its
engagement with India.
IFC - the private sector lending affiliate of WB has decided to fund 4000 MW ultra mega
Power Project to be developed by Tata Power at Maunder in Gujarat.
WB has given approved to fund Rs. 7000 crore to build eight proposed hydel power
project in Himachal Pradesh.
WB to provide $ 944 million for strengthening rural credit cooperative project, vocational
education training project and additional credit. For Karnataka community based water
tank management project. World Banks report entitled Global Economic
Development: Technology Diffusion in the developing world presents the view that
India is likely to witness further moderation in eco. Growth with GDP slepping to 8.4%
in 2008 but may marginally improve to 8.5% in 2009.
West Bengal government has sought a loan of $ 300 million from WB for minor
irrigation schemes over 2, 3,500 acres form land.
The world Bank has approved $ 65 million additional aid for Andhra Pradeshs Rural
Poverty Reduction Project, a programme that has improved the lives of 5-7 million
women since its inception in 2008.
Miga: Multilateral Investment guarantees Agency Established in 1988. It supports and
encourages foreign investment in developing countries WB President.

World Intellectual Property Organisation (WIPO)

WIPO was established by WIPO Convention signed at Stockholm on July 14, 1967 and
came into force on April 26, 1970. Its headquarters in Geneva, Switzer-land.
It is responsible for promoting the progressive development and harmonization of
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Intellectual Property legislation, standards and procedures among member states.

It aims to promote intellectual property into national development policies and
programmes and develop international intellectual property laws and standards.
It creates and disseminates a wealth of public outer each material to increase
understanding of how to protect and benefit from the resulting intellectual property.
It provides services to enable users to file international applications for patents and
international registration for trademark designs & appellations of origin.
With 184 countries as members and 250 organisations currently accredited as observers
at WIPO meetings. In 1886, copyright entered international arena with Berne connection
for protection of literacy and Artistic works.
Kamil Idris is the Director General of WIPO
Protection of Intellectual Property rights is guided by Paris Convention.

World Trade Organisation

Genesis: General agreement on Tariff and Trade set up in 1947 to provide a framework
for the conduct of trade relation by reducing trade barriers in inter-national trade and thus
providing a set of rules of conduct.
Eight rounds of GATT were conducted initiating in Geneva in 1947. The eighth round
known as Uruguay Round was announced in Marrakesh meeting in 1994 with signing of
Final act by GATT members. It paved the way for setting up of WTO.
WTO agreement came into force from Jan 1, 1995 GATT was not, really an org. It was
just a legal arrangement while WTO is a new international organisation set up as a
permanent body and de-signed to play the. Role of a watchdog in the sphere of trade in
goods and trade in services, preign investment, and intellectual property rights etc.
The highest body is the Ministerial Conference. Jain agreement of WTO is agreement
on agriculture agreement on trade in textiles and clothing or Multifibre Arrangement
which calls for phasing out import quotas on textiles & clothing by 1 January, 2005.
Agreement on Trade related investment means uses calls for introducing national
treatment of foreign investments and removed of quantitative restrictions. Agreement on
Trade Related Intellectual Property Rights, agreement on services etc.
There is a dispute settlement Body, seeks to plug the loopholes and thus provide security
and predictability to the multilateral trading system. It has now been made mandatory to
settle a dispute within 18 months.
Subsidies
(1)
Green Box: None distorting in terms of production and trade direct income support
Unlinked to productions saving environment.
(2)
Blue Box: Less trade distorting because white the directly links production to subsidies,
They also set limits on production Eg - By quotas.
(3)
Amber Box: Most trade distorting, primarily by encouraging excessive productions.
Doha Round of Negotiations
Fourth Ministerial meet took place at Doha in 2001. It entails certain features:
(1) Doha declaration announced the launch of a new round of negotiations to be concluded
by Jan 1, 2005 called Doha Round.
(2) Doha declaration stated that aim would be substantial improvements in market access,
reduction of and ultimately phasing out all trade distorting subsidies(3) TRIP and Public Wealth: The agreement can and should be interpreted & implemented
in a manner suppositive of WTO members right to protect public health.
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(4) Environment & labour issues: Negotiations on environment issues were agreed to and
labour issues were to be left to ILO.
(5) Greater access for industrial products of developing countries.
The three issues under basic issue of agriculture are
(1) Trade distorting subsidies
(2) Export Competition
(3) Market excess
It is estimated that EU and US provide subsidy of nearly $ 1 billion a day. In 205, the
level of trade distorting support to agriculture in US was $ 19.7 billion & on the other
hand, it demanded huge concessions from developing countries in terms of reduced tariff
and enhanced market access for both agricultural & non - agricultural products and services.
It the mini- Ministerial meet in Geneva in 2006, EU had agreed to reduce average form
Tariffs by 51% this was a significant step forward. But US is not particularly bothered
about arriving at an agreement.
US has still not repeated its 30 and super 30 provisions which enable imposition
of sanctions against countries mat harm its trade business. Continues to provides priority
states for patent rights on first to invent basis rather for patent rights on, first of invent
basis rather than first to file basis to invent basis rather than first to file basis adopted by
all other countries.
As a consequence of pressure from developing nations US & EU relented and accepted a
number of issues. Irritants for developing nations.
(1) It was agreed that developing countries need not source their essential medicines & drugs
at high cost from western MNCs which hold patents.
(2) Reduction and elimination of tariffs in non-agriculture goods & other barriers, mainly
on products that are important to developing countries is an-other gain.
(3) With regards to services, it is hoped that India would gain by increasing access for
banking, insurance and other companies and increasing opportunities for people to work
in other countries.
(4) US agreed to review anti dumping rules.
(5) WTO appointed a 9 member committee to which key issues of TRIPS had been refereed
to. India s Brazil made its members. The Govt, of India passed an order on December
26, 2004 for the amendment in the patent act in context with agreement of WTO thus
Product Patent systems has been declared effective for Jan 1, 2005.
(6) India felt some relief through non-Agreement market access on industrial imports -a
Swiss formula presented by EU.
In the Hong Kong Ministerial meet it was decided to eliminate export subsidies in
agriculture by 2013.
Duty free, quote free market access for all LDCs products to all developed countries. In
cotton, expose subsidies to be eliminated by developed countries in 2006 and trade
distorting domestic subsidies to be reduced more ambitious by & over a short period of
time.
As a part of commitment to WTO, India has made its patent law consistent from January 1, 2005.
It includes expending product patent regime to food, drugs, chemicals agro chemicals &
biotechnical product.

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WTO CONFERENCES
Singapore
First
Second Geneva
Third
Seattle
Fourth Doha
Fifth
Cancun
Sixth
Hongkong
Head - Pascal hamy
United Nations conference on Trade Development (UNCTAD)
Genesis: The Cairo Conference of the developing countries held in July 1962 on the
problems of economic development passed the Cairo Declaration on Developing countries
calling for conference on Trade & Deputed and constituting on International Trade Organisation
which would consider vital questions relating to international trade of poor nations.
First UNCTAD was organised in Geneva from March to June 1964. UNCTAD was
established as a permanent organ of UN General Assembly which defines the functions,
activities and membership of UNCTAD. Trade and Development Board is the policy
making body of UNCTAD.
The main purpose of creating UNCTAD is to pro-mote speedy development of
underdeveloped countries by solving the problems of the sluggish expansions of their
export trade, deficits in their external BOP and excessive burden of foreign debt etc.
UNCTAD II was organised in 1968 in New Delhi.
In 2005, UNCTAD launched Development India which is a comprehensive review of
global trade and development performance, integrating key factors & indicators like
international finance, trade performance, human capital and physical infrastructure. In a
recent report India has been ranked at 86 m place while US first.
According to Trade and Development Report 2006, released by UNCTAD, India has
become the tenth largest developing economy in terms of overseas investment received
with $ 5.5 billion in 2004 while china tops the list.
India did not figure among the top ten developing countries with the largest FDI inward
Stock.
According to UNCTADs world Investment Report, India has emerged as the second
most attractive location after China for Global FDI in 2007. India was the 4 largest
suspecting of FDI during 2005-06.
UNCTAD has projected Indias economic growth for 2007-08 to be 8.5%, whereas
chinas growth at 10.5% during same fiscal.
According to a survey conducted by world Economic Forum, India has
been ranked 48m in Global Competitiveness Index 2008-08. US topping
the list.
India ranks 69th in Global Economic Freedom India in 2005 according to Economic
Freedom Index in 2005 according to Economic Federation of World Report 2007
released by commerce minister of India Kamal Nath.

Asian Development Bank (ADB)

ADB is a multinational development financial instillation established for the purpose of
lending funds, promoting investment and providing technical assistance for promoting
the economic and social progress of its developing member countries in Asia and Pacific
region.
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ADB with its HQ at Manila (Philippines) started its operation in 1966.

India is the third largest subscriber of ADB - after Japan and China.

South Asia Free Trade Agreement (SAFTA)

Agreement on SAFTA was signed during the 12th SAARC Summit on January 6, 2004 in
Islamabad.
Negoliations Completed on:
(1)
Rules of Origin
(2)
Sensitive lists
(3)
Revenue Compensation for LDCs
(4)
Technical assistance to LDCs
The tariff liberalisation programme under the agreement has been implemented from July
1, 2006.
Asia Pacific Economic Cooperation
APEC was established in 1989 for the independent economic development of the countries of
Asia-pacific regions.
Members - 21
India is not a member of APEC and further has to wait for its membership till 2010.
HQ- Singapore
Director - Piamsak Maria (Chile)
Summit was held at Australia and the recent one, i.e. 19th summit was also hosted by
Australia (SYDNEY).
Outcome
(1) Sydney declaration on climate change
(2) Energy security and clean development
(3) Setting specific goals on reducing energy intensity and increasing forest cause in the region
by atleast 20 million hectares by 2020.
(4) Stand-alone statement on Doha round of WTO negotiation was also issued reaffirming
leaders support for multilateral trading system.
APEC countries represent 56% of world GDP & nearly half of the Global trade.
Next APEC summit to be held in PERU (2008)
Establishment - The five important industrialized countries formed G-5- Germany, Japan,
Britain, France & US
In 1976, Canada and Italy joined G-5 and it became G7.
On 10 July, 1994, Russia joined G7 and finally present G-8 formed.
33rd G-8 summit took place in HELLIGEN DAMN (Germany).
Key Issues (1) Grow & Responsibility was the central theme
(2) Climate protection & thus common goals for the reduction of green house gases.
(3) Helping Africa by increasing official developments assistance by 2010 & by US $ 25 billion
each year.
(4) Fair investment Promotion by 2009.
For the first time developing countries like India, China, Brazil was invited in the 29th
summit held at France.
2008 Summit to be held in Japan.

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Group of 20 (G-20)
Block of developed and developing nations established in 199 as a response both to
(i)
the financial crises of late
1990s and a growing recognition that key emerging
markets were not adequately included in the case of global economic discussion &
governance.
(ii) MD-IMF & President- WB and Chairman of International. Monetary and Financial
Committee of IMF and WB also Participate in G-20 meetings ex-offices basis.
(iii) G-20 chair rotates between member nations. For 2006 it was Australia, 2007- South
Africa.

SOCIAL SECTOR

Various studies on poverty indicate that while growth in per capita income is a necessary
condition for poverty reduction, it is by no means sufficient. It is also important to focus
on creating an enabling environment for the poor to participate in, and benefit from, the
growth process. The pro-poor public policies include creation of employment
opportunities and enhancing the level of health, education and skill of the poor.

Plan and Non-plan expenditure of the central government for social services such as
education, health, family welfare, water supply. Housing etc has more than doubled
from Rs 18240 crore in 1995-96 to Rs 74,439 crore in 2005-06.

However, trend witnessed in the total plan and non-plan expenditure on the social sector
by both centre and states indicate that there had been a continuous decline of the share of
social sector in total expenditure since 2000-01.

In the last two decades there is a significant decline in proportion of people living below
poverty line, from 51.5% in 1977-78 to 26.1% in 1999-2000. In absolute terms, the
number of the poor declined from 328.9 million in 1977-78 to 260.3 million in 19992000.

Though poverty has declined at the micro-level, there are wide rural- urban and interstate disparities in the improvement pattern.

Significant declines in the incidence of poverty were witnessed in Andhra Pradesh,

Gujarat, Haryana, Punjab, Karnataka, Kerala, West Bengal, and Maharashtra.

Tenth Plan also focus on specific sectors which provide greater opportunities for the poor
to participate in the growth process. Plan allocation has been enhanced in areas of health,
education, sanitation etc.

There has been decline in the rate of growth of employment Command Daily Status
(CDS) during the 1990s. (2.7 per cent per annum in 1983-94 to 1.07% per annum in
1994-2000.

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On the other hand, employment growth in all the sub-sectors within services, such as
trade, hotels, transport, communication, and financial and business services, (except
community social and personal services having negative growth rate) exceeded 5% per
annum.

There are larger inter-state differentials in unemployment during the period 1993-94 to
1999-2000; growth in employment was the highest in Haryana (2.43%), followed by
Gujarat (2.3%), while Kerala recorded the least growth of employment 0.07%.

National Population Policy, 2000 provides a policy framework for advancing goals ad
prioritizing strategies during the next decade to meet the reproductive and child health
needs of the people of India, and to achieve net replacement levels of total fertility rate by
2010.

Among the major states, the states of Kerala and Tamil Nadu have already achieved the
replacement of fertility viz. Total Fertility Rate (TFR) of 2.1 while the states of Andhra
Pradesh, Gujarat, Karnataka, Maharashtra, Orissa, Punjab and West Bengal, having a
TFR in the range, of 2.2 to 3 arcs in the direction of achieving the replacement level of
fertility.

The Empowered Action Group (EAG) has been set up to raise performance (social)
indicators of laygard states. The EAG states arc Bihar Chhattisgarh, Jharkhand, MP,
Orissa, Rajasthan, Uttaranchal, and Uttar Pradesh. These states TFR range between 4 to
4.8, and crude birth rates and death rates arc also high.

Poverty Alleviation Programmes

SGSY (Swarnajayanti Gram Swarojgar Yojana)
Launched: April 1, 1999
SGSY = IRDP (Rural Debt) + DWCRA (Women & Children) + TRYSEM (Rural Youth)
+ MWS (wells) + GKY(farmer) + SITRA (Artisans)
Cost sharing basis- 75:25
Self Employment programme, focusing on poverty alleviation Promotes self help
group; development of micro enterprises (asset creation) through bank credit and
government subsidy)
50% benefit to SCs and STs; 40% for women, and 3% for disabled
SGRY (Sampoorna Grameen Rojgar Yojana)
Launched in September 2001
Cost sharing basis- 87.5:12.5
SGRY=SGRY+JGSY(villagework) + EAS (employment), from April 1,2002
To provide wage employment in rural areas; ensuring of food security; creation of
durable community; social and economic infrastructure
Implementation through Panchayati Raj system.
PMGY (Pradhan Mantri Gramodaya Yojana)
Launched in 2000-01
Lunched in all states & UT's in order to achieve the objective of sustainable human
development at the village level.
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Village level development in 6 crucial areas: Primary health, primary education, rural
shelter, rural drinking water, nutrition and rural electrification
Some of its areas got impetus through the Bharat Nirman Scheme.

PMGSY (Pradhan Mantri Gram Sadak Yojana)

Launched on 25th December 2000
To provide road connectivity by good quality all weather roads to 1.60 lakh Unconnected
Habitations with a population of 500 persons or more in the rural areas (250 in the case of
hilly area) by the end of the Tenth Plan period (2007). Source for funding of PMGSY is
the diesel cess, 50% of which is earmarked for PMGSY
Estimated cost, Rs 60,000 crore
Bharat Nirman Yojana has also taken the road construction objective.
Pradhan Mantri Gramodaya Yojana (Gramin Awaas)
Launched: April 2000
Sustainable habitat development in rural areas; to meet housing needs of poor.
Pradhan Mantri Gramodaya Yojana - Rural Drinking Water Project
A minimum of 25% of the total allocation to be utilized on projects/schemes for water
conservation/harvesting/recharge/source development in respect of areas under Desert
Development Programme/Drought Prone Areas Programme.
Rural drinking water schemes are being done under the Rajiv Gandhi Drinking Water
Mission.
SJSRY (Swarna Jayanti Shahri Rozgar Yojana)
Launched in December 1997
Cost sharing basis- 75:25
Two special schemes run (I) The Urban Self Employment Programme (2) Urban Wage
Employment Programme
SJSRY (Swarna Jayanti Shahari Rojgar Yojana) is a rationalised (merged) version of the
erstwhile schemes of Urban Basic Services, NRY (Rozgar) and PMs Integrated Urban
Poverty Eradication Programmes.

Gainful employment to the urban unemployed poor through encouraging the setting up of
self-employment ventures or provision of wage employment.
30% women, 3% disabled; SC/STs on the strength of local population

I AY (Indira Awaas Yojana)

The Indira Awaas Yojana (IAY) launched in 1996
Cost sharing basis- 75:25,
Construction of houses and money to be given to poor. Criteria of allocation of funds to
states /UTs has changed from poverty ratio to equally reflect the poverty ratio and housing
shortage in the states. Similarly, criteria for allocating funds to districts changed from
poverty ratio to equally reflect SC/ST population and housing shortage. (minimum 60% to
SCs/STs)
Rs 20,000 for normal areas; Rs 22,000 for hills/difficult areas

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Samagra Awaas Yojana 1999-2000

On pilot project basis in one developmental block each in 25 districts of 24 states.
Integrated provision of shelter, sanitation and drinking water with special emphasis on technology
transfer, human resource development and habitat improvement with peoples participation.
Food for Work Programme
Launched in February 2001
Augmenting food security through wage employment in drought affected rural areas in 8
states: Gujarat, Chhattisgarh, Himachal Pradesh, MP, Maharashtra, Orissa, Rajasthan and
Uttaranch Programme further extended till March 31, 2002in respect of notified Natural
Calamity Affected Districts.
Antyodaya Anna Yojana
Launched in the year 2000
2 crore poorest families out of BPL families under TPDS (targeted) are identified.
35 kg of foodgrains are to be made available to each eligible family at highly subsidised
rates.
Wheat to be supplied @ Rs. 2 per kg
Rice to be supplied @ Rs. 3 per kg
Rs 3500 crore subsidy on this scheme
Annapurna
Launched in 1999-2000
100% Centrally sponsored
To meet requirement of the senior citizens.
10 kgs. Of foodgrain per person per month supplied free of cost.
Jai Prakash Rojgar Guarantee Yojana (2002)
The scheme seeks to provide guaranteed
employment
to unemployed in the most
distressed districts of the country. (Operational modalities are being worked out.)
Employment on demand within 15 days, and a minimum guarantee of 100 days employment.
Valmiki Ambedkar Awaas Yojana (VAMBY)
Launched in year 2001
The scheme seeks to ameliorate the conditions of urban slum dwellers living below the
poverty line that do not possess adequate shelter. Nirmal Bharat Abhiyan is a component of
the scheme to provide a healthy and enabling urban environment through community
toilets.
Integrated Child Development Scheme (ICDS)
The ICDS scheme is the worlds largest publicly funded programme for early childhood.
Since its inception in 1975, the scheme continues to be the flagship scheme towards promoting the
over all development of the young children (0-6 years) - especially the girl child, and expectant
and nursing mothers all over the country through its holistic package of six basic services - health
check up, immunization, referral services, supplementary nutrition, pre-school education and
health and nutritional education through a single window delivery.

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Kishori Shakti Yojana (KSY)

As a part of ICDS programme, KSY was launched in 2000-01 for adolescent girls in the
age group of 11-18 years. The scheme aims at breaking the inter-generational life cycle of
nutritional and
gender
disadvantages
and providing a supportive environment for self
development by promoting awareness on health, hygiene, nutrition, home management, child
care, and training to improve/ upgrade vocational skills.
Jawaharlal Nehru National Urban Renewal Mission (JNNURM)
JNNURM, which is for a seven year period from 2005-06, has two main components Basic Services to the Urban Poor (BSUP) Programme and Integrated Housing and Slum
Development Programme (IHSDP). BSUP was launched to assist cities and towns in taking up
housing and infrastructural facilities for the urban poor in 63 selected cities in the country. IHSDP
for taking up housing and slum up gradation programmes in non-BSUP cities was launched along
with BSUP in December 2005.
National Rural Employment Guarantee Scheme (NREGS)
With the NREG Act being passed in September, 2005, the NREGS was implemented
from February 2, 2006 in 200 identified districts of the country with the objective of providing 100
days of guaranteed unskilled wage employment to each rural household opting for it. The
ongoing programmes of SGRY and National Food for Work Programme (NFFWP) have been
subsumed under NREGS in these districts. NREGS will cover all districts of the country within
five years. The NREGS, a demand-driven scheme, has its focus on works relating to water
conservation, drought proofing
(including afforestation/tree plantation), land development,
flood control/protection (including drainage in waterlogged areas) and rural connectivity in terms
of all-weather roads.
National Rural Health Mission (NRHM)
NRHMis the main vehicle for giving effect to the mandate of the NCMP.
Operationalized throughout the country, its special focus is on 18 States with weaker health
infrastructure and health status indicators. Provision of accessible, affordable, accountable,
effective and reliable primary health care facilities especially to the poor and vulnerable sections
of the population, bridging the gap in rural health care services through creation of a cadre of
Accredited Social Health Activists (ASHA), improved hospital care, decentralized planning,
ensuring population stabilization, intersectora convergence and maintaining gender balance
constitute the basic features of the NRHM.
The Mission envisaged selection of a trained female community health worker called
ASHA in each village in the ratio of one per 1000 population in all 18 high-focus States and in
tribal and under-served areas of other States. ASHA would reinforce community action for
universal immunization, safe delivery, and newborn care, prevention of waterborne and other
communicable diseases, nutrition and sanitation. ASHAs would work in close coordination with
the Anganwadi Workers (AWW). ASHAs would also provide immediate and easy access for the
rural population to essential health supplies like Oral Rehydration Solution (ORS), contraceptives,
set often basic drugs, and a health communication kit developed for villages.

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Indian

Economy

PLANNING IN INDIA

Introduction
The philosophy behind economic planning recognizes that markets and price system
alone cannot ensure welfare of the citizens of a state. While individuals are the best judges of
what is good for them, the sum total of such judgement need not be the best option for the
society as a whole. Moreover, areas like infrastructure require large investments without
immediate tangible returns and therefore do not attract private investment. This requires the state
to step in either directly as in the past or through private-public partnership, which is the
principle behind the build-operate-transfer (BOT) type of infrastructure development. Finally,
the government provides for some goods called public goods, such as the quality of environment
and national defences which can be enjoyed by one person without depriving others of similar
enjoyment.
The credit for concertising ideas on national planning goes to Sri M.Visvesvaraya, the
visionary engineer and statesman of Mysore who published his Planned Economy for India in
1934, which was a blue-print for a ten-year programme of planned economic development for
India.
Indian National Congress set up a National Planning Commission as far back as 1938
with Jawaharlal Nehru Chairman. Over the next decade, there were several initiatives. The most
important were:
A Plan for Economic Development in India (1944), popularly known as the Bombay
Plan which gave priority to the development of basic industries, while at the same time
seeking the doubling of agricultural production and of per capita income within a 15
years framework.
The Peoples Plan drafted by Shri M N Roy which had a 10-year period and which
sought to give greatest priority to agriculture. It advocated the nationalization of all
agricultural production and distribution.
The Gandhian Plan drafted by Sriman Narayan emphasized economic decentralization
with primacy to rural development through the development of cottage industries.

Types of Planning

Some of the important types of planning (not mutually exclusive) are described below:
Imperative planning involves centralized planning and implementation as opposed to
indicative planning which only lays down the broad goals, strategies and guidelines for
achieving the goals.
Fixed term plans are drawn up for a particular period (five years in India) whereas a
rolling plan will be more flexible in its targets and allow extension of implementation
period.
Structural planning refers to a strategy, which involves the need to change existing
institutions or creating new ones. On the other had, functional planning seeks to achieve
the objectives within the existing institutional framework (i.e., without changing existing
laws, for instance).

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Apex planning or centralized planning envisages only a central institution while multilevel planning allows for decentralized planning. The Panchayati Raj institutions seek to
strengthen multi-level planning.

A Review of Five Year Plans

First Plan (1951-56)
Highest priority to agriculture, irrigation and power projects
44.6% of total public sector outlay of Rs. 2069 crores (subsequently increased to Rs.
2378 crores) on agriculture, irrigation and power.
Transport and communication received 26.4% and industry only 2.8%
Rate of investment targeted at 7% of national income
National income grew by 18% and per capita income by 11%
Food production went up by 20%
Second Plan (1956-61)
Targeted a 25% increase in national income through rapid industrialization. Actual
achievement was only 20%
Adopted the socialistic pattern of society as the goal
Rate of investment planned to be raised from seven percent to 11% of national income.
National Income increased by almost 20% but per capita income rose only by eight per
cent.
Large industries including steel plants (Durgapur, Bhilai and Rourketa) were set up. The
locomotive factory at Chittaranjan and Coach Factory at Perambur were other major
projects of this period.
Third Plan (1961-66)
Emphasis on basic industries continued but agriculture and allied sectors (irrigation and
power) were allocated 35% of the outlay.
A series of crises China war (1962) Nehrus death (196) marred the smooth
implementation of the plan.
Growth rate of only 2.2% achieved as against a target of 5% per annum
Inflation (36%) ate up much of the achievement; Rupee devaluation (1966)
Annual Plans (1966-69) after the disastrous experience of the Third Plan, a plan holiday was
declared for three years. All available resources were mobilized for building a buffer stock and
for stepping up food production learning from the experience of near-famine years (1965-66).
Favourable monsoon and technological break-through in wheat popularly known as
green revolution reduced the inflationary pressure. Nationalisation of banks was another major
step during this period.
Fourth Plan (1969-74)
Emphasis on growth with distributive justice.
Substantial increases in the outlay for family planning (Rs. 278 crores from Rs. 25 crores
in third plan).
Poor achievement of targets national income grew by 3.3% per annum; per capital
income by 1.2% per annum; agricultural production by 2.8%; industrial production by
3.9%.
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Fifth Plan (1974-79)

Twin objectives of poverty eradication and attainment of self-reliance.
A National Programme for Minimum Needs including elementary education, safe
drinking water health care, shelter for landless, and slum up graduation.
A growth rate of 5.2% (against a target of 4.4%) achieved.
Agricultural production increased by 4.2% - the highest so far
Moderate inflation of 2.1% per annum during he Emergency years (1975-1977)
The Janata Government terminated the Plan in 1978.
Sixth Plan (1980-85)
Janata Government had adopted a Sixth Plan (1978-83), which was conceived as rolling
plan. Mrs. Gandhis Government in 1980 abandoned this and a new sixth plan was
drafted.
Poverty alleviation given the top priority.
Schemes for transferring skills (TRYSEM) and assets (IRDP) and providing slack season
employment (NREP).
Actual growth of national income was higher at 5.3% (against a target of 5.2%)
Increase of 16% per annum in real investment in fixed asset by private sector.
Poverty declined from 48.3% in 1977-78 to 37.4% in 1983-84
Seventh Plan (1985-90)
Strong emphasis on creation of productive employment on farm as well as rural
subsidiary occupations.
Stress on increasing the production of food grains, oilseeds, sugar, textiles, domestic fuel
and housing
Outward-looking strategy with exports receiving high priority.
Tempo of domestic and external liberalization has tened
The plan also had a 15-year perspective (1985-2000) for removal of poverty, providing
for basic needs, achieving universal elementary education and total access to health
facilities.
Average annual growth rate during the plan period was 5.6% (target fiver percent)
Agriculture grew at 4.1% against a target of four percent.
Manufacturing industries achieved a growth rate of 8.8% (target 8%)
There was a severe short fall in the mining sector (5.6% against a target of 13%)
Social sector performance fell far short of targets especially in housing for the landless,
elementary education, and general poverty alleviation.
Eighth Plan (1992-97)
The plan was launched in 1992 after the plan holiday during economically and politically
difficult days of 1990-91 and 91-92.
The acceptance of liberation and the need for market forces to play a greater role.
Employment generation to be speeded up to achieve full employment by 2000
Total literacy to be achieved in the 15-35 age group by covering an additional 110
million people
Restructuring the systems of economic management through public sector reforms,
including selective disinvestment.
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The English Plan was to walk on two legs one leg of alleviating poverty and removing
unemployment and the other leg providing a safety net for those who will be affected
by the structural adjustment programme. The plan had thus built in the human face
element of adjustment.
Ninth Plan (1997-2002)
The development strategy emphasized the role for markets and the need for government
to intervene to ptomote a degree of competition through suitable legislation. Licence Raj
was to be ended. The plan emphasized co-operative federalism. It also stressed the
importance of infrastructural development.
The plan was indicative in nature, focusing on policies. It also provided a 15-year
perspective. It aimed to achieve a growth rate of eight percent per annun in the medium
term and a rate of 6.5percent during the plan period (97-02)

Tenth Plan
Annual 8.1 percent GDP growth during 2002-07
Annual FDI flows of 7.5 billion US dollars
Public sector outlay at Rs. 15,92,300 crore
States and UT outlay at Rs. 6,71,009 crore
Literacy rate to increase to 75 percent by 2007
Maternal mortality Rate to be reduced to 45 in 2007 and 25 by 2012
Reduction in gender gaps in literacy ad wage rates by at least 50 percent by 2007
Cleaning of major polluted river stretches
Reduction in Government dis-savings to -0.5 percent
Increase in tax-GDP ratio to 10.3 percent by 2007

Approach Paper to 11th Plan

Planning Commission recently approved the approach paper to the Eleventh Five Year
Plan beginning in 2007-08. It has clearly set an ambitious target of achieving ten per cent economic
growth by the last year of the plan-that is 2011-12.
Prime Minister Manmohan Singh, who chairs the full planning commission, said that two
areas that require immediate attention were Agriculture and infrastructure. The industry and
services sectors in the country are doing well clocking double-digit growth.
Agriculture sector
It is the agriculture sector, which needs a thrust as the growth rate has virtually stagnated
in the sector. If the GDP growth is to be pushed up by 1-2 per cent, it is the agriculture, which
has to grow by at least 4 per cent annually on a sustained basis.

As over 60 per cent of the population is still dependent on agriculture, it is important that
rural India grows rapidly to ensure growth is all inclusive and that gap between rural and
urban areas, rich and poor are narrowed down.

There has been emphasis on the need for vocational education and skill development to
ensure greater employment.

The current agrarian crisis can be tackled only if the centrality of state intervention was
recognized howsoever inefficient may be.

Food security and stability of essential commodity prices are equally important and the
approach paper seems to have adopted kid-glove approach in dealing with the issue.

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The country would have to move towards single common market for farm produce.

There is also the need to encourage food processing industries and a separate action plan
is needed to boost this sector. Nearly 35-40% of fruits and vegetables produced in the
country go as waste.

Employment Generation
It proposes to create 70 million new work opportunities.
Infrastructure
It proposes to provide electricity connections to all villages and below poverty line household by
2009 and round the clock power by the end of the plan and telephone connectivity to every
village by November 2007 and broadband connectivity to all villages by 2012.
Fiscal Sector
The approach paper estimates that the gross budgetary support for the Plan (Centre and states
combined) would have to increase by 2.5 percentage points of GDP above the Tenth Plan period.
The issue of Fiscal Prudence
The Approach paper has also recognized the difficulties posed by the rigid FRBM (Fiscal
Responsibility and Budget Management) targets to rein-in on fiscal and revenue deficits. It had
even suggested a postponement of the FRBM targets for a period of two years. It has also
suggested that the focus on wiping out revenue deficits by 2009 should be abandoned as a
number of items of expenditure that contribute to human capital formation are listed as revenue
expenditure.
Public Private Partnership
It is for this reason that the Approach Paper advocated an aggressive effort to promote public
private partnership in infrastructure projects due to scarcity of public resources.

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Tenth Plan: Features

The Tenth Plan has a number of new features:
Firstly, the Plan recognises the rapid growth in the labour force over the
next decade.

The Tenth Plan, therefore, aims at creating 50 million job opportunities

during the period, by placing special emphasis on employment intensive
sectors of agriculture, irrigation, agro-forestry, small and medium
enterprises, information and communication technology and other
services.

Secondly, the Plan addresses the issue of poverty and the unacceptably
low levels of social indicators.

Thirdly, Tenth Plan has adopted a differential development strategy. It is

also for the first time that statewise growth and other monitorable targets
have been worked out in consultation with the States.

This Plan is the recognition that Governance is perhaps one of the most
important factors for ensuring that the Plan is realised. The Plan has laid
down a perspective list of reforms in this connection.

Finally, considering the present market-oriented economy, the Tenth Plan

has dwelt at length about the policies that would be necessary and the
design of key institutions.

The Tenth Plan not only includes a carefully crafted medium term macroeconomic policy stance, both for the Centre and the States, but also lays
out the policy and institutional reforms that are required for each sector.

Changing nature of planning

In a federal democracy like ours, the principal task of planning is to evolve shared vision
among not only the federal units but also among other economic agents, so that the
efforts of all the actors become convergent towards the national priorities.

While the growth process can be made the responsibility of the corporate sector to a
greater degree, its direction and distribution are to be steered by planned public
intervention, so that regional imbalances are reduced and socio economic inequities are
set right. For example, directing the growth of the large industry into the backward areas
and technology-intensiveareas to realise national goals.
The nature of instruments available to planners in the implementation has changed. The
planning process has to focus on the need for planning for policy, so that the signals that
are sent to the economic system induce the various agents to grow in a manner that is
consistent with national goals. In particular, investment patterns would be determined by
sectoral policies. For example, phasing in rupee convertibility over almost a decade, so
that the necessary changes and adjustments can be made.
Given the federal nature of the Indian context, the role of planning is to develop a
common policy stance for the Centre and the States. Also, the task of federal policy
coordination is central to Indian planning. For example, the need to invite foreign
investment in infrastructure areas like power need centre-state coordination as the

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necessary legislation and administrative changes involve both.

Lastly, planning at the grass root level, that is participatory, is very crucial for improving
the delivery systems and proper use of resources. The role of the Government is thus to
facilitate participatory planning.

With the change in the role of the State, the function of planning for the development of
the country also is undergoing change, particularly since the commencement of the economic
reforms in 1991 in India. There has been a national debate about the relevance of planning in
the changing context of economic liberalization.
In the new context of the economic reforms, the following changes are evident:

Government only indicates targets and facilitates growth unlike earlier when the
Government directed the process, thus reducing the Governmental role reflected in
the indicative model of planning adopted since the 8th five year plan (1992-97).

The physical control of the Government over the economic process is gradually being
replaced with fiscal controls.

Integration of Indian economy with the global economy as the import controls and tariffs
are being relaxed and reduced; rupee convertibility being brought in phases; FDI is being
invited on liberal terms and so on.

Increasing role for the market and the consequent increase in the role of the private
sector.

The public sector units will be confined to select socially relevant and infrastructure areas
and given greater autonomy in their functioning.

The role of the government will be in the area of creating an enabling milieu.

In the context of such a situation, the planning model needs to be changed to achieve building
of social infrastructure for human development; protection of ecology, regenerating environment
and natural resources; protecting the vulnerable sections; and bringing about balanced regional
growth.

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Monitorable targets for the Tenth Plan and beyond

Reduction of poverty ratio by 5 percentage points by 2007 and by 15

percentage points by 2012;
Decadal Population Growth to reduce from 21.3% in 1991-2001 to
16.2% in 2001-11.
Providing gainful high-quality employment to the addition to the labour
force over the Tenth Plan period;
All children in school by 2003; allchildren to complete 5 years of
schooling by 2007;
Reduction in the decadal rate of population growth between 2001 and
2011 to 16.2percent;
Increase in literacy rate to 75 per cent within the plan period;
Reduction of infant mortality rate (IMR) to 45 per 1000 live births
by 2007 and to 28 by 2012;
Reduction of maternal mortality ratio (MMR) to 2 per 1000 live
births by 2007 and to 1 by 2012;
Increase in forest and tree cover to 25per cent by 2007 and 33 per cent
by 2012;
All villages to have sustained access to potable drinking water within
the Plan period; and Cleaning of major polluted rivers by 2007 and
other notified stretches by 2012.

The planning exercises are necessary as the problem of the market driven economy is
that it caters to the short term needs; well-off sections;more developed regions and its sensitivity
to the macro problems requiring a national effort is minimal.
Further, planning is necessary for the sectors like energy, communications, transport and
so on as private sector needs to be guided into the national plan.
More, in the context of federal finance, the planning exercise continues to be relevant, as the
resources need to be shared, augmented and sourced well.
It is further observed, that the liberalization process is presently showing trends of
bypassing the weaker states and (he need of planning process is to even the process of growth
so that regional economic imbalances do not result from the market-driven growth.
The allocation of resources for various sections of the society equitably is another
important function of planning which assumes greater importance, as monopolies and
oligopolies are an intrinsic part of market economies.
In the era of globalisation where corporates are not expected to plan beyond the growth
of a particular unit, the role of safeguarding national interests is that of planning by the State.
For example, being subjected to various discriminative trade practices by EU, USA and so on,
the Indianexporters have to fight sophisticated battles in the WTO for which, the legal services
and information and building up bargaining power are best provided by the State.

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AGRICULTURE

India ranks second worldwide in farmoutput. Agriculture and allied sectors like forestry,
logging and fishingaccounted for 20% of the GDP in 2005, employed 60% of the total workforce
and despite a steady decline of its share in the GDP, is still the largest economic sector and plays
a significant role in the overall socio-economic development of India. Yields per unit area of all
crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year
plans and steady improvements in irrigation, technology, application of modern agricultural
practices and provision of agricultural credit and subsidies since the green revolution. However,
international comparisons reveal that the average yield in India is generally 30% to 50% of the
highest average yield in the world. According to the advanced estimates the growth of
agriculture sector during 2006-07 was 2.7%. A moderate annual average growth of 3.0% in the
first six years of the new millennium starting 2001-02, notwithstanding a growth of 10% in
2003-04 and 6 per cent in 2005- 06, agriculture and allied sector has continued to be a cause of
concern. The structural weaknesses of the agriculture sector reflected in low level of public
investment, exhaustion of the yield potential of new high yielding varieties of wheat and rice,
unbalanced fertilizer use, low seeds replacement rate, an inadequate incentive system and post
harvest value addition were manifest in the lacklustre agricultural growth during the new
millennium. 8.6 Low yield per unit area across almost all crops has become a regular feature of
Indian agriculture
National Agriculture Policy 2000
The first ever National Agriculture Policy was announced on 28 July, 2000. Over the next
two decades, it aims to attain:

Growth that is based on efficient use of resources and conserve our soil, water and
biodiversity.
Agricultural growth that is sustainable
technologically, environmentally and
economically.
The use of biotechnology will be promoted for evolving plants which consume less
water, are drought resistant, pest resistant, contain more nutrition, give higher yields and
are environmentally safe.
Balanced and conjunctive use of biomass, organic and inorganic fertilisers and controlled
use of agrochemicals through INM and IPM will be promoted.
A major thrust will be given to diversifying agriculture through Integrated Farming.
Rational utilisation and conservation of the countrys abundant water resources will be
promoted through Integrated Water Management practices.
Agroforestry will receive a major National Rainfed Area Authority Government has
decided to set up a thrust for efficient nutrient cycling, nitrogen fixation, organic matter
addition and for improving drainage.
Concerted efforts will be made to promote traditional practices, knowledge and wisdom
to harness them for sustainable agricultural growth.
The increases in the Minimum Support Price (MSP) for wheat and rice in recent years are

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such that they have begun to have inflationary effect.

As the MSP is increased, partly under the influence of the big farm lobby, the open
market prices also move up.
Inflation results, CIP are hiked and the poor are hurt.

Since the small farmers do not have the surpluses, only the big farmers benefit and that too
from the advanced states like Punjab, Mariana and western UP.
The
most
embarrassing consequence of MSP rising irrationally is the bulging food
stocks to levels almost double of what is prescribed as the minimum norm for food security i.e.
more than 40 mt.
Recent initiatives
National Rainfed Area Authority Government has decided to set up a National Rainfed
Area Authority to address the problems of rainfed areas for sustainable and holistic
development of such areas including appropriate farming and livelihood system approaches.
Micro-irrigation
A Centrally Sponsored Scheme on micro-irrigation was launched in January, 2006 for
covering a total area of 6.2 lakh ha. The scheme aims to achieve greater water use efficiency to
result in enhanced productivity and better quality of produce.
National Bamboo Mission
Department of Agriculture and Cooperation has launched the National Bamboo Mission with
100 per cent central assistance at a total cost of Rs.568.23 crore, including an outlay of Rs.90
crore during 2006-07 (Tenth Plan) and the first four years of the Eleventh Plan.
Livestock Insurance
Livestock Insurance Scheme was approved in February 2006 for its implementation
during the remaining part of 2005-06, and in 2006-07 on a pilot basis in 100 selected districts
across the country with a total outlay of Rs. 120 crore. The scheme aims at protecting the farmers
against losses due to un-timely death of animals. National Fisheries Development Board has
been set up to realize the untapped potential of fishery sector with the application of modern
tools of research and development including biotechnology. The Board was registered in July,
2006.
National Commission on Farmers
The National Commission on Farmers (NCF) chaired by Dr. M.S. Swaminathan
submitted five Reports between December 2005 and October, 2006. Key recommendations of
the Commission are incorporated in the Revised Draft National Policy for Farmers. These
include: asset reforms covering land, water, livestock and bio resources; farmer-friendly
support services covering extension, training and knowledge, connectivity, credit and insurance;
assured and remunerative marketing; inputs and delivery services; and curriculum reforms in the
agriculture universities. Other major initiatives recommended include bringing Agriculture in the
Concurrent List of the Constitution; setting up of a National Food Security and Sovereignty
Board; universalization of Public Distribution System (PDS); setting up of an Indian Trade
Organization; making the Commission on Agriculture Cost and Prices into an autonomous
statutory organization with MSP at least 50 per cent more than the cost of production, and launch
of a Rural Non- farm Livelihood Initiative (RNFLI). RNFLI when implemented would be able to
absorb higher number of people dependent on agriculture.
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Rehabilitation Package for distressed farmers

A special relief package for farmers was announced for 31 districts in Andhra Pradesh,
Maharashtra^ Karnataka and
Kerala where there was high incidence of farmers suicides. As regards credit, the package
envisages: (a) waiving of interest on overdue loans as on July 1, 2006 so that farmers have no
past burden. This would make them eligible for fresh loan from the banking system. (b) The
overdue loans of the farmers as on July 1, 2006 will be rescheduled over a period of 35 years
with a one year moratorium, A credit flow of Rs. 21,422 crore will be ensured in these 31
districts in 2006-07.
Rainfall Insurance Scheme-"Varsha Bima"
AICIL introduced Rainfall Insurance Scheme known as Varsha Bima during 2004
south-west monsoon period. Varsha Bima provided for five different options suiting varied
requirements of fanning community: (i) seasonal rainfall insurance based on aggregated rainfall
from June to September, (ii) sowing failure insurance based on rainfall between June 15 and
August 15, (iii) rainfall distribution insurance with the weight assigned to different weeks
between June and September, (iv) agronomic index constructed on the basis of water
requirements of crops, (v) a catastrophe option covering extremely adverse deviation of 50 per
cent and above in rainfall during the season. During kharif 2006, the scheme is being
implemented as Varsha Bima-2006 in and around 150 districts/rain gauge station areas covering
16 states across the country.
Capital Formation in Indian Agriculture
The share of the agricultural sectors capital formation in GDP declined from 2.2 per cent
in the late 1990s to 1.9 per cent in 2005-06 (Table 8.19). This disturbing decline was partly due
to the stagnation or fall in public investment in irrigation, particularly since the mid-1990s.
However, there is indication of a reversal of this trend with public sector investment in
agriculture accelerating since 2002-03.
Agricultural Marketing
Ministry of Agriculture had formulated a model law on agricultural marketing in
consultation
with
State/UT Governments to bring about marketing reforms in line with
emerging trends. This model Act enables establishment of private markets/yards, direct purchase
centres, consumers/farmers markets for direct sale, and promotion of public-private-partnership
(PPP) in the management and development of agricultural markets in the country. It also
provides for exclusive markets for onions, fruits, vegetables and flowers.
Regulation and promotion of contract farming arrangement has also been made a part of this
legislation. A provision has also been made for constitution of State Agricultural Produce
Standards Bureau for promotion of grading, standardization and quality certification of
agricultural produce.
Towards another Big Push to Agriculture- Second Green Revolution
The urgent need for taking agriculture to a higher trajectory of 4 per cent annual growth
can be met only with improvement in the scale as well as quality of agricultural reforms
undertaken by various States and agencies at various levels. These reforms must aim at efficient
use of resources and conservation of soil, water and ecology on a sustainable basis, and in a
holistic framework. Such a holistic framework must incorporate financing of rural infrastructure
such as water, roads and power.

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The Approach Paper to the Eleventh Five Year Plan has aptly highlighted such a holistic
framework and suggested the following strategy to raise agricultural output: (a) doubling the rate
of growth of irrigated area; (b) improving water management, rain water harvesting and
watershed development; reclaiming degraded land and focusing on soil quality; (d) bridging
the knowledge gap through effective extension; (e) diversifying into high value outputs, fruits,
vegetables, flowers, herbs and spices, medicinal plants, bamboo, bio-diesel, but with adequate
measures to ensure food security: (f) promoting animal husbandry and fishery; (g) providing
easy access to credit at affordable rates; (g) improving the incentive structure and functioning
of markets; and (h) refocusing on land reforms issues. National Commission on Farmers has
already laid the foundation for such a framework. Programme formulation as well as their
implementation in the States must be based on unique regional contexts incorporating agroclimatic conditions; and availability of appropriate research and development (R&D) backed by
timely and adequate extension and finance.
Vishesh Krishi Upaj Yojana
The objective of the scheme is to promote export of fruits, vegetables,
flowers, minor forest produce, and their value added products, by
incentivising exporters of such products.
Entitlement: Exporters of such products shall be entitled for duty
credit scrip equivalent to 5% of the FOB value of exports for each
licencing year commencing from April 1, 2004. The scrip and the
items imported against it would be freely transferable.
Imports allowed: Duty credit may be used for import of inputs or
goods including capital goods, as may be notified, provided the same
is freely importable under ITC (HS). Imports from a port other than
the port of export shall be allowed under TRA (Telegraphic Release
Advice) facility as per the terms and conditions of the notification
issued by Department of Revenue.
Cenvat/Drawback: Additional customs duty/excise duty paid in cash
or through debit under Visheh Krishi Upaj Yojana shall be adjusted as
CENVAT Credit or Duty Drawback as per rules framed by the
Department Revenue.
National Agricultural Insurance Scheme (NAIS)
NA1S was introduced from Rabi 1999-2000 seasons, replacing the Comprehensive Crop
Insurance Scheme (CCIS) which was in operation since 1985.
It envisages coverage of all the food crops.
Among the commercial/horticultural crops, eleven crops viz. sugarcane, potato, cotton,
ginger, onion, turmeric, chillies, pineapple, banana, jute and tapioca are currently covered under
the scheme.
The premium rates are 3.5 per cent (of sum insured) for bajra and oilseeds, 2.5 per cent
for other Kharif crops, 1.5 per cent for wheat, and 2 per cent for other Rabi crops or actual rates
whichever is less. In the case of commercial/ horticultural crops, actual rates are being charged.
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Small and marginal farmers are entitled to a subsidy of 50% of the premium charged from them,
which will be shared on 50:50 basis by the Central and State governments. The premium subsidy
will be phased out over a period of 5 years.
The scheme is operating on the basis ofArea Approach, i.e. defined areas for each
notified crops for widespread calamities, and on an individual basis for localized calamities
such as hailstorm.
Kisan Credit Card Scheme
The Kinas Credit Card Scheme, introduced in 1998-99, as an innovative scheme to facilitate access
to short term credit by farmers.
This Scheme gained popularity and its implementation has been taken up by 27 commercial banks,
378 District Central Cooperative Banks/State
Cooperative Banks and 196 Regional Rural Banks throughout the country.
The number of cards issued and the amount sanctioned under the scheme
Has increased in each successive year since its inception to reach a total of over 435.6 lakh cards.

INFLATION
Inflation is a state in which the prices of goods and services rise on the one hand and
value of money falls on the other.
Inflation is of two types:
1. Demand Pull Inflation: Demand Pull inflation is that inflation when rices rise due to higher
Demand for goods and services over the available supply. In other words, demand pull
Inflation takes place when increase in production lags behind the increase in money supply.
2. Cost Push Inflation: It is another type of inflation in which prices rise due to increased input
Costs.
Deflation: Deflation is that state in which the prices of goods and services fall and the value of
money rises.
Current Scenario
The Wholesale Price Index (WPI), available weekly and going back the longest,
continues to be the most popular measure for monitoring inflation. Higher food prices pushed the
wholesale price index (WPI) inflation to 4.41 % for the week ended 14 July 2007, up from
4.27%... the previous week.
Inflation was 4.62% in the corresponding week last year.
The inflation numbers are still within the five per cent annual target of the Reserve Bank,
which is due to review the monetary policy on July 31. Among the primary articles, prices of
vegetables rose sharply by 7% during the week, while those of cereals rose by 0.9%.
Among the primary articles, prices of vegetables rose sharply by 7% during the week,
while those of cereals rose by 0.9%. Among manufactured products, rates of rice and bran oil
rose by 3% each, while imported edible oil, groundnut oil, cotton seed oil and oil cakes became
costlier by one percentage point.
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In the current year, increase in prices of wheat, pulses, edible oils, fruits and
vegetables, and condiments and spices have been the major contributor to the higher inflation
rate of primary articles. Shortfall in domestic production vis-a-vis domestic demand and
hardening international prices were the major causes for the increase in prices of these
commodities.

Recent Anti-Inflationary Measures

The anti-inflationary policies of Government include strict fiscal and monetary discipline;
rationalization of excise and import duties of essential commodities to lighten the burden on the
poor; effective supply-demand management of sensitive items through liberal tariff and trade
policies; and strengthening the public distribution system. The RBI has adopted a policy of
monetary tightening, raising the cash reserve ratio (CRR) the share of deposits that banks
park as cash with the central bank and the short-term inter-bank lending (repo) rate lo contain
inflation. While the repo rate was hiked by 0.25 percentage points to 7.75 per cent in March, the
CRR has been raised by 0.50 per cent in two stages this year. During 2006-07, the Government
initiated a slew of measures to contain the price rise of primary commodities:

State Trading Corporation tendered overseas for import of 55 lakh tones of wheat to
supplement domestic
availability.
Permission was given to private trade to import wheat first at 5% duty from June 27,
2006 and then at zero duty from September 9, 2006 as against the normal applicable duty
of 50%.
Import of pulses was permitted at zero duty from June 8, 2006 and a ban on export of
pulses was made with effect from June 22, 2006.
Close monitoring of prices of each and every essential item on a weekly basis was put in
place.
Regulatory measures were initiated by the Forward Markets Commission (FMC) to
contain volatility in the futures prices of wheat, sugar and pulses and ban on futures
trading in some pulses was imposed to reduce speculative pressures.
Reduction in duty on palm group of oils by 20-22.5 percentage points was effected in two
phases, first in August 2006 and later in January 2007. Further, tariff values of these oils
were frozen at levels prevailing in July 2006, thus reducing to that extent the impact of
increase in international prices.
On January 22, 2007, further duty cuts were announced for Portland cement, various
metals and machinery items.

INDUSTRY
India ranks fourteenth worldwide in factory output. Concerted efforts at industrialisation
by the government, aiming at self-sufficiency in production and protection from foreign
competition, for nearly four decades since independence, have encouraged a diverse (though
small) industrial base. They together account for 28.4% of the GDP and employ 17% of the total
workforce. Economic reforms brought foreign competition, led to privatization of certain public
sector industries, opened up sectors hitherto reserved for the public sector and led to an
expansion in the production of fast-moving Consumer goods.
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Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old
family firms and required political connections to prosper was faced with foreign competition,
including the threat of cheaper Chinese imports. It has since handled the change by squeezing
costs, revamping management, focusing on designing new products and relying on low labour
costs and technology.
Highlights of CPSE performance in 2005-06
The share of CPSEs in GDP at market prices stood at 11.12 per
cent in 2005-06 and 11.68 per cent in 2004-05.
The cumulative investment of all CPSEs at end-March, 2006 was
Rs.3, 93,057 crore. The share of manufacturing CPSEs in such
investment was the highest at 51 per cent followed by service
CPSEs at 40 per cent, mining CPSEs at 7 per cent.
The overall growth in turnover of CPSEs was 11.86 per cent. The
growth in the turnover of 'heavy engineering and construction
services group was the highest at 39 per cent during the year.
In terms of capacity utilization, 51 percent of all CPSEs operated
at 75 percent or higher; 16 per cent at 50- 75 per cent, and the
residual 33 per cent at less than 50 per cent.
The accumulated losses of all CPSEs declined by Rs. 10,578 crore
from Rs.83, 725 crore in 2004-05 to Rs.73,147 crore.
44 CPSEs are listed on the domestic stock exchanges. While the
shares of MTNL (ADR) are listed on the New York Stock
Exchange, the shares of GAIL and SAIL are listed on the London
Stock Exchange,
At end-March, 2006, the 239 CPSEs employed over 16.49 lakh
people excluding casual workers. The comparable figures in the
previous four years were 19.92 lakh, 18.66 lakh, 17.62 lakh, 17.00
lakh, respectively.

Public Sector
Since the beginning of the planned process of economic development after Independence, public
sector played a pre-eminent role in India. Commanding heights of the economy were to be in the
hands of the public sectorbasically infrastructure areas like transport, communications, energy,
steel and fertilizers.
Objectives of the PSUs
establish sound economic infrastructure
set up industries in the backward regions and thus help bring about balanced regional
development
assist in ancillarization and thus the spread of the benefits of industrialization
create sufficient levels of employment and set standards in labour welfare
build a self-reliant economy
earn ingestible resources for development
prevent/reduce concentration of private economic power
selling goods and services at reasonable prices so as to serve consumer, keep low
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inflation and help non-inflationary growth process

Invest in areas where the private sector would not and could not like in roads, transport
and so on.

Performance
In the last 50 years of economic development, the public sector indeed lived upto the
expectations as can be seen below:
around 240 Central PSUs today (excluding some insurance, finance and other companies)
provide the country with infrastructure in steel, cement, transport, communications,
power and so on
the record of the PSUs in supplying many goods and services like coal, drugs, transport,
power, irrigation and so on is commendable though an element of subsidy is involved in
the effort
The PSUs are a model employer providing various facilities like education, housing and
etc.
By establishing industries in the poor states like MP, Rajasthan, Bihar and others, the
efforts of the PSUs to reduce regional economic imbalances are not insignificant.
Problem Areas
The problems with the PSUs in general are:
lack of sufficient autonomy due to the fact of excessive government control which is
unavoidable because the resources spent are public resources
The technology is obsolete due to meager or no expenditure on modernization, which is
explained by the loss making nature of the units. For example, the State Electricity
Boards(SEBs)
the managerial efficiency is low as there is no incentive for higher efficiency partly
because it is not rewarded and also because the financial package is unattractive
the tenure of the chief executive is uncertain and leaves little scope for
commitment and dynamism
the locational disadvantages are such that some plants need to work at 125% capacity to
break even, for example, some of the cement plants in central India belonging to the CCI
the labour strength is in excess and the wage bill is very high
In some cases the project appraisal is incomplete, for instance, in the case of Surgical
Instruments Ltd (Chennai) where the technological tie-up with Russia made instruments
suitable for an average Russian, with physical proportions much larger than an Indian.

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Professionalisation of PSU Boards

In order to ensure and encourage efficiency in their
functioning, Government has taken various steps to
professionalise the Boards of CPSEs. These include provision of
outside professionals in the form of part-time non- official
Directors, restricting the number of Government nominated
Directors to one sixth of the actual strength of the Board subject
to a maximum of two, and incorporation of functional Directors
upto a limit of 50 per cent of the actual strength of the Board. On
the recommendations of Arjun Sen Gupta Committee, the
Government, during 1987-88, introduced the concept of
Memorandum of Understanding (MoU) to ensure clarity in the
functioning of CPSEs, and proper
Balance between accountability and autonomy for better results.
The number of CPSEs signing MoUs went up from 4 in
1987-88 to 112 in 2006-07. In order to further the competitive
spirit, an attempt has also been made to evaluate the performance
of the CPSEs on the basis of (a) sales, (b) growth of sales, (c) net
profit, (d) growth in net profit, (e) return on net worth, (f) earning
Per share, and (g) dividend pay-out ratio.

Reforms
With the onset of economic reforms in 1991, systemic reforms are being made to make the
functioning of the PSUs better. They are:

the 1991 New Industrial Policy (NIP) dereserved many areas kepi for the PSUs earlier
and today only 6 areas
Stand reserved
the NIP 1991 made it possible to disinvest a portion of the PSU equity for a variety of
purposes
the NIP 1991 facilitated changes in the SICA to enable the sick PSUs to be referred to
the,BIFR for revival or closure
the budgetary support for the PSUs is progressively declining
the liberal import of capital goods and others compels the PSUs in the manufacturing
sector to perform or perish
the MoU system is being improved with more than 60% of the weightage being given to
the criterion of financial performance
Efforts are on to privatise some of the sick units.
Navaratnas that is 9 PSUs were granted financial and managerial autonomy
for
global competitiveness. Recently 3 more PSUs (Bharat Electronics, Hindustan
Aeronautics, and Power Finance Corporation) were granted navaratna status.
97 mini-ratnas were taken up for similar reform
696 guidelines for the PSUs that have outlived their purpose were dropped.

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Strategic Sale
It involves selling 51 % or more of the equity to a
strategic partnerdomestic or global, so as to restructure the
management towards private management control, In some
cases, the government stake holding is completely liquidated,
While in most others it is reduced to 26%.
The Disinvestment Commission
Believed that 26% stake of the Government is the minimum for
the protection of national interest and to stall shareholders
resolution, according to the Companies Act.
Advantages:
the sale of equity is independent of the state of the
capital market, as the
strengths of the unit along with its potential matter more
FDI does not bring finances for the Government while
strategic sale will
it will vastly improve the market sentiment by attracting
FIIs
Strong signals will be sent to the foreign investor that
India is serious about PSU reforms and consequently,
FDI will flow to a greater extent.
Another modality to divest the Government stake to
49% is being mooted
In order to take precautions to ensure that the reforms do not lead to workers problems,
the National Renewal Fund (NRF) was sanctioned in the 1991-92 budgets and is being continued
since.
Small Scale Industries
An Expert Committee headed by Abid Hussain was set up to review the status of the
small enterprise and government policy. It submitted its report on January 27, 1997. Some of the
major issues which had an impact on small scale industries can be summarized as follows:
Definition of SSI
The definition of SSls has been changing continuously. Initially, values of fixed capital
and number of employees were combined in defining SSls. Fixed assets were fixed at half a
million rupees in 1955 and number of employees at 50, if the unit used power and 100 without
use of power. Then, the employee value was removed and the definition was based on fixed
assets alone. Now, it has been fixed at Rs 6 million for SSIs and Rs 7.5 million for ancillary
units.

Salient Features of the Micro, Small and Meidum

Enterprises Development Act, 2009.
It provides the first-ever legal framework for recognition of the concept of "enterprise"
(comprising both manufacturing and services) and integrating the three tiers of these
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enterprises, viz, micro, small and medium. Under the Act, enterprises have been categorized
broadly into those engaged in (i) manufacturing and (ii) providing/ rendering of services. Both
categories have been further classified into micro, small and medium enterprises, based on their
investment in plant and machinery (for manufacturing enterprises) or in equipment (in case of
enterprises providing or rendering services) as under:
Manufacturing Enterprises
Micro Enterprises investment up to Rs. 25 lakh.Small Enterprises-investment above Rs.
25 lakh and up to Rs. 5 crore.Medium Enterprises investment above Rs. 5 crore and up to Rs.
10 crore.
Service Enterprises:
Micro Enterprises - investment up to Rs. 10 lakhSmall Enterprises - investment
above Rs. 10lakh and up to Rs. 2 crore.Medium Enterprises - investment above Rs. 2 crore and
up to Rs. 5 crore.
The Act provides for a statutory consultative mechanism at the national level with wide
representation of all sections of stakeholders, particularly the three classes of enterprises, and
with a wide range of advisory functions, and an Advisory Committee to assist the Board and the
Centre/State Governments.
The other features include
i) Establishment of specific Funds for the promotion, development and enhancement of
competitiveness of these enterprises,
ii) Notification of schemes/programmes for this purpose,
iii) Progressive credit policies and practices,
iv) Preference in Government procurements to products and sevices of the micro and small
enterprises,
v) More effective mechanisms for mitigating the problems of delayed payments to micro and
small enterprises and
vi) Simplification of the process of closure of business by all three categories of enterprises.
Objectives of divestment
The objectives of divestment do not refer to the process as a means of improving
financial performance of the enterprises.
The primary objectives were
To raise resources for the budget which are essentially non-inflationary in nature?
Broad-base the ownership of the enterprises which would eventually allow the enterprises
to raise resources from the capital market and thereby lower their dependence on
budgetary support.
However, to increase efficiency, productivity and competitiveness of the sector, a number of
other measures were introduced. These were policies which have focussed on

Creating internal competition by eliminating entry barriers, subsidies, price distortions

and preferential access to budget and bank resources;
Improving the management of public enterprises by increasing autonomy and the
mandate to become profit-oriented centres; and
Introducing restructuring policies and establishing a social safety.

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The Government policy on disinvestment has evolved over the last decade and has been
generally announced through the Budget. Disinvestment of Government equity in CPSEs began
in 1991 - 92. Till 1999- 2000, disinvestment was primarily through sale of minority shares in
small lots. Between 1999-2000 and 2003-04, the emphasis of disinvestment changed in
favour of strategic sale. The proceeds from disinvestment from April 1991 to March 2006
amounted to Rs. 49,241.29 crore. At present, the policy is to list large, profitable CPSEs on
domestic stock exchanges.
The National Common Mimimum Programme (NCMP) stipulates a strong and effective
public sector whose social objectives are met without prejudice to its commercial functioning.
Efforts are being made to modernize and restructure sick CPSEs and revive sick industry. Only
the chronically lossmaking CPSEs are being considered for closure or sell-off after payment of
due compensation to the laid-off employees.
Major Policy initiatives for FDI
A comprehensive review of the FDI policy was undertaken last year to consolidate the
liberalization already effected and further rationalize the FDI policy governing various activities.
The major policy intiatives taken are:

Change of route: FDI has been allowed p to 100 per cent under the automatic route for distillation
and brewing of potable alcohol, manufacture of industrial explosives, manufacture of hazardous
chemicals, setting up of Greenfield airport projects, lying of natural gas/LNG pipelines etc.
Increase in equity caps: FDI caps have been increased to 100 per cent and automatic route
extended to coal and lignite mining for private consumption, setting up of infrastructure relating to
marketing in petroleum and natural gas etc.
FDI in new activites: FDI has been allowed up to 100 per cent on the automatic route in power
trading and processing and warehousing of coffee and rubber. FDI has also been allowed p to 51%
for single brand product entailing which requires prior approval f Government. Specific guidelines
have been issued for governing FDI for single brand product retailing.
Removal of restrictive conditions: mandatory divestment conditions for Business to Business ecommerce have been dispensed with.
Procedural simplification: The transfer of shares from resident to non-resident including
acquisition of shares in an existing company has been placed on the automatic route subject to
sectoral policy on FDI.
In order to boost production of cash crops through infusion of foreign funds and technical
know how, agriculture & plantations was removed from the list of prohibited sectors for FDI.

Special Economic Zone (SEZ)

SEZs have been established in many countries as testing grounds for implementation of
liberal market economy principles. They are viewed as instruments to enhance the acceptability and
credibility of transformation policies, to attract domestic and foreign investment, and generally, for
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the opening up of the economy. With its genesis in the Export Processing Zones (EPZ), the SEZs in
India seek to promote value addition component in exports.
Generate employment and mobilize foreign exchange. EPZs and SEZs were employed with
considerable success by China and other ASEAN countries in the 1970s and 1980s to create regional
islands, where export-oriented manufacturing could be undertaken. In India, the EPZ experiment
was much less of an unequivocal success; and since 1965, when the first EPZ in Kandla was set up.
A total of only 11 such zones have come into existence. The Exim Policy of 1997-2002 then
introduced the more comprehensive and liberal SEZ concept, after which a bill was drafted and
passsed by Parliament in the form of the
SEZ Act, 2005.

SEZ Act 2005

Objectives
to provide for a stable and long-term fiscal policy framework with minimum regulatory
intervention for such zones
to attract investment, both domestic and foreign
to ensure employment generation through encouraging export activities t
There would be no violation of labour laws in the SEZs.
It also provides for a single-window clearance mechanism for the establishment of SEZs.
The objective of SEZs includes making available goods and services free of taxes and
duties, bolstered
by integrated infrastructure for export production and a package of
incentives to attract foreign and domestic investments for promoting export- led growth.

Provisions
It empowers the Union Government to specify an officer or agency for carrying out
surveys or inspections to verify or ensure compliance with the provisions of the Central
Act by a developer or an entrepreneur.
The Act provides that SEZs could also take the form of port, airport, inland container
depot, land station and land customs stations, as the case may be, under Section 7 of the
Customs Act.
The Act approves the setting up of an International Financial Services Centre in a SEZ.
The Act provides for tax concession for 15 years in respect of newly established SEZ
units that begin to manufacture or produce articles or provide services during the
previous year relevant to any assessment year commencing on or after April 1, 2006.
under this dispensation, units would be eligible for 100 per cent tax exemption for 5
years, 50 per cent for the next five years and 50 per cent of the ploughed back export
profits for the next five years (in all 15 years).
Indian SEZs to be based on India- specific model instead of adopting the model
followed by any other country.
Apprehensions against SEZ
Some of the apprehensions against the SEZs are
a) Generation of little new activities as there may be relocation of industries to take
Advantage of tax concessions,
b) Revenue loss,
c) Large-scale land acquisition by the developers which may lead to displacement of
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e)
f)

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farmers with eager compensation,

acquisition of prime agricultural land having serious implications for food security,
Misuse of land by the developers for real estate and
Uneven growth aggravating regional inequalities.

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