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ASSIGNMENT SOLUTIONS GUIDE (2018-2019)

M.E.C.-105
Indian Economic Policy
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SECTION-A
Q. 1. "Indian economic environment has undergone dramatic changes with a shift in development
strategy". Comment.
Ans. Structural Changes In Indian Economy: Indian economy took its path towards development with first
Five Year Plan (FYP) on April1, 1951. It mainly aimed at bringing stability in the economy caused by partition. Second
FYP aimed mainly to provide large scale and strategic industry so that productive capacity of the economy can be
enhanced. New policies came after 1990 with the introduction of NEP which brought about privatization, liberalization
and globalization. Growth rate increased from 3.5% in 1975 to 5.5% during 1975-1990 to 6.5% in 1990s to further 7%
during 2005-12. It brought changes in structural composition of the economy.
Composition of Gross Domestic Product
Structural composition refers to relative share of three sectors in GDP of an economy. In underdeveloped economy,
primary sector dominates in GDP, as economy grows share of first secondary and then tertiary sector increases.
Question arises why is it so?
It is so because income elasticity of primary products is less than one while income elasticity of industrial goods
and services is more than one. On the supply side, agriculture is mainly dependent on a fixed factor, land; on which
law of diminishing returns applies. Therefore, industry in which all factors can be varied goes on expanding and
same applies to service sector.
In Indian economy, over the period, the share of primary sector has fallen by 40%. Share of secondary and
tertiary sector have increased. During 1980’s, when all the three sectors were growing, secondary sector was growing
at the highest rate thereafter tertiary sector was growing at the highest rate. We cannot deny the growth momentum
generated by tertiary sector after 1990’s. Service sector has become the growth driver of Indian economy. It is
contributing almost 2/3 of GDP. In India, secondary sector has not grown fast enough to enable to transfer growing
labour force. Uneducated, unskilled, landless masses of rural sector have continued to struggle in primary sector and
those shifted to urban areas have joined urban sector's slum area. It shows the connection between low growth rate
of secondary sector and increasing levels of poverty and unemployment.
Causes of Rapid Increase in Tertiary Sector
The following factors are responsible for rapid increase in tertiary sector.
(a) Advent of IT and knowledge economy has enhanced the growth of high productivity in this sector.
(b) Development demand better infrastructure and it is provided by service sector. Therefore, with development,
it has expanded. 1

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 (c) Public services have also grown as the state has emerged as welfare state. They are paying attention on
improving social and economic infrastructure.
(d) Operation of demonstration effect due to growing mobility which is caused by expanding foreign trade,
tourism, cultural and educational tours is also responsible.
(e) Urbanization has also led to rise in demand for infrastructure services. Many new goods and services have
added to consumption basket due to urbanization.
(f) Tourism has increased in India. It has, in turn, promoted all other types of services.
(g) In manufacturing many services like accounting, legal, advertisement, marketing and finance are required.
It has also increased importance of tertiary sector.
(h) International favourable environment also opened up many possibilities for service sector.
Prospects and Opportunities
There are domestic as well as international factors behind growth of service sector in Indian economy.
Domestic Factors
Some of the important domestic factors responsible for growth of service sector are as follows:
(a) With increase in real per capita GDP, demand for goods increases faster than other sectors which in turn
reinforce GDP growth itself.
(b) Intermediate consumption in service sector has multiplier effects.
(c) All other sectors use service sector and therefore, expansion in these sectors automatically increase service
sector.
(d) With economic growth many new services have emerged like communication, IT, advertising, public relations
etc.
(e) Efficient delivery of services increases the productivity of both labour and capital in the economy as a
whole. Service sector is a catalyst for growth.
International Factors
Some of the important international factors responsible for growth of service sector are as follows:
(a) Rapid expansion of knowledge based services;
(b) Progress in IT leading to increase in R & D, inventory management, accounting, personnel management etc.
(c) Cost of communication is falling and hence, is no more affecting cost structure of the product.
(d) It is possible for a country like India to provide value added services without waiting to ‘catch up’ in technology
of production of sophisticated equipment of products.
(e) The aging of population in the developed country has an implication that service in developing countries will
grow in future as well.
Implications
(a) It calls for a need to introduce policy initiatives in this sector to ensure competition and efficiency for
sustainable growth.
(b) With increase in productivity in other two sectors, employment will shift from these sectors to service
sector.
(c) It will mean that service sector can constitute a vast tax-base potential which needs to be realized.
Limitations
Many challenges are there for service sector. It is lacking in clear cut policies. Liberalization has not occurred in
many services. Economic and social position of workers in service sector is going down steadily. It would imply
economic stagnation and consequent social tension. The workers in this sector will make use of their numerical
strength to get proper wages and working conditions.
Need for an Integrated Policy
We need to introduce a coherent integrated service policy for service sector. Consequently, the depth and pace of
reforms lack uniformity in all service sectors. We need to follow liberalization in this sector in phases. Social
policies are needed to avoid unemployment and social unrest. It will go a long way in sustaining the dynamist of
service-led growth.

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 Following major changes in the structure of the economy as an economy develops:
(a) As a percentage of GDP, savings increase, food consumption decrease, non food consumption increase,
relative output of industry and tertiary sector increase and that of agriculture decrease with development.
(b) Share of workers employed in primary sector decrease and that of industry and tertiary sector increase.
(c) Exports account for larger proportion of incomes and composition of exports shifts from raw material to
finished goods, primary products to industrial products and services. BOT will come in balance.
India’s economy has made great strides in the years since independence. In 1947, the country was poor and
shattered by the violence and economic and physical disruption involved in the partition from Pakistan. The economy
had stagnated since the late nineteenth century, and industrial development had been restrained to preserve the area
as a market for British manufacturers. In fiscal year (FY) 1950, agriculture, forestry, and fishing accounted for 58.9
per cent of the Gross Domestic Product (GDP) and for a much larger proportion of employment. Manufacturing,
which was dominated by the jute and cotton textile industries, accounted for only 10.3 per cent of GDP at that time.
Beginning in the late 1970s, successive Indian governments sought to reduce state control of the economy.
Progress toward that goal was slow but steady and many analysts attributed the stronger growth of the 1980s to those
efforts. In the late 1980s, however, India relied on foreign borrowing to finance development plans to a greater extent
than before. As a result, when the price of oil rose sharply in August 1990, the nation faced a balance of payments
crisis. The need for emergency loans led the government to make a greater commitment to economic liberalization
than it had up to this time. In the early 1990s, India’s post-independence development pattern of strong centralized
planning, regulation and control of private enterprise, state ownership of many large units of production, trade
protectionism and strict limits on foreign capital was increasingly questioned not only by policy-makers but also by
most of the intelligentsia.
As India moved into the mid-1990s, the economic outlook was mixed. Most analysts believed that economic
liberalization would continue, although there was disagreement about the speed and scale of the measures that
would be implemented. It seemed likely that India would come close to or equal the relatively impressive rate of
economic growth attained in the 1980s, but that the poorest sections of the population might not benefit.
Of course, not everyone agrees with the narrative that the India of 2013 is worse than it was in 1991. Actually it
is not. And more of the same kind of reforms is perhaps not the answer either. The world was very different in 1991
when western economies were still strong and looking outward, trying to deepen the process of economic globalisation.
Today, major OECD economies are looking much more inward than before, trying to fix their own domestic economy
and polity. Emerging economies like India, which managed to avoid until 2011 the negative impact of the global
financial crisis, began to dramatically slowdown after 2011. Most of the BRICS economies have lost over four per
cent off their peak GDP growth rates experienced until 2010.
After 2010, excess global liquidity flowing from the West, the consequent high international oil and commodity
prices fed seamlessly into India’s domestic mismanagement of the supply of key resources such as land, coal, iron
ore and critical food items to create a potent cocktail of high inflation and low growth, and a bulging CAD. The key
difference between 1991 and 2013 is the availability of global financial flows. In 1991, western finance capital had
not significantly penetrated India. Now, a substantial part of western capital is tied to India and other emerging
economies where OECD companies have developed a long-term stake. The broader logic of the global capital
movement is that it will seamlessly move to every nook and corner of the world where unexploited factors of
production exist and there is scope to homogenise the modes of production and consumption in a global template.
This relentless process may indeed gather steam after the United States shows further signs of recovery. Indeed,
some experienced watchers of the global economic scene have said that a recovery in the U.S. will eventually be
beneficial for the emerging economies. This basic logic will sink into the financial markets in due course. At present,
the prospect of the U.S. Federal Reserve withdrawing some of the liquidity it had poured into the global marketplace
is causing emerging market currencies to sharply depreciate.
In a sense, the depreciation of 15 to 20 per cent this year of the currencies in Brazil, South Africa, Turkey,
Indonesia and India can be seen partially as a knee-jerk reaction to the smart recovery of the housing market in the
U.S. and the consequent prospect of the Federal Reserve gradually unwinding its ongoing $40 billion a month

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support to mortgage bonds over the next year or so. But eventually, a fuller recovery in the U.S. will mean better
economic health globally.
Besides, some tapering of liquidity by the U.S. Federal Reserve is inevitable as such an unconventional monetary
policy cannot last forever. The U.S. Federal Reserve balance sheet was roughly $890 billion in 2007. It has ballooned
to a little over $3 trillion today simply by printing more dollars. Such massive liquidity injection by printing dollars
in such a short period is probably unprecedented in American history. This is also unsustainable because sooner
rather than later, such excess liquidity could send both inflation and interest rates shooting up in the U.S. – which
again may not be good for the rest of the financially connected world.
So what should India learn from the current situation? One, it needs to understand that cheap, finance capital
flowing in from the West is a double-edged weapon. If not used judiciously to enhance productivity in the domestic
economy, such finance will tend to become an external debt trap. This lesson is as important for the government as
it is for the Indian capitalist class which has shown a tendency to use cheap finance and scarce resources such as
spectrum, coal, land and iron ore to play stock market games in collusion with the political class. Of course, this is
a systemic issue and needs to be addressed at the level of electoral funding reform. Indeed, this is more important
than “fresh economic reforms” that blinkered economists advocate.
Q. 2. How are the inequalities of income measured in an economy? Examine the policy implications of
widespread poverty and inequality in the Indian economy. Do you think that social protection can play an
important role in mitigating poverty and inequality?
Ans. The concept of inequality is distinct from that of poverty and fairness. Income inequality metrics or income
distribution metrics are used by social scientists to measure the distribution of income and economic inequality among
the participants in a particular economy, such as that of a specific country or of the world in general. While different
theories may try to explain how income inequality comes about, income inequality metrics simply provide a system of
measurement used to determine the dispersion of incomes.
The Income Measure
● Range

● Range Ratio

● The McLoone Index

● Coefficient of Variation

● Lorenz Curve

The Non-Income Measures

The non-income aspect includes the access to safe drinking water, access to sanitation, access to education and
health, employment opportunity.
● Inequality in distribution of consumption expenditure

● Inequality in social category

It implies that we need to make growth for Indian economy inclusive. There is a need to follow a policy that pays
attention on:
Agricultural Development: Irrigation and water management, credit, research and extension, marketing, Land
and water management, Development of agro based industries in rural areas.
Public Investment: Priority to public investment in physical and human infrastructure.
Public Expenditure on Health and Education: Increase public expenditure on health and education with
increased effectiveness of these expenditures. It will improve quality of human capital.
Social Protection: Many poverty alleviation programmes have been launched to address the issue of poverty
and inequality. Public Distribution System (direct food subsidy), Indira Awas Yojana (Housing for poor) and direct
cash transfer through the programmes like old age pension scheme, widow pension scheme, disability pension
scheme, national family benefit schemes, etc.
On one hand we are witnessing mushrooming of malls in almost all cities across India, which depicts the economic
development and enhanced purchasing power of Indians and on the other hand number of poor and beggars are
increasing which show our under performance in human development. This is a very obvious contrast that can be

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seen anywhere in India. Mercer Human Resource Consulting has conducted a Worldwide Quality of Living survey.
In this it has been stated that two of the most prominent cities in India viz. Delhi and Mumbai are very low in ranking
and these are even after Colombo and Dakar. In this survey Bangalore has been ranked at 153 and Chennai 160. At
present there are about 240 million people in India who are living a poor quality of life.
We always compare India with other countries especially China on economic development but such comparisons
are seldom done for factors such as life expectancy, education level, daily life of a person etc., The World Bank and
the United Nations reports show that Life expectancy at birth in China is 73.5 years whereas in India it is 64.4 years.
Then India has more infant mortality rate, mortality rate of children under five, and maternal mortality rate as
compare to China. Also statistics for years of schooling, and adult literacy are more in China.
No doubt that economic development is a must for any country and individual, as this uplifts the quality of life,
but along with this we need to work hard on human development sector. There are many factors that lead to the
advancement in living standard but one major among these is how government is going to utilize that extra income
which has come from the economic development. But with the increase in corruption there is a poor utilization of
money in India. Everyone is busy filling their own pockets rather than doing anything for India.
SECTION-B
Q. 3. Explain the nature of crises in Indian agriculture. What suggestions would you like to make for
sustainable growth of Indian agriculture?
Ans. Agriculture in India is undergoing a structural change leading to a crisis situation. The rate of growth of
agricultural output is gradually declining in the recent years. The relative contribution of agriculture to the GDP has
been declining over time steadily. The performance of agriculture by crop categories also clearly indicates the slowing
down process of agriculture in India. The onset of deceleration in agriculture began from early nineties and it became
sharp from the late nineties. The trends in the area, input use, capital stock and technology also reflect the agricultural
downfall and the farmer’s response accordingly. It is alarming that India is moving towards a point of no return, from
being a self-reliant nation of food surplus to a net importer of food. All these trends indicate that the agricultural sector
in India is facing a crisis today.
It is argued that the root cause of the crisis was that agriculture is no more a profitable economic activity when
compared to other enterprises. It means that the income derived from these activities is not sufficient enough to meet
the expenditure of the cultivators. And therefore, unless agriculture is made a profitable enterprise, the present crisis
cannot be solved. The related factors responsible for the crisis include: Dependence on rainfall and climate, liberal
import of agricultural products, reduction in agricultural subsidies, lack of easy credit to agriculture and dependence
on money lenders, decline in government investment in the agricultural sector and conversion of agricultural land
for alternative uses.
It is argued that the consequence of agricultural crisis in India is very vast and likely to hit all the other sectors
and the national economy in several ways. In specific, it has adverse effects on food supply, prices of foodgrains,
cost of living, health and nutrition, poverty, employment, labour market, land loss from agriculture and foreign
exchange earnings. In sum, it revealed that the agricultural crisis would be affecting a majority of the people in India
and the economy as a whole in the long run. And therefore, it can be argued that the crisis in agriculture is a crisis of
the country as a whole.
The only remedy to the crisis is to do all that is possible to make agriculture a profitable enterprise and attract the
farmers to continue the crop production activities. As an effort towards this direction, the government should augment
its investment and expenditure in the farm sector. Investment in agriculture and its allied sectors, including irrigation,
transport, communication, rural market, rural infrastructure and farm research, should be drastically increased and
the government should aim at integrated development of the rural areas.
The only remedy to the crisis is to do all that is possible to make agriculture a profitable enterprise and attract the
farmers to continue the crop production activities. As an effort towards this direction, the government should augment
its investment and expenditure in the farm sector. Investment in agriculture and its allied sectors, including irrigation,
transport, communication, rural market, rural infrastructure and farm research, should be drastically increased and
the government should aim at integrated development of the rural areas. The solution of the problem is not in a few

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“packages” but in drastic changes in the present economic policies related to agriculture. No other sector’s growth
and development must be at the cost of agriculture. All farmers, agricultural labourers, societies, Government and
People's Organizations should work collectively to revive agriculture and “Save India from Agriculture Crisis”.
Strategy of Reforms in Agriculture
While announcing any economic policy, we cannot ignore agriculture sector esp. for a country like India, because
it determines the fortunes of a vast majority of farmers in India and also makes a dent in their poverty. But NEP 1991
has neglected public investment in rural infrastructure, causes stagnation in the growth in this sector and increased
cost of farm production. Moreover, market driven liberalization process in agriculture is extremely biased towards
rich farmers and prosperous regions. Policies must not ignore the interests of small farmers and ensure that
disadvantaged regions are protected and they are also enabled to gain from trade liberalization.
India is blessed with all that it takes to be agricultural superpower: abundant sunshine, adequate rainfall, varied
agro-climatic conditions and biodiversity.
But due to confusing policy environment, uncertainty over adoption of agricultural biotechnology, lack of rural
infrastructure and poor institutional set-up we are not becoming so. Some of such concerns are discussed below:
Pricing Policy
Not only agriculture policies but also other macro-economic policy measures affect the sector to a great extent
by altering the production as well as social relations.
The issue of pricing has gained momentum due to following reasons.
(i) There has been a rise in the political power of the formidable farm lobby.
(ii) There are strong macro-linkages of pricing policy which have a potential to significantly alter the result of
the stabilization-cum-structural reform package in vogue.
It is suggested that we should remove the present negative protection to the agriculture sector and let prices
correct themselves via demand and supply forces. It is possible through poverty alleviation and employment generation
programmes and by limiting Public Distribution System (PDS) to a narrowly targeted population.
Fiscal Policies
We need to evolve a politically sustainable policy like reducing input subsidies, especially on fertilizers and
electricity. Price of a commodity act as a signal of its scarcity and if water charges and electricity rates are not raised
to appropriate levels to recover cost from beneficiaries, it will not increase but deteriorate agricultural growth rates.
We cannot expect agriculture sector to grow without increase in public investment in this region. The fall in
agriculture’s share in investment is sharper than its share in government expenditure.
Input Supplies
Fertilizer use is concentrated in a few crops and few regions making the benefit of subsidies to farming community
highly skewed. The Government should reduce these subsidies in a phased manner and spend on increasing irrigation.
Improved technology is most important for the growth of output. Another important factor is the availability of
quality seeds. Most of the farmers do not distinguish between “seed and grain” and use common grain as seed. We
need to make efforts for adequate supply of quality seeds through research institutes and public expenditure.
Agricultural Credit
We need to revitalize credit for agricultural development as credit is crucial for any sector. We need to increase
formal credit facilities, make it easily available to small and marginal farmers and also need to give loans for personal
purposes during seasonal unemployment.
Agricultural Marketing
Indian agricultural markets are inefficient and even primitive to some extent. Price support operations are biased
in favour of wheat and rice crops. Commercializing Indian agriculture unduly benefit the endowment-rich regions.
Marketing structures in backward districts do not quite function commercially.
Food Stock Operations
Food Corporation of India (FCI) is facing a sharp increase in economic cost of food grains because of increasing
gap between economic cost and procurement prices. Therefore, we need to restrict PDS coverage to a narrowly
targeted group. Another point to be considered is optimal level of stocks should be maintained so that stocks are not

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wasted. Before decision to restrict PDS to a narrower target group, we must complete the exercise of setting stock
norms.
Technology and Sustainability
Technology and sustainability has several dimensions for agricultural growth.
(a) Take up dissemination of dry land technology on a priority basis.
(b) Priority to development of infrastructure
(c) Research and extension services and
(d) Dissemination of dry land technology.
Agro-Climatic Regional Planning (ACRP) provides a suitable framework for technology and sustainability. We
also need to concentrate on the sustainability of irrigation system. We also need to be concerned for drought prone
areas.
Institutional Arrangements
A renewed thrust on land reforms is the best solution for structural adjustment process.
There is bias in state-intervention and inter-regional differences in agrarian reforms.
We need to provide institutional credit to enhance lending for both production and long-term investment purposes.
The crop insurance scheme coverage should be encouraged and include more remunerative cash crops. We also need
to improve marketing network for coarse cereals on a regional basis for distribution operations. Therefore, we need
to treat NAFED at par with FCI for all practical purposes. We also need to ensure that agriculture labour is not
exploited. Hence, we need to take institutional measures for an effective monitoring of minimum wage legislation
and for distributing surplus land among these labourers.
Q. 4. Explain the important issues crucial for promotion of Indian exports and hence need to be addressed
in India•fs trade policy.
Ans. Trade Policy 1991 Onwards: Features and Issues: In 1991, the Indian government did not have
sufficient foreign exchange to pay external debt payments that were due. It forced us to approach the International
Monetary Fund (IMF) for a loan.
The IMF attached conditions on loans relating to reforms that the borrowing government is required to undertake.
Mainly they asked Indian economy to remove all tariff and non-tariff barriers from foreign trade.
In the early 1960s, South Korea and Taiwan were largely agrarian economies but in the late 1960s and 1970s,
they along with Hong Kong and Singapore, began to change the composition of their exports. They were called
‘New Industrializing Economies’ or NIEs, and later on South-east Asian countries. They began exporting light
manufactures, such as garments, footwear, soft toys and plastic goods which were labour intensive. Wages being
low, these countries were able to establish themselves as manufacturers and exporters of labour-intensive commodities.
China also joined the team in 1970s.
NIEs, esp. China began to run up huge trade surpluses with their main trading partners, Europe and North
America. So these countries refuted ‘export pessimism’ approach. This put an end to export pessimism and called for
a new international trade policy and gave birth to new approach: A trade policy based on the comparative advantage
of developing countries.
Conditions that brought these changes:
● Improvement in manufacturing and management capabilities of many developing countries.

● Improvement in skills and abilities of human capital.

In 2012, India has emerged as the largest exporter of rice. But there is no guarantee that it will continue to be able
to export rice the next year too. There is a ‘flip-flop’ type of trade policy in India which is not conducive for growth
of trade.
India and the Changing Nature of World Trade
It is important to understand the process through which developing economies’ firms manage to get entry into
developed economy markets. These countries did not enter through sale on the market, as in the case of say, rice or
sugar. MNCs like Gap, Nike or Adidas, sub-contracted the manufacturing work to developing country firms and

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entered into contracts with buyers from the developed countries. Hence, the developing country firms need not
independently search for markets. In present times trade is not of complete commodities but some parts or processes.
It is called Cut-Make-Trim (or CMT), i.e. using cheap labour for non technical tasks while using inputs imported from
numerous countries.
Many a times, export figures may be misleading. For example, India exports a high volume of diamonds and
gems. But raw materials are imported by India, cut and polished in India, using Indian labour and then exported. So,
India gets only the wage of cutting and polishing and the profit on that operation.
If we ask why has the opening of trade not led to India making the same advances in garments or leather
products? Answer lies in historical policy of reservation for small-scale units, poor infrastructure and inflexible
labour regulations can be held responsible for it.
Trade in Services
Services that can only be provided on the spot to the consumer are non-traded services. But a number of services
can be provided at a distance, such services are traded. The WTO under the General Agreement on Trade in Services
(GATS) has divided services into three modes. Mode 1 is by foreign companies investing in the country where the
services are to be provided, like banking. Mode 2 is by setting of the service to a foreign location, like the call
centers. Mode 3 is the movement of labour or migration.
Indian current account shows a surplus in export and import of services. India carries out many services called
Business Process Outsourcing (BPO) also called IT Enabled Services (ITES).
It is mainly due to educated, skilled cheap labour availability in India. Indian firms, as mentioned above, account
for a substantial share of world trade India’s IT services that have India on the world map as a rising power.
How much did trade policy contribute to India’s success in trade in IT services? Till 1991, trade policy was a
hurdle in the growth of service export but since NEP 1991, trade policy has promoted trade in services.
India’s trade in services includes IT and ITES services as well as Migration of two streams: (a) professionals to
the developed countries and (b) skilled or relatively low-skilled workers, chiefly to West Asia. Tourism is another
sector that has been growing very rapidly. India has emerged as a destination for medical tourism.
Trade and Intellectual Property
In the WTO regime, trade issues include matters of Intellectual Property Rights (TRIPS- or Trade Related
Intellectual Property Rights). TRIPS require all member countries to have a similar IP protection law. It states that
Patent rights to be allowed for products and not only processes. Earlier Indian IT law protected only processes and
not products which were used by Indian companies by introducing different processes to ‘reverse engineer’ products
initially made in the industrialized countries. Using such methods, Indian companies developed generic forms of
patented drugs. These generic versions reduced the prices of drugs in the international market. However, it has cost
benefits. Drugs for treatment of HIV-AIDS cost more than a $1,000 for one month per patient. But Indian companies
supplied the generic versions for less than $100 per person per month. Bearing this, WTO allowed export of cheap
generic versions in the interest of public health.
Now when India also provides patent protection to products and not just processes, the profitable trade niche for
Indian companies has reduced. Some of the Indian companies are forced to join international pharma majors like
Ranbaxy with the Japanese Daiichi.
Production in the developed economies concentrates on design, branding and marketing while outsourcing
manufacturing, mainly to firms in Asia. The surplus profits go to design and marketing segments and manufacturing
segments get only normal profits because of monopoly position given by intellectual property law. Since design,
branding etc, is done by developed country firms and manufacturing by developing country firms, developed countries
insist on the protection of IPRs.
Agriculture and Livelihoods
Agreements in agriculture have been stalled by the collapse of the Doha Round of WTO negotiations. The USA
and European Union (EU) both provide large subsidies to their farmers. WTO divided subsidies into two categories:
Red is a trade distorting subsidy like export subsidies and Green is for general support to the sector that helps the
subsidy receiving farmers to export at lower prices increasing competition for farmers of developing countries.

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Developing countries call such terms as unfair. Similarly, India has not allowed free exports of agricultural commodities.
Higher quality basmati rice can be freely exported, but general rice or wheat exports are allowed only when domestic
needs are fulfilled. This leads to a stop-go food grains trade.
Regional Trade
Regional trade is very limited in South Asia. It is around 3 per cent for a long time however, regional trade is 30
per cent for East Asia and SE Asia.
Recently the Government announced the removal of all restrictions on imports of garments from Bangladesh
and Investment Protection Treaty with Nepal to stimulate regional trade. It is opposed by local producers many
times. For example, when the India- Sri Lanka Free Trade Agreement (ISLFTA) resulted in spice imports from Sri
Lanka displacing local spice production, Kerala spice producers demanded protection against Sri Lankan imports.
This is not unusual in India. We need to increase competitiveness not subsidies. India-Pakistan trade is goes on via
Dubai, which increase the cost of trade and still, Indo-Pak trade via Dubai is about $2 billion per year. However,
many times these issues become political in nature and opposes of the policies have apolitical influence.
What should be the basis of regional trade policy?
It is a debatable issue. Most Regional Free Trade Agreements (RFTAs) are based on the principle of equal access
to each other’s markets. Equal access, however, is likely to lead very unequal trade outcomes, when countries are at
different levels of development because it is competition among unequal. Secondly, Non-reciprocal access exist i.e. the
more developed economies grant unilateral concessions to the less developed economies. Thus, India has opened up its
garments sector to Bangladesh, without demanding that Bangladesh do the same in return. It is expected that it would
help overcome the fears of the small South Asian countries, which fear domination by India. It will force Indian firms
to move up the value chain.
Trade – Labour and Environmental Standards
International trade has a relation with difference in labour standards at the level of wages. Labour surplus
countries have lower wages levels therefore; they specialize in the production and export of labour-intensive products
and tasks. Sometimes these countries use child labour or forced/bonded labour.
There is a debate: Should commodities produced by such forms of forced labour be allowed in international
trade?
The developing countries, including India, insisted that issues of labour standards should be taken up by the
International Labour Organization (ILO). It has been internationally agreed that trade action, such as banning imports
made with child labour or forced labour, should not be used as an instrument for improving labour standards. But
many private brands like Nike, Marks and Spencer, or any other big buyer – the labour codes that they expect their
suppliers to adhere to include matters such as the non-employment of child labour. They go beyond Indian law and
insist on 18 years as the cut-off age.
Even in contracted selling of garments and other such products, the issue of child labour comes into the picture.
But such non-employment is really only enforced and monitored at the factory level. In tasks, such as hand embroidery,
which are often out-sourced to the household level, it is difficult to monitor the employment of child labour.
Trade also depends on differences in environmental standards. Environmental standards are weaker and poorly
enforced in developing countries. So, can we expect a tendency for polluting industries to be exported to the ‘pollution
havens’ of developing countries?
Yes, it contributes to an export of polluting tasks to developing countries. Meeting environmental standards has
a cost that can be avoided by exporting polluting industries to developing countries, where such monetary costs may
not be incurred by the firm concerned.
But we must remember that waste does not mean it has no utility. Waste is what goes back as inputs into
production of different types. Treatment of waste is relatively cheaper in developing countries. Consequently, the
treatment of waste creates many jobs and yields many useful inputs into new production. The international Basle
Convention on the handling of waste requires that asbestos and mercury need to be properly handled and removed
before the ship is sent for breaking up to a developing country. It is often violated. But it can be checked. the French

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aircraft carrier, Clemenceau was not allowed to be brought to India until all hazardous materials were removed by the
Indian Supreme Court.
Major Features
Twenty six new markets have been added under Focus Market Scheme. The incentive available under Focus
Market Scheme (FMS) has been increased from 2.5 per cent to 3 per cent. Market Linked Focus Product Scheme
(MLFPS) has been expanded to many more products.
Export obligation on import of spares, moulds under the EPCG Scheme has been reduced to 50
per cent of the normal specific export obligation. Additional Duty Credit scrips shall be given to status holders @1
percent Scrips of the FOB value of past exports which can be transferred to status holders. The transfer can be made
only to status holders.
Duty Entitlement Passbook (DEPB) Scheme shall also include factoring of custom duty component on fuel. Income
Tax exemption to 100 percent EOUs and to STPI units IT Act has been extended for the financial year 2010-11 in
Budget 2009-10. EOUS have been allowed to sell products manufactured by them in DTA up to a limit of 90 percent.
EOUs will be allowed to procure finished goods for consolidation, subject to certain safeguards. EOUs will be allowed
credit facility for the component of SAD and Education Cess on DTA sale.
A minimum 15 per cent value addition on imported inputs under Advance Authorization Scheme has been
prescribed.
Payment of customs duty for exports obligation has been allowed by way of debit of Duty Credit scrips. Import
of restricted items will be allowed against transferred DFIAs.
Number of samples/pieces has been increased from the existing 15 to 50. No fee shall now be charged for grant
of incentives under Chapter 3. Maximum fee is being reduced to Rs. 100,000 from Rs. 1,50,000 and Rs. 50,000 from
the existing Rs. 75,000 for other 18 authorizations.
Evaluation
Positive Features: 1. The Foreign Trade Policy’s three pillars are: Improvement in export-related infrastructure,
lowering of transaction cost and providing full relief on all indirect taxed and levies. It recognizes the vulnerability
of employment-oriented and sensitive sectors.
2. The incentives in focus product scheme have been increased from 1.25 per cent to 2 per cent. The 26 new
markets that have been added to the focus market scheme that would enable our exporters to get the benefits
under the schemes which were hitherto denied to them. It has given special thrust to the employment-oriented
sectors in the fields of textiles, leather and handicrafts.
3. Incentives for technological upgradation such as zero duty EPCG benefit and
4. 1 per cent additional duty credit for status holders for many important sectors will help in stepping up India’s
competitiveness.
Negative Features: 1. Lower non-oil imports means there is decrease in the domestic investment.
2. Some of India’s export promotion schemes such as DEPB scheme are not compatible with the WTO rules and
will be reviewed.
3. Market-linked focus product scheme covered only garments, made-ups, knitted fabrics and synthetic textile
fabrics. Hence, increasing number of countries is of no use.
4. The FTP is silent on the steps India will take if WTO’s expectation of 9% fall in foreign trade proves true.
There is no reason why the FTP should not attempt measures to shore up India’s exports.
5. The efficacy of the policy of incentivizing import of capital goods with Actual User Condition, by providing
additional duty credit scrips at the rate of 1 per cent of FOB value of export to status holders in specified sectors
is doubtful, as most of the status holders are merchant exporters. Therefore, they will not be able to meet the
requirement of the Actual User Condition.
6. At present, core problem is that there is no demand for our export products because of global recession. FTP
has not done any efforts to increase demand for exports.
7. We can reduce the prices of our products if our logistics costs come down from current 13 per cent to 8 per
cent.

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 Q. 5. "The financial sector in India is still in a state transition"- Comment.
Ans. The financial relations between the centre and state are the main subject of controversy now-a-days. While
deciding these relations the fathers of the Constitution followed the India Act of 1935. Some taxes are levied and
collected exclusively by the Central Government while others are levied and collected only by the states. These are
taxes levied by the centre which are collected by the states and others which are levied and collected by the centre
and given to the states.
The centre gives grants-in-aid to the states from the consolidated fund. The Constitution makes it clear that state
legislature can make laws relating to taxes for the benefit of the state. Such a system cannot last longer. According to
Dr Jenning “... arrangement of this character always proves to be unsatisfactory after ten years or so”. But there is a
provision for setting up a Finance Commission after five years.
The Planning Commission is criticized on the ground that it has no statutory basis though it exercises enormous
powers. States are left with no initiative because clearance for every scheme is given by the Planning Commission.
The allocation of funds, it is alleged is not proper. Punjab wants the allocation to be made on the basis of population
: Himachal Pradesh wants it on area basis, whereas West Bengal insists on the basis of the economic conditions of
the state.
In fact serious thought should be given to centre-state relations. Power-wresting strategies have deprived the
issue of its sanctity. As all the central leaders belong to the states and all the people of the states belong to India, the
centre should not be reluctant to review the centre state relations. At least the irritants should be removed.
The Indian Constitution provides for the appointment of a Finance Commission every five years to determine
the criteria and amount of finance to be divided between the Centre and the States. Transfer of resources takes places
in the following three ways: share in taxes and duties, grants and loans.
However transfers through the Finance Commission contribute only about one-third of the total transfers from
the Centre to the States. The rest are channeled through the Planning Commission and discretionary grants from the
Centre to the States.
This has led to arbitrary distribution with backward states suffering a disadvantage and has led to an erosion of
state autonomy. The revenue raising capacity of the states is also restricted because of the nature of the taxes assigned
to them.
The scope of the Finance Commission should therefore be enlarged to reduce the interference of the Centre in
the financial management of the States. In the context of raising revenues the recommendation of the Tenth Finance
Commission to increase the role of industry, needs to be seriously considered.
Q. 6. "Rapid Industrialization and diversification of the Industrial structure have been twin objectives of
industrial policy in India". In the light of this statement critically examine". 'Make in India' Programme.
Ans. Rapid growth and diversification has been twin objectives of growth in Indian industries. These two objec-
tives are complementary at times and become conflicting as well. If we concentrate on those industries where we have
a comparative advantage, we shall be able to attain rapid industrialization but not diversification. If we pay attention on
all industries, we shall diversify at the cost of efficiency. Therefore, we need to make a judicious choice so that we can
get dual advantage.
The keynote of the new industrial policy includes liberalization and globalization of the economy. Liberalization
means deregularisation of the industrial sector by cutting down to the minimum administrative interference in its
operation so as to allow free competition between market forces. Similarly globalization means making the Indian
economy an integral part of the world economy by breaking down to the maximum feasible the barriers to movement
of goods, services, capital and technology between India and the rest of the world. The new Industrial Policy fulfils
a long-felt demand of the industry to remove licensing for all industries except 18 industries (coal, petroleum, sugar,
motor cars, cigarettes, hazardous chemicals, pharmaceuticals and luxury items). It proposes to remove the limit of
assets fixed for MRTP Companies and dominant undertakings. Hence business houses intending to float new companies
or undertake expansion will not be required to seek clearance from the MRTP Commission. This step will enable
MRTP Companies to establish new undertakings, and effect plans of expansions, mergers, amalgamations and takeovers

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without prior government approval. They shall have the right to appointment of directors. The new Industrial Policy
goes all out to woo foreign capital. It provides 51% foreign equity in high priority industries and may raise the limit
to 100% in case the entire output is exported. This runs counter to the Nehruvian Model. By opening the gates of the
Indian economy wide to the multinationals, the self reliance aspect has been completely ignored. These multinationals
with slightest of inconvenience may shift their operations elsewhere leaving the economy in the lurch. Since
multinational and private entrepreneurs would prefer most favourable locations for their industries it would further
intensify spatial disparity in economic development. This fact has been well collaborated by the letters of intent so
far approved. While selling out public sector shares and companies to private investors the Government is not only
ignoring the interests of the employees but is transferring the assets at throw away prices. These public sector
companies could have been handed over to the working class or autonomous organisations to manage their affairs
independently. In the absence of MRTP safeguard private companies may develop monopolistic outlook and may
indulge in unfair trade practices. There is also a risk of growing consumerism rather than strengthening the sinews of
the economy. Foreign investors may prefer to invest in low priority consumer sector instead of going for high
priority sector.
With the state yielding to the private enterprise the social objectives of equity with growth and protecting the
interests of the down trodden and semi-skilled labourers would be thrown to the winds. This will be against the
cherished goals of our Constitution and may create socio-economic disparity and tension.
The combination of protectionist, import-substitution and Fabian social democratic-inspired policies governed
India for sometime after the end of British occupation. The economy was then characterized by extensive regulation,
protectionism, and public ownership of large monopolies, pervasive corruption and slow growth. Since 1991,
continuing economic liberalization has moved the country towards a market-based economy. By 2008, India had
established itself as one of the world’s fastest growing economies. Growth significantly slowed to 6.8% in 2008-09,
but subsequently recovered to 7.4% in 2009-10, while the fiscal deficit rose from 5.9% to a high 6.5% during the
same period. India’s current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous
quarter. The unemployment rate for 2010-11, according to the state Labour Bureau, was 9.8% nationwide. As of
2011, India’s public debt stood at 68.05% of GDP which is highest among the emerging economies. However,
inflation remains stubbornly high with 7.55% in August 2012, the highest trade (counting exports and imports)
stands at $606.7 billion and is currently the 9th largest in the world. During 2011-12, India’s foreign trade grew by an
impressive 30.6% to reach $792.3 billion (Exports-38.33% and Imports-61.67%).
Liberalization collectively a set of sweeping reforms covering industry, trade, investment and the financial
sector, alongside rationalization of the tax structure, was principally responsible for transforming India from an
economy in a low-growth equilibrium trap as late as the late 1980s to the second fastest growing large economy in
the world two decades later. It was extreme crisis that drove change. India, in May 1991, faced a balance of payments
crisis and was on the verge of defaulting on its external debt repayment obligations. Any bailout by multilateral
institutions was contingent upon liberalizing the economy, internally and externally.
The most conspicuous contribution of industrial liberalization was in promoting domestic entrepreneurship.
The change was twofold - existing firms rapidly scaled up, while several new first generation enterprises were
started. Trade policy reform was slower compared to industrial reform. As a first step, the lifting of the ban on
intermediates and capital goods helped make Indian industry more competitive. This reform was also easier to push
through, because the number of existing domestic producers was small to begin with. However, the situation with
final products was different because of the large number of domestic producers, mostly belonging to the small-scale
sector. Tariff reduction was slower and often unsteady. While peak customs duties have come down from 150% in
1991-92 to about 30% today, they are still very high compared to China and Southeast Asia, where corresponding
rates are around 10%. Nevertheless, due to a combination of factors, India's trade profile has changed significantly.
In 2010-11 exports were $247 billion and imports $359 billion. They collectively amount to about 30% of GDP, a
significant increase from the pre-liberalization era. While India still does not rank among the world’s great trading
nations like China, it is undeniably a more open economy today than two decades ago.

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 The change in investment regime and its impact is equally striking. Foreign Direct Investment (FDI) in India
increased from virtually nothing in 1990 to $25 billion in 2010 (it reached a peak of $36 billion in 2009). FDI has
made domestic firms more competitive by forcing them to upgrade their technology, which in turn has enabled them
to expand to more efficient scales of production. The economic reforms of 1991 have changed India unrecognizably.
However, there is still a large unfinished agenda.
Q. 7. Do you agree that the existing institutional structure in India have not led to good governance
outcome? Give reasons in support of your answer.
Ans. Yes we agree.
(a) A majority of the people – the poor and the illiterate – is unaware of its entitlements. Women, even the
educated ones, fare no better.
(b) Elections continue to be driven by influence of money and muscle power and corruption, thereby preventing
a real competition for political power. About 25 per cent the members of the 15th Lok Sabha and about 10
per cent of the present Rajya Sabha are industrialists, businesspersons, traders and builders.
(c) The implementation of development schemes of the Five Year Plans, especially those meant for the weaker
sections of society, is lax and benefits hardly flow to the target groups. And corruption adds to the problem.
(d) The Information Commission and its counterparts in the States have shown some success but the success of
the commissions is limited to the highly literate.
(e) Corruption is the way of life in India. The Confederation of Indian Industries (CII) study of 1999 covering
210 private contractors found 60 per cent of them confirming the price payable to secure a government
contract as 2 to 25 per cent of the contract value. Another CMS study also found that a majority of the
citizens is not satisfied with the delivery of public services, that there is hardly any effective complaint
redress system in most deptts., that staff behaviour is a matter of concern and that most are not tuned into the
changing expectations of citizens.
(f) The judiciary is over-burdened with the more than 4 crores cases pending in the courts and this has resulted
in miscarriage of justice in many instances. Access to the courts remains difficult, time-consuming and
expensive.
Yes, I think that existing institutional structure towards good governance is merely symbolic thread.
(a) The influence of money and muscle power and corruption continue to dominate elections.
(b) There are worrying trends in Parliamentary processes like loss of time in the sittings of Parliament due to
disruption of its proceedings, participation of MPs in its work and the declining time devoted to legislative
matters.
(c) The judiciary is over-burdened, leading to miscarriage of justice in many instances. Access to courts is
difficult (and oddly enough, now even for PLIs), time-consuming and expensive, scaring away the poor and
the not so well off from them. The image of the judiciary is also somewhat tarnished, with the number of
cases of alleged corruption against judges increasing. Efforts to set-up a high level, independent, strong,
effective and credible anti-corruption watchdog, in the context of the failure of existing mechanisms to curb
corruption in public life, have not borne fruit so far.
(d) The benefits of development schemes, especially those for the weaker sections of society, hardly flow to the
target groups. Corruption continues unabated despite institutional mechanisms in place to check it.
(e) The success of the RTI Act is limited to the highly literate.
(f) Sections of the media are entangled in the vice of paid news.
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