Economics 2

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040

(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester:
Semester: Third
Third Semester
Semester
Name
Name of
of the
the Subject:
Subject:
Economics-II
Economics-II
Marginal Efficiency of
Capital
1
SYNOPSIS
• Introduction
• Marginal efficiency of capital.
• Factors effecting MEC
• MEC and interest rates
• How companies maintain Capital using MEC
• Case study
• Conclusion
2
INTRODUCTIO
N
 Irving Fisher was first economist to make use of concept
MEC
in 1920.
 He gave it a name Rate of return over cost.
 Simply MEC means “expected rate of profitability of

new investment”.
 It’s calculation depends upon two factors mainly
I. amount of profit
II. cost of capital asset
3
MARGINAL EFFICIENCY OF
CAPITAL
 The marginal efficiency of capital (MEC) is that rate of discount which
would equate the price of a fixed capital asset with its present discounted
value of expected income.
 In short, MEC is the internal rate of return of an extra unit of
capital.
 The theory of marginal efficiency indicates that investment
decisions will be influenced by:
I. The marginal efficiency of capital
II. The interest rates
4
MEC CURVE
5
Factors Affecting the Marginal Efficiency
of Capital
Cost
of
Capita
l
Technologic Demand
al for
Innovation
Marginal goods
Expectatio
ns and
Efficienc Marginal rate
of Tax
confidence
y of
Capital
Availability
of
Finance
6
Factors Affecting the Marginal
Efficiency of Capital
1. The cost of capital:
If cheap capital is available for investment, then

investment opportunities become more attractive.
7
2. Demand for goods and services
If tastes and preferences change and demand for a good increases,
then the increased demand is likely to increase profitability.
3. The marginal rate of tax: If the marginal rate of tax is increased then the net
return on an
investment will fall, reducing the marginal efficiency of capital.
4. The availability of finance: Restrictions on lending will limit investment. A

relaxation of credit controls will make investment easier.
8
5. Expectations and confidence
If people believe that growth in economy is slowing and
•unemployment may rise in the foreseeable future, then
demand in the economy may contrast.
6. Technological change
•Innovation in products or processes may increase
the potential size of the market or help to drive
down costs.
9
MEC AND
INTEREST RATES
An investor while taking an investment decision makes a comparison
between MEC and rate of interest.
 when ROI is less than MEC (ROI<MEC) investor make more
investment.
 When ROI is more than MEC (ROI>MEC) no investment will be
made.
 When ROI is equal to MEC (ROI=MEC) investor stop making
any more investment.
10
HOW COMPANIES MAINTAIN
CAPITAL USING MEC
EXAMPLE:
• Suppose the price of machine is 30000.Duration of life of machine is 10
years, expected income during this period is 60000.
NOW
Total Profit of machine is 60000-30000= 30000 Average
profit per year - 30000/10 = 3000 MEC = 3000/30000
*100= 10%
11
CASE
STUDY
• This is case is about Nike which is a popular brand in sporting apparel
division.
• Nike generated 2.81billion$ in operating income on revenue
of 20.9billion$ in FY 2014 end of may.
• Nike planning on expansion in to fashion apparel segment.
• 2.5billion$ is capital investment (marginal capital) they are
going to invest.
• Expected market share will be at 2% in first year.
• Gross profit margins are expected to be a 23% of revenues.
• Total time period is 12 years.
• Nike has used MEC for taking decision on expansion plan investment .
12
School of Thoughts
13
School of thoughts
• Classical Economics
• Keynesian Economics
• Monetarist
• New Classical Economics
• Real Business Cycle
• New Keynesian Economics
14
Classical Economics
• Inspired by
– David Hume
– Adam Smith
– Thomas Malthus
– David Ricardo
– Etc.
• The main idea is “invisible hand”. The
most effective market system is the
market without government intervention.
The outcome will be efficient.
15
Classical Economics
• Aggregate supply
– Prices and wages can adjust quickly and
fully.
– Households and firms learn reasonably
and quickly about economic
environment.
– The economy is always fully-employed.
– The position of AS changes because of
capital stock, technology, or skill of
labor.
16
Classical Economics
• Aggregate demand
– The classical theory centers on the
quantity theory of money
MV = PT (1)
With M = the quantity of Money in the
circulation
V = the transaction velocity of money
P = price level
T = volume of transaction
17
Classical Economics
- Assume that T = Q (real output), with Q
is fixed at the fully employed level. Also,
the short run V is fixed.
- Therefore, (1) becomes:
M V  PQ
A change in money supply only affects
the price level.
18
Classical Economics
• Implications of Classical Economics
– Money supply changes has not effect on
current output, only affect price.
– Changes in government expenditure has no
effect on current output.
– Changes in the overall level of taxation do not
affect current output.
– Changes in marginal tax rates can cause
current output to change.
– Policy tools will not affect output and
employment but add instability.
– Let market work properly is the best thing the
government can do.
19
Neoclassical Economics
• The main decision problem is
resource allocation, not economic
growth.
• Price is determined by preference of
consumers, not purely on production
cost (which is claimed by traditional
classical economists).
• “Marginalism”, use marginal value to
analyze economic problems.
20
Keynesian Economics
• Motivated by the great depression
• Keynes published “The General
theory of Employment, Income, and
Money” in 1936.
• The classical economics cannot
explain the great depression since it
considers only LR equilibrium and
expects a temporary disequilibrium
to be adjust quickly.
21
Keynesian Economics
• Keynesians believed that the cause of the
great depression was due to a combination
of events that led to great uncertainty,
huge decreases in investment, and
economies being stuck in an
unemployment trap.
• “In the long run, we are all dead”
• Government intervention is needed to help
an economy to go back to the steady
state.
22
Keynesian Economics
• Aggregate supply
– Wages and quantities do not adjust
immediately (wage/price rigidities in the
short run).
– Involuntary unemployment could occur.
– When prices are rigid, all necessary
information are not transmitted to
market participants; hence, market
might not work well.
23
Keynesian Economics
– The main tool used by Keynesian
economists is IS-LM model.
– LM is flat and IS is steep; therefore,
• Liquidity trap, the change in money stock
would have little effect or no effect at all on
the interest rate.
24
Keynesian Economics
• Implications of the Keynesian model
– The economy is unstable.
– The economy takes a long time to adjust
to shocks and go back to the steady
state.
– AD is the main determinant of output
and employment.
– Fiscal policy is preferred to monetary
policy.
25
Monetarist
• Inspired by
– Friedman (1912)
– Brunner (1916)
– Meltzer (1928)
• Friedman did not believe the
Keynesian view that money had little
or no impact.
26
Monetarist
• The important of money
– The only times that major economic
contractions occurred were when the
absolute value of the money stock fell.
– From evidences, changes in money cause
changes in money income.
– Monetarists believe that money is a
substitute for a wide range of real and
financial assets, but not single asset could
be a close substitute for money. So
interest rate affect money demand.
27
Monetarist
• Monetarists thought that LM is flatter
and IS is steeper than in Keynesians.
• Fiscal policy would lead to a large
amount of “crowding out” of
investment and have little impact on
total output.
• There is no liquidity trap.
28
Monetarist
• Philips curve
– The second wave of monetarism deal with
Philip curve.
– Philip curve is published in 1958 using UK
data. It shows the inverse relationship
between money wage and the rate of
unemployment.
– The Keynesians draw the conclusion of
this finding to support their idea of a
permanent trade-off between inflation
and unemployment.
29
Monetarist
• Philips curve (cont’)
– To justify Keynesian policy, the workers
must have “money illusion”.
– Friedman argued that money illusion
occurs in the short run only. In the long
run, there is no trade-off between
unemployment and inflation and the
evidences seem to confirm this point of
view.
30
Monetarist
• Implications of monetarist
– Monetary policy is more effective than fiscal
policy.
– No long-run trade-off between inflation and
unemployment.
– The market system was not perfect, the
government would only make things worse.
– Fiscal policy could only influence the
distribution of income and the allocation of
resources (crowding out effect).
– The only way to increase output permanently is
to make market work better.
– Adaptive expectation.
31
New Classical Economics
• Initiated by
– Lucas
– Wallace
– Sargent
– Barro
• Initiated because of:
– Theoretical : introduce microeconomic
foundation in macroeconomics instead of AD-
AS model.
– Empirical: inconsistencies between Keynesian
and Monetarist and what actually happened in
1970s from oil price shocks, “Stagflation”.
32
• Rational Expectation
– Stagflation is inconsistent with adaptive
expectation (backward-looking).
– John Muth developed “rational expectation”,
which is forward looking expectation.
– It features: - people would look to the future.
- people use information wisely.
- people would not make
systematic errors.
33
• Incorporating rational expectations in
the AS-AD model
1. Imperfect information : Household
may not know the price level at the time
they make decision.
2. Parameterization of AS, Ls and Ld
curve: The curves are parameterized by
expectations of the values of the
exogenous variable.
34
• Implications of new classical economics
– Expectations are formed normally. They may
form wrong expectations, but once they have
learnt their mistake, they will no longer make
mistakes.
– Only unanticipated policies have an effect on
the output and employment.
– SR AS is upward sloping from imperfect
information.
– LR AS is vertical.
– Self-correcting economy.
35
Real Business cycle
• New classical fails to explain the
important empirical fact, deviations
from capacity output tended to be
prolonged and correlated.
36
Real Business cycle
• Important summary
1. Random walks : shocks to US output
is random walk so it did not revert back
to its trend.
2. Intertemporal substition : Instead of
AS-AD model, RBC tried to use
intertemporal substitution to explain
how shocks are transmitted into the
economy.
3. RBC still uses rational expectation.
37
Real Business cycle
• Important summary (cont’)
4. Market are always clearing.
5. Money is neutral.
6. Economic fluctuations are due to
supply side such as technological changes,
natural disaster, tax, input prices, etc.
38
New Keynesian Economics
• There are 3 main problems with new
classical
1. Unhappy / involuntary workers.
2. 1982 US recession.
3. Intertemporal substitution of labor
does not seem to be as large as RBC
suggested.
4. Hysteresis of unemployment.
39
• New Keynesian uses the new
classical model but introduces:
– Union models
– Contracts and staggering of price and
wage changes
– Menu cost and imperfect competition
40
• Implications of New Keynesian
Economics
– Market may not adjust quickly even with
rational expectation.
– Strong recession warrants government
intervention.
– Government should ensure that market
works smoothly as possible via
microeconomic policies.
41
UNIT- II
Unit-II
Issues in Economic Development
Poverty in India
Concept of
Poverty
• Poverty in India has been defined as that
situation in which an individual fails to
earn income sufficient to buy minimum
means of subsistence.
– A reasonable satisfactory level of nutritional

diet.
– Minimum required clothing, housing and
furniture
– Minimum level of health facilities, clean water
and education.
Relative and
Absolute Poverty
• Relative Poverty is comparative
• Absolute Poverty refers to total number of
people living below the poverty line.
• What is Poverty Line
• Poverty line or poverty threshold is the minimum
level of income a person or a family needs to live
on.
• A minimum income level used as an official
standard for determining the proportion of
a population living in poverty.
Poverty Line
in India
• The Planning Commission set up a Working
Group in 1962. It recommended that the
national minimum for a household of 5 persons
should be not less than Rs. 100/- per month for
rural and Rs. 125/- for urban at 1960-61 prices.
• These estimates excluded the expenditure on
health and education, which both were expected
to be provided by the State.
• This was subsequently expanded in 1979 by a
task force (Y. K. Alagh Committee)
Y. K. Alagh
Committee
• Till 1979 the approach was traditional i.e. Lack of
income. The committee decided to measure
poverty precisely as starvation i.e. that is in
terms of how much people eat.
• The committee recommended that people
consuming 2400 Calories in Rural and
2100 calories in Urban areas are poor
• States would take care of education and
health
Lakdawala
Committee - 1993
• Lakdawala formula was different in
the following respects –
• In the earlier estimates both health
and education were excluded
• Household per capita consumption
expenditure was the basis of poverty
line. CPI-IL and CPI-AL were used
• First estimated the per capita HH exp.
And then all person were defined as
poor as a result the number of poor
Suresh Tendulkar
•
Committee
In 2005 Tendulkar committee was set-up and the current estimates
are based upon the recommendations of this committee.
• The committee recommended the shift away from the calorie based
model and made poverty line broad based by considering the
monthly spending on education, health, electricity and transport also.
– Target nutritional outcomes should be counted
– Uniform Poverty Basket Line be used for rural and urban
region
– Suggested a change in the way prices are adjusted and
demanded.
– Tendulkar adopted the cost of living as the basis for
identifying poverty.
Tendulkar
Committee-
contd..
• Poverty line was estimated on the basis of daily per
capita expenditure of Rs. 27 and Rs. 33 in rural and
urban areas, respectively.
• 22% of the population was estimated to be below
poverty line.
• C Rangarajan reviewed the poverty estimation
methodology and raised the limits to 32/- and Rs. 47/-
respectively and estimated that the 30% of the
population was below the poverty line in 2011-12. The
number of poor in India was estimated at 36.3 crores.
• Vector of poverty: Poverty is not only fulfilling
the calorie requirement. We as a humans have
variety of needs and it is the duty of the society
to at least give minimum standard of living so
that poor may live in comfort. The vector is
given here under:
• Poverty gap measure is defined as the ratio of
the average income below the poverty line. In
this approach the aggregate shortfall of income
of all the poor from the specified poverty line is
calculated. It explains the fact how poor the are.
*****
Magnitude of
Poverty
Poverty line Poverty Ratio
• Year 2004- • Year 2004-
05
– Rural Rs. 05
– Rural 41 .
– Urba 446.68 – Urban 8
• Yearn 2011-12 Rs. – Total 25.7
578.80 37.2
– Rural Rs.816.00 • Year 2011-12
– Urba Rs.1000.0 – Rural 25.7
•Number
n of Poor0has declined – Urba 1 3.7
2004-05 Total 407.1 Million n 21 .9
2011-12 Total 269.3 Million – Total
Causes or Factors of poverty:
• Rapid growth of population
• Unemployment
• Indebtedness
• Geographical factors- isolation, low resource base, low rainfall
• Inequality
• Demographic factors- high dependency ratio, poor nutrition
• Low education
• Social factors
• Institutional factors-land reforms
• Low capital
• No skill or assets, poor health, Traditional expenditure on rituals,
exploitation in the market, climatic conditions, corruption,
inflation and high prices
Government’s
Measures
• Government’s Initiatives
• • Nehru Rozgar Yojana (NRY)
• • Self Employment to the
educated urban Youth
• (SEEUY)
• • Urban Basic Services for The
Poor
• • Prime Minister’s Integrated
Urban Poverty
• Eradication Program
Control
Measures
• • Create jobs
• • Raise the minimum wage
• • Invest in affordable, high-quality
child care and
• early education
• • Reduce the rate of interests of
agricultural and small
• business Loans
• • Agricultural Growth
Unemployment
in India
Concept Of
Unemployment
In a common sense , unemployment is a situation characterized when any one
is not gainfully employed in a productive activity. It means that an
unemployed person is one who is seeking any work for wages but is unable
to find any job suited to People willing to work but not presently working.
The "unemployed" comprise all persons above a specified age who during
the reference period were:
(a) "without work", i.e. that hadn't a paid employment or a self-

employment;
(b) "currently available for work", i.e. were willing to accept a paid
employment or a self-employment during the reference period;
(c) "seeking work", i.e. had taken specific steps to seek paid employment or
self-employment. The specific steps may include e.g. registration at a public
or private employment exchange; application to employers; answering or
placing newspaper advertisements. his capacity.
Kinds Of
Unemployment
• Structural Unemployment
• Under-Employment
• Disguised Unemployment
• Open Unemployment
• Educated
Unemployment
• Frictional Unemployment
• Seasonal Unemployment
Structural
Unemployment
A longer-lasting form of unemployment caused by
fundamental shifts in an economy.
Structural unemployment occurs for a number
of reasons – workers may lack the requisite job
skills, or they may live far from regions where
jobs are available but are unable to move there.
Or they may simply be unwilling to work because
existing wage levels are too low. So while jobs are
available, there is a serious mismatch between
what companies need and what workers can
offer.
Underemployment can refer to:
• "Over qualification" or "over education", or the employment of workers

with high education, skill levels, or experience in jobs that do not
require such abilities. For example, a trained medical doctor who works
as a taxi driver would experience this type of underemployment.
• "Involuntary part-time" work, where workers who could (and would like
to) be working for a full work-week can only find part-time work. By
extension, the term is also used in regional planning to describe regions
where economic activity rates are unusually low, due to a lack of job
opportunities, training opportunities, or due to a lack of services such as
childcare and public transportation.
• "Overstaffing" or "hidden unemployment" (also called "labor hoarding",

the practice in which businesses or entire economies employ workers
who are not fully occupied—for example, workers currently not being
used to produce goods or services due to legal or social restrictions or
because the work is highly seasonal.
• Disguised unemployment --- exists where part of
the labor force is either left without work or is
working in a redundant manner where worker
productivity is essentially zero. An economy
demonstrates disguised unemployment where
productivity is low and where too many workers
are filling too few jobs.
• Open unemployment – It is a situation where in a
large section of the labour force does not get a job
that may yield them regular income. This type of
unemployment can be seen and counted in terms
of the number of unemployed persons. The labour
force expands at a faster rate than the growth rate
of economy. Therefore all people do not get jobs.
• Educated Unemployment: Among the educated
people, apart from open unemployment, many are
underemployed because their qualification does not
match the job. Faulty education system, mass output,
preference for white collar jobs, lack of employable
skills and dwindling formal salaried jobs are mainly
responsible for unemployment among educated
youths in India. Educated unemployment may be
either open or underemployment.
• Frictional unemployment is caused due to improper

adjustment between supply of labour and demand for
labour. This type of unemployment is due to
immobility of labour, lack of correct and timely
information, seasonal nature of work. etc.
Seasonal
Unemployment
It is unemployment that occurs during certain
seasons of the year. In some industries and
occupations like agriculture, holiday resorts, ice
factories etc., production activities take place only
in some seasons. So they offer employment for
only a certain period of time in a year. People
engaged in such type of activities may remain
unemployed during the off-season.
Causes of Unemployment
in India
The important causes of Unemployment in India are as follows:
1. Rapid growth of population and increase in labour force.
2. Underdevelopment of the economy.
3. Slow growth in the agricultural sector.
4. Defective system of education.
5. Absence of manpower planning.

6. Degeneration of village industries.
7. Inappropriate technology.
8. Slow growth of industrial sector.
9. Immobility of labour.
10. Jobless growth.

Statistics About
Unemploymen
t In India
• Unemployment Rate in India decreased
to 4.90 percent in 2013 from 5.20
percent in 2012.
• Unemployment Rate in India averaged
7.32 percent from 1983 until 2013,
reaching an all time high of 9.40
percent in 2009 and a record low of
4.90 percent in 2013. Unemployment
Rate in India is reported by the Ministry
of Labour and Employment, India.
According to “Annual Employment And
Unemployment Survey Report 2013-14” the
rates of unemployment on Usual Principal State
(UPS) in the country as follows.
• Aggregate Unemployment Rate – 4.7%
• Unemployment Rate in rural areas- 4.9 %
• Unemployment Rate in urban areas- 5.5 %
• State having maximum unemployment
people Sikkim
• State having the least unemployed people
– Chhattisgarh
• State having maximum unemployment rate
– Kerala
Steps To Reduce
Unemployment
• Reconstruction Of Agriculture
• Adoption of Labour-intensive
Techniques
• Rapid Industrialization
• Population Control
• Reorientation Of Education System
• Encouragement Of small enterprises
• Guiding centres and more
employment exchanges.
Government Policy Measures to Reduce
Unemployment
• National Rural Employment Programme

• Rural Landless Employment Guarantee
Programme
• Integrated Rural Development Programme
• Food For Work Programme
• Training Rural Youth For Self Employment
• Operation Flood II
• Employment Guarantee Scheme
UNIT
UNIT -- III
III
Unit-III
Public Finance
Meaning & Scope of Public Finance
Meaning of Public
Finance
• The word public refers to general people and the
word finance means resources. So public finance
means resources of the masses, how they are
collected and utilized. Thus, Public Finance is the
branch of economics that studies the taxing and
spending activities of government. The discipline of
public finance describes and analyses government
services, subsidies and welfare payments, and the
methods by which the expenditures to these ends
are covered through taxation, borrowing, foreign aid
and the creation of money.
Definition
• According to Findlay Shirras
• “Public finance is the study of principles underlying
the spending and raising of funds by public
authorities”.
• According to H.L Lutz
• “Public finance deals with the provision, custody and
discursement of resources needed for conduct of
public or government function.”
• According to Hugh Dalton
• “Public finance is concerned with the income and
expenditure of public authorities, and with the
adjustment of the one to the other.
Nature of Public Finance
• Nature of public finance implies whether it is a science or
art or both.
• Public Finance as Science
• Science is the systematic study of any subject which studies
relationship between facts. Public finance has been held as science
which deals with the income and expenditure of the government’s
finance.It studies the relationship between facts relating to revenue
and expenditure of the government.
• Arguments in support of Public Finance as Science:
• Public finance is systematic study of the facts and principles
relating to government expenditure and revenue.
• Principles of Public finance are empirical.
• Public finance is studied by the use of scientific methods.
• Public finance is concerned with definite and limited field of human
knowledge.
• Public Finance as Art
• Art is application of knowledge for achieving definite objectives. Fiscal
Policy which is an important instrument of public finance makes use of
the knowledge of government’s revenue and expenditure to achieve
the objectives of full employment, economic development and
equality. Price stability etc. To achieve the goal of economic equality
taxes are levied which are likely to be opposed. Therefore it is
important to plan their timing and volume. The process of levying tax
is therefore an art. Study of Public finance is helpful in solving many
practical problems. Public finance is therefore an art also.
• From the above discussion it can be concluded that public finance is
both science and art. It is positive science as well as normative
science.
• It is a positive science as by the study of public finance factual
information about the problems of government’s revenue and
expenditure can be known. It also offers suggestions in this respect.
• It is also normative science as study of public finance presents
norms or standards of the government’s financial operations . It
reveals what should be the quantum of taxes, kind of taxes and on
what items less of public expenditure can be incurred.
Scope of Public Finance
• Public finance not only includes the income and expenditure of the
government but also the sources of income and the way of expenditure of
various government corporations, public companies and quasi
government ventures. Thus the scope of public finance extends to the
study of independent bodies acting under the government’s direct and
indirect control. The Scope of public finance includes:
• Public Revenue
Public finance deals with all those sources or methods through which a
government earns revenue. It studies the principles of taxation, methods
of raising revenue, classification of revenue, deficit financing etc.
• Public Expenditure
Public expenditure studies how the government distributes the
resources for the fulfillment of various expenses. It also studies principles
that the government should keep in view while allocating resources to
various sectors and effects of such expenditure.
• Public debt
It deals with borrowing by the government from internal and external
sources. AT any time government may exceed its revenue. To meet the
deficit, government raises loans. The study of public fiancé focuses on the
problems of raising loans and the methods of repayment of loans.
• Financial/Fiscal administration
The scope of financial administration is wider. It covers all the financial
functions of the government. It includes drafting and sanctioning of the
budget, auditing of the budget, etc. Financial administration is concerned with
the organization and functioning of the government machinery responsible for
performing the various financial functions of the state. The budget is the
master financial plan of the government.
• Economic Stabilization and Growth
In the present times, public finance is mainly concerned with the economic
stability and other related problems of a country. For the attainment of these
objectives, the government formulates its fiscal policy comprising of various
fiscal instruments directed towards the economic stability of the nation.
• Federal Finance
Distribution of the sources of income and expenditure between the
central and the state governments in the federal system of government is
also studied as the subject matter of the public finance. This branch of public
finance is popularly known as Federal Finance.
Public & Private Finance
• Public Finance: studies income and
expenditure activities of the state or
government.
• Private Finance: studies income and
expenditure activities of the private
individuals and private entities.
Similarities
• 1. Both the individuals and & the state

have broadly same objectives, viz. the
satisfaction of human wants. Private
finance- satisfaction of personal wants &
public finance- satisfaction of collective
wants.
• 2. Both individuals and state have
receipts and expenditure and each tries to
balance both to get maximum
satisfaction.
• 3. Both in private and public finance, borrowing becomes
essential when expenditure is more than income.
• 4. Both face the problem of adjustment of income and
expenditure. i.e. problem of unlimited wants and scarce
resources
Differences
1. Determination of expenditure
Public authority first determines the volume of expenditure
and then tries to find out resources to meet this expenditure.
Whereas private individual first looks at income and then
decides volume of expenditure.
2. Compulsory Character
State cannot avoid or postpone certain expenditure, while this
can be done in case of individuals. E.g. expenditure on defence,
public administration etc. cannot be avoided or postponed.
3. Principle of equi-marginal utility
Private individuals are more capable of applying this principle
because they are more free to follow their own scale of
preferences. Whereas public authority is unable to take this
principle as a basis of its expenditure on defence, education,
agriculture etc.
4. Nature of Budget
An individual generally believes in surplus budget but public
authority may follow deficit budget for several years,
specially in case of war and economic development.
5. Nature of Resources
The resources for individuals are more or less limited.
Whereas when it comes to public authority, it can print
currency, pass different laws to increase its income etc.
6. Motive of expenditure
Motive of private individual on business transaction is
profit. Transaction of public bodies is motivated by public
welfare.
• 7. Long Term Consideration
Private individuals invest where returns are quick and
immediate. Govt. undertakes projects in interest of public
welfare. 8. Coercive Methods Public authority can use
coercive methods to realise its revenue. But private
individuals cannot use force to get their income in the
manner in which the govt. does.
• 8. Coercive Methods
Public authority can use coercive methods to realise its
revenue. But private individuals cannot use force to get
their income in the manner in which the govt. does.
• 9. Publicity and Audit
Private individual likes to keep his financial transaction
secret, while govt. gives greatest publicity to its budget
proposals and allocation of resources to different heads in
its plan documents.
Taxation
Taxatio
n
The most important source of revenue of the government
is taxes. The act of levying taxes is called taxation. A tax
is a compulsory charge or fees imposed by government
on individuals or corporations. The persons who are
taxed have to pay the taxes irrespective of any
corresponding return from the goods or services by the
government. The taxes may be imposed on the income
and wealth of persons or corporations and the rate of
taxes may vary.
Objectives of Taxes
 Raising Revenue
 Regulation of Consumption and Production
 Encouraging Domestic Industries
 Stimulating Investment
 Reducing Income Inequalities
 Promoting Economic Growth
 Development of Backward Regions
 Ensuring Price Stability
Taxes can be classified into
two types :
Ta
x
Direct Indirect
Tax Tax
 Direct Taxes
A direct tax is that tax whose burden is borne by the same
person on whom it is levied. The ultimate burden of taxation
falls on the person on whom the tax is levied. It is based on the
income and property of a person.
The examples of Direct taxes are :
• Corporation Tax
• Income Tax
• Wealth Tax
• Gift Tax
• Property Tax
 Indirect Taxes
An indirect tax is that tax which is initially paid by
one individual, but the burden of which is passed
over to some other individual who ultimately bears
it. It is levied on the expenditure of a person.
Examples of Indirect Taxes are:

 Excise Duty
 Sales Tax
 Custom Duties
 Value Added Tax(VAT)
On the basis of degree of progression of tax,
it may be classified into:
 Proportional tax
 Progressive tax
 Regressive tax
 Degressive tax
 Proportional Taxation
A tax is called proportional when the rate of taxation remains
constant as the income of the tax payer increases. In this system all
incomes are taxed at a single uniform rate, irrespective of whether
tax payer’s income is high or low. The tax liability increases in
absolute terms, but the proportion of income taxed remains the
same.
 Progressive Taxation
When the rate of taxation increases as the tax payer’s income
increases, it is called a progressive tax. In this system, the rate of tax
goes on increasing with every increase in income.
 Regressive Taxation
A regressive tax is one in which the rate of taxation decreases as
the tax payer’s income increases. Lower income is taxed at a
higher rate, whereas higher income is taxed at a lower rate.
However absolute tax liability may increase.
 Degressive Taxation
A tax is called degressive when the rate of progression in taxation
does not increase in the same proportion as the increase in
income. In this case, the rate of tax increases upto a certain limit,
after that a uniform rate is charged. Thus degressive tax is a
combination of progressive and proportional taxation. This type of
taxation is often used in case of income tax. This is the case of
income tax in India as well.
Canons of Taxation
A good tax system should adhere to certain principles

which become its characteristics. A good tax system is
therefore based on some principles. Adam Smith has
formulated four important principles of taxation. A
few more have been suggested by various other
economists. These principles which a good tax system
should follow are called canons of taxation.
Adam Smith’s four canons of taxation
 Canon of Equality
 Canon of Certainty
 Canon of Convenience
 Canon of Economy
Canon of Equality
This states that persons should be taxed according to their ability to
pay taxes. That is why this principle is also known as the canon of
ability. Equality does not mean equal amount of tax, but equality in
tax burden. Canon of equality implies a progressive tax system.
 Canon of Certainty
According to this canon, the tax which each individual is required
to pay should be certain and not arbitrary. The time of payment, the
manner of payment and the amount to be paid should be clear to
every tax payer. The application of this principle is beneficial both
to the government as well as to the tax payer.
 Canon of Convenience
According to this canon, the mode and timings of tax payment

should be convenient to the tax payer. It means that the taxes
should be imposed in such a manner and at the time which is most
convenient for the tax payer. For example, government of India
collects the income tax at the time when they receive their salaries.
So this principle is also known as ‘the pay as you earn method’.
 Canon of Economy
Every tax has a cost of collection. The canon of economy implies
that the cost of tax collection should be minimum.
Income exempt from Tax
 Dividends paid by companies and mutual funds
 Insurance proceeds from an Insurance company
 Maturity proceeds of a Public provident fund (PPF
account)
Deductions from taxable income
 Section 88 of the Income Tax Act 1961(rebate on certain
investments)
 Section 80C deductions
 Section 80D(Medical insurance premiums)
 Interest on Housing loans
Conclusion
To conclude, we can say that the instrument of taxation is
of great significance on
• increasing the level of economic activity - Regressive

taxation
• reducing income inequalities - progressive taxation
• promoting economic growth – Funds could be reinvested
Social-Welfare Objective - Tax payment helps reduce the gap

between the haves and have-nots. As it helps in mobilizing the
surplus income from the haves and reinvesting them for public
welfare, it helps these surplus funds to reach the have-nots.
Public Debt
Introduction
 Public Debt is the debt borrowed by government through
various methods from the public
 R.B.I. Formed Internal Debt Management Cell in
October 01, 1992
 Formation of debt policy that seeks to achieve certain
objectives & the implementation of such a policy
 Methods adopted by the government through the
processing of FLOATING, REFUNDING &
REPAYMENT of public debt
 Management of public debt by Govt to avoid
inflationary or deflationary effect on the economy
Functions of Public Debt
Management
Manages:-
 The form of issue of public securities
 The form of refund of public debt
 The proportion of different types of debt to be
issued
 The pattern & structure of interest rate on
securities
 Authoritative decision making in public
debt
Relevance of Public Debt
 Increase or decrease of public debt has effect on
the working of any economy
 Public debt influences the formation of the
economic policy of the country
 Utilization of public debt will foster or hamper the
changes in economic development
 Necessary to know the conditions which are
essential for the implementation of planning
policies
 Gives knowledge about the actual amount
required for a certain policy
Relevance of Public Debt
 To maintain government‟s economic policy:- Helps
to raise the purchasing power and effective
demand in depression period & vice- versa during
inflation
 Providing sufficient funds to economy during war
period.
 To strengthen the money market of the
country
 Beneficial for the activities of government
 Should not have any adverse effect on the
economic condition of the country.
Principles of Public Debt
According to Philip E Taylor, three general principles of
debt management can be identified as:
a. The policies pursued must be able to extract
from the public without undue coercion.
b. The extraction of loanable funds from the
market and its repayment when it is
inconvenient to do so.
c. It should be so placed as to minimize the need to
enter the market when it is inconvenient to do so.
Principles of Public Debt
 Minimum interest cost of servicing public debt.
 Satisfaction of the investors.
 Funding the short term debt into long term
debt.
 Public debt must be in co-ordination with
fiscal and monetary policies.
 Proper adjustment of maturity
Debt Management and Optimal
Maturity Structure
 Low interest obligation.
 Preference pattern of investors.
 Optimal maturity structure.
 Monetization of debt.
 Maintenance of interest rate
 Anti- cyclical use of debt
Types of Public Debt
 Productive debt & Unproductive debt
 Voluntary debt & Compulsory debt
 Internal debt & External debt
 Short term debt, Medium term debt & Long
term debt
 Redeemable debt & Irredeemable debt
 Funded debts and Unfunded debts
Productive debt
 Public debt when raised productive purposes and used
to add the productive capacity of the economy
 Public debts which are fully covered by assets of equal
or greater value.
 Self liquidating in nature
 Provides a continuous flow of income to Govt.
 The interest and principal amount is generally paid out
of income earned by the government from the
production projects
E.g. Railway projects, Irrigation projects, Power
generation Projects etc
Unproductive Debt
 Public debt which do not add to the
productive capacity of the economy
 Public debt used for war, famine relief, social
services, etc. is considered as unproductive
debt
 Not necessarily self liquidating
 Burden to the government
 Repaid generally through additional taxes.
Voluntary debt
 Loans are provided by the members of the
public on voluntary basis
 Voluntary in nature
 Obtained in the form of market loans, bonds, etc.
 The Government makes an announcement in the
media to obtain such loans
 The rate of interest is normally higher than that of
compulsory debt, in order to induce the people to
provide loans to the government.
Compulsory debt
 Rare phenomenon in modern public finance
 Raised in special situations like war or crisis
 Public are compelled to give debt
 The rate of interest on such loans may be low
 These loans are similar to tax, the only
difference is that loans are rapid but tax is not.
 E.g. Compulsory deposit scheme In India
Internal Debt
 Funds borrowed by the government from various sources within the
country.
 Include individuals, banks, business firms, and others.
 Instrument include market loans, bonds, treasury bills, ways and
means advances, etc.
 Repayable only in domestic currency
 It imply a redistribution of income and wealth within the country
& therefore it has no direct money burden.
 The internal debt of the Central Governme India has
incrSeOPa18s, MeBAd11-1f3rBom Rs.1.54 lakh crore
External Debt
 Debts raised from foreign countries orinternational
institutions
 Debts repayable in foreign currencies
 Voluntary in nature
 It involves transfer of resources from foreign countries to the
domestic country
 Repayment of interest and principal amount through transfer of
resources takes place in the reverse direction.
 Help to take up various developmental programmes in
developing and underdeveloped countries
Fiscal Policy
Introductio
n
 Fiscal Policy is a part of macro economics.
 This policy is also known as budgetary policy.
 One major function of the government is to stabilize the
economy.
 Current indian govt wants to achieve fiscal deficit target by
not reducing expenditure but increasing tax collection.
 Keynesian economics, when the government changes the
levels of taxation and governments spending, it influences
aggregate demand and the level of economic activity.
Meanin
g
• The word fisc means ‘state treasury’ and fiscal policy
refers to policy concerning the use of ‘state treasury’ or
the government finances to achieve the
macroeconomic goals.
• Fiscal policy involves the decisions that a government

makes regarding collection of revenue, through taxation
and about spending that revenue.
• It is sister strategy to monetary policy through which a

central bank influences a nation’s money supply.
Objectives of Fiscal
Policy
1. Development by effective mobilisation of resources
2. Reduction in inequalities of income and wealth
3. Price stability and control of inflation
4. Employment generation
5. Reducing the deficit in the balance of payment
6. Increasing national income
7. Development of infrastructure
Instruments of Fiscal
policy
Instruments of Fiscal
Policy
Budget Taxation Public Public debt

expenditure
Budg
et
• “A Budget is a detailed plan of operations for some
specific future period”
• Budget is presented by the finance minister of
India.
• Budget is also known as Annual Financial Statement
of the year.
• Total Expenditure has accordingly been estimated
at Rs.17,77,477 crore in 2015-16
• The requirements for expenditure on Defence,
Internal Security and other necessary expenditures
are adequately provided.
Taxatio
n
Direct Tax Indirect Tax
•Individual Income Tax & • Central excise (a tax
Corporate Tax. on manufacture
• Wealth tax @ 2% goods)
• VAT @ 12.5%
• Service Tax @ 14%
• Custom Duty
Public
Expenditure
• Public expenditure is spending made by the
government of a country on collective needs and
wants such as pension, provision, infrastructure, etc.
• Public expenditure is an important component of
aggregate demand.
• Public expenditure include Revenue expenditure and
capital expenditure.
Public
Debts
“ public debt is defined as any money owned by
a government agency”
• Internal borrowings
Borrowings from the public means of treasury bills and
govt. bonds.
Borrowings from the central bank
• External borrowings
Foreign investment
International organizations like World Bank &IMF
Market borrowings
Types of Fiscal
Policy
Fiscal policy
Discretionary
Non-discretionary
policy
fiscal policy
To cure To control
recession inflation Personal
Transfer
income
Increase in Raising taxes payment
taxes
Govt. to control
expenditure nflation
Corporate Corporate
Reduction Disposing of Income dividend
of taxes budget taxes policy
surplus
Concept of
Deficit
• Revenue Deficit = Revenue Expenditure – Revenue
Receipts
• Fiscal Deficit = Total Expenditure (that is Revenue

Expenditure + Capital Expenditure) – Total Receipts
(that is all Revenue and Capital Receipts other than
loans taken)
Achievements of Fiscal
Policy in India
• Mobilization of resources
• Increase in savings
• Increase in capital formation
• Incentives to investment
• Reduction in Income and wealth Inequalities
• Reduction in inter regional variations
Fiscal Reforms in
India
• Simplification of taxation system
• Improving tax to GDP ratio
• Reduction in rates of direct taxes
• Reforms in indirect taxes
• Introduction of service tax
Contd
…
• Reduction in non-plan government expenditure
• Reduction in subsidies
• Closure of sick public sector companies
• Disinvestment of public sector units
• Efforts to reduce government administrative expenses
Fiscal Responsibility and Budget
Management Act, 2003
• The Fiscal Responsibility and Budget Management
Act, 2003 is an Act of the Parliament of India to
institutionalise financial discipline, reduce India's
fiscal deficit, improve macroeconomic
management and the overall management of the
public funds by moving towards a balanced
budget.
• Objectives
• To introduce transparent fiscal management systems in the
country
• To introduce a more equitable and manageable distribution
of
• the country's debts over the years
•
Current Fiscal
Policy
• The state of world economy has been the most decisive factor affecting
the fortunes of every developing countries.
• Roadmap to achieve Fiscal deficit of 3% of GDP in three years: Target is
3.9% in 2015-16, 3.5% in 2016-17, 3% in 2017-18.
• The current financial year will end on a satisfactory note with the fiscal
deficit at 4.6 percent (below the red line of
4.8 percent) and the revenue deficit at 3.3 percent.
• Fiscal Deficit in 2014-15 estimated to be 4.1 percent which will be
below the target set by new Fiscal Consolidation Path and Revenue
Deficit is estimated at
3.0 percent.
Conclusi
on
• Thus, the fiscal policy encompasses two separate but related decisions;
public expenditures and the level and structure of taxes. It occupies the
central place for maintaining full employment without inflationary forces in
the economy. With its various instruments it influences the economic
stability of an economy. The fiscal policy of the Indian government has been
very successful in several fields such as mobilization of resources for
economic development, increasing rate of savings and capital formation,
developing cottage and small scale industries ,reducing the incidence of
poverty etc.
UNIT-IV
Liberalization, Globalization and Related
Issues
WHAT IS FDI
•Foreign direct investment (FDI) in its
classic form is defined as a company from
one country making a physical investment
into building a factory in another country.
•Include investments made to acquire

lasting interest in enterprises operating
outside of the economy of the investor.
Generally speaking FDI refers to capital inflows
from abroad that invest in the production capacity of
the economy and are
• Usually preferred over other forms of external

finance because they are
• Non-debt creating, non-volatile and their returns

depend on the performance of the projects financed
by the investors.
• FDI also facilitates international trade and

transfer of knowledge, skills and technology.
The FDI relationship consists of a parent enterprise
and a foreign affiliate which together form a
Multinationals Corporations (MNC).
In order to qualify as FDI the investment must

afford the parent enterprise control over its foreign
affiliate.
The IMF defines control in this case as owning

10% or more of the ordinary shares or voting
power of an incorporated firm or its equivalent for
an unincorporated firm.
Foreign Direct Investment (FDI) is permitted as under the
following forms of investments-
• Through financial collaborations.
• Through joint ventures and technical

collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential

allotments.
ENTRY STRATEGIES FOR
FOREIGN INVESTOR
• Foreign Company has the following options to set
up business operations in India :
• By incorporating a company
under the Companies Act, 1956
• A wholly owned subsidiary
• Joint venture company - existing company
or new company with domestic partner
• As an unincorporated entity
• Liaison Office
• Project Office
• Branch Office
LIAISON OFFICE
• Liaison office not permitted to undertake

any commercial/trading/industrial activity
• The role of the liaison office is limited

to
• Collecting about possible

opportunities
information and providing information about
market
the company and its products to prospective
Indian customers
• Acting as a communication channel between
the parent company and Indian Companies.
• It can promote export/import from/to India and

also facilitate technical/financial collaboration
between parent company/Group companies
and companies in India
• Approval for establishing a liaison office in

India is granted by RBI
PROJECT OFFICE
• General permission to foreign entities to
establish Project / Site Offices (temporary
in nature)
• Such offices cannot undertake or carry on

any activity other than the activity relating
and incidental to execution of the project
• General permission also for remitting surplus

funds after completion of project on
production of the following documents:
BRANCH OFFICE
• Foreign companies engaged in manufacturing
and trading activities abroad are allowed to set
up Branch Offices in India for specified
purposes
• Branch Offices are established with the

approval of RBI
• Permitted to remit outside India profit of

the branch
FOREIGN INVESTMENTS
THROUGH GDRs (Euro
Issues)
Foreign Investment through GDRs is

treated as Foreign Direct Investment
CLEARANCE FROM FIPB
There is no restriction on the number of Euro-issue to be
floated by a company or a group of companies in the
financial year .
A company engaged in the manufacture of items covered

under Annex-III of the New Industrial Policy whose direct
foreign investment after a proposed Euro issue is likely to
exceed 51%
or
Which is implementing a project not contained in Annex-III,

would need to obtain prior FIPB clearance before seeking
final approval from Ministry of Finance.
USE OF GDRs
The proceeds of the GDRs can be used
for-
•
Financing capital goods imports,
• Capital expenditure including domestic
purchase/installation of plant,
• Equipment and building and
• Investment in software development,
• Prepayment or scheduled repayment of earlier external
borrowings, and
• Equity investment in JV/WOSs in India.
WHY FDI ?
1. Gain a foothold in a new geographic market.
2. Increase a firm’s global competitiveness

and positioning.
3. Fill gaps in a company’s product lines in a

global industry.
4. Reduce costs in areas such as R&D,

production, and distribution.
FACTORS REQUIRED TO
ATTRACT FDI
• Low cost BUT Qualified, Educated/Skilled Labor Pool.

• Long-term Market Potential OR Yields greater than
can be achieved Domestically.
• Access to Natural Resources.
• Geography
• Stability of the economic and Political
Environment.
FORBIDDEN TERRITORIES
FDI is not permitted in the following
industrial sectors:
• Arms and ammunition.
• Atomic Energy.
• Railway Transport.
• Coal and lignite.
• Mining of iron, manganese, chrome,
gypsum, sulphur, gold, diamonds, copper,
zinc.
• Lottery Business
• Agricultural or plantation activities
• Housing and Real Estate Business (except

development of townships, construction of
residen-tial/commercial premises, roads or
bridges to the extent specified in Notification
No. FEMA 136/2005-RB dated July 19, 2005).
F D I - APPROVAL
Foreign direct investments in India
are approved through three routes:
• Automatic approval by RBI.
• The FIPB Route.
• CCFI Route
AUTOMATIC ROUTE
• No need of Prior Approval From FIPB,RBI,GOI.
BUT
The investors are only required to notify the

Regional Office concerned of the Reserve Bank
of India within 30 days of receipt of inward
remittances.
AND
File the required documents along with form

FC- GPR with that Office within 30 days of
issue of shares to the non-resident investors.
AUTOMATIC ROUTE
The Reserve Bank of India accords automatic
approval within a period of two weeks
(provided certain parameters are met) to all
proposals involving:
• foreign equity up to 50% in 3 categories

relating to mining activities .
• foreign equity up to 51% in 48

specified industries.
• foreign equity up to 74% in 9

categories .
THE FIPB ROUTE
• FDI in activities not covered under the

automatic route require prior government
approval.
• Approvals of all such proposals including

composite proposals involving foreign
investment/foreign technical collaboration is
granted on the recommendations of FIPB.
• Application for all FDI cases, except NRI
investments and 100% EOUs, should be
submitted to the FIPB Unit,DEA, Ministry
of Finance.
• Application for NRI and 100% EOU cases

should be presented to SIA in Department of
Industrial Policy and Promotion (DIPP).
• Application can be made in Form FC-IL. Plain

paper applications carrying all relevant details
are also accepted.
• No fee is
payable.
CCFI ROUTE
• Investment proposals falling outside
the automatic route.
And
• Having a project cost of Rs. 6,000 million or
more would require prior approval of
Cabinet Committee of Foreign Investment
(“CCFI”).
• Decision of CCFI usually conveyed in 8-10

weeks. Thereafter, filings have to be made
by the Indian company with the RBI.
MAJOR BODIES
CONSTITUTED FOR FDI
1991- Foreign Investment Promotion Board
FIPB
1996- Foreign Investment Promotion

Council FIPC
1999- Foreign Investment

Implementation Authority FIIA
2004- Investment Commission
Secretariat for Industrial Assistance (SIA)

ADVANTAGES OF FDI
• Increase in Domestic Employment/Drop
in unemployment
• Investment in Needed Infrastructure.
• Positive Influence on the Balance of

Payments.
• New Technology and “Know How” Transfer.
• Increased Capital Investment.

• Targeted Regional and Sectoral Development.
DISADVANTAGES OF FDI
• Industrial Sector Dominance in the
Domestic Market.
• Technological Dependence on Foreign
Technology Sources.
• Disturbance of Domestic Economic Plans
in Favor of FDI-Directed Activities.
• “Cultural Change” Created by “Ethnocentric
Staffing” The Infusion of Foreign Culture ,
and Foreign Business Practices
FDI
SECTORAL GUIDELINES
AIRPORTS
Foreign Investment up to 100% is allowed in
green field projects under automatic route
Foreign Direct Investment is allowed in

existing projects
- up to 74% under automatic route
- beyond 74% and up to 100%

subject to Government approval
TELECOM
• FDI in basic and cellular, unified
access
services, national/ international long
distance ,
V-Sat, public mobile radio trunk
services ,
global mobile personal
communications services
- Automatic up to 49%
- FIPB beyond 49% but up to 74%
Manufacture of telecom equipments -

Automatic up to 100%.
DOMESTIC AIRLINES
• FDI up to 49% (40%) permitted
under automatic route
• Automatic Route is not available
• However, a foreign airlines are not allowed to

have any direct or indirect equity participation
• 100% investment by NRIs/OCB’s

DRUGS & PHARMA
• FDI up to 100% is permitted under the automatic route
for manufacture of drugs and pharmaceuticals (The
following is the current position)
• FDI up to 74% in the case of bulk drugs, their

intermediates Pharmaceuticals and formulations would
be covered under automatic route.
• FDI above 74% for manufacture of bulk drugs will be

considered by the Government on case to case basis
INSURANCE
• FDI up to 26% allowed on the automatic route
• However, license from the Insurance Regulatory

& Development Authority (IRDA) has to be
obtained
• There is a proposal to increase this limit to 49%

MINING
• Coal & Lignite mining for captive consumption

by power projects, and for iron & steel and
cement production - Automatic up to 100%
• Mining exploration and mining

covering of
diamonds and precious stones, gold,
silver and minerals - Automatic up to 100%
PETROLEUM
• Petroleum and natural gas sector, other than
refining and including market study and
formulation; setting up infrastructure for
marketing - Automatic up to 100%
• For petroleum refining activity 100% FDI is

permitted in Indian Private Companies under
automatic route and up to 26% FDI is permitted
in Public Sector Undertakings with
Government approval
PRIVATE SECTOR BANKING
•Foreign Investment up to
74% is permitted from all
sources under the automatic
route subject to guidelines
for setting up of
branches/subsidiaries of
foreign banks issued by RBI
from time to time.
TRADING
• Wholesale / cash & carry trading -
Automatic upto 100%
• Trading for exports - Automatic upto 100%
• Trading of items sourced from small scale

sector
- 100% with Government approval
• Single product retailing - 51%
Government
Brand approval
with
PRINT MEDIA
• FDI upto 100% in publishing/printing scientific
& technical magazines, periodicals & journals
• FDI upto 26% in publishing news papers and

periodicals dealing in news and current affairs.
• All investments are subject to the guidelines

issued by the Ministry of Information and
Broadcasting
BROADCASTING
• FDI permitted for setting up hardware facilities
such as up-linking, HUB, etc up to 49% under
Government approval route
• FDI permitted in Cable Network up to 49% under
• Foreign Investment (FDI/FII) up to 49% allowed under

Government approval route in Direct to Home Service
Providers. FDI limited to 20%
• FDI permitted in FM radio up to 20% under
INFRASTRUCTURE
• 100% FDI is permitted for the following
activities:
• Electricity Generation (except Atomic energy)

• Electricity Transmission
• Electricity Distribution
• Mass Rapid Transport System
• Roads & Highways
• Toll Roads
• Vehicular Bridges
• Ports & Harbors
• Hotel & Tourism
SPECIAL INVESTMENT
AVENUES
ELECTRONIC HARDWARE AND
SOFTWARE TECHNOLOGY PARKS
• 100 percent foreign investment
under automatic route is
allowed in electronics and
software industries set up
exclusively for exports.
• Eligible to purchase, free of

customs duty/ excise duty,
their entire requirement of
capital goods, raw materials
and components, spares and
consumables, office
equipments etc.
EXPORT ORIENTED UNITS
• 100% foreign equity (is permitted through

Automatic Route similar to SEZ units) in
Export Oriented Units (“EOUs”) even if it is
manufacturing an item reserved for the small
scale sector
• EOUs enjoy several privileges like duty

exemption on import and domestic
procurement and also Income tax exemption
till 31.03. 2009
• Project with minimum investment of Rs.10
million and above in building, plant and
machinery qualify to be considered under
EOU scheme
Not applicable in case of certain industries

like agriculture, floriculture, information
technology, services, hand made jewellery, etc.
• Exemption of Industrial Licensing for

manufacture of items reserved for SSI
sectors.
• .
SPECIAL ECONOMIC ZONE
• Special Economic Zone (“SEZ”) is
deemed to
be foreign territory for the purposes of
trade operations and duties and tariffs
• No cap on Foreign investment for

manufacturing items reserved for SSI as well as
exemption from industrial licensing
• An SEZ unit can be set up to undertake trading

activities in addition to manufacturing of goods
and rendering of services
ILLUSTRATIVE LIST OF
SECTORS UNDER
AUTOMATIC ROUTE FOR
FDI UP TP 100%
• Most manufacturing activities
• Drugs and pharmaceuticals
• Food processing
• Electronic hardware
• Software development
• Film industry
• Advertising
• Hospitals
• Pollution control and management
• Management consultancy
• Computer related Services
• Research and Development Services
• Construction and related Engineering Services
• Pollution Control and Management Services
• Health related & Social Services
• Travel related services
ADVANTAGES OF INDIA
• Stable democratic environment over 60
years of independence
• Large and growing market
• World class scientific, technical and
managerial manpower
• Cost-effective and highly skilled
labor
• Abundance of natural resources
• Well-established legal system
with independent judiciary.
• Developed banking system and vibrant capital

market .
• India among the top three investment hot

spots and one of the fastest growing
economies in the world.
• Large English speaking population

Special Economics Zones
Special Economic Zones
Special Economic Zones (SEZs) Scheme in India was
conceived by the Commerce and Industries Minister
Murosoli Maran during a visit to Special Economic Zones
in China in 1999.
The scheme was announced at the time of annual

review of EXIM Policy effective from 1.4.2000. The basic
idea is to establish the zones as areas where export
production could take place free from all roles and
regulations governing imports and exports and to give
them operational flexibility.
Special Economic Zone (SEZ) is a specifically delineated

duty free enclave, which shall be deemed to be a foreign
territory for the purposes of trade operations and duties
and tariffs.
India’s Economic Potential and SEZs
With a population of 1.1 billion and a GDP per capita of US$3,400, India
is a rising power that no international company can afford to ignore.
In 2005, the International Monetary Fund (IMF) reported India’s GDP to
be US$3.63 trillion in terms of purchasing power parity, ranking fourth in
the world. By some definitions, India’s middle class consists of 300
million people and its expansion will raise consumption and make
economic growth faster and more sustainable. As is well-known, India has
developed a world-class information technology and business process
outsourcing (“BPO”) sector that exports its services globally. Yet for all of
India’s achievements, the country is still wrestling with high poverty and
unemployment rates. India may have excelled in BPO, but when it comes
to export manufacturing, India is the poorer cousin of China. Hence, there
is great interest within India to promote the export-oriented
manufacturing sector through Special Economic Zones or SEZs.
THE GLOBAL DEBATE ON SEZs
Worldwide, the first known instance of an SEZ seems to have been an industrial park set up
in Puerto Rico in 1947 to attract investment from the US mainland. In the 1960s, Ireland
and Taiwan followed suit, but in the 1980s China made the SEZs gain global currency with
its largest SEZ being the metropolis of Shenzhen.
From 1965 onwards, India experimented with the concept of Export Processing Zones
(EPZ). These did not quite deliver as much as was expected, however. Thus, in 2000, the
new Export and Import Policy allowed for SEZs to be set up in the public, private or joint
sector or by state governments.
Eight EPZs were converted into SEZs. Altogether, a total of 19 SEZs were established prior
to the promulgation of the SEZ Act, which were later – in 2005 – legally deemed as SEZs
under the new Act. More than 300 SEZs have obtained either formal or “in principle”
approval over the years.
SEZs have been enabled with a view to providing an internationally competitive and
hassle-free environment for exports. Units may be set up in SEZs for manufacturing goods
and rendering services. All the import/export operations of the SEZ units are on a self-
certification basis. Sales by SEZ units in the domestic tariff area are subject to payment of
full custom duty and to the import policy in force. Furthermore, offshore banking units may
be set up in the SEZs.
Thirty years ago, 80 special economic zones (SEZs) in 30 countries
generated barely US $6 billion in exports and employed about 1 million
people. Today, 3,000 SEZs operate in 120 countries and account for US
$600+ billion in exports and 50 million direct jobs.
After the success of the first SEZ when it appeared in Taiwan’s
Kaohsiung harbor 40 years ago, some economists thought that greater
trade liberalization around the world would soon make these zones
obsolete. That was especially true after 1995, when the founding of the
WTO promised to bring trade barriers crashing down and usher in a
new golden age of globalization.
Such “special” zones were to be expanded to entire countries, regions
and ultimately, the world. Instead, zones have had an enduring appeal—
even in mostly open economies such as Taiwan’s. In fact, their numbers
are booming: In 1995, there were 500 in 73 countries; by 2002, there
were 3,000 in 120 countries.
What do SEZs Produce
SEZs are the markers of government's

strategy to create an "export-oriented"
economy. Vast majorities of developing world
have invested in servicing the needs of the
European and the American consumers.
Developing countries aim for export
economies for garnering foreign exchange.
Foreign Trade Zones / Free Trade Zones
The Government of India has established several foreign trade zone schemes to
encourage export-oriented production. These provide a means to bypass many of the
domestic economy's fiscal and infrastructural obstacles that otherwise make Indian
goods and services less competitive in international markets.
The most recent of the schemes is the Special economic Zone (SEZ), a duty-free
enclave with separately developed industrial infrastructure. Other schemes include
the Export Processing Zone (EPZ) and the Software Technology Park (STP), both of
which are designated areas for export-oriented activities. In addition, India allows
an individual firm to be designated an Export Oriented Unit (EOU).
All of these schemes are governed by separate rules and granted different benefits.
In May 2005, the Government of India passed new legislation called the “Special
Economic Zones (SEZ) Bill 2005” endorsing its commitment to a long-term and
stable policy for the SEZ structure which had previous been only an administrative
construct.
EPZ and SEZ differences
Conceptually, EPZs and SEZs are different – the
former is an industrial estate whilst the latter is an
industrial township. Despite criticisms that India’s
attempt to convert its Export Processing Zones
(EPZs) into SEZs is an insurmountable task, India
has gone full steam ahead. The SEZ and EOU/EPZ
schemes have a common philosophy and common
objectives. Therefore, by and large the procedures
are the same. The one critical difference is that
whereas the EOUs are ‘stand alone’ units the units
in the SEZ/EPZ are in a well defined enclave.
Salient features of an SEZ
An SEZ is a geographically demarcated region that has economic
laws that are more liberal than the country’s typical economic laws
and where all the units there in have specific privileges.
SEZs are specifically delineated duty-free enclaves and are
deemed to be foreign territory for the purposes of trade
operations, duties and tariffs.
The principal goal is to increase foreign investment. Through the
introduction of SEZs, India also wants to enhance its somewhat
dismal infrastructural requirements, which, once they have been
improved, will invite even more foreign direct investment. As far as
trade and commerce are concerned, SEZs are regarded as
international territory.
Local raw materials bought by producers within SEZs are regarded
as exports whereas those goods that are produced in SEZs and
sold in the DTA (Domestic Tariff Area) are regarded as imports.
Objectives of SEZs
The objective behind an SEZ is to enhance
foreign investment, increase exports, create jobs
and promote regional development. To put in the
government’s own words, the main objectives of
the SEZs are:
(a)Generation of additional economic activity;
(b)Promotion of exports of goods and services;
(c)Promotion of investment from domestic and
foreign sources;
(d)Creation of employment opportunities;
(e) Development of infrastructure facilities.
EVOLUTION OF SEZs IN INDIA
In India, the first zone was set up in Kandla as early as 1965. It was followed by
the Santacruz export processing zone which came into operation in 1973.
The government set up five more zones during the late 1980s. These were at
Noida (Uttar Pradesh), Falta (West Bengal) Cochin (Kerala), Chennai (Tamil
Nadu) and Visakhapatnam (Andhra Pradesh). Surat EPZ became operational in
1998.
The EXIM Policy, 2000 launched a new scheme of Special Economic Zones
(SEZs). Under this scheme, EPZs at Kandla, Santa Cruz, Cochin and Surat were
converted into SEZs. In 2003, other existing EPZs namely, Noida, Falta, Chennai,
Vizag were also converted into SEZs.
In addition, approval has been given for the setting up of 26 SEZs in various parts
of the country. Apparently, India is now promoting the EPZ programme much more
vigorously than in the initial phases of their evolution. Huge amounts of public
resources are being invested in the zones.
SEZs in India were announced by the government in March 2000.
To provide a stable economic environment for the
promotion of Export-import of goods in a quick,
efficient and hassle-free manner, Government of India
enacted the SEZ Act, which received the assent of the
President of India on June 23, 2005.
The SEZ Act and the SEZ Rules, 2006 (“SEZ Rules”)
were notified on February 10, 2006. Since then 15
SEZs including 8 EPZs (Export Processing Zones)
have been set up at Kandla, Surat, Mumbai, Kochi,
Noida, Chennai (3 SEZs), Visakhapatnam, Indore,
Jaipur and Jodhpur, Falta, Manikanchan, and Salt Lake.
The salient features of the Indian SEZ initiative further
include the following points:
•Unlike most of the international instances where zones are primarily developed
by governments, the Indian SEZ policy provides for development of these zones
in the government, private or joint sector. This is meant to offer equal
opportunities to both Indian and international private developers.
•100 per cent FDI is permitted for all investments in SEZs, except for activities
included in the negative list.
•SEZ units are required to be positive net foreign-exchange earners and are not s
subject to any minimum value addition norms or export obligations.
•Facilities in the SEZ may retain 100 per cent foreign-exchange receipts in Exchange
Earners’ Foreign Currency Accounts.
•100 per cent FDI is permitted for SEZ franchisees in providing basic telephone
services in SEZs.
• No cap on foreign investment for small-scale-sector reserved items which are
otherwise restricted.
•No import licence requirements.
• Exemption from customs duties on the import of
capital goods, raw materials, consumables, spares,
etc.
• Exemption from Central Excise duties on
procurement of capital goods, raw materials,
consumable spares, etc. from the domestic market.
• No routine examinations by Customs for export and
import cargo.
•Facility to realize and repatriate export proceeds
within 12 months.
•Profits allowed to be repatriated without any
dividend-balancing requirement.
•Exemption from Central Sales Tax and Service Tax.
PROBLEMS OF SEZs
1. Large scale and unjustified acquisition of land
2. Inadequate resettlement and rehabilitation policies and plans
3. Inadequate employment opportunities for local people through SEZs leading to loss of
livelihood
4. Increasing burden on natural resources and the environment and alienation of local
communities from these resources
5. SEZs contributing to real estate boom and creating real estate zones
6. Potential revenue loss from heavy subsidizing in SEZs
7. Concerns over the process of approving and implementing SEZs – where is local
government consultation and sanction?
8. No wider public consultation
9. Threat to water security 1
10.Bypassing local governments and ignoring local communities
11. Increases regional disparities
With so many complications involved, will this SEZ
finally materialise at all? And finally for what? What
kind of a development goal is one that will render
around 50,000 farmers landless (per SEZ), destroy
livelihood sources for a much larger number of
people, pull all the stops against exploitation of
labour and cause huge chunks of resources,
private and otherwise, to pass on into private
hands? Is the administration prepared for the huge
backlash of discontent, protest and social upheaval
that oppression on such large scale could trigger?
These questions are not going to be easy to
answer.
World Trade Organization
World Trade Organization, as an institution was
established in 1995. It replaced General Agreement on
Trade and Tariffs (GATT) which was in place since 1946.
In pursuance of World War II, western countries came

out with their version of development, which is moored
in promotion of free trade and homogenization of world
economy on western lines. This version claims that
development will take place only if there is seamless
trade among all the countries and there are minimal
tariff and non- tariff barriers.
That time along with two Bretton wood institutions –

IMF and World Bank, an International Trade
Organization (ITO) was conceived. ITO was successfully
negotiated and agreed upon by almost all countries.
Consequently, GATT became de-facto platform for
issues related to international trade. It has to its credit
some major successes in reduction of tariffs (custom
duty) among the member countries. Measures against
dumping of goods like imposition of Anti-Dumping
Duty in victim countries, had also been agreed upon.
It was signed in Geneva by only 23 countries and by
1986, when Uruguay round started (which was
concluded in 1995 and led to creation of WTO in
Marrakesh, Morocco), 123 countries were already its
member. India has been member of GATT since 1948;
hence it was party to Uruguay Round and a founding
member of WTO. China joined WTO only in 2001 and
Russia had to wait till 2012.
Why WTO replaced GATT?
While WTO came in existence in 1995, GATT didn’t cease to exist. It continues
as WTO’s umbrella treaty for trade in goods.
There were certain limitations of GATT. Like –
It lacked institutional structure. GATT by itself was only the set of rules and
multilateral agreements.
It didn’t cover trade in services, Intellectual Property Rights etc. It’s main focus
was on Textiles and agriculture sector.
A strong Dispute Resolution Mechanism was absent.
By developing countries it was seen as a body meant for promoting interests of
wests. This was because Geneva Treaty of 1946, where GATT was signed had
no representation from newly independent states and socialist states.
Under GATT countries failed to curb quantitative restrictions on trade. (Non-
Tariff barriers)
Accordingly WTO seeks to give more weightage to interests of global south in
framing of multilateral treaties. Here, a number of other aspects have been
brought into, such as Intellectual property under Trade related aspects of
Intellectual Property (TRIPS), Services by General Agreement on Trade in
Service (GATS), Investments under Trade related Investment Measures (TRIMS).
Major agreements of WTO
1. Agreement on subsidies and countervailing measures –

SCM
2. General Agreement on Trade in Services – GATS
3. TRIPS
4. TRIMS
5. AOA
6. Multifibre Arrangement and Agreement on Textiles and
Clothing
7. Sanitary and Phyto- Sanitary Measures
1. Agreement on subsidies and countervailing measures – SCM
The WTO SCM Agreement contains a definition of the term “subsidy”. The
definition contains three basic elements: (i) a financial contribution (ii) by a
government or any public body within the territory of a Member (iii) which confers
a benefit. All three of these elements must be satisfied in order for a subsidy to exist.
2. TRIPS
The Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS) is an international agreement administered by the World Trade
Organization (WTO) that sets down minimum standards for many forms
of intellectual property (IP) regulation as applied to nationals of other WTO
Members. It was negotiated at the end of the Uruguay Round of the General
Agreement on Tariffs and Trade (GATT) in 1994.
It remains an issue between Developed and developing countries. TRIPS was fine
tuned in favor of developing countries in 2003, as part of Doha development
agenda, when all members agreed to compulsory licensing in certain cases.
However, now U.S. and Europe remain unhappy about current strict terms of patent
allowed by TRIPS
3. General Agreement on Trade in Services – GATS
Negotiations is services under GATS are classified in 4 modes, interests of different

countries depend upon this classification –
Mode 1 – It includes cross border supply of services without movement of natural
persons. For eg. Business Process Outsourcing, KPO or LPO services. Here, it’s in
India’s interest to push for liberalization given its large human resource pool and
competitive IT industry.
Mode 2 – This mode covers supply of a service of one country to the service
consumer of any other country. E.g. telecommunication
Mode 3 – Commercial presence – which covers services provided by a service supplier
of one country in the territory of any other country. This opens door of relevant sector in
one country to investments from another country. Accordingly, it is in west’s interest to
push for liberalization here. There has been sustained pressure to open up higher
education sector, insurance sector, Medical sector etc through this mode.
Mode 4 – Presence of natural persons – which covers services provided by a service
supplier of one country through the presence of natural persons in the territory of any
other country. E.g. Infosys or TCS sending its engineers for onsite work in US/Europe
or Australia. Here again it’s in India’s interest to push for liberalization. In 2012, India
dragged the US to the World Trade Organization’s (WTO’s) dispute settlement body
(DSB) over an increase in the professional visa fee (H1B/L1).
4. TRIMS
The Agreement on Trade-Related Investment Measures (TRIMS) recognizes
that certain investment measures can restrict and distort trade. It states that
WTO members may not apply any measure that discriminates against foreign
products or that leads to quantitative restrictions, both of which violate basic
WTO principles. A list of prohibited TRIMS, such as local content
requirements, is part of the Agreement. Recently India was dragged to WTO
by U.S. over former’s specification of Domestic Content Requirement in
relation to procurement of Solar Energy cells and equipments.
5. AOA
WTO’s agreement on agriculture was concluded in 1994, and was aimed
to remove trade barriers and to promote transparent market
access and integration of global markets. Agreement is highly complicated
and controversial; it is often criticized as a tool in hands of developed
countries to exploit weak countries. Negotiations are still going on for some
of its aspects.
6 Multifibre Arrangement and Agreement on Textiles and Clothing
The MFA was introduced in 1974 as a short-term measure intended to allow developed
countries to adjust to imports from the developing world. Developing countries and
countries without a welfare state] have an absolute advantage in textile production because
it is labor-intensive and they have low labor costs.
The Arrangement was not negative for all developing countries. For example, the European
Union (EU) imposed no restrictions or duties on imports from the emerging countries, such
as Bangladesh, leading to a massive expansion of the industry there.
It was decided to bring the textile trade under the jurisdiction of the World Trade
Organization. The Agreement on Textiles and Clothing provided for the gradual
dismantling of the quotas that existed under the MFA. This process was completed on 1
January 2005. However, large tariffs remain in place on many textile products.
7. Sanitary and Phyto- Sanitary Measures

This agreement was one of the results of Uruguay Round of negotiation entered into force
with the establishment of the World Trade Organization on 1 January 1995.
The Agreement sets out the basic rules forfood safety and animal and plant health
standards. It allows countries to set their own standards. But it also says regulations must
be based on science. They should be applied only to the extent necessary to protect
human, animal or plant life or health. And they should not arbitrarily or unjustifiably
discriminate between countries where identical or similar conditions prevail.
Is WTO a friend or foe of India?
India is one of the prominent members of WTO and is largely seen as leader of developing
and under developed world. At WTO, decisions are taken by consensus. So there is bleak
possibility that anything severely unfavorable to India’s interest can be unilaterally imposed.
India stands to gain from different issues being negotiated in the forum provided it engages
with different interest groups constructively, while safeguarding its developmental concerns.
In absence of such a body we stand to lose a platform through which we can mobilize
opinion of likeminded countries against selfish designs of west. Thanks to vast resources of
developed countries they can easily win smaller countries to their side. WTO provides a
forum for such developing countries to unite and pressurize developed countries to make
trade sweeter for poor countries. Accordingly, India remains committed to various
developmental issues such as Doha Development Agenda, Special Safeguard Mechanism,
Permanent solution of issue of public stock holding etc.
Apart from this, Dispute Resolution Mechanism of WTO is highly efficient. Chronological
list of cases in WTO can be accessed here. Countries drag their trading partner to this body
when action of one country is perceived to be unfair and violative of any WTO agreement,
by other country.
Cases of Complaints against India
India — Certain Measures Relating to Solar Cells and Solar
Modules (Complainant: United States)
India —Anti-Dumping Duties on USB Flash Drives from the Separate Customs
Territory of Taiwan, Penghu, Kinmen and Matsu(Complainant: Chinese Taipei)
India —Measures Concerning the Importation of Certain Agricultural
Products(Complainant: United States)
India —Certain Taxes and Other Measures on Imported Wines and
Spirits(Complainant: European Communities)
Cases of Complaints by India
United States —Countervailing Measures on Certain Hot-Rolled Carbon Steel
Flat Products from India (Complainant: India)
Turkey —Safeguard measures on imports of cotton yarn (other than sewing
thread)(Complainant: India)
European Union and a Member State —Seizure of Generic Drugs in
Transit(Complainant: India)
Why India stayed out of Information Technology
Agreement-II in Nairobi?
As many as 53 WTO members agreed in Nairobi to a seven-year time frame to
scrap all tariffs on 201 IT products that account for an annual trade of $1.3 trillion.
Such a pact is touted to drive down prices of items ranging from video cameras to
semi-conductors. However, India had been opposing such an agreement on fears
that the deal would benefit only those countries (notably the US, China, Japan and
Korea) that have a robust manufacturing base in these products, and not India.
This Information Technology Agreement is being called ITA-II. Original ITA was
signed in 1996. New ITA aims at expanding lists of items covered and total
elimination of custom tariffs in 7 year framework. Since 1996 many new items
have creeped in electronics industry which remains outside the ambit of ITA.
Current dismal state of Indian electronic industry is often attributed to ITA of 1996.
This compelled India to keep certain electronic items tariff free which gave us
infamous ‘inverted duty structure’. Here, domestic products are charged to higher
excise duty than custom duty on imports. This put Indian manufacturers at serious
disadvantage in comparison to foreign vendors.
It is expected that by 2020 India will consume electronic items worth $ 400 billion.
As per current situation, out of this it is likely to import atleast goods worth $300
billion. Electronic hardware manufacturing is one of the main components of
‘Make in India’ and ‘Digital India’ program. Hence India stayed away from ITA-II.
How India’s stand differs when it comes to services?
From India’s point of view, services present a

different picture from agriculture and industrial
tariffs. As an emerging global power in IT and
business services, the country is, in fact, a
demander in the WTO talks on services as it seeks
more liberal commitments on the part of its
trading partners for cross-border supply of
services, including the movement of ‘natural
persons’ (human beings) to developed countries,
or what is termed as Mode 4 for the supply of
services. With respect to Mode 2, which requires
consumption of services abroad, India has an
offensive interest.
Should India provide market access in Higher Education?
As we have read in General Agreement on

Trade in Services, Mode 3 classification covers
services provided by a foreign commercial
establishment through physical presence in
relevant country. Accordingly, western
countries are pushing hard to get unrestricted
access to Indian education sector under this
mode and again India is defensive. India has
already made some offers on this front to
WTO in run up to Nairobi Meet. Topics are still
under negotiation and discussion.
Conclusion
India has to continue its effort to prevent issues of

developmental importance to be sidelined. Until this is
done WTO cannot impinge upon sovereignty of India. India
has already marked red line in sectors such as agriculture
by making it clear than there is no scope of compromise on
its positions. West has relentlessly tried to project India as
rigid and uncompromising negotiator. However, these
attributes are better suited to U.S. and other developed
countries. They have been backtracking on various
commitments under Doha Development Round and
desperately trying to bring in new issues including
Singapore issues. These issues are prejudicial to interests
of majority of countries and vast majority of population.
Consequently, majority of countries stand with India after
failure of every meet.
THANK YOU
THANK YOU
Thank You
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Chanderprabhu Jain College of Higher Studies & School of Law

Plot No. OCF, Sector A-8, Narela, New Delhi – 110040

 Simply MEC means “expected rate of profitability of

If cheap capital is available for investment, then

4. The availability of finance: Restrictions on lending will limit investment. A

Total Profit of machine is 60000-30000= 30000 Average

profit per year - 30000/10 = 3000 MEC = 3000/30000

– A reasonable satisfactory level of nutritional

(a) "without work", i.e. that hadn't a paid employment or a self-

• "Over qualification" or "over education", or the employment of workers

• "Overstaffing" or "hidden unemployment" (also called "labor hoarding",

• Frictional unemployment is caused due to improper

1. Rapid growth of population and increase in labour force.

2. Underdevelopment of the economy.

3. Slow growth in the agricultural sector.

4. Defective system of education.

5. Absence of manpower planning.

8. Slow growth of industrial sector.

10. Jobless growth.

• National Rural Employment Programme

• 1. Both the individuals and & the state

The examples of Direct taxes are :

Examples of Indirect Taxes are:

A good tax system should adhere to certain principles

According to this canon, the mode and timings of tax payment

• increasing the level of economic activity - Regressive

Social-Welfare Objective - Tax payment helps reduce the gap

• Fiscal policy involves the decisions that a government

• It is sister strategy to monetary policy through which a

Budget Taxation Public Public debt

• Fiscal Deficit = Total Expenditure (that is Revenue

•Include investments made to acquire

• Usually preferred over other forms of external

• Non-debt creating, non-volatile and their returns

• FDI also facilitates international trade and

In order to qualify as FDI the investment must

The IMF defines control in this case as owning

• Through financial collaborations.

• Through joint ventures and technical

• Through capital markets via Euro issues.

• Through private placements or preferential

• Liaison office not permitted to undertake

• The role of the liaison office is limited

• Collecting about possible

• It can promote export/import from/to India and

• Approval for establishing a liaison office in

• Such offices cannot undertake or carry on

• General permission also for remitting surplus

• Branch Offices are established with the

• Permitted to remit outside India profit of

Foreign Investment through GDRs is

A company engaged in the manufacture of items covered

Which is implementing a project not contained in Annex-III,

2. Increase a firm’s global competitiveness

3. Fill gaps in a company’s product lines in a

4. Reduce costs in areas such as R&D,

• Low cost BUT Qualified, Educated/Skilled Labor Pool.

• Agricultural or plantation activities

• Housing and Real Estate Business (except

• Automatic approval by RBI.

• The FIPB Route.

The investors are only required to notify the