SYBCom Business Economics Semester IV 2014

Dr Ranga Sai

SYBCom Semester IV Business Economics ( wef June 013

SY BCom – Semester IV Business Economics Paper II (Recent Issues of Indian Economy)

Module I ‐‐‐‐Basic Issues in Economic Development New Economic Policy 1991: Rationale and Key, Policy Changes – Trends in National Income and Per Capita Income – Sectoral Composition of National Income and Occupational Structure –Inclusive Growth – Progress of Human Development Index in India ( post 1991 ) –Health, Gender Related Development and Economic Indicators – Government Policy w.r.t. Education and Health – Recent Trends in Employment – Problems of Unemployment

Module II ‐‐‐‐ Agricultural Sector in India Trends in Agricultural Production and Productivity – New Agricultural Policy 2000 and Recent Policy Measures – Public Distribution System and Food Security – WTO and Indian Agriculture

Module III ‐‐‐‐ Industry and Service Sectors in India Industrial Development Since 1991: Growth and Diversification – MRTP and Competition Act –Comprehensive Policy Package for SSI’s 2000 and Recent Policy Measures – Service sector: Growth and Performance since 1991.

Module IV ‐‐‐‐Banking and Monetary Policy Since 1991 Banking Sector Reforms since 1991: Rationale and Measures – Structure of Banking in India – Performance of Commercial Banks –Developmental and Promotional Functions of RBI – RBI’s Recent Measures of Money Supply – Inflation: Trends and Causes – Recent Changes in Monetary Policy in India

Business Economics Paper Business Economics Paper Business Economics Paper Business Economics Paper IIIIIIII Revised Revised Revised Revised October 2014October 2014October 2014October 2014

S.Y.B.Com. Lecture Notes

Dr. Ranga Sai Vaze College, Mumbai

Semester IV

October 2014

Dr Ranga Sai


SYBCom : Business Economics Paper II Semester IV

Based on the syllabus prescribed by University o Mumbai

[With effect from June 2013]

Module I : Basic Issues in Economic Development

New Economic Policy 1991: Rationale and Key, Policy Changes – Trends in National Income and Per Capita Income – Sectoral Composition of National Income and Occupational Structure –Inclusive Growth – Progress of Human Development Index in India ( post 1991 ) –Health, Gender Related Development and Economic Indicators – Government Policy w.r.t. Education and Health – Recent Trends in Employment – Problems of Unemployment Module II : Agriculture, Industry and Service Sectors

Trends in Agricultural Production and Productivity – New Agricultural Policy 2000 and Recent Policy Measures – Public Distribution System and Food Security – WTO and Indian Agriculture Module III :Industry and Service Sectors in India

Industrial Development Since 1991: Growth and Diversification – MRTP and Competition Act –Comprehensive Policy Package for SSI’s 2000 and Recent Policy Measures – Service sector: Growth and Performance since 1991.

Module IV : Banking and Monetary Policy Since 1991

Banking sector reforms since 1991: Rational and measures – Structure of Banking in India – performance of commercial banks since 1991 – Promotional and Developmental functions of RBI, RBI’s recent measures of Money supply-Trends and Causes of Inflation since 1991 – Recent changes in monetary policy in India.

For private circulation only Available at www.rangasai.com

Dr Ranga Sai


Contents

Module I :Basic Issues in Economic Development New Economic Policy 1991 Trends in National Income and Per Capita Income Sectoral Composition of National Income and Occupational Structure Inclusive Growth Progress of Human Development Index in India Human Development and Health, Human Development and education Gender Related Development and Economic Indicators Recent Trends in Employment Problems of Unemployment

Module II : Agriculture

Significance of Agriculture Trends in Agricultural Production and Productivity New Agricultural Policy 2000 and Recent Policy Measures Public Distribution System Food Security WTO and Indian Agriculture

Module III : Industry and Service Sectors in India

Industrial Development Since 1991 MRTP and Competition Act Small and m,edium industries: Policy Package for SSI’s 2000 Service sector: Growth and Performance since 1991.

Module IV : Banking and Monetary Policy Since 1991 Banking sector reforms since 1991 Structure of Banking in India – performance since 1991 Reserve Bank of India – Promotional and Developmental functions RBI’s recent measures of Money supply Trends and Causes of Inflation since 1991 Recent changes in monetary policy in India.

Dr Ranga Sai


Dear Student friends… During these days of commercialization it becomes very difficult to find information on web which is relevant, authentic as well as free. We believe that knowledge should be free and accessible to all those who need. With this intention the notes, which are originally intended for the students of Vaze College, Mumbai, are made available to all, without any restrictions. These notes will be useful to all the S.Y.B.Com students of University of Mumbai, who will be writing their Business Economics Paper III examinations on or after March 2014. Distance Education students are advised to refer the recommended syllabus. This is neither a text book nor an original work of research. It is simple reading material, complied to help the students readily understand the subject and write the examinations. We no way intend to replace text books or any reference material. This is purely for academic purposes and do not have any commercial value. Feel free to use and share. We solicit your opinions and suggestions on this endeavor.

Dr. Prof. Ranga Sai [email protected] October 2014

Dr Ranga Sai


Module I Basic Issues in Economic Development

New Economic Policy 1991: Rationale and Key, Policy Changes – Trends in National Income and Per Capita Income – Sectoral Composition of National Income and Occupational Structure –Inclusive Growth – Progress of Human Development Index in India ( post 1991 ) –Health, Gender Related Development and Economic Indicators – Government Policy w.r.t. Education and Health – Recent Trends in Employment – Problems of Unemployment

New Economic Policy of 1991

The Indian Government has introduced many Economic Reforms in India since 1991. In 1990-91 India had to face grave economic problem. India was facing serious deficiency in her foreign trade balance and it was increasing. Since 1987-88 till 1990-91 it was increasing in such a rapid scale that by the end of 1990-91 the amount of this deficit balance became 10,644 crores of rupees. Need for A major Policy change

1. Economic instability – monetary deficit reached 8.4percent of GDP. Current account deficit $9.9 billion

2. Unfavorable balance of payments- trade share decreased to 0.4percent in 1991 from 2percent in 1951

3. Petroleum crisis – Gulf war – foreign remittances decreased, petroleum prices increased $34

4. Shortage of forex reserves - $1 Billion 5. Debt burden : 1990-91 it was 62.5percent of GDP 6. Scanty industrial growth 1950-80 growth rate was 3.5 percent 7. Fall in economic growth 2.6percent 8. Inflation : 11.2 percent in 1991 9. Wave of liberalization Germany, EC, China 10. Collapse of Soviet union

The main characteristics of new Economic Policy 1991 are:

a. Delicencing. Only six industries were kept under licensing scheme.

b. Entry to Private Sector. The role of public sector was limited only to four industries; rest all the industries were opened for private sector also.

c. Disinvestment. Disinvestment was carried out in many public sector enterprises.

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d. Liberalization of Foreign Policy. The limit of foreign equity was raised to 100percent in many activities, i.e., NRI and foreign investors were permitted to invest in Indian companies.

e. Liberalization in Technical Area. Automatic permission was given to Indian companies for signing technology agreements with foreign companies.

f. Setting up of Foreign Investment Promotion Board (FIPB). This board was set up to promote and bring foreign investment in India.

g. Setting up of Small Scale Industries. Various benefits were offered to small scale industries.

Three Major Components or Elements of New Economic Policy: There are three major components or elements of new economic policy-

1. Liberalization 2. Privatization 3. Globalization 4. Marketization

1. Liberalization: Liberalization refers to end of license, quota and many more restrictions and controls which were put on industries before 1991. Indian companies got liberalization in the following way:

A. Abolition of license except in few. B. No restriction on expansion or contraction of business activities. C. Freedom in fixing prices. D. Liberalization in import and export. E. Easy and simplifying the procedure to attract foreign capital in India. F. Freedom in movement of goods and services G. Freedom in fixing the prices of goods and services.

2. Privatization: Privatization refers to giving greater role to private sector and reducing the role of public sector. To execute policy of privatization government took the following steps:

A. Disinvestment of public sector, i.e., transfer of public sector enterprise to private sector

B. Setting up of Board of Industrial and Financial Reconstruction (BIFR). This board was set up to revive sick units in public sector enterprises suffering loss.

C. Dilution of Stake of the Government. If in the process of disinvestments private sector acquires more than 51percent shares then it results in transfer of ownership and management to the private sector.

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3. Globalization: It refers to integration of various economies of world. Till 1991 Indian government was following strict policy in regard to import and foreign investment in regard to licensing of imports, tariff, restrictions, etc. but after new policy government adopted policy of globalization by taking following measures:

• Import Liberalization- Government removed many restrictions from import of capital goods.

• Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act (FEMA)

• Rationalization of Tariff structure

• Abolition of Export duty.

• Reduction of Import duty. As a result of globalization physical boundaries and political boundaries remained no barriers for business enterprise. Whole world becomes a global village. Globalization involves greater interaction and interdependence among the various nations of global economy. 4. Market Friendly State:

The role of the state is to ensure a smooth functioning of the market economy. For this, the state has to ensure stability in the market through the use of macro economic policies. The state will also intervene in the market when it fails.

Trends in National Income Trends in National Income The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and output. GDP can be defined in three ways, which should give identical results. First, it is equal to the total expenditures for all final goods and services produced within the country in a specified period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production by all the industries, plus taxes and minus subsidies on products. Third, it is equal to the sum of the income generated by production like compensation of employees, taxes on production and imports less subsidies, and gross operating surplus. GDP per capita is obtained by dividing the country’s gross domestic product, adjusted by inflation, by the total population.

Dr Ranga Sai


1951-1965: Post independence the country was wrought with economic stagnation and extreme poverty, as a result this phase witnessed rapid industrialization. While the agricultural sector contributed more than 50percent to the GDP, the consumer goods industry were completely neglected. As a result the growth rate kept fluctuating during this period. 1966-80: During this period, India’s economic growth can be characterized by one word – “volatile”. The 1971 war with Pakistan, successive changes In Government in the late 1970’s and the huge drought in 1979 which affected nearly 200 million people in the agricultural sector, had a major impact on the national income. 1981-1991: In the 1980s, the businesses were able to drive efficiency and react to supply and demand incentives, the economy took off. The plan laid stress on improving the productivity level of industries by upgrading of technology. So, the national income always increased as depicted by the graph shown. Progress toward that goal was slow but steady. In the late 1980s, however, India relied on foreign borrowing to finance development plans to a greater extent than before. Trend since 1991: Economic liberalization of India began in 1991. The economic abolished license raj, reduced tariffs, removed entry-exit barriers and ended various trade barriers. The period from 1991 saw the Indian economy get integrated with global economy and the steady flow of foreign investment chipped in. The structural reforms and the stabilization measures undertaken since have had far reaching effects on the Indian economy. De-regulation, Liberalization and Globalization was able to attract international capital and modern technology. The Indian economy has undergone substantial changes since the introduction of economic reforms in 1991. These reforms were a comprehensive effort consisting of three main components namely, liberalization, privatization and

Plan GDP growth Growth per capita income

I Plan 3.7 2.4

II Plan 4.2 2.2

III Plan 2.8 0.3

IV Plan 3.4 0.9

V Plan 4.9 2.6

VI Plan 5.4 3.1

VII Plan 5.6 3.3

VIII Plan 6.6 4.6

IX Plan 5.0 3.5

X Plan 7.6 5.9

XI Plan 7.9 6.3

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globalization. They included various measures like deregulating the markets and encouraging private participation; trade liberalization; dismantling the restrictions on domestic and foreign investments; reforming the financial sector and the tax system, etc. All such policy initiatives radically changed the economic set-up of the country and integrated it with the rest of the world. Thus, India was placed in a globally competitive position so as to fully utilize its potentials and opportunities for rapid growth of the economy. Net National Product (NNP) at factor cost (at 1993-94 prices) increased from 0.5 per cent in 1991-92 to 6.3 per cent in 1999-2000. It increased to 8.8 percent in 2003-04 at 1999-2000 prices. Similarly, per capita NNP increased from -1.5 per cent to 4.4 percent and then to 7.0 percent during the same period. Gross National Product (GNP) at factor cost (at 1993-94 prices) increased from 1.1 per cent in 1991-92 to 6.2 percent in 1999-2000. It increased to 8.7 percent in 2003-04 at 1999-2000 prices. Gross Domestic Product (GDP) at factor cost ( at 1999-2000 prices) has increased from 4.4 percent in 2000-01 to 7.5 per cent in 2004-05. The industrial sector has been going through a process of restructuring and consolidation after liberalization. The industries have responded to the reforms through mergers and acquisitions, adoption of cost cutting measures, foreign collaboration, technology up gradation and outward orientation in sectors such as cement, steel, aluminum, pharmaceuticals, and automobiles. Industrial growth increased sharply in the first five years after the reforms, but then slowed to an annual rate of 4.5 percent in the next five years. From low growth rate of 2.7 per cent in 2001-02, the industry sector grew at a rate of 7.1 per cent in 2002-03 and further to 9.8 per cent in 2004-05. There has been steady and continuous rise in supply of money in the economy since initiation of reforms. Reserve Money(Mo) has increased from Rs. 99,505 crores in 1991-92 toRs. 573066 crores (Provisional) in 2005-06. Narrow money (M1) has increased from Rs.114406 crores to Rs. 825245 crores (Provisional), while, broad money (M3) has increased from Rs. 317049 crores to Rs. 2729535 crores (Provisional) during the same period. Low and volatile growth rates in Indian agriculture and allied sectors was reflected in the average annual growth rate of value added in the sector declining from 4.7 per cent during the Eighth Plan (1992-1997) to 2.1 per cent during the Ninth Plan (1997-2002). From negative growth rate of -7.2 percent in 2002-03, the agriculture sector grew at a rate of 10.0 per cent in 2003-04 and at a rate of 6.0 per cent in 2005-06. As a proportion of GDP, the share of exports, which had grown from 5.8 per cent in 1990-91 to 12.2 per cent in 2004-05, grew further to 13.1 per cent in

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2005-06. The corresponding rise in imports was from 8.8 per cent in 1990-91 to 17.1 per cent in 2004-05 and further to 19.5 per cent in 2005-06. Thus, trade deficit as a proportion of GDP, which had declined from 3.0 per cent in 1990-91 to 2.1 per cent in 2002-03, widened to 4.9 per cent in 2004-05 and further to 6.4 per cent in 2005-06. The recent trends show that the 2012-13 per-capita national income in real terms is estimated to have risen to Rs.39,168 from Rs.38,037 in 2011-12. The growth rate in per-capita income is estimated at 3percent in 2012-13 against 4.7percent in 2011-12.

Inclusive growth Inclusive growth is a process, in which, economic growth, measured by a sustained expansion in GDP, contributions to opportunity, capabilities, access and security. Inclusive Growth basically means the following:

1. Opportunity: The economy should generate more and varied ways for people to earn a living and increase their incomes over time.

2. Capability: The economy shall provide the means for people

to create or enhance their capabilities in order to exploit available opportunities.

3. Access: The economy shall provide the means to bring

opportunities and capabilities together. 4. Security: The economy shall provide the means for people to

protect themselves against a temporary or permanent loss of livelihood.

Inclusive growth and India

• Poverty Reduction and increase in quantity and quality of employment: There are 458 million workers in India in 2004-05. Out of this 423 million workers are unorganized workers (92 percent). Thus, quality of employment needs to be improved. Workers in this sector do not have social security. Government shall provide minimum social security to unorganized workers

• Agricultural Development: The agricultural growth has been reducing from 3.5 percent during 1981-97 to 2 percent

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during 1997-2005. There are land and water problems. Agricultural policy shall consider these aspects. There are disparities in growth across regions and crops: growth rate declined more in rain fed areas. The per capita land availability is fast decreasing. There is a reduction in share of employment (still 55 percent )

• Social Sector Development: In social sector there is a need for significant achievements in education and health. The Human development index rank is 127 out of 170 countries. The problems in Social Sector are slow progress, large regional, social and gender disparities, low level and slow growth in public expenditures particularly on health, poor quality delivery systems, privatization of health and education

• Reduction in regional disparities: There are significant regional disparities in India. In terms of per capita income the highest is Rs.16,679 in Punjab and lowest at Bihar with Rs.3557. Female infant mortality varies from 12 in Kerala to 88 in Madhya Pradesh. These disparities are mostly due to low investment in physical and human capital, Technology and bad governance

• Protecting the environment: There is a need to prevent degradation of land, water, and control in pollution levels. The challenges of climate need to be met effectively. Finally, higher economic growth should not lead to decline in our environment

Human Development Index and Human Resource

Development Human development is a process of developing quality embodied in human beings. According to human development report 1997, Human development is a process of widening people’s choice as well as raising the level of well being achieved.

The Human Development Index (HDI) is a statistical tool used to measure a country's overall achievement in its social and economic dimensions.

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Pakistani economist Mahbub ul Haq created HDI in 1990 which was further used to measure the country's development by the United Nations development Program (UNDP). Calculation of the index combines four major indicators: life expectancy for health, expected years of schooling, mean of years of schooling for education and Gross National Income per capita for standard of living. UNDP measures HD in terms of HDI. This is a composite index encompassing selected information on literacy and education, expectation of life at birth and measures of material well being. HDI shows the quality of life of the people. The Human Development Index (HDI) is the measure of life expectancy, literacy, education, standard of living, and GDP per capita for countries worldwide. It is a standard means of measuring well-being, especially child welfare. The HDI human development index is a summary composite index that measures a country's average achievements in three basic aspects of human development: longevity, knowledge, and a decent standard of living. Longevity is measured by life expectancy at birth; knowledge is measured by a combination of the adult literacy rate and the combined primary, secondary, and tertiary gross enrolment ratio; and standard of living by GDP per capita

The HDI combines three basic dimensions:

• Life expectancy at birth, as an index of population health and longevity

• Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting).

• Standard of living, as measured by the natural logarithm of gross domestic product(GDP) per capita at purchasing power parity (PPP)

Countries with high HDI are USA, Japan and Norway with HDI 0.8 and above. These are countries with high HDI ranking. HDI lower than 0.5 are poor countries like Pakistan and Bangladesh India with HDI of 0.577 ranks 124th belongs to group with HDI score. HDI Score between 0.5 and 0.8 are called medium countries.

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The national human development index report for India found that Kerala ranks top of the list with a HDI of 0.638 and Bihar ranks the last with HDI of 0.367. The next top three positions go to Punjab, Tamilnadu, and Maharashtra with HDI value of over 0.52. The lowest three states apart from Bihar are M.P, U.P, and Assam.

The Gender Empowerment Measure (GEM) is a measure of inequalities between men's and women's opportunities in a country. It combines inequalities in three areas: political participation and decision making, economic participation and decision making, and power over economic resources. It is one of the five indicators used by the United Nations Development Programme in its annual Human Development Report

The gender empowerment measure is a composite indicator that captures gender inequality in three key areas:

1. Political participation and decision-making, as measured by women’s and men’s percentage shares of parliamentary seats;

2. Economic participation and decision-making power, as measured by two indicators—women’s and men’s percentage shares of positions as legislators, senior officials and managers and women’s and men’s percentage shares of professional and technical positions;

3. Power over economic resources, as measured by women’s and men’s estimated earned income

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Human Development through Education

Education is universally recognized as an important element of HD. It plays an important role in economic growth and population control. There has been an increase in Gross Enrolment Ratios in the field of education. Gross Enrolment Ratio has improved in both primary and upper primary levels during the period of 1950-51 to 2005-06. According to economic survey 2006-07, Gross Enrolment Ratio of the primary level has risen from 42.6 percent in 1950-51 to 95.4 percent in 2002-03. Similarly GER at upper primary level has increased from 12.7 percent to 60.9 percent in the same period. The literacy rate of the country as a whole has increased from 18.33 percent to 65.38 percent between 1951-2001.The literacy rate for males has increased from 27.16 percent to 75.85 percent and for females from 8.86 percent to 54.16 percent during the same period. The growth rate of literacy during 1991 to 2001 has been higher in case of females as compared to males and has been higher in rural areas as compared to urban areas. But after this much growth also we have not achieved that level of growth where there is complete literacy. The failures of literacy are due to:

• Lower enrollment of girls

• Increase in number of students per teacher

• High dropout rates

• Inadequate infrastructure

• Neglect of quality in education

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Human development through health

As it is rightly said health is wealth, health forms an important aspect of HD. In India over the years economic growth and development are not merely confined to increased GDP or per capita income but in broader terms it has been extended to enhancement of human well being .This includes not only an adequate level of consumption of food and other types of consumer goods but also access to basic social services especially education, health, safe and clean drinking water, sanitation as well as expansion of economic and social opportunities for all individuals. In India social welfare and social security measures were introduced only after independence:

1. Employee’s State Insurance Act,1948 was passed to provide compulsory and contributory health insurance

2. Family Pension: family pension schemes were introduced

from March 1st 1971 called Coal Mines Family Pension Scheme and Employment Family Pension Scheme to provide long term financial securities to families.

3. Gratuity: The payment of gratuity act was passed in 1972.

According to this act completion of 5 years of service the employees are entitled to gratuity payable at the rate of 15 days wages for each completed years of service.

4. Maternity Benefit Act was enacted to provide uniform

standards for maternity protection

Achievements in Health Care

1. The death rate dropped from 12.5 in 1981 to 8.5in 2007.The death rate is expressed per thousand.

2. Infant mortality reduced from 110 in 1981 to 68 in 2007.

Infant mortality expressed as deaths of infants below 12 months of age per thousand.

3. The number of primary health centers increased from 5700

to 24000, between 1918 and 2007.

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4. Increase in life expectancy: Life expectancy has increased from 50.8 in 1981 to 60.3 in current levels.

5. Control of diseases: national health programs are

implemented to control communicable and non communicable diseases.

Limitations:

1. 20 percent of population does not have access to safe drinking water as a result of which they are affected by water borne diseases.

2. Huge stock of food grains are held by government, yet a good number of people suffer from hunger and malnutrition

3. People in India are reluctant to use of medical health until the sickness becomes severe.

4. Due to population and congestion in urban areas there are many health problems.

Human development through family welfare

Government of India has adopted several family welfare programs during planning period. It aimed at:

1. to stabilize the growth of population 2. to improve health of mothers and children

3. to reduce infant mortality rate and maternal mortality rate

4. to ensure responsible rate

5. to ensure responsible parenthood.

Nature of Unemployment in India

Types of Unemployment:

1. Frictional unemployment: This unemployment caused by people moving in between jobs, e.g. graduates or people changing jobs. There will always be some frictional unemployment.

2. Structural Unemployment: This occurs due to a mismatch of skills in

the labour market it can be caused by: a) Occupational immobility's. This refers to the difficulties in

learning new skills applicable to a new industry, and technological change.

b) Geographical Immobility's. This refers to the difficulty in moving regions to get a job.

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c) Technological Change. If there is the developments of labour saving technology in some industries there will be a fall in demand for labour.

d) Structural change in the economy. The decline of the coal mines due to a lack of competitiveness meant that many coal miners were unemployed and they may find it more difficult to get jobs in new industries such as computers.

3. Classical or Real Wage Unemployment: This occurs when wages in a

competitive labour market are pushed above the equilibrium. This is sometimes known as "disequilibrium" unemployment. Wages will also be sticky downwards. This could be caused by minimum wages, or trades unions.

4. Demand Deficient or "Cyclical Unemployment": This occurs when

the economy is below full capacity. e.g. in a recession when AD falls there will be a fall in output, therefore firms will employ less workers because they are producing less goods.

5. Seasonal Unemployment: Unemployment tends to be higher during

certain times of the year, either in summer or winter depending on the country.

The Expert Committee on Unemployment Estimates (1970) suggested three different approaches to measure employment and unemployment. The three approaches are:

1. Usual status approach with a reference period of 365 days preceding the date of survey. The person is unemployed for the entire period

2. Current weekly status : A person is considered to be employed

if he or she pursues any one or more of the gainful activities for at least one-hour on any day of the reference week.

3. Current daily status The person is employed least one day of

the seven days of the reference period.

Trends in Employment The growth in employment was 4.68 million per year between 2009-10 and 2011-12. Between 2004-05 and 2009-10 employment growth was, however, lower, at 0.8 million per year, and was higher at 2.93 million per year. The employment growth slowed between 2009-10 and 2011-12.


In 2011-12, 36.4percentforce, that is, either working or actively seeking work according to the UPS.2 Of the total population, 35.4was unemployed (or 5.6Indian workers were engaged in agriculture and related activities, whereas in 2009-10 it was just about 50 In terms of type of employment, 50employed, 20percent were employed on a regular wage or salary,29percent were on a casual wage. Since 1999employed workers has been around 50was 52percent). However, between 19

Participation in the labor force, the proportion of males in bothurban areas was much higher than that of females. Urban female participation, which also increased in 200410 and then increased marginally in 2011in 2004-05. Rural female workers engaged inworkers has declined since 1999between 2004-05 and 2009 According to International Labor Organization (ILO) data, labor force participation for pers55.6percent in 2011, while it was 69.9China. In the same year, the India, while it was 64.8has less labor participation levels seen in other developing countries.


percent of the Indian population was active in the labour force, that is, either working or actively seeking work according to the

.2 Of the total population, 35.4percent was employed and 2.7was unemployed (or 5.6percent according to CDS).3 About 45percent

ers were engaged in agriculture and related activities, whereas 10 it was just about 50percent.

In terms of type of employment, 50percent of Indian workers were selfwere employed on a regular wage or salary,

on a casual wage. Since 1999-2000 the proportion of selfemployed workers has been around 50percent (except in 2004-05, when it

). However, between 1999-2000 and 2011-12.

Participation in the labor force, the proportion of males in both rural and urban areas was much higher than that of females.

Urban female participation, which also increased in 2004-05, fell in 200910 and then increased marginally in 2011-12, but to a level lower than that

Rural female workers engaged in agriculture as a proportion of total workers has declined since 1999-2000, but the fall was more drastic

05 and 2009-10, and continued till 2011-12.

According to International Labor Organization (ILO) data, labor force participation for persons aged 15 years and above in India was

in 2011, while it was 69.9percent in Brazil, and 74.1China. In the same year, the worker to population ratio was 53.6India, while it was 64.8percent in Brazil and 70.9percent in Chi

participation levels seen in other developing countries.

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lation was active in the labour force, that is, either working or actively seeking work according to the

was employed and 2.7percent percent of

ers were engaged in agriculture and related activities, whereas

of Indian workers were self-were employed on a regular wage or salary, and

2000 the proportion of self-05, when it

rural and

05, fell in 2009-12, but to a level lower than that

agriculture as a proportion of total 2000, but the fall was more drastic

According to International Labor Organization (ILO) data, labor force ons aged 15 years and above in India was

in Brazil, and 74.1percent in population ratio was 53.6percent in

in China. India participation levels seen in other developing countries.

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Employment policy since 1991

Planning commission task force on employment generation identifies the following factors important in framing any policy on employment

• Economic growth of > 8 percent, together with increasing savings and investment, better infrastructure and fiscal consolidation

• Sectoral growth : growth in specific sectors like, agriculture and allied activities, food processing, small scale industries and service sector

• Designing special employment programs for marginal farmers, fishing and diary farming

• Skill development through reforms in education

• Emphasis on poorer states

• Reforms in the labor laws The government of India has come up with some employment generation and poverty alleviation programs. The objective is to create more employment and also improve the quality of present employment. The policy aimed at creating 10 million employment opportunities per year over the plan period; alongside improve certain labour intensive sectors like agriculture, small industries and tourism. This way, an additional 20 million jobs can be created. Some of the employment programs launched since 1919 are:

• Swarnjayanthi Gram Swarozgar Yojana

It was launched in April 1999 by merging programs like IRDP, TRYSEM, DWCRA etc into a single self employment scheme.

• Food for Work Programme

It was launched in February 2001 to give food through wage employment in the drought affected areas in eight states. Wages are paid by the state governments partly in cash and partly in food grains. These are provided free of cost by the centre to the drought affected states.

• Pradhan Mantri Gram Sadak Yojana

This was launched in December 2000 to provide connectivity to all rural areas with a population of more than 1000 by the year 2003 and with a population of more than 500 by the year 2007 through good roads.

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• Samagra Awas Yojana

It was launched in 1999-2000 as a housing scheme to ensure provision of shelter, sanitation and safe drinking water.

• Pradhan Mantri Gramodaya Yojana This program was launched in 2000-2001 focusing on five important areas of village development, health, drinking water, primary education, housing and rural roads with the aim of improving the quality of life of people in rural areas.

• Sampoorna Grameen Rozgar Yojana

It was launched in September 2001 to provide wage employment and food security in rural areas and also to create durable economic and social assets.

• Jawahar Gram Samridhi Yojana

It was launched in April 1999 by restructuring the Jawahar

Rozgar Yojana and is implemented by Gram Panchayats for creating productive community assets.

• Employment for the urban poor: Under Nehru Rojgar Yojana, earlier known as Urban Self employment Program, 7 lac man days of employment was created . Similarly, during VIII Plan, 7 lac micro entrepreneurs were launched under Self employment for Educated Youth.

• Khadi and Village Industries Commission has played an active role in reaching technology to rural households for promoting cottage/micro enterprises.

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Module II:

Agriculture, Industry and Service Sectors

Trends in Agricultural Production and Productivity – New Agricultural Policy 2000 and

Recent Policy Measures – Public Distribution System and Food Security – WTO and

Indian Agriculture

Indian agriculture

Although agriculture contributes only 21percent of India’s GDP, its importance in the country’s economic, social, and political fabric goes well beyond this indicator. The rural areas are still home to some 72 percent of the India’s 1.1 billion people, a large number of whom are poor. Most of the rural poor depend on rain-fed agriculture and fragile forests for their livelihoods. The sharp rise in foodgrain production during India’s Green Revolution of the 1970s enabled the country to achieve self-sufficiency in foodgrains and stave off the threat of famine. Agricultural intensification in the 1970s to 1980s saw an increased demand for rural labor that raised rural wages and, together with declining food prices, reduced rural poverty.

Sustained, although much slower, agricultural growth in the 1990s reduced rural poverty to 26.3 percent by 1999/00. Since then, however, the slowdown in agricultural growth has become a major cause for concern. Face India’s rice yields are one-third of China’s and about half of those in Vietnam and Helvetica "Indonesia. With the exception of sugarcane, potato and tea, the same is true for most other agricultural commodities.

The Government of India places high priority on reducing poverty by raising agricultural productivity. However, bold action from policymakers will be required to shift away from the existing subsidy-based regime that is no longer sustainable, to build a solid foundation for a highly productive, internationally competitive, and diversified agricultural sector.

Significance of Agricultural sector

(i) Share of Agriculture in National Income

Agriculture has got a prime role in Indian economy. Though the share of agriculture in national income has come down, still it has a substantial share in GDP The contributory share of agriculture in Gross Domestic Product was 55.4percent in 1950-51, 52percent in 1960-61 and is reduced to 18.5percent only at present. The share of the agricultural sector’s capital formation in GDP declined from 2.2percent in the late 1999s to 1.9percent at present.

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(ii) Important Contribution to Employment

Agriculture sector, at present, provides livelihood to 65 to 70percent of the total population. The sector provides employment to 58.4percent of country’s work force and is the single largest private sector occupation.

(iii) Important Source of Industrial Development

Various important industries in India find their raw material from agriculture sector -cotton and jute textile industries, sugar, vanaspati etc are directly dependent on agriculture. Handloom, spinning oil milling, rice thrashing etc are various small scale and cottage industries which are dependent on agriculture sector for their raw material. This highlights the importance of agriculture in industrial development of the nation.

(iv) Importance in International Trade

India’s foreign trade is deeply associated with agriculture sector. Agriculture accounts for about 14.7percent of the total export earnings. Besides, goods made with the raw material of agriculture sector also contribute about 20percent in Indian exports. In other words, agriculture and its related goods contribute about 38percent in total exports of die country.

Agricultural productivity

Agricultural productivity has two aspects. Land productivity and labour productivity. The former implies the productivity of land per hectare or acre and the latter refers to the productivity per worker employed. Both land and labour productivity in Indian agriculture is extremely low.

In the post-independence period, particularly after 1962, the previous stagnant agricultural scenario was reversed and the following changes have been observed: 1. There has been a steady increase in areas under cultivation. 2. There has been an increase in the intensity of cropping. 3. The production and productivity, particularly in case of wheat has increased significantly.

Trends in Agricultural Productivity a. Production of rice and wheat grew at 28.0 per cent and 23.6 per cent,

respectively, during 1967-68 while their yields during the same year grew at 19.6 per cent and 24.4 percent, respectively.

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b. This was the first time that such high growth in production and yield of both rice and wheat was witnessed in the country. These levels of growth remain one of the highest achieved so far.

c. The development of high-yielding variety (HYV) of seeds in mid 1960s and the subsequent use of the fertilizer-pesticides-irrigation package, better seeds, improved irrigation and education of farmers led to quantum jumps in the productivity. Consequently, production of wheat, rice and food grains grew at an average rate of 21.9 per cent, 10.3 per cent and 10.9 per cent, respectively, during the subsequent years 1967-1970.

d. High growth in production and yield continued during the subsequent decades of 1970s and 1980s. Production of wheat, rice and food grains during 1970s-1980s grew at an average rate of 5.1 per cent, 4.0 per cent and 3.3 per cent, respectively.

e. The yields of wheat, rice and food grains grew at an average rate of 3.1 per cent for wheat and rice, and 2.9 per cent for food grains, respectively, during the same period.

Growth of agricultural productivity percent

Rice Wheat Pulses Food grains

1970-90 3.1 3.1 0.7 2.9

1990-2010 1.2 1.7 1.1 1.6

1968-70 7.9 11.2 13.9 8.1

2006-11 1.3 2.3 3.0 2.4

Measures to improve Indian Agriculture

Various measures taken by the central and state governments from time to time, some of them are:

1. To begin with government took lead in providing various facilities on its own. In course of time different types of activities were entrusted to specific public agencies.

2. The government abolished the zamindari system. It was followed with the consolidation of small holdings to make them economically viable.

3. Another important input was the widespread use of radio and television for acquainting farmers in new and improved techniques of cultivation.

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4. The crop insurance was another step to protect the farmers against losses caused by crop failure on account of natural calamities like drought, flood, hailstorm, cyclone, fire, diseases etc.

5. Easy availability of capital or investment input through a well-knit network of rural banking and small scale cooperative societies with low interest rates were other facilities provided to the farmers for modernisation of agriculture.

6. Special weather bulletins for farmers were introduced on radio and television.

7. The government announced minimum support price for various crops removing the elements of uncertainty. It ensures minimum price for the crop grown by the farmers.

National Policy on Agricultural 2000 The National Policy on agriculture aims at :

• A growth rate in excess of 4 per cent per annum in the agriculture sector

• Growth that is based on efficient use of resources and conserves our soil, water and bio-diversity;

• Growth with equity, i.e., growth which is widespread across regions and farmers;

• Growth that is demand driven and caters to domestic markets and maximizes benefits from exports of agricultural products in the face of the challenges arising from economic liberalization and globalization;

• Growth that is sustainable technologically, environmentally and economically.

Specific areas of policy:

1. Sustainable Agriculture: To promote technically sound, economically viable, environmentally non-degrading, and socially acceptable use of country's natural resources - land, water and genetic endowment to promote sustainable development of agriculture.

2. Food and Nutritional Security: To raise the productivity and

production of crops to meet the increasing demand for food

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generated by unabated demographic pressures and raw materials for expanding agro-based industries.

3. Transfer of Technology: To improve the role of Krishi Vigyan

Kendras, Non-Governmental Organizations, Farmers Organizations, Cooperatives, corporate sector and para-technicians in agricultural extension will be encouraged for organizing demand driven production systems.

4. Resource management: Emphasis is placed on resource

management in respect of soil, water, and land. Technologies have been developed to improve the quality of land and soil resources, soil – resource maps for some states have been prepared and crop weather relationship models have been developed for different agro – ecosystems.

Policy outline

1. Privatization of agriculture 2. Private sector participation for technology transfer, capital

flow and development of horticulture 3. Increase in investment for better human resource

development 4. Agricultural research 5. Guards against quantitative restrictions of WTO 6. National livestock breeding strategy 7. Developing plant varieties 8. Review of excise duty on farm machinery 9. Rural Electrification 10. Developing renewable sources of energy 11. Package insurance policy in rural sector

Farmers’ Policy 2007

In continuation with the National Policy of Indian Agriculture, the Government enacted the Farmers’ Policy in 2007. The policy aims at:

1. Economic wellbeing of farmers 2. New technologies 3. Agricultural bi-security system 4. Support services to women 5. Credit and insurance 6. DnyaChuapaals provide Information and Communication

technology for farmers 7. Minimum support price on crops to farmers 8. Food security

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Public distribution system

Evolution of public distribution of grains in India had its origin in the 'rationing' system introduced by the British during the World War II. In view of the fact that the rationing system and its successor, the public distribution system (PDS) has played an important role in attaining higher levels of the household food security and completely eliminating the threats of famines from the face of the country, it will be in the fitness of things that its evolution, working and efficacy are examined in some details.

The system was started in 1939 in Bombay and subsequently extended to other cities and towns. The Department of Food under the Government of India was created in 1942, which helped in food matters getting the serious attention of the government. On attaining Independence, India was forced to reintroduce it in 1950 in the face of renewed inflationary pressures in the economy immediately after independence "which were accentuated by the already prevailing high global prices of foodgrains at the end of the War. It was also decided to have two variations of the system, Statutory Rationing Areas, where foodgrains availability was. supposed to be only through the Ration Shops and Non-Statutory Rationing Areas, where such shops would only supplement the open market availability.

Objectives of Public distribution system

o Providing food grains and other essential items to vulnerable sections of the society at reasonable (subsidised) prices;

o to have a moderating influence on the open market prices of cereals, the distribution of which constitutes a fairly big share of the total marketable surplus; and

o to attempt socialisation in the matter of distribution of essential commodities.

o to provide to the beneficiaries two cereals, rice and wheat and four essential commodities viz. sugar, edible oil, soft coke and kerosene oil.

Review of PDS in India Its greatest achievement lies in preventing any more famines in India. As recently as during the 1987 drought, considered worst in the century, the PDS helped the country overcome it with dignity and effectiveness. PDS is not cost effective, its operations are too costly and the ratio between procurement and transportation is too high pointing to 'wasteful' movements.

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it has been found that "the value of the subsidy is so little even for those households who make all their purchases of cereals from rationshops. The main weakness in PDS i.e. not reaching poor effectively Suggestions for improvement

o Retail price at FPSs should be uniform throughout the state/area after weight-averaging the transport cost for the FPS.

o Regular supply of good quality grains has to be ensured. o Entitlement card's easy availability and improvement in its design and

durability. o FPS doorstep delivery of PDS commodities instead of delivery to FPS

owners at FCI godowns. o Improvement in the viability of FPSs. o Enlarging the basket of PDS commodities to enhance its utility as also

to improve economic viability of FPSs. o Streamlining of the supply chain by construction of small intermediary

godowns between FCI's base godown and FPSs in the interior. o Introduction of a more effective Management Information System. o A number of new FPS to be opened so that physical access of

beneficiaries is improved; o Special campaign to be mounted by the state governments to cancel the

bogus entitlement cards and to issue new cards to households found to be without them;

o To progressively bring more and more FPS under the system of FPS doorstep delivery of PDS commodities;

o Set up vigilance committees of local people with substantial representation of women for each FPS at the village level and also at higher levels;

o Improve the supply chain by constructing or hiring small intermediary godowns;

Food Security in India

Food security means availability of food to all people all the time. Food security has following dimensions:

a. Availability of food: This means the food production within the country, food imports and previous years’ stock stored in government granaries.

b. Accessibility of food: This means food should be within reach of every person.

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c. Affordability: This means that every individual has enough money to buy sufficient, safe and nutritious food to meet one’s dietary needs.

The National Food Security

The National Food Security Act, 2013 (Right to Food Act) is an Act of the Parliament of India which aims to provide subsidized food grains to approximately two thirds of India's 1.2 billion people.

Salient features of Food security

a. 75percent rural and 50percent of the urban population are entitled for three years from enactment to five kg food grains per month at Rs 3 , Rs 2 , Rs 1 ) per kg for rice, wheat and coarse grains, respectively;

b. The states are responsible for determining eligibility;

c. Pregnant women and lactating mothers are entitled to a nutritious "take home ration" of 600 Calories and a maternity benefit of at least Rs 6,000 for six months;

d. Children 6 months to 14 years of age are to receive free hot meals or "take home rations";

e. The central government will provide funds to states in case of short supplies of food grains;

f. The current food grain allocation of the states will be protected by the central government for at least six months;

g. The state government will provide a food security allowance to the beneficiaries in case of non-supply of food grains;

h. The Public Distribution System is to be reformed;

i. The eldest woman in the household, 18 years or above, is the head of the household for the issuance of the ration card;

j. There will be state- and district-level redress mechanisms; and

k. State Food Commissions will be formed for implementation and monitoring of the provisions of the Act.

l. The cost of the implementation is estimated to be $22 billion(1.25 lac crore), approximately 1.5percent of GDP.

m. The poorest who are covered under the Antodaya yojna will remain entitled to the 35 kg of grains allotted to them under the mentioned scheme.

Limitations

o High fiscal burden- subsidy cost above 1.25 lakh crore rupees per year. (Budget 2014 allotted 1.15 lakh crores, out of that, 88000 crore specially for Food security act.)

o Government will have to keep large stock of foodgrains but FCI storage capacity insufficient.

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o If so much food grains kept out of open market will cause food inflation, and middle class will suffer.

o Government may have to import foodgrain during drought years leading to an additional current account deficit.

o An Adult needs ~14kg foodgrain. While NFSA gives only 5 kg per person to Priority households.

o Focusing only cereal. What about pulses (to give protein), edible oil (to give fat), fruits, vegetables (for vitamin) and milk- to combat malnutrition?

o Malnutrition has its connections with lack of sanitation and medical facilities in rural areas. NFSA alone insufficient.

o Parliamentary standing Committee has recommended GPS tracking of trucks, CCTVs in go-downs to prevent diversion. But this are not implemented.

o identifying households eligible for this scheme will be a big challenge o Section 44 of the act: During natural calamity and wars- Union and

state govt. will not be responsible for non-supply of foods. o Stopping “institutional” corruption in state PDS machinery is difficult.

WTO and India Agriculture From 1947 to 1994, General Agreement on Trade and Tariff (GATT) was the forum for managing trade barriers. The World Trade Organization (WTO) was established on 1st January 1995. . The WTO has 148 members, accounting for over 97 percent of world trade. Around 30 others are negotiating membership. WTO prescribes several conditions governing trade agreements in service sector, intellectual property rights, international disputes and also agriculture. Important among them is the Agreement on Agriculture. WTO Agreement on agriculture covers

1. Market access: This involves tariffication, and reduction in tariff and access opportunities. Tariffication means all non-tariff barriers like quotas, variable levies, minimum support prices, discretionary licensing and state trading measures need to be placed with tariffs. This is 24 percent for developing countries.

2. Domestic support: Policies are subject to reduction, from the total support given 1986-88. Total Aggregate Measure of Support (Total AMS) shall be 13 percent.

3. Export subsidies: Export subsidy expenditure to be reduced to 36 percent and for developing countries is 24 percent.

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As special differential treatment, developing countries are permitted untargeted subsidized food distribution to meet requirements of urban and rural poor. In operation WTO prescribes four fold approach:

• Green Box: It contains fixed payments to producers for environmental programs, so long as the payments are not a part of current production

• Blue Box: Minimum support price and direct payments to agriculture

• Special and differential box: Investment subsidies

• Amber Box: Contains domestic subsidies that governments have agreed to reduce but not eliminate. The Blue Box contains subsidies which can be increased without limit, so long as payments are linked to production-limiting programs.

India and WTO:

India has undertaken is to bind its tariffs on primary agricultural products at 100 percent; processed foods at 150 percent; and edible oils at 300

percent. Further, India’s share in total agricultural exports from developing Asia is 8 percent

• Maintains quantitative restrictions due to Balance of Payments reasons

• No commitment regarding market access.

• Green box is considered with development box

• Agricultural exports do not get direct subsidy.

• Indirect subsidy by way of exemption of export profit from Income tax

• Subsidies on cost of freight on export shipment of fruits, vegetables, floral products

• Share of Indian agriculture in world market is negligible except rice

• Subsidies of rich nations does not effect Indian exports

• Indian products are cost effective

• No fear of Indian markets being flooded by imports

• It is important to protect food and livelihood security to alleviate poverty, rural development and employment

• There is a need to create opportunities for expansion of agricultural exports with meaningful market access in developing counties.

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Module III Industry and Service Sectors in India

Industrial Development Since 1991: Growth and Diversification – MRTP and Competition Act –Comprehensive Policy Package for SSI’s 2000 and Recent Policy Measures – Service sector: Growth and Performance since 1991.

Monopolies and Restrictive Trade Practices Act, 1969 The Monopolies and Restrictive Trade Practices Act, 1969 is a competition law of India. It is based on the ground that that the operation of the economic

system does not result in the concentration of wealth and means of production

to the common detriment. The Monopolies Inquiry Commission (MIC) was set-up in 1964 which reported that there was high concentration of economic power in over 85percent of industries in India at that point in time. MRTP has been promulgated to prevent damage by concentration of economic power in the hands of only a few and thereby causing damage. The principal objectives of MRTP Act are:

i) prevention of concentration of economic power to the common detriment;

ii) control of monopolies; iii) prohibition of Monopolistic Trade Practices (MTP); iv) prohibition of Restrictive Trade Practices (RTP); v) prohibition of Unfair Trade Practices (UTP).

Competition Act, 2002 The competition Act, 2002 received assent of the president of India on January 13, 2003 and was published in the Gazette of India on January 14, 2003. The main features of the Bill were:

i. Prevent non-competitive practices, ii. Promote and sustain competition, iii. Protect consumer interest, and iv. To endure free trade for participants in the market

The Competition Act, 2002 was based on the Raghvan Committee Report. The principle elements of the Raghvan Committee Report being:

i. Prohibit Anti-Competitive agreements, ii. Prohibit Abuse of Dominant position by enterprises, and

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iii. Regulate Combinations exceeding threshold limits in terms of prescribed turnover and assets.

Competition Act, 2002 has essentially four compartments:

• Anti - Competition Agreements

• Abuse of Dominance

• Combinations Regulation

• Competition Advocacy The Act aims to prevent

a) creation of barriers to new entrants in the market, b) driving existing competitors out of the market, c) foreclosure of competition by hindering entry into the market, d) accrual of benefits to consumers, e) improvements in production or distribution of goods or provision of

services, and f) promotion of technical, scientific and economic development by

means of production or distribution of goods or provision of services.

MRTP ACT, 1969

COMPETITION ACT, 2002

1 Based on the pre-reforms scenario Based on the post-reforms scenario 2 Based on size as a factor Based on structure as a factor 3 Competition offences implicit or not

defined Competition offences explicit and defined

4 Complex in arrangement and language

Simple in arrangement and language and easily comprehensible

5 14 per se offences negating the principles of natural justice

4 per se offences and all the rest subjected to rule of reason.

6 Frowns upon dominance Frowns upon abuse of dominance 7 Registration of agreements

compulsory No requirement of registration of agreements

8 No combinations regulation Combinations regulated beyond a high threshold limit.

9 Competition Commission appointed by the Government

Competition Commission selected by a Collegium (search committee)

10 Very little administrative and financial autonomy for the Competition Commission

Relatively more autonomy for the Competition Commission

11 No competition advocacy role for the Competition Commission

Competition Commission has competition advocacy role

12 No penalties for offences Penalties for offences 13 Reactive and rigid Proactive and flexible 14 Unfair trade practices covered Unfair trade practices omitted (consumer

fora will deal with them)

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The Small Scale Industry Sector The Small Scale Industry Sector has emerged as India's engine of growth in the New Millennium. By the end of March 2000, the MSME sector accounted for nearly 40 per cent of gross value of output in the manufacturing sector and 35 per cent of total exports from the country. Through over 32 lakh units, the sector provided employment to about 18 million people. The on going programme of Economic Reforms based upon the principle of liberalisation, globalisation and privatisation and the changes at the international economic scene including the emergence of World Trade Organisation (WTO), have brought certain schallenges and several new opportunities before the MSME Sector. The most important challenge faced by the sector is that of growing competition both globally and domestically. At the sametime sector has also been facing some problems which relate to credit, infrastructure, technology, marketing, delayed payment hassels on account of so many rules and regulations etc. In order to enable this sector to avail the opportunities and play its role as an engine of growth, it is essential to address to these problems effectively and urgently.

Major Policy Initiatives A separate Ministry for Small Scale Industries & Agro and Rural Industries set up on August 14, 1999 to focus concerted efforts on the problems of small and tiny enterprises. Investment limit for the SSI sector in plant and machinery reduced from Rs 3 crore to Rs 1 crore.

A Comprehensive Policy Package A Group of Ministers on SSI was constituted under the Chairmanship of Shri L K Advani, the Union Minister for Home Affairs to promote and strengthen the SSI sector in the context of dismantling of Quantitative Restrictions. Based on the recommendations of the Group of Ministers, a comprehensive policy package was announced for the SSI sector on August 30, 2000 by the Prime Minister at the first ever National Conference on SSI organised by the Ministry of SSI & ARI. The policy package aimed at enhancing competitiveness of SSIs both globally and domestically by providing easier access to credit, infrastructure support, marketing avenues etc. Out of actions points emerging from the comprehensive policy package, action has been completed on 26 points.

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Technology Upgradation To meet the urgent need of technology upgradation, the Government has announced a capital subsidy of 12 per cent for investment in technology in select sector and setting up of an inter-ministerial committee of experts to define the scope of technology upgradation and sectorial priorities. To encourage total quality management, the Government has decided to continue, for the next six years, granting Rs 75,000 to each small scale unit that obtains ISO 9000 certification. The Ministry has formulated a comprehensive plan for preparing Small Scale Industries for e-commerce with appropriate infrastructure support. It has also sought to strengthen the IT support to Small Scale Industry through the development of a 'Master Website' on small industries comprising information on policies and procedures, technology, products etc., with hyperlinks to States. Credit Guarantee Scheme The Government has approved a Rs 125 crore Credit Guarantee Fund Scheme for small industries to tackle the problem of collateral guarantee and provide necessary comfort level to banks lending money to small-scale units. The scheme will be operational from 2000-2001 and will be implemented by a trust set up by the Small Industries Development Bank of India (SIDBI). The SIDBI will no longer be a subsidiary of IDBI and shall have a separate status in order to promote development of small industries. In the National Equity Fund (NEF) Scheme, the project cost limit has been revised from Rs 25 lakh to Rs 50 lakh. The soft loan will be retained at 25 per cent of the project cost subject to a maximum of Rs 10 lakh per project. Assistance under the NEF will be provided at a service charge of 5 per cent per annum. Initiatives for North-Eastern region The Government has announced a number of initiatives for the development of SSIs in the North-eastern region at the national convention on SSIs on August 30, 2001. A task force comprising of all North-Eastern State Ministers in-charge of SSIs has been set up specifically for that region. Marketing Development Assistance Scheme SSIs face problems in marketing of their products. To help SSIs in marketing their products a new SSI Marketing Development Assistance (MDA) scheme has been launched to assist SSIs exporters to participate in international exhibitions and fairs. Sub contracting and acnillarisation is being encouraged through setting up sub-contracting exchanges and vendor development programmes.

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Access to SSI Information Adequate steps have been taken to improve access to SSI information included comprehensive knowledge portal launched for SSIs on August 30, 2001 Special Package for Tiny Sector The Government has decided to raise the limit for composite loans from Rs 10 lakh to Rs 25 lakh. Entrepreneurs will now be able to secure term loans and working capital from the same agency. The National Small Industries Corporation will continue to give composite loan up to Rs 25 lakh to the tiny sector and continue to charge one per cent concessional interest rate. Twenty per cent of the projected annual turnover of tiny units would qualify for working capital loan. Under the Integrated Infrastructure Development (IID) Scheme, 50 per cent of the plots will be earmarked for the tiny sector as against 40 per cent done earlier. Under the National Equity Fund Scheme, 30 per cent of the investment will be earmarked for the tiny sector.

Service sector The tertiary sector of the economy (also known as the service sector or the service industry) is one of the three economic sectors, the others being the secondary sector (approximately the same as manufacturing) and the primary sector (agriculture, fishing, and extraction such as mining).The production of information is generally also regarded as a service, but some economists now attribute it to a fourth sector, the quaternary sector. The various sectors that combine together to constitute service industry in India are:

Trade, Hotels and Restaurants, Railways, Other Transport & Storage, Communication (Post, Telecom), Banking, Insurance, Dwellings, Real Estate, Business Services, Public Administration; Defence, Personal Services, Community Services, Other Services

Growth of Service Sector The development of a country's services sector is an indicator of its economic development. India's services sector is a vital component of its economy, as it presently accounts for around 60 per cent of its gross domestic product (GDP). It has matured considerably during the last few years and has been globally recognised for its high growth and development.

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India is in a position to tap the top end of the USD 3 trillion global healthcare market because of the quality of its services and the brand equity of Indian healthcare professionals across the globe. The Indian Government places top priority on the healthcare sector and is focusing on indigenous research and development and the further creation of human capital.

• Tourism is estimated to contribute 5.83 per cent to the GDP and 8.27 per cent to employment in the country; the employment generated by tourism is estimated at 51.1 million in 2006-07

• In the case of engineering and integrated engineering services, India has the single largest pool of technically qualified and trained manpower with the potential to operate in the international market.

• In the case of engineering and integrated engineering services, India has the single largest pool of technically qualified and trained manpower with the potential to operate in the international market. With the growth in the manufacturing and services sector, and given the aging demographic profile of most developed countries, the demand for Indian engineers is likely to increase considerably in the coming years.

• Professional services include the widest variety of individual and firm based services. These include, inter alia, legal, accountancy, engineering, architecture and medical services. This set of services is amenable to all the four modes of supply recognised under GATS.

• Education levels have a direct bearing on the sustainability of a country’s competitiveness and economic growth. Against the background of economic globalisation, the development of human capital very much depends on the internationalisation of education services.

• The share of banking and insurance services in the GDP of India has been stable between 5.5 and 6.5 per cent over the last few years even though the sector has been showing a double digit growth in the pre-2008 period.

• The telecom services have been recognized the world-over as an important tool for socio-economic development for a nation. It is one of the prime support services needed for rapid growth and modernization of various sectors of the economy. Indian telecommunication sector has undergone a major process of transformation through significant policy reforms, particularly beginning with the announcement of NTP 1994 and was subsequently re-emphasized and carried forward under NTP 1999.

• Information technology essentially refers to the digital processing, storage and communication of information of all kinds . Therefore, IT can potentially be used in every sector of the economy.

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Module IV

Banking and Monetary Policy Since 1991 Banking sector reforms since 1991: Rational and measures – Structure of Banking in India

– performance of commercial banks since 1991 – Promotional and Developmental

functions of RBI, RBI’s recent measures of Money supply-Trends and Causes of Inflation

since 1991 – Recent changes in monetary policy in India.

Narasimham Committee

In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. M. Narasimham (1998) had pointed out; the reforms in the banking sector can be classified into two phases:

1. The first phase consisted of the curative measures, which were brought about for making the banking sector more oriented to the market and impart competition to the environment.

2. The second phase consisted of the preventive measures, which

were brought about to ensure smooth functioning of the banking sector in the long run.

The primary curative measures included the reduction of reserve requirements, interest rate deregulation and lifting of entry barriers. Other important measures introduced in this category included prudential reforms in terms of following capital adequacy norms as well as adhering to well-defined asset classification and provisioning standards. Supervisory and regulatory reforms were introduced to ensure transparency and adequate risk management practices were made mandatory. The thrust of the preventive measures was primarily on privatization and government stake was reduced to 30 per cent. The establishment of asset reconstruction companies was envisaged and capital adequacy norms were made more stringent.

Some of the recommendations offered by the committee, in its report submitted in November 1991, are:

1. A reduction, phased over five years in the Statutory Liquidity Ratio (SLR) to 25 percent, synchronized with the planned contraction in Fiscal Deficit.

2. A progressive reduction in the Cash Reserve Ratio (CRR). 3. Gradual deregulation of interest rates. 4. All banks to attain Capital Adequacy o 8 percent in a phased

manner.

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5. Banks to make substantial provisions for bad and doubtful debts.

6. Profitable and reputed banks be permitted to raise capital from the public.

7. Instituting an Assets Reconstruction Fund to which the bad and doubtful debts of banks and Financial Institutions could be transferred at a discount.

8. Facilitating the establishment of new private banks, subject to RBI norms.

9. Banks and financial institutions to classify their assets into four broad groups, viz, Standard, Sub-standard, Doubtful and Loss.

10. RBI to be primarily responsible for the regulation of the banking system.

11. Larger role for SEBI, particularly as a market regulator rather than as a controlling authority.

As a sequel to the report, the government has acted upon many of the suggestions. These actions include reductions in CRR and SLR, stipulation of capital adequacy norms for banks and announcement of guidelines for new private banks. The Report of the Narasimham Committee-II, which was submitted to the Government in 1998 made a number of recommendations covering institutional, supervisory, legislative and banking policies aspects. These recommendations relate to capital adequacy, asset quality, non-performing asset, directed credit, prudential norms, disclosure requirement, system and methods in banks structural issues, rural and small industrial credit, regulation and supervision, legal and legislative framework. Most of the recommendations have been accepted and implemented by RBI. Consideration and examination in respect of some remaining recommendations is going on. The Committee, recommended that the public sector banks should be encouraged to go the market to raise capital to enhance their capital. The Government has accepted the recommendation of Narasimham Committee for reducing the requirement of minimum shareholding of Government in nationalized banks to 33 per cent without changing the public sector character of banks.

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Growth of banking since 1991

The banking sector has grown in terms of volume and quality of services since 1991. Liberalizations of banking system, implementations of Narasimham committee recommendations, growth of capital markets, mutual funds, privatization of insurance business have all added to the phenomenal growth f banking sector. These developments also brought out need for improving policy and the financial infrastructure.

1. Capital Adequacy and Recapitalization of Banks

Out of the 27 public sector banks, 26 Public sector banks achieved the minimum capital to risk assets ratio of 9 per cent by March 2000. Of this, 22 Public sector banks had CRAR exceeding 10 per cent. To enable the Public sector banks to operate in a more competitive manner, the Government adopted a policy of providing autonomous status to these banks, subject to certain benchmarks. As at end-March 1999, 17 Public sector banks became eligible for autonomous status. 2. Prudential Accounting Norms for Banks

The Reserve Bank persevered with the on-going process of strengthening prudential accounting norms with the objective of improving the financial soundness of banks and to bring them at par with international standards. The RBI guidelines aimed at reducing the stock of Non-performing assets by encouraging the banks to go in for compromise settlements in a transparent manner.

Recognizing that the high level of Non-performing assets in the Public sector banks can endanger financial system stability, the Government in 2001 set up seven more Debt Recovery Tribunals for speedy recovery of bad loans. 3. Asset Liability Management (ALM) System

The Reserve Bank advised banks in 1999 to follow ALM system. Banks were expected to cover at least 60 per cent of their liabilities and assets in the interim and 100 per cent of their business by 2000. 4. Disclosure Norms

Towards greater transparency, banks were directed to disclose the following additional information since 2000:

(i) Maturity pattern of loans and advances, investment securities, deposits and borrowings,

(ii) Foreign currency assets and liabilities,

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(iii) Movements in Non-performing assets and (iv) Lending to sensitive sectors as defined by the Reserve

Bank from time to time.

5. Technological Developments in Banking

In India, banks as well as other financial entities have entered the domain of information technology and computer networking in 1999. A satellite-based Wide Area Network (WAN) would provide a reliable communication framework for the financial sector. The Indian Financial Network (INFINET) was inaugurated in June 1999. 6. Revival of Weak Banks

The Reserve Bank had set up a Working Group to suggest measures for the revival of weak Public sector banks in February 1999. The Working Group, in its report suggested that weak banks need to be supported on the basis of three factors:

1. Solvency (capital adequacy ratio and coverage ratio), 2. Earnings capacity (return on assets and net interest

margin) and 3. Profitability

7. Deposit insurance system, The Reserve Bank’s Working Group, Jagdish Capoor, made some recommendations in 1999:

1. Fixing the capital of the Deposit Insurance and Credit Guarantee Corporation (DICGC) at Rs.500 crore, contributed fully by the Reserve Bank,

2. Withdrawing the function of credit guarantee on loans from DICGC and

3. Risk-based pricing of the deposit insurance premium in lieu of the present flat rate system.

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Structure of Banking: Indian Banking system:

The Indian banking sector consists of the Reserve Bank of India (RBI), which is the central bank, commercial banks and co-operative banks. Commercial banks are of two types:

1. Scheduled, which are subject to statutory requirements and 2. Non-scheduled, which are not.

Scheduled banks can be further classified into a. Public sector banks comprising of the State bank of India, its seven associates, b. Other nationalized banks b. Regional Rural Banks and c. Private sector banks, which can be either domestic or foreign.

Public Sector Banks

a. State Bank of India and its associate banks called the State Bank group b. 20 nationalized banks c. Regional Rural Banks mainly sponsored by Public Sector Banks

Private Sector Banks

a. Old generation private banks b. New generation private banks

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c. Foreign banks in India d. Scheduled Co-operative Banks e. Non-scheduled Banks

Scheduled and Un-scheduled Banks

The commercial banking structure in India consists of:

• Scheduled Commercial Banks in India • Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. "Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank". "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

Reserve Bank of India

The Hilton Young Commission in 1926 originated the idea of Reserve Bank of India as the central Bank. This commission came to be known as the Royal Commission on Indian Currency and Finance. Prior to 1926, the Presidency Banks had the right of note issue. This was taken over by RBI in 1934 under the Reserve Bank of India Act,

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Formally, in 1935 RBI was established as an apex institution and the nation's monetary authority. It had a division of two separate activities viz. the issue department and the Banking department. The Banking Regulation Act of 1949 gave RBI the control and supervision of commercial Banks. The amendments to RBI Act in 1962 provided the RBI right of information from commercial banks regarding their credit functions. Currently, RBI has emerged as a potential apex monetary authority with control over the capital markets, money markets, foreign exchange markets and the monetary policy. RBI as an apex institution has the overall control over the monetary policy. It regulates the monetary economy by sets of guidelines pertaining to interest rates, liquidity, lending operations of financial institutions etc. It also promotes financial institutions to augment Government of India.

The broad objectives of the Reserve Bank are: (a) Regulating the issue of currency in India; (b) keeping the foreign exchange reserves of the country; (c) establishing the monetary stability in the country; and (d) developing the financial structure of the country on sound lines

consistent with the national socio-economic objectives and policies.

Functions of Reserve Bank of India 1. Note Issue:

The Reserve Bank has the monopoly of note issue in the country. It has the

sole right to issue currency notes of all denominations except one-rupee notes.

One-rupee notes are issued by the Ministry of Finance of the Government of

India. The Reserve Bank acts as the only source of legal tender because even

the one-rupee notes are circulated through it. The Reserve Bank has a separate

Issue Department, which is entrusted with the job of issuing currency notes.

The Reserve Bank has adopted minimum reserve system of note issue. Since

1957, it maintains gold and foreign exchange reserves of Rs. 200 crore, of

which at least Rs. 115 crore should be in gold.

2. Banker to Government:

The Reserve Bank acts as the banker, agent and adviser to Government of

India:

(a) It maintains and operates government deposits,

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(b) It collects and makes payments on behalf of the government,

(c) It helps the government to float new loans and manages the public debt,

(d) It sells for the Central Government treasury bills of 91 days duration,

(e) It makes 'Ways and Means' advances to the Central and State Governments

for periods not exceeding three months,

(f) It provides development finance to the government for carrying out five

year plans,

(g) It undertakes foreign exchange transactions on behalf of the Central

Government,

(h) It acts as the agent of the Government of India in the latter's dealings with

the International Monetary Fund (IMF), the World Bank, and other

international financial institutions, (i) It advises the government on all

financial matters such as loan operations, investments, agricultural and

industrial finance, banking, planning, economic development, etc.

3. Banker's Bank:

The Reserve Bank acts as the banker's bank in the following respects:

(a) Every Bank is under the statutory obligation to keep a certain minimum of

cash reserves with the Reserve Bank. The purpose of these reserves is to

enable the Reserve Bank to extend financial assistance to the scheduled banks

in times of emergency and thus to act as the lender of the last resort.

According to the Banking Regulation Act, 1949, all scheduled banks are

required to maintain with the Reserve Bank minimum cash reserves of

5percent of their demand liabilities and 2percent of their time liabilities. The

Reserve Bank (Amendment) Act, 1956 empowered the Reserve Bank to raise

the cash reserve ratio to 20percent in the case of demand deposits and to

8percent in case of time deposits. Due to the difficulty of classifying deposits

into demand and time categories, the amendment to the Banking Regulation

Act in September 1972 changed the provision of reserves to 3percent of

aggregate deposit liabilities, which can be raised to 15percent if the Reserve

Bank considers it necessary,

(b) The Reserve Bank provide financial assistance to the scheduled banks by

discounting their eligible bilk and through loans and advances against

approved securities,

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(c) Under the Banking Regulation Act,1949 and its various amendments, the

Reserve Bank has been given extensive powers of supervision and control

over the banking system. These regulatory powers relate to the licensing of

banks and their branch expansion; liquidity of assets of the banks;

management and methods of working of the banks; amalgamation,

reconstruction and liquidation of banks; inspection of banks; etc.

4. Custodian of Exchange Reserves:

The Reserve Bank is the custodian of India's foreign exchange reserves. It

maintains and stabilises the external value of the rupee, administers exchange

controls and other restrictions imposed by the government, and manages the

foreign exchange reserves. Initially, the stability of exchange rate was

maintained through selling and purchasing sterling at fixed rates. But after

India became a member of the international Monetary Fund (IMF) in 1947,

the rupee was delinked with sterling and became a multilaterally convertible

currency. Therefore the Reserve Bank now sells and buys foreign currencies,

and not sterling alone, in order to achieve the objective of exchange stability.

The Reserve Bank fixes the selling and buying rates of foreign currencies. All

Indian remittances to foreign countries and foreign remittances to India are

made through the Reserve Bank.

5. Controller of Credit:

As the central bank of the country, the Reserve Bank undertakes the

responsibility of controlling credit in order to ensure internal price stability

and promote economic growth. Through this function, the Reserve Bank

attempts to achieve price stability in the country and avoids inflationary and

deflationary tendencies in the country. Price stability is essential for economic

development. The Reserve Bank regulates the money supply in accordance

with the changing requirements of the economy. The Reserve Bank makes

extensive use of various quantitative and qualitative techniques to effectively

control and regulate credit in the country.

5. RBI is the Controller and Supervisor of Banking Systems The RBI has been assigned the role of controlling and supervising the bank system in India. The RBI is responsible for controlling the overall operations of all banks in India.

The control and supervisory roles of the Reserve Bank of India is done

through the following:

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• Issue of License: Under the Banking Regulation Act 1949, the RBI has

been given powers to grant licenses to commence new banking

operations. The RBI also grants licenses to open new branches for

existing banks. Under the licensing policy, the RBI provides banking

services in areas that do not have this facility.

• Prudential Norms: The RBI issues guidelines for credit control and

management. The RBI is a member of the Banking Committee on

Banking Supervision (BCBS). As such, they are responsible for

implementation of international standards of capital adequacy norms

and asset classification.

• Corporate Governance: The RBI has power to control the appointment

of the chairman and directors of banks in India. The RBI has powers to

appoint additional directors in banks as well.

• KYC Norms: To curb money laundering and prevent the use of the

banking system for financial crimes, The RBI has “Know Your

Customer“ guidelines. Every bank has to ensure KYC norms are

applied before allowing someone to open an account.

• Transparency Norms: This means that every bank has to disclose their

charges for providing services and customers have the right to know

these charges.

• Risk Management: The RBI provides guidelines to banks for taking the

steps that are necessary to mitigate risk. They do this through risk

management in basel norms.

• Audit and Inspection: The procedure of audit and inspection is

controlled by the RBI through off-site and on-site monitoring system.

On-site inspection is done by the RBI on the basis of “CAMELS”.

Capital adequacy; Asset quality; Management; Earning; Liquidity;

System and control.

• Foreign Exchange Control: The RBI plays a crucial role in foreign

exchange transactions. It does due diligence on every foreign

transaction, including the inflow and outflow of foreign exchange. It

takes steps to stop the fall in value of the Indian Rupee. The RBI also

takes necessary steps to control the current account deficit. They also

give support to promote export and the RBI provides a variety of

options for NRIs.

• Development: Being the banker of the Government of India, the RBI is

responsible for implementation of the government’s policies related to

agriculture and rural development. The RBI also ensures the flow of

credit to other priority sectors as well. Section 54 of the RBI gives

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stress on giving specialized support for rural development. Priority

sector lending is also in key focus area of the RBI.

6. Ordinary Banking Functions:

The Reserve Bank also performs various ordinary banking functions: a. It accepts deposits from the central government, state governments and

even private individuals without interest, b. It buys, sells and rediscounts the bills of exchange and promissory notes

of the scheduled banks without restrictions, c. It grants loans and advances to the central government, state

governments, local authorities, scheduled banks and state cooperative banks, repayable within 90 days,

d. It buys and sells securities of the Government of India and foreign securities,

e. It buys from and sells to the scheduled banks foreign exchange for a minimum amount of Rs. 1 lakh,

f. It can borrow from any scheduled bank in India or from any foreign bank,

g. It can open an account in the World Bank or in some foreign central bank.

h. It accepts valuables, securities, etc., for keeping them in safe custody. i. It buys and sells gold and silver.

7. Miscellaneous Functions: In addition to central banking and ordinary banking functions, the Reserve Bank performs the following miscellaneous functions:

(a) Banker's Training College has been set up to extend training facilities to supervisory staff of commercial banks. Arrangements have been made to impart training lo the cooperative personnel,

(b) The Reserve Bank collects and publishes statistical information relating to banking, finance, credit, currency, agricultural and industrial production, etc. It also publishes the results of various studies and review of economic situation of the country in its monthly bulletins and periodicals.

. Developmental and Promotional role of RBI

Along with the routine traditional functions, central banks especially in the

developing country like India have to perform numerous functions. These

functions are country specific functions and can change according to the

requirements of that country. The RBI has been performing as a promoter of

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the financial system since its inception. Some of the major development

functions of the RBI are maintained below.

1. Development of the Financial System : The financial system comprises

the financial institutions, financial markets and financial instruments.

The sound and efficient financial system is a precondition of the rapid

economic development of the nation. The RBI has encouraged

establishment of main banking and non-banking institutions to cater to

the credit requirements of diverse sectors of the economy.

2. Development of Agriculture : In an agrarian economy like ours, the

RBI has to provide special attention for the credit need of agriculture

and allied activities. It has successfully rendered service in this

direction by increasing the flow of credit to this sector. It has earlier the

Agriculture Refinance and Development Corporation (ARDC) to look

after the credit, National Bank for Agriculture and Rural Development

(NABARD) and Regional Rural Banks (RRBs).

3. Provision of Industrial Finance : Rapid industrial growth is the key to

faster economic development. In this regard, the adequate and timely

availability of credit to small, medium and large industry is very

significant. In this regard the RBI has always been instrumental in

setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI

and EXIM BANK etc.

4. Bill market : it also undertakes measures for developing bill market in

the country.

5. Provisions of Training : The RBI has always tried to provide essential

training to the staff of the banking industry. The RBI has set up the

bankers' training colleges at several places. National Institute of Bank

Management i.e NIBM, Bankers Staff College i.e BSC and College of

Agriculture Banking i.e CAB are few to mention.

6. Collection of Data : Being the apex monetary authority of the country,

the RBI collects process and disseminates statistical data on several

topics. It includes interest rate, inflation, savings and investments etc.

This data proves to be quite useful for researchers and policy makers.

7. Publication of the Reports : The Reserve Bank has its separate

publication division. This division collects and publishes data on

several sectors of the economy. The reports and bulletins are regularly

published by the RBI. It includes RBI weekly reports, RBI Annual

Report, Report on Trend and Progress of Commercial Banks India., etc.

This information is made available to the public also at cheaper rates.

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8. Promotion of Banking Habits : As an apex organization, the RBI

always tries to promote the banking habits in the country. It

institutionalizes savings and takes measures for an expansion of the

banking network. It has set up many institutions such as the Deposit

Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982,

NHB-1988, etc. These organizations develop and promote banking

habits among the people. During economic reforms it has taken many

initiatives for encouraging and promoting banking in India.

9. Strengthening banking system: By encouraging the commercial banks

to expand their branches in the semi-urban and rural areas, the Reserve

Bank helps

� to reduce the dependence of the people in these areas on

the defective unorganised sector of indigenous bankers and

money lenders, and

� to develop the banking habits of the people

10. Deposit insurance: By establishing the Deposit Insurance Corporation,

the Reserve Bank helps to develop the banking system of the country,

instills confidence of the depositors and avoids bank failures,

11. Savings mobilization: Through the institutions like Unit Trust of India,

the Reserve Bank helps to mobilise savings in the country,

12. Promotion of Export through Refinance : The RBI always tries to

encourage the facilities for providing finance for foreign trade

especially exports from India. The Export-Import Bank of India (EXIM

Bank India) and the Export Credit Guarantee Corporation of India

(ECGC) are supported by refinancing their lending for export purpose.

RBI’s Third Working Group 1998

The Third working group in 1998 recommended compilation of monetary aggregates which is simple, uncomplicated, comprehensive, and operationally feasible in terms of frequency of availability of information. Accordingly the group proposed compilation of following four measures of monetary aggregates: M0 = currency in circulation + bankers’ deposits with RBI + other

deposits with RBI.

Narrow money: Narrow money deals with transactions demand for money. The constituents of narrow money are limited to the central bank and the central government and commercial and co-operative banks.

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M0 is essentially the monetary base, i.e. reserve money. It is compiled weekly. This measure denotes effects on the consumer price index. M1 = currency with public + demand deposits with the banking system

+ other deposits with RBI M1 reflects the banking sector’s non-interest bearing monetary liabilities. It is compiled fortnightly. M2 = M1 + time liability of savings deposits with the banking system

+ certificates of deposit issued by banks + term deposits = currency with public + current deposits with the banking system

+ saving deposit with the banking system + certificates of deposit issued by banks + term deposits the banking system + other deposit with RBI

M3 = M2 + term deposits banking system + call borrowings from ‘Non

banking financial corporations.

M3 is the international standard of money supply. IMF, World Bank and WTO use this measure, uniformly, for comparing different economies of the world. M3 is similar to Milton Friedman’s measure of money supply. M3 is the measure of aggregate liquidity in the economy. This is an important measure for monetary targeting by RBI.

Liquidity measures for Broad money

In addition, the Third Working Group proposed two liquidity measures for broad money for measuring overall economic activities (monthly and quarterly compilation). This measure brings out the importance of Non depository corporations (Non banking financial corporations). L1 = M3 + all deposits with post office savings bank except NSC L2 = L1 + term deposits with Term Lending Institutions and

Refinancing Institutions (FIs) + term borrowing by FIs and Certificates of Deposits issued by FIs

L3 = L2 + public deposits of non banking financial companies

Recent Trends in Inflation Inflation has been one of the most important problems facing India's economy. Over the past five years (2006-11), the annual average Consumer Price Index (CPI) inflation was 8.7 percent for industrial workers and 9.7 percent for agricultural labourers, while the Wholesale Price Index (WPI)

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inflation was 6.3 percent. India's CPI inflation has been the second highest among the Asian economies.

Nature of inflationary pressures in India:- 1. Deregulation of administered prices such as petrol, diesel etc and

other measures such as caps on number of subsidized cylinders a household can use leads to upward movement in the prices.

2. Supply shocks which happen due to adverse monsoon conditions leads to increase in demand in agricultural sector which can spillover to other sectors.

3. Increase of indirect taxes in the recent budget of 2012. 4. Increase in the prices of crude oil imports which leads to price rise

in all those industries which use it as raw material. eg-power, petroleum products.

5. Increase in money in the hands of people due to increased Government spending in schemes like NREGA.

6. Increase in population which leads to increase in demand. 7. Capital stock deficiency tends to lead to bottlenecks, under which

resource constraints, including limited infrastructure and/or the lack of manufacturing capacity delay overall production or service generating processes, further leading to higher inflation through shortages in supply. India's capital stock-to-GDP ratio was 1.79 in 2010, among the lowest in Asia.

8. Demand Side Drivers (The National Rural Employment Guarantee Act (NREGA)): demand-side inflation drivers, especially those arising from a sharp rise in personal income and an expansionary fiscal policy, have also played an important role in keeping inflation persistently high.

9. Food price inflation has been a major driver of inflation and the lack of rainfall during the monsoon season often hits India's food production. In addition, the structural change in food intake has contributed to food price inflation.

10. Import price pressures have also been an important factor for overall inflation as India has become a more open economy over the past 10 years. In fact, the imported goods-to-GDP ratio doubled from just above 11 percent in FY00/01 to 21.9 percent in FY10/11 with bulk imports, such as crude oil, metals, rubber and food - primarily commodity-related items - accounting for 42.7 percent of total imports.

Inflation Expectations: In the RBI's latest inflation expectations survey of households, respondents' inflation expectations for three months ahead inched up to 12.2 percent in the third quarter of 2011 from 11.8 percent in the second quarter. Overall, inflation expectations have been largely driven by food price

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inflation in India as food constitutes more than 50 percent of the average Indian household's consumption basket.

Changing trends in monetary policy Monetary Policy deals with changing money supply and rate of interest for the purpose of stabilizing the economy at full employment or potential output level by influencing aggregate demand The RBI makes use of instruments to regulate money supply and bank credit so as to influence the level of aggregate demand for goods and services. The monetary policy has to balance the objectives of economic growth and price stability. Economic growth requires expansion in the supply of money so that no legitimate productive activity suffers due to finance shortage. Price stability requires control the expansion of credit so that money supply does not cause inflation. Changes in the monetary policy can be made anytime during the year. The Central Bank may adopt an expansionary or contractionary policy depending on the general economic policy of the Government and conditions in the economy. Monetary policy may also be used to influence the exchange rate of the country’s currency.

Monetary management

Maintenance of a sound monetary system is the basic objective of any central bank of a nation - De kock. Monetary management involves four major issues.

1. Price stability 2. Control over money supply 3. Control of Reserve money creation (RBI credit to

government) and 4. Rationalization of administered interest rate.

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The pre reforms monetary regime

• Existence of a spectrum of interest rates with built in elements of concessions and cross subsidies to meet the priorities to different sectors.

• Rate of return on government securities was fixed and was lower than market rates.

• Resolution of deposit rates and borrowing rates to maintain the cost of funds in relation to lending ratio.

• Unlimited accommodation through adhoc treasury bills to meet budgetary deficits of the central government

• Maintenance of high CRR and SLR of 15 per cent and 38.5 per cent respectively.

• Lack of depth in government securities market on account of application of lower than market coupons and

• Lack of depth and vibrancy in money market.

During transition to liberalized regime of monetary policy, formulation and implementation there were several changes:

• A shift in dependence from direct to indirect instruments of monetary control

• A more transparent way of formulation and implementation, keeping up with time consistency

• Recognition of the absence of trade-off between inflation and unemployment

The monetary policy now has to deal with twin objectives. Monetary policy now aims at striking a fine balance between high growth rate and price stability.

Changing trends in Monetary policy � Controlled Expansion (1951-72):

RBIs main concern during this period was to moderate the expansion of credit and money supply in such a way so as to legitimize needs of industry and trade and to curb the use for unproductive and speculative purposes.

� Tight Monetary Policy (1972-1991):

RBI tightened the monetary policy to curb inflation. In seventies and eighties, large fiscal deficits were incurred. Reserve Bank’s credit to the Government increased sharply which caused a rapid growth in money supply.

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Thus the monetary policy was to neutralize the inflationary effect

� Monetary Policy during reforms (1991 onwards): � As part of the economic reforms in 1991 it was decided

to reduce the fiscal deficit. Until 1995 the focus of the policy was on ensuring price stability. Since 1995 the policy has been eased to accelerate economic growth. Since 1999, effects of policy were more encouraging

� Like all emerging economies, India too has been affected by the crisis, and much more than was expected earlier.

� GDP growth has shown lower industrial production, negative exports, reduction in services activities, and decreasing business confidence.

� There were some strong points like well-functioning financial markets, good rural demand, lower headline inflation and comfortable foreign exchange reserves which buffered the impact of the crisis.

� Reduced the repo rate to 4.75 per cent � Reduced the reverse repo rate to 3.25 per cent � Kept the CRR unchanged at 5.0 per cent

� Monetary Policy 2009-10

� The thrust of the Reserve Bank's policy stance since mid-September 2008 aimed at providing rupee liquidity, ensuring comfortable dollar liquidity and maintaining continued credit flow to productive sectors.

� There is scope for banks to further reduce lending rates

so as to ensure credit flow for all productive economic activity.

� In the January 2009 policy review, there was a

projected growth for 2008-09 of 7.0 per cent. � Keeping in view the global trend in commodity prices

and domestic demand-supply balance, WPI inflation is projected at around 4.0 per cent by end-March 2010.

RBI’s Short term Liquidity management The Government of India borrows from public by issue of securities, to finance its deficit. RBI uses government securities to control liquidity in the market in order to influence the interest rates.

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RBI may reduce liquidity by selling the securities in the market and may increase liquidity by buying back the securities from the public. Short term liquidity management refers to injection or absorption of liquidity by RBI through Repos and Reverse Repos. Liquidity adjustment facility is an instrument of monetary policy through which the repos and reverse repos are auctioned within a corridor of interest rates in the short run. The corridor of inertest rates refr to narrow range predetermined by RBI. The second Liquidity adjustment facility announced in 2005 allowed auction twice daily. This reduced dependence on other tools like cash reserve ratio. Liquidity adjustment facility reduces emphasis on the banks monetary targeting and concentrates on interest rate alone. Market stabilization scheme

RBI introduced the Market Stabilization scheme in April 2004 to mop up the excess liquidity. The MSS operates mainly through Treasury bills. The Government will issue T-bills by way of auctions by the RBI in addition to its normal borrowing requirements, for moping up excess liquidity. The amount raised through this scheme is to be held in a separate account with the RBI and would be used only for the purpose of redemption or buyback of the T-bills Repo and Reverse Repo are tools available in the hands of RBI to manage the liquidity in the system. It either injects liquidity into the market if the conditions are tight or sucks out liquidity if the liquidity is excess in the system through the Repo and Reverse Repo mechanism, besides a host of other measures.

• RBI, as lender of last resort, provides liquidity to the banks through Repo auction, where RBI purchases securities from banks with an agreement to sell back the securities after a fixed period.

• RBI conducts Repo / reverse Repo auctions daily for overnight funds. Currently RBI is conducting Repo actions thrice daily, as the banks need to maintain their liquidity

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• It is the objective of RBI policy that the money market rates should normally move within the corridor of the policy rates (currently within the band of 3.25 percent and 4.75 percent).

• The Reverse Repo rate would lay the floor, which is the minimum rate of interest banks can earn on excess funds.

• The Repo rate would lay the upper side of the corridor as the maximum rate of interest at which banks can borrow overnight funds from RBI (RBI has imposed ceiling over call money lending and borrowing by banks. Banks can borrow and lend overnight up to a maximum of 100 percent and 25 percent respectively of their capital funds.

• Negotiated Dealing System is an electronic platform for facilitating dealing in government securities and money market instruments.

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SYBCom Business Economics Semester IV 2014

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