AGRICULTURAL

7 FINANCE

7.1 Need and Classification of Agricultural Finance

7.2 Sources of Agricultural Finance
(A) Non-Institutional
(B) Institutional
7.3 National Bank For Agriculture and Rural
Development (NABARD)
7.4 Limitations of Institutional Finance
7.5 Suggestions

7.1 NEED AND CLASSIFICATION OF

AGRICULTURAL FINANCE

Finance is required to mobilise the inputs required to carry out

production of goods and services. Agriculture is no exception to
this. Poverty prevents majority of the farmers from modernising
the method of cultivation. Availability of finance easily and at
favourable terms, therefore, is essential.

In the post independent period the situation has been changing.

Yet the traditional or non-institutional sources continue though with
the reduced importance as suppliers of agricultural credit.
vicultural Finance
Agricultundt
95

A+ present,
At prE National Bank for Agriculture and Rural Development
(NADARECommercial banks, Regional Rural Banks (RRBs) and
NABARD),
Cooperative Banks through their various schemes provide major
part of
the agricultural credit.

NEED FOR FINANCE

Finance or money capital is one of the important factors in
agricultural development. As discussed earlier, poverty prevents
farmers from improving cultivation. The quantity and quality of
the inputs applied depend on the financial strength of the farmer.
Insufficient income and inability to obtain finance on reasonable
terms result in a state of indebtedness and vicious circle of poverty.
Availability of enough finance from the right sources and at the
right time would give them the required big push to come out of
the vicious circle of poverty that a large number of farmers suffer
from.

CLASSIFICATION OF AGRICULTURAL FINANCE

Short term finance is required for consumption and to carry out
farming and other activities. The former includes providing
livelihood specially during the off season and social and religious
ceremonies. Purchase of seeds, fertilizers, fodder and some simple
equipment comprise the second category.

To meet these expenses, the loans required are short-term, that is, a
period of upto 15 months. Such loans are required to provide for
harvest.
the working capital and usually repaid after the
Medium-term finance is needed for purchasing cattle, equipment
or income
or any other requirements for improving cultivation
earning activities. Such loans are for a period of 15 months to 5
years.

Long-term finance is required for effecting major changes. They

include buying additional land, addition to the capital stock such
as
irrigational facilities, purchasing off
costly
old agricultural machinery
debts. To meet these
having long life span or paying
requirements farmers are required to borrow loans for a period of
more than 5 years.
 Business Economics V (T.Y.B.Com. : SEM-V)
96
Agricultural credit can also be
Productive and Unproductive The former is for the
classified as productive and unproductive.
purchase of different types of inputs which improve the productivity
social ceremonies like
and the total production. Credit spent in
death ceremonies though essential is
festivals, marriage, birth and to the debt burden of the
unproductive expenditure and adds under inclusive finance,
farmers who are already poor. However,
such unproductive purposes.
credit is required to extended even for

7.2 SOURCES OF AGRICULTURAL FINANCE

Agricultural credit can be secured from various sources which can

be broadly classified into (1) Non-Institutional and (2) Institutional.
A. NON-INSTITUTIONAL CREDIT

At the beginning of the planning period, non-institutional sources

played prominent role in supplying rural credit. In 1951, 92.7 per
cent of rural agricultural credit was provided by non-institutional
sources. Money lenders figured prominently by providing 69.7
percent of the credit. They still constitute the major source of non-
institutional credit. The second important role was of relatives and
friends, leaving the third place to traders, the landlords being the
last, extending only 3.3 percent of the credit.

At present the share of non-institutional finance is reduced to about

20 per cent. Small and marginal farmers however depend on them
upto 40 percent of their credit. After the nationalisation of major
commercial banks, subsequently with the lead bank scheme and
the establishment of National Bank of Agriculture and Rural
Development (NABARD), with morenew and innovative schemes,
the non-institutional credit has decreased significantly.
(a) Merit of Non-Institutional Credit
(i)
It
tois easy
each to obtain loan as the lenders and borrowers are known
other.
 97
Agricultural Finance
(ii) oral guarantee. However when
it is only on Simple Procedures are followed while givingthe amount
loans. is
Very often
comparatively large, a written guarantee is obtained.

(iii) Easy access

and no formal timings to approach the money
lenders, traders or landlords. During an emergency even at
midnight a borrower could obtain loans.
imposed on the use of the loan. It is granted
(iv) No Restriction is
for productive as well as non-productive purposes.

(v)
Consumption loans are also available from money lenders and
others. Money required for marriages and other social
celebrations and even for death ceremonies is available without
much delay. For these purposes it is not possible to obtain loans
from the institutional sources.

(b)
Demerits

(i) Exorbitant rate of interest is charged by money lenders and

others making it impossible for the farmers to redeem the loans.

Indebtedness is the main problem arising out of rural credit.

The burden goes on accumulating and in certain cases it leads
to perpetual burden.

(iii) Loss of land and property. Failure to pay the loan and interest
results in loss of land and property to the lenders of credit. Small
and marginal farmers are deprived of the ownership of their
land when they cannot repay the credit.

(iv) Malpractices are indulged in the form of obtaining thumb

impression or signature on blank bond/stamp papers and
misusing them and thus depriving the farmers of their property
and assets.

(v) Exploitation of farmers becomes easier by making them

and
obligated to render free services to money lenders
landlords. Traders compel them to sell the products at a lower
price immediately after the harvest.
and
(vi) Bonded labour is the result of indebtedness of small
marginal farmers. In certain cases it may even continue from
 98 Business
Economics - V (T.Y.B.Com. : SEM-V
generation
to to generation as they cannot redeem the debt due
high interest and other malpractices resorted by the lenders.
B. INSTITUTIONAL CREDIT

The share of institutional credit has

this sector,
increased substantially. Within
cooperative and commercial banks have been playing
major roles in rural/agricultural credit. Let us discuss in brief the
major sources of institutional credit.

Chart 7.1 : Structure of Agricultural Credit System In India

GOVERNMENT OF INDIA
RESERVE BANK OF INDIA

NABARD

COMMERCIAL RURAL CO-OPERATIVE

BANKS REGIONAL
CREDIT INSTITUTIONS RURAL BANKS

LONG-TERM CREDIT
SHORT-TERM CREDIT
STRUCTURE
STRUCTURE

STATE-CO-OPERATIVE STATE CO-OPERATIVE

AGRICULTURE AND RURAL BANKS
DEVELOPMENT BANKS
DISTRICT CENTRAL
CO-OPERATIVE BANKS
PRIMARY CO-OPERATIVE
AGRICULTURE AND RURAL
DEVELOPMENT BANKS PRIMARY AGRICULTURAL
CREDIT SOCIETIES

DEPOSITORS AND BORROWERS

in
TheTable credit supplied by three institutional sources is shown
No.of7.1.
amount
 Finance
Agricu
voricultural 99
Table 7.1 : Flow of
Institutional Credit to Rural Area
(Agriculture and Allied Activities)
Percentage Share
Agency 1970s 1980s 2000- 2011- 2016-
2001 2012 2017
Cooperative Banks 77.0 55.9 39.0 17.21 13.4
Commercial Banks 21.0 38.9 53.0 72.13 75.0
Regional Rural Banks 2.0 5.3 8.0 10.65 11.6
Total (100) (100) (100) (100) (100)
Source:RBI Annual Revorts.

The above table tells us that, of the total institutional credit in 2016-
17, 75.0 per cent comes from commercial banks, 13.4 from co-
operatives and 11.6 per cent from RRBs. It is not very encouraging
to note that the co-operatives' share has been declining over the
period. Co-operatives and RRBs which are specially meant and
committed to the agricultural finance must be more active in
financing this sector.

(I) COMMERCIAL BANKS

They played a comparatively less significant role till the
nationalisation of the major commercial banks in 1969. The number
of rural branches increased from less than 25 percent of the total in
1969 to about 35.3 percent of the total in March 2017. In 2016-17, the
commercial banks' lending to agriculture amounted to about 75%
of the total institutional credit to agriculture.

Commercial banks' lending can be classified as (i) short term, (ii)

medium and long term, (iii) direct finance and (iv) indirect finance.
Short-term finance is extended for purchasing fertilisers, seeds,
pesticides, etc. It provides the required working capital. More than
50 percent of commercial banks' agricultural finance is in this
category.

Medium / Long-term : Commercial banks lend medium term but

do not encourage the long-term finance. Money borrowed under
 Business Economics: V(T.Y.B.Com. : SEM-V)
100

of land. In recent years, however, banks have become this is usually used to purchase cattle, equipment and improvement liberal and

therefore, have widened the scope of medium term lending.

agriculture fall
Accordingly some of the medium term lendings get extended to
long term. Nearly 50 percent of banks' lending to
under this group.
Direct finance is meant for expenditure on purchasing pump sets,
tractors and other agricultural machinery, construction of wells,
other activities.
bore-wells and tube wells, purchase of ploughing Lending
animals, purchase
and development of land, and for many
under direct finance has been around 10 percent of the total lending,
Indirect finance is granted to cooperative societies of various
Commercial bankstypes
also
to enable them function
more effectivity.
subscribe to the debenture of central land development banks
besides extending loans to them.Government
Indirect finance
andisother
provided to Food
agencies for
Corporation of India, the State
distribution of foodgrains. Not more than
procurement, storage and
4 percent has been advanced under this scheme.
Lead Bank Scheme was launched by the Reserve Bank of India to
make individual commercial banks responsible for the development
of individual districts. The banks were expected to prepare District
Credit Plan (DCP) in terms of both physical and financial targets
for the overall development of a district through the coordinating
efforts of all the three institutional financing agencies viz. the
branches of Commercial Banks, Regional Rural Banks and
Cooperative Banks. The banks were given the responsibility of
monitoring the progress. This was joint venture wherein different
institutions put together their expertise and financial strength to
help agriculture in general and rural areas in particular.
(II) CO-OPERATIVES

Co-operative credit societies were

established to provide rural credit
at a lower cost. The co-operative banks provide short term and long
term loan through credit societies via land development banks. They
have well established organisations as shown in the following chart.
 Finance
Agricultural 101

Chart 7.2 : STRUCTURE OF COOPERATIVES

State Co-op. Banks

(at state level) State Land Development
Banks (at state level)

Central Co-op. Banks

(at district level) Primary Land
Development Banks
(at district and village level)
Primary Agricultural
Credit Societies
(at village level) Long Term Credit

Short Term and

Medium Term Credit

SHORT AND MEDIUM TERM CREDIT

State Co-operative Banks are the apex of the
co-operative credit
structure. They act as a link
and the National Bank for between the central co-operative banks
Agriculture and Rural Development
(NABARD).

between
Central primary
Co-operative societies
Banks functionand state
at the co-operative
district banks.
level and provide linkThe
primary societies borrow
money from the state co-operatives
through central cooperatives.

The primary credit societies are at the base level, that is, at the village
level. They provide short and medium term credit to the farmers.
Besides credit they also help farmers by supplying seeds, fertilizers,
insecticides,
etc. agricultural equipment, marketing and farm produce
To combine other services along with credit, Farmers Service
Societies (FSS) were established. On the recommendations of the
study team appointed by the Government of India in 1971, Large
Sized Adivasi Multi Purpose Co-operative Societies (LAMPS)
were of organised in the adivasi and tribal areas. LAMPS provided a variety
services from credit to marketing under one single roof.
102 Business Economics - V (T.Y.B.Com. : SEM-V)

The share of co-operative banks has declined from more than 50%
of the institutional lending in 1990-91 to around 13.4 percent in
2016-17. However in absolute terms they have made good progress.
By now, the cooperatives have covered more than 97% of the villages
with almost 900 lakh members.

LONG TERM CREDIT

For long term credit, land development banks are established. They
work at two levels. At the district level, there are Primary Land
Development Banks and at state level State Land Development
Banks. Loans from the land development banks are for a period of
10 to 15 years and at times they are extended for upto 20 years.

(III) REGIONAL RURAL BANKS (RRBS)

They were established in 1975 on the recommendation of M.
Narsimha committee. These banks were regionally based, rurally
oriented and generally sponsored by scheduled commercial banks.
Some private sector banks as well as State Cooperative banks have
also supported the RRBs. At present there are 56 RRBs.

Objectives
(i) To develop rural economy.

(ii) To extend finance to farmers specially small and marginal,

village artisans, small
entrepreneurs and agricultural labourers.
(iii) To supply credit to those areas where other financial institutions
are not active.

RRBs lent more than 7 1000 billion of credit

to agriculture and allied
activities in 2016-17. There has not been much progress in their share
and
in recent
pooryears. Political
recovery are interferences,
some of the pressure from vested interests
seriousproblems that confront
the RRBs.

To improve the functioning of the RRBs it is necessary to improve

the capital base of these institutions, allow greater liberty in
functioning, provide refinance at lower rate of interest and train the
bank personnel in all aspects of agriculture and rural development.
 Finance 103
scricultural
term loans continue to dominate RRBs lending. It's share in
Chort
thetotal lending is steadily increasing.

RECENIMEASURES
Government has taken several measures for improving the flow of
agricultural credit.
1. The flow of agricultural credit since 2003-04 has consistently
exceeded the target.

2. Farmers have been receiving crop loans upto a principal amount

of 3 lakh at 7 percent of interest since 2006-07. Since 2012-13
the effective rate of interest has been 4 percent for farmers who
introduced
repay their loans promptly. This concession was
under interest subvention scheme.

3. Post-harvest loans were granted against negotiable warehouse

receipts at a commercial rate of interest. Such measure prevents
distress sale immediately after harvest.
4. The Government is a implementing a revival package for short-
term Rural Co-operative Credit structure involving a financial
outlay of more than 13 crore.
5. As a safeguard against the risk arising out of weather changes,
natural disasters and uncertainty in output prices, government
has introduced a number of crop insurance schemes.

7.3 NATIONAL BANK FOR AGRICULTURE

AND RURAL DEVELOPMENT (NABARD)
for
The NABARD was established in 1982 as an institution
financial apex bankwas
agricultural and rural credit. An apex
necessary to provide direction, infuse dynamism and provide
sufficient finance in the form of refinance.

Role and Functions of NABARD

To work as an apex body and provide finance through cooperatives,

commercial banks and RRBs.
104
Business Economics - V (T.Y.B.Com. : SEM-V)
To promote integrated rural development by providing credit to
agriculture, small-scale industries, cottage and village industries
handicrafts and other allied economic activities in rural areas.

To promote and develop financial institutions specially in those

areas where there are no or not enough number of financial
institutions.

To inspect district and state cooperative banks and RRBs.

To reduce
regional imbalance in the availability of finance.

To introduce innovations in the form of new schemes.

AGRICULTURAL FINANCE BY NABARD

As a refinance institution, it provides refinance to State Co-operative

banks, RRBs and other rural financial institutions.

Gives long-term loans to state governments to enable them to

subscribe to the share capital of co-operative credit societies.

Provides long-term loans to any institution approved by the

Central Government, for the purpose of agricultural finance.
(a) Micro Finance : This scheme was introduced in 1992 as a pilot
project under which formal banking system reaches the
microentrepreneurs including farmers. The scheme has been
implemented through Self-Help Group (SHG) and bank
linkage programme. The beneficiaries of this programme
comprise the marginal farmers, landless labourers, artisans and
craftsmen and people engaged in small business like hawking
and vending in the rural areas.

The SHG Bank Linkage Programme is implemented by

commercial banks RRBs and co-operative banks. The
programme has enabled about 100 million poor families to gain
access to micro-finance from the banking system. The
programme, however, iS not very successful due to problems
associated with the recovery of loans.

(b) Bulk Lending Support to NGOs: NABARD introduced this

scheme for on-lending to rural micro and household enterprises.
NGOs receive finance under this scheme.
 105
Agricultural Finance
Tribal Development Project (the Wadi Project) in Gujarat:
(c)
NABARD has supported since 1995, an innovative tribal
development programme in Valsad district of Gujarat. This
programme has multipronged objectives which include
alleviation of poverty, restoration of forest lands, checking
seasonal migration, community hygiene and inculcating self-
help among tribals. More than 4000 families have developed
about 1400 hectares of marginal land. This programme has
demonstrated that tribals can remain in their territory and do
what they are best at - forestry, horticulture and develop their
lot on a sustainable basis.

(d) Farm Income Insurance Scheme (FIIS) was introduced in 2003-

04. It provides income protection to the farmers by integrating
the mechanism of insuring production as well as market risks.
The farmers income would be protected by ensuring minimum
guaranteed income.

KISAN CREDIT CARD (KCC)

in 1998-
The scheme was prepared by the NABARD and introduced
of the
99 to facilitate
banks accessrural
and regional to credit fromThe
banks. co-operative banks, commercial scheme
salient features
are :

(a) Farmers eligible for production credit of 7 5000 or more are

eligible for issue of Kisan Credit Card.
a Kisan Card and Pass
(b) Eligible farmers are to be provided with
book or card-cum-pass book.

(c) Provision of revolving cash credit facility involving any number

of withdrawals and repayments within the limit.
ancillary
needs for full year plus
(d) Entire production credit
activities related to crop production considered while fixing
limit. In due course, all activities and non-farm credit needs
will also be covered.

(e) Limit to be fixed on the basis of operational land holding,

cropping pattern and scale of finance.
(f) Sub-limits may be fixed at the discretion of banks.
106 Business Economics - V (T.Y.B.Com. : SEM-V)
review.
(g) Card valid for 3 years subject to annual
(h) Each withdrawal to be repaid within 12 months.
(i) Conversion/reschedulement of loans also permissible in case
of damage to crops due to natural calamities.
() As incentive for good performance, credit limits could be
enhanced to take care of increase in costs, changes in cropping
pattern etc.

(k) Security, margin, rate of interest as per RBI norms.

(l) Operations may be through issuing branch or at the discretion

of bank, through other designated branches.

(m) Withdrawals through slips/ cheques accompanied by card and

passbook.

The government also introduced a new scheme to provide cover for

accidental deaths or permanent disability for KCC holders for a
maximum amount of 50,000 and 7 25,000 respectively. Besides the
crop loan, the KCC scheme has been enlarged to include term loans
for agriculture and allied activities along with a component to meet
the consumption needs. The credit delivery system is being
simplified with more flexibility in the use of KCC. The KCC scheme
has now been extended to borrowers of long term cooperative credit.
This arrangement paves the way for acceptance of KCC as a single
window for a comprehensive credit product.
A revised KCC scheme was introduced in March 2012 in which KCC
passbook has been replaced by an ATM-cum-debit card to all
eligible and willing farmers in a time-bound manner.

7.4 LIMITATIONS OF INSTITUTIONAL

FINANCE

Financial institutions have

been playing a significant role in
agricultural finance specially after
in 1969. At present the institutionalnationalisation of major banks
finance constitutes a major
portion in agricultural finance. Institutional finance has to play a
 Agricultural Finance 107

greater role to make agriculture dynamic and progressive. However,

the institutional finance has not
yet become as popular as it should
have been due to certain limitations, which are :
i)
Formalities A
farmer is required to go through official
formalities before obtaining a loan. With a vast number of
farmers
the being illiterate, they are discouraged from approaching
institutions.

ii)
Security Insisting on collateral security creates a problem
specially when a farmer neither owns the land nor possesses
proper ownership records.

iii) Productive loans only Loans other than for productive

purposes
for have not yet become popular. Farmers require loan
consumption or unproductive purposes such as social
ceremonies like marriages or to meet sickness expenditure. For
these requirements they still require to run to the money
lenders.

iv) Political interference : Financial institutions come under

political pressure and are unable to function objectively and
impartially. Loans are disbursed as directed by political leaders
resulting in a large number of bad debts.
v) Corruption and Red tapism : Financial institutions lending
agricultural finance do not function transparently. Red tapism
and corruption creeps in specially when the borrowers are
illiterate and ignorant or incapable of influencing the decisions
of bank officials.

7.5 SUGGESTIONS

To improve agriculture it is necessary to provide enough finance to

the farmers both for production as well as consumption purpose

Following suggestions are made for improvement :

(1) Extend institutional credit for all purposes that is even for
certain essential consumption requirements. Even social
108 Business Economics - V (T.Y.B.Com.: SEM-V)

activities like marriages, minimum expenses required for

ceremonies involved in birth as well as death be covered.

(2) Kisan Credit Card be issued to all farmers with a higher ceiling
of credit. Credit on KCC must be available for consumption
purpose too.

(3) Low rate of interest should be charged specially to small and

marginal farmers, preferably not more than 1 percent above
the deposit rate.

(4) No Collateral security be demanded if the farmers do not own

land or other assets.

(5) Crop insurance be made compulsory SO that the farmers will

be covered against the crop failures. Insurance will enable them
repay the loans through the insurance money. The premium
must also be low so that it would not be a burden on poor
farmers. A grading rate of premium can be introduced based
on the amount covered.

(6) Minimise Formalities involved in granting loans by financial

institutions. Too many hurdles due to unnecessary formalities
discourage poor and illiterate or semi-literate farmers from
approaching the banks or cooperatives.

(7) Strengthen the Credit Cooperatives in their financial abilities

SO that most of the financial needs of the farmers can be met
through Credit Cooperatives.

REVIEW QUESTIONS

1. Discuss the need for agricultural finance and its

major sources.
2.
Discuss
sector. the main sources of institutional finance for the agricultural

3. Write short notes on:

(a) Merits and demerits of non-institutional credit
Cooperative credit society
RRBs
(o)
(d) NABARD
 AGRICULTURAL
6 PRICING

6.1 Features of Agricultural Prices in India

6.2 Need for Agricultural Policy
6.3 Price Policy And Its Implementation
6.4 Evaluation of Agricultural Price Policy

Farmers earn their income by selling what they produce, that is,
agricultural commodities. How much would they earn depends on
the prices of what they sell. Since half of our population depends
on agriculture, a remunerative price for agricultural goods is very
significant in deciding their economic conditions. Farmers suicides
which has become a serious problem is partly due to low price hence
low income. It is, therefore, necessary to have an appropriate
agricultural pricing policy.

6.1 FEATURES OF AGRICULTURAL PRICES

IN INDIA
1. Non-Remunerative prices : Remunerative price is essential to
have better income. Higher income provides the necessary
incentive to put in hard work, apply better inputs, produce more
and earn more. Farmers, however, very often get non-
remunerative prices.
 Business Economics - V (T.Y.B.Com. : SEM-V)
82

2. supply.
determined like any other prices by Role of Supply in Agricultural prices : Agricultural prices are demand and

that
Demand for these products plays
by and anisimportant
large role Itin
almost inelastic.
is therefore the supply
income
determining agricultural price. It is observed that a good harvest than a bad harvest.
with more supply brings less market is subject to seasonal
3. Uncertainty Agricultural discourages farmers
fluctuations. Uncertainty about the prices from
from introducing any innovations in cultivation and also
taking risks. A comparatively stable price will provide the
confidence to improve the cultivation and produce more.
need of money for
4. Distress Sale Farmers being poor, are in
do not have holding capacity and
various reasons. They harvest.
therefore resort to distress sale immediately after the
farmers sell their
Middle men: Most of the
small and marginal
5.
produce to the middle men who exploit them by paying a lower ais
price than the market price. More the middle men, greater
price and the consumers
the gap between producers (farmers)
(final) price.
Most of the farmers do not have
6. Incomplete information
sufficient market information regarding the prevailing prices.
This makes the farmer sell their product at a lower price.
Purchasers take the advantage of the lack of information or
ignorance of farmers, thus exploiting them.
7. Poor infrastructure : Facilities like official or organised market,
and so
market information, communication, transport system
on, for effective marketing of agricultural goods are insufficient,
resulting in farmers exploitation.

Agricultural price policy aims at determining two sets of prices by

the government that is (i) procurement prices at which the
government purchases agricultural commodities, mainly foodgrains
from the farmers to provide and ensure better incomes to farmers
(üi) issue prices at which the government sells agricultural goods
 83
Agricultural Pricing
through fair price shops to poor consumers to ensure their minimum
livelihood.
In this chapter we are mainly concerned with the price paid to the
farmers to enable them overcome the constraint on agricultural
development.

6.2 NEED FOR AGRICULTURAL POLICY

An official price policy in India has become essential :

(i) To provide remunerative prices to the farmers SO that they not

only cover the cost but earn enough income to improve
agriculture and also their living standard.

(ü) To provide incentives to farmers so that they will take enough

interest in improving agriculture.

(iii) To promote capital formation through farmers' savings and

investment in irrigation, equipment and other essential
supporting services. This is possible only if the farmers will
have good prices for their products hence surplus income to
save and invest.

(iv) To have better terms of trade between agricultural and non-

agricultural sector. It is usually argued that agriculturists suffer
from adverse terms of trade though there iS no conclusive
evidence for the same. Yet a better price will help the farmers
enjoy more income.

(v) To reduce income inequality between primary and non-

primary sectors. Changes in agricultural prices effect a transfer
of income between agricultural and non-agricultural sectors of
the economy. Stable agricultural prices would prevent and
possibly reduce inequality of income between the sectors.

(vi) To prevent inbuilt fluctuations in agricultural prices due to (i)

Seasonal nature of agriculture (ii) Low price (iii) Low elasticity
of demand and (iv) Biological nature of agricultural products.
 Business Economics - V (T.Y.B.Com. : SEM-y)
84
utilisation of land and other inputs
for agricultural products.
(vii) To encourage rational
through an appropriate price policy of India
Keeping the above factors in mind the government
since 1964-65 evolved a price policy. It aims to strike a balance
between different forces agriculturist,have
consumers and
its ramification
industrial sector - since agricultural prices
throughout the economy.

6.3 PRICE POLICY AND ITS

IMPLEMENTATION

The Government of India, keeping in mind the need for a price policy
set up a committee under the chairmanship of Prof. Jha in 1964-65.
The Jha Committee recommended the prices for agricultural
commodities for the year 1964-65. The committee further
recommended setting up Agricultural Price Commission.
Accordingly Agricultural Price Commission was set up in 1965.
Currently the commission is called - Commission For Agricultural
Costs and Prices (CACP). The commission is expected to determine
and announce administered prices on a yearly basis.
(A)
DETERMINATION OF APPROPRIATE LEVEL OF PRICE
The CACP while
determining
an appropriate level of price is
expected to consider the following factors (i) the cost of production
(v) risk
(ii) changes in input prices (iii) market prices (iv) demand and supply
factors
living (viii) (vi)on
effect effect on industrial
general cost (vii) effect on cost of
price level
(ix) international price
situation (x) parity between price of different crops, paritybetween
input
in the and
past.output prices and also parity between price received by
the farmers and paid by the consumers and (xi) trend of price level
Agricultural Pricing 85

(B) ANNOUNCEMENT OF ADMINISTERED PRICES

Government announces three types of administered prices, namely,
minimum support prices, procurement prices and statutory
minimum support prices.

(i) Minimum Support Prices (MSP): The minimum support prices

announced each year by the CACP takes into account the above
mentioned factors. Special consideration is given to the cost
factor. The cost concept covers all items of expenses of
cultivation including the imputed value of inputs owned by
farmers. The important cost concepts used by CACP are the C,
and C, costs.

C, cost includes all actual expenses in cash and kind incurred

in production by actual owner plus rent paid for leased land
plus imputed value of family labour plus interest on value of
owned capital assets plus rental value of owned land net of
land revenue.

C3 cost is equal to C, + 10 percent of cost to account for

managerial remuneration to the farmer.

Thus the formula for Minimum Support Price (MSP) can be

expressed as

MSP = C = (C, + C,)

Swaminathan Formula : The M.S. Swaminathan Committee
titled as
'The National Commission on Farmers' recommended
to fix MSP at level 50 percent more than the weighted average
cost of production (C)), in its report submitted in 2006. It is
called C, + 50%. Farmers during their recent agitation in
Maharashtra demanded the implementation of Swaminathan
formula.
 Business Economds Eivrcny -V
86
€ per quintal)
Table 6.1 : Minimum Support Prices (MSP)
MSP
Commodity Irecommended
MSP
Commodity for 2017-18
recommendedl
(crop year)
for 2017-18
to be
(crop year) marketed in
2018-19

Rabi crops 1,735

Kharif crops Wheat
1,550 4,400
Paddy (common) Gram
1,570 4,250
Paddy (Gr. A) 1,700 Masur (lentil)
Jowar (Hybrid) Rapeseed ) 4,000
Jowar
1,725
Mustard
(Maldandi) 1,410
1,425 Barley
Maize 4,100
5,450
Safflower
Arhar (Tur) 230
5,575 Sugarcane
Moong Cotton 4,020
Urad 5,400
3,500
Jute
Groundnut
4,450 Groundnut
in shell 4,450
Sunflower Seed 4,100 (in shell)

Source : Government Publication.

stated that the
The Union Government in its budget 2018-19,
MSP for the rabi season will be 1.5 times of production cost but
did not elaborate the cost structure.

The minimum support prices fixed by the government are in

the nature of a long term guarantee to enable the producer pursue
his efforts with the assurance that the prices of his produce would
not be allowed to fall below the level fixed by the government
even in the event of a glut in the market arising out of excess
production or the lack of purchasing power of the poor. It served
as a floor price and guaranteed income to the farmers. 24 major
crops are covered under this scheme. Prices (MSP) recommended
 87
Agricultural Pricing
in 2018-19 are shown in
for 2017-18 (crop year) to be marketed
table 6.1.
case of two
(ii) Statutory Minimum Support Price : Earlier in the
minimum support prices
commodities namely jute and sugarcane the
had been assigned a statutory status. This madeits
it illegal for
minimum
anybody to purchase the commodity at less than
factory can pay a
support price. In the case of sugarcane, no
price lower than the statutory minimum. In case of jute, the
market infrastructure continues to remain weak, hence the
enforcement of minimum support price has become a difficult
task. Inspite of its statutory basis, the implementation of
statutory minimum price remains unsatisfactory. Thus
limitations of the law to deal with the economic phenomena
are to be recognised and dealt with.

This scheme could be extended to any commodity, if necessary.

(üi) Procurement Price: Procurement price is the price at which the

government procures grain from producers. Normally, the
market price but higher
procurement price is lower than the open
than the minimum price.

(iv) Issue Prices : They are prices at which the government supplies
food grains at ration shops. They are lower than the
procurement prices to protect consumer's (BPL) interest. The
difference between the MSP and issue price is met by the
government through subsidy. For Antyodaya Anna Yojana
was 7 300 per quintal. Since
(AAY) scheme the issue price
2002-03 the issue price for AAY categories have remained
unchanged. The MSP for these items was much higher than
issue price.
PRICES
(C) IMPLEMENTATION OF ADMINISTERED
For implementing administered price the following measures are
taken by the government:
Task to Different Agencies: The Food
(i) Entrusting the
undertakes prices support operations
Corporation of India (FCI)
for most foodgrains.
88
Busines Economics - V (T.Y.B.Com.: SEM-V)
The National Agricultural Cooperative Marketing Federation
(NAFED) undertakes such operations for coarse cereals, pulses
and oilseeds.

The Cotton and Jute Corporations of India are entrusted with

the price support operations for cotton and jute respectively.

In the case of sugarcane, sugar mills are required to pay atleast

the minimum prices to the producers.

For tobacco, the responsibility for implementing the price policy

decisions rests on Tobacco Board. Similar specialised
Commodity Boards exist for rubber, coffee, tea, spices, coconut,
oil-seeds and vegetable oils, horticulture etc.

Establishment of National Crop Forecasting Centre (NCFC):

It was established
by the Government in January 1999 to keep
a careful watch on the prices of primary products which include
wage goods and other items of common man's consumption
and recommend
vigorous intervention if necessary by the
government in the market. NCFC will put an advanced warning
system that signals likely supply shortfalls. This was found
necessary till now in the case of onions, pulses, and edible oil.

(üii) Setting up of High Powered Price Monitoring Board : It was

set up in 1999 for monitoring the essential commodity prices
market.
and anticipating the need for government's intervention in the

(iv) Buffer Stocks Buffer stocks are stocks build up by the

government
NAFED to stabilize
build-up buffer prices. Food corporation of India and
stocks of essential grains which are
utilized when there is shortage of output. Since 1992 onwards
buffer stocks have
gone up continuously. Currently we have
enough buffer stocks of essential grains.
(v) Warehousing : Government has made
arrangements to set up
warehouses
help farmers including warehouses of FCI. Such warehouses
store the farm
the market. products till they are demanded in
 Agricultural Pricing 89

(vi) Regulated markets : Most of the states have regulated markets

which have helped stabilise agricultural prices. Regulated
markets fix appropriate prices in the interests of farmers.

(vii) Credit Facility The government has made efforts to provide

finance to farmers at low interest rates to enable them stock
their produce and sell later when prices are better. This brings
about stability in agricultural prices.

6.4 EVALUATION OF AGRICULTURAL PRICE

POLICY

The working of agricultural price policy has certain limitations.

They are:
1.
Difficulty in Deciding 'Fair' Prices Prices fixed by the
government have attracted a great deal of attention in the recent
past following farmers agitations for 'remunerative prices'. With
reference to administered pricing, the most controversial issue
has been what constitutes a 'fair' level of support and
procurement price. It may be said that the price fixed be
Sty
regarded as 'fair' if it were above the cost of production even
though it were much below the free market price. In case of
§nl monopoly procurement it was not easy to determine the
"fairness' of the administered
price. Here the price movements
of competing crops could be taken into consideration to avoid
a distortion of the cropping pattern.
2.
abo No Integration between Different Criteria : In determining
the procurement price, the Agricultural Prices Commission
considers various criteria. However, according to Raj Krishna
and Roychaudhuri, the various criteria listed by APC, were
applied and emphasized in an unco-ordinated way. Some of
them were stressed and used for some decisions and others on
other occasions. They were never integrated into an objective
model to compute the price to be recommended".
90 Business Economics• V (T.Y.B.Com. : SEM-V)
3. Benefit to Large Farmers : Given the significant differences-
intersize, inter-class, interregional, and intercrop in the levels
'who' and 'which'
of marketability, the question arises as to
region benefits from remunerative prices. Given the high degree
of inequality in the distribution of marketable surplus among
different size-groups, the chief beneficiaries of 'high'
agricultural prices will continue to be the large farmers.
Since
public distribution system is almost non-existent in rural areas,
the rural poor who are mostly unorganised will be chief victims
of 'high' prices. It is likely that disparity between (rich)
producers and (poor) consumers and sub-marginal producers
who purchase substantial quantity of foodgrains for
consumption would widen.
4. Mounting Fiscal Deficits Huge Food Subsidies:
Implementation of agricultural price policy involves the
expenditure on procurement of foodgrains, warehousing
storage and distribution via the PDS through fair price shops.
This expenditure known as food subsidies have risen
enormously in recent years. However the government can
spend more for MSP by reducing its own unproductive
expenditure.
5. Contribution to inflationary trend : CACP has been increasing
procurement prices year after year. Calculations by CACP IS
questioned by economists. The increase in price has nothing to
do with the cost of production. Large farmers hoard foodgrains
and force the government to increase prices.
6. Impact on rural poor: The Government assumes that increase
in agricultural prices leads to higher returns to farmers, which
in turn leads to higher wages to agricultural labour. However,
the trickle down of wages is hardly a fraction of the increase.
Benefits of higher prices hardly accrue to the poor farmers as
they do not supply much marketed surplus and on the contrary
depend mostly on the market for meeting their consumption
requirements. Thus, the bulk of rural population has suffered
on account of high and increasing food grain prices.
7.
Bias in favour of low cost states : The current practice of CACP
is to fix a uniform purchase price for the country as a whole on
 91
Pricing
Agricultural
the basis of costs of production in a high cost state. As a result
substantial
of this policy the farmers in low cost regions enjoy
differential rents.

8. Not all commodities covered Wheat and rice areessential

usually
covered under the price policy. Many other
commodities are left-out resulting in exploitation of producers
as well as consumers.
liberal. India
Under W.T.O. agricultural trade has become more
like all other countries will have to face more competitive
market both at home and internationally. Agricultural prices
therefore will be influenced more by market forces than the
government measures. The emerging new scenario may also
lead to a change in resource allocation and different crop pattern
in tune with changing market forces. Indian agriculturist may
to the market and rely less on
require to adjust himself more
government support.
It is necessary for the Indian farmers to increase efficiency
and reduce cost so that the competitive market price becomes
remunerative price. The Government, however, should not
abandon their responsibility of providing a minimum level
is no reason why the
of support to the agriculturists. There
government cannot implement Swaminathan formula.

REVIEW QUESTIONS
agricultural prices.
1. Discuss the government measures to stabilise
2. Critically examine the agricultural price policy of the government of
India.
3. Explain the features of agricultural prices in India and the need for
agricultural price policy.
4. Write short notes on :
(a) Need for agricultural price policy
(b) Measures to stabilise agricultural prices
(c) Limitations of agricultural price policy.
 92 BusinessEconomics - V (T.Y.B.Com.: SE)

OBJECTIVE QUESTIONS
A. one sentence :
Answer the following in
1. What is the Minimum Support Price ?
2. What is C, cost ?
3. What is procurement price ?
4. What is issue price ?
B. Choose the correct answer and rewrite the statements:
1. Agricultural prices in India are
(a) very certain (b) uncertain
(c) very remunerative
2. Agricultural price policy is required to
(a) provide incentives to farmers
(b) to encourage farmers to spend more
(c) to increase income inequality
3. Minimum Support Price guarantees the farmers with
(a) High income (b) Floor price
(c) Competitive price
4. Issue price is at which the government supplies foodgrains
(a) in the open market (b) to the middlemen
(c) to ration shops
5. Fair price shops protect the interest of
(a) poor farmers (b) poor consumers
(c) poor traders
6. Price policy mainly benefits
(a) small farmers (b) marginal farmers
(c) large farmers
Ans.: (1) - (b), (2) - (a), (3) - (b), (4) - (c), (5) - (b), (6) - (c)
C. State whether the following statements are true or false with
reasons:
1.
Supply plays an important role in agricultural price.
2. Issue price is lower than procurement price.
3. ones.
Agricultural price policy has benefited rich farmers than the poor
4. Distress sale is one of
the reasons for low agricultural price.
5.
Agricultural
favour price policy is necessary to improve terms of trade in
of farmers.
 52
52

... • -~• • ..._ •

.f"t,,,;., .~) /.
• V

' .'.
·:·:· .J

FOREIGN
4 INVESTMENT
IN INDIA

4.1
4.1 Foreign C
Foreign Capital
apital
4.2
4.2 Foreig
nD irect IInvestment
Foreign Direct nvestment (FDI)
(FDI)
A
A.. Types o f
Types of FFDI
DI
B.
B. Benefits o f FD
I t o th
e Host
H o s t Country
cC.. Benefits of FDI to the Country
C osts ofFDI t
o Host
Costs of FDI to H o s t Countries
Countries
4.3
4.3 Multinationa
l Corporation
Multinational
A.. Defin
A Corporationss (MNCs)
(MNCs)
Definition
ition
B.
B. Role o f M
Role of MNCs
NCs
C. .Disadva
ntages of ·MN
4.4
'4.4 C. Disadvantages
India's Foreig of MNCsCs
n Direct Inve
stment Polic
India's Foreign Direct Investment Policy yand
andTrends
Trends

41 FOREIGN CAPITAL
Foreig
Foreignn capital
capital hash a s a signific
regard less of . ant r o le t o p
l a y i n every economy
its level of de
necess ary to a significant
v e lo p m erole
nt. F o r d e v ein every eco·e
to play no~~, -
necessary
regardless to
of s u
its p p
level
o r tof development. For l o p s 1ttS
countries, it is s u s e
t a i n a b l e d e v developed countries d countn itis
ing
u s e d to incre elopment. F
accumulation ase t h e r a t e o r develop .~
support
so as to sustainable
furth of i n v e sFor
development. t m edeveloping
d capit
er economic nt a n
g rinvestment
countries, it is used to increase the rate of owth. and capita
accumulation so as to further economic growth.
Foreign Investment in India
Foreign India 53
53
Forms of
Forms of Foreign
Foreign Capital
Capital

FORMS
FORMS OF
OFFOREIGN
FOREIGNCAPITAL
CAPITAL

Foreign Direct
Foreign Direct Foreign Portfolio Depository
Investment
Investment Investment
Investment Capital
Debt Capital
Receipts
Receipts

1.
1. Foreign Direct Investment
Investment (FDI)
(FDI)
Accordingto
According tothe
theIMF,
IMF,FDI
FDIis is
anan
investment that
investment is made
that to to acquire
is made acquire
a lasting
a lasting interest
interest in
in an
anenterprise
enterprise operating
operating in
inan
aneconomy
economy other
other
than that
than that of
of the
the investor.
investor. The
The investor's
investor's purpose
purpose isis to
to have
have an
an .
effective control
effective inthe
control in themanagement
managemen tofofthe
theenterprise.
enterprise.
Foreign
Foreign direct
directinvestment
investmentisisinvestment
investment made
made by aa foreign
foreign
individualororcompany
individual companyin in a productive
a productive capacity
capacity ofof another
another country.
country.
It
It is
is the
the movement
m·o vementof
ofcapital
capitalacross borders in aa manner
across national borders manner
that gives
gives the
the investor
investorcontrol
controlover
overthe
theacquired
acquiredasset.
asset.
FDImay
FDI maytake
takethe
theform
formof
ofbuying
buyingor
orconstructing
constructing a factory
factoryin
inaforeign
foreign
country or
or adding
addingimprovements
improvemen tsto
tosuch
such aa facility,
facility, ininthe
theform
formof
of
property, plants,
plants, or
or equipment.
2. Foreign
Foreign Portfolio
PortfolioInvestment
Investment (FPI)
(Ffl) via
via Foreign
Foreign Institutional
Institutj.onal
Investors
Investors (FII)
(FIi)
Investingininforeign
Investing foreignfinancial
financialinstruments
instrumentsisisPortfolio
PortfolioInvestment.
Investment
Portfolio equity
Portfolio equityflows
flowshave
have played
played an important
important role
role of
ofproviding
providing
finance to
finance to firms indeveloping
firms in developingcountries.
countries.Foreign
Foreignportfolio
portfolioequity
equity
investment involves
investment involvesbuying
buyingcompany
companyshares
sharesininanother
anothercountry,
country,
usually through
usually throughstock
stockmarkets,
markets,without
withoutgaining
gainingeffective
effectivecontrol
control over
over
company's management.
any company's managemen t.
3.
3. Depository Receipts
Depository Receipts (American
(American or
or Global)
ADR or
ADR orAmerican
AmericanDepository
DepositoryReceipt
Receipt--AnAnADRADRisisa anegotiable
negotiable
certificate issued
certificate byaaUS
issued by USbank
bankrepresenting
representing a specified
a specified number
number of of
shares (or one share)
shares (or one share) in
inaa foreign
foreignstock
stock that
that is
is traded
traded on US exchange.
exchange.
 54
54 Business Ec
onomics - V
ADRs are ~
are d enOu; n a t e d i n Business Economics -
( f . Y.B.Co
V (T.Y.B.Com.: m.: SSPM
ADRs U S $ with the d EM.-v
by a US fin =• u n er ymgl .
ancial i n s t i
by a US
Global D e financial
denominated institution
t u tin
i o USoverseas.
$
n overseas with the underlying security hek
security h ,.
I

pository R .
b Deposi e e~
tory B a n k c e i p t ( G D R ) i s a n e g
by
c~m Depository
pany. GDR against th ~tiable ins
s are listed e d o m e s t i c s h a r t r u m e n t issue11
exchangthe and trade es of the
Bank against esGlobal
, eexcept
xcept i n
Depository Receipt (GDR) is a d
negotiable o n o n e o r m o shares of theisissuing
instrument issued domestic suin
exchanges,
company. in UUSA.
S A. and traded on one or more internationai r e internatioJ
4 D e b t GDRs are listed
4.. Foreign C
apital com
• DebtL o a n sForeign e s iinn the
e i t h e r Capital
from frie
comes t h e form
f o r mof o f::
institution ndly gov
s like t h e W ernments
Loans
• institutions either from
External C like the World friendly
o r l d BBank governments,
a n k oor IMF,
,oromultilateral
r multilate
ommercia r I M F , ral
l Borrowi
• External
RemittancCommercial Borrowing n g (ECBs),
(ECBs),
Remittances es and
a nd
• Foreig
n Currenc
country. y deposit
country. s of non-
resident
Foreign Currency deposits of non-resident citizens c i t i z e nof
s othe
f the

D4.2
EFINFOREIGN DIRECT INVESTMENT (FDI)
DEFINITION
ITION
According
a lasting int o t h e IMF
te est i n ' F D I .
than that oto rthe
According IMF, FDI i s an_ .
f the i ninvan
a lasting interest i
e: en:rp~ nvestment that is m
effective vo s e o p e r a t that is madea dtoe acquire .
ice i n t h is an investment i n t o ac q u it
.
than that of the investor,
oenterprise
r , e i n v operatingiin
e m a n athe estor's pu n a
investor's
g an e c o n o m yother!
n economy
F D I is c a l gement rpose bei othel
f t epurpose n
as t he purcculated t o i n c l u 0 h e n t e r p r ibeing
s
gtot ohave
havean a1\
effective h
voice
asesinofthe management
d e
stocks a:l . of the enterprise. e .
by a wholly
by l kinds of
o
th~ l e n d i n w n e d c o m . w e
c a p i t a l co
n t r i b u t i o n such
g of f u n d ll as the r s , s~ch
FDI
reinis
vecalculated
stment of to include s \ o y ialln ckinds
orporated of capital
e i n vcontributions,
e s t m e
earning a n t of eaft\ll
cFoDmI pany a d f b r o a d ( s u b \g,
d . o r e i g n subsidi s i d i ary),atld
FDI calculaa~tio its s u b s i d8i a nforeign t r a n s £ subsidiary orr branch.
a r y o b r a n c h -The
ns
calculations.. ary o f t e n e r O f a s s e t s b 'f\le
as the purchases of stocks, as well as the reinvestment of earning* the lending of funds to wholly owned company incorporated abroad (subsidiary) a

Once a f i r m of earnings and transfer constitute e t w e e n a ret't

reinvestment of assets s a between
s i g n i f i c aan tparent
pa ·
undertake
s F D
part ol
company and its subsidiary,often I
i t b e cconstitutes
. a significant part of
omes a
Once a firm undertakes FDI, it becomes a m u l t i n a t i o n
multinationalaenterprise. l enterprt·,~e
Foreign Investment
Foreign India
in India
Investment in 55
55
A.
A. Types
Types of
of FDI
FDI
FDI
FOi may
may be
be classified
classi fied as
as follows:
follows:

I.
I. Greenfield
Gree nfield Investments
Inves tmen tsand
andMergers
Merg ers and Acqu isitio ns
and Acquisitions
(M & A)
(M&: A)
1.
1. Green-field
Green -fieldinvestment
inves tmen trefers
referstotoestablishing wholl ynew
establishingaawholly new
operation
opera tioninina aforeign
foreig ncountry. Greenfield
count ry. Greenfield investments s·involve
inves tmentinvolve
the
the flow
flow of ofFDIFDIfor
foreither
eitherbuilding
build ingupupof of
new produ ction
production
new
capacities in the host nation
capac ities in natio n or
or for expan sion of the
for expansion existing
the existing
production
produ ctionfacilities
facilitiesofofthe
thehost
hostcountry.
country.The points of
pluspoints
Theplus this
of this
come in
in form increa sedemployment
formofofincreased s, relatively
t opportunitierelatively
emplo ymenopportunities,
high
highwages,
wage s,R&D R&Dandandcapacity enhancement.
capac ityenhancement.
2.
2. Acquiring
Acqu iringor ormerging
merg ingwith
withananexisting firminin
existingfirm the foreign
theforeign
country,
count ry,ininother , acqui ring
wordsacquiring
otherwords, contro
control of existing
ofl existing entities
entities
through merge rs and acquisitions.
cross- borde r mergers
throu ghcross-border occurs when
acquisitions. ItItoccurs when
ofexisting
transf er of
a transfer assets from
existi ngassets firms takes
local firms
from local place.
takes place.

The
The majority inves tment sare
major ityofofinvestments thethe
arein in form of of
form merge rs &
mergers &
acquisitions:
acqui sition s:
about77%
repre sent about
These represent 77% ofofall flowsinin
allflows countries
developed countries
These developed
and about33%
and about flows
33 %ofofallallflows in in developing
developing countries.
countries.

II.
II. Horizontal
Horizontal and
andvertical
verticalinvestment
investment
1.
1. Horizontal
HorizontalDirect Investment:This
DirectInvestment: refers to
Thisrefers to FDI
FDI in
inthe
thesame
same
indus tryabroad
industry the foreign
asthe
abroa das foreig ninvestor company.
inves torcompany.

2.
2. Vertical directinvestment:
Verticaldirect ofof
bebe
: can
investmentcan two
two kinds.
kinds.

(i) B kward - inves tment s into indus try that provides inputs
(i) Backward - investments into industry that provides extractive
inputs
into (typic
dome sticproduction
firm'sdomestic
i;: aa firm's ally extrac
produ ction(typically tive
industries; e.g. minin
indus tries; e.g. mining)g)
F d _investment
inves tmen t in an industry
in an indus try that
that utilizes
utiliz es the
the
(1·1·) orwar
(ii)
dome stic pro d •
uction (typ1ca y sa1es
· 11
firm's
fr om afrom a firm's domestic production (typically sales
outpu ts
Forward outputs
and
and distribution)
distri butio n)
56 Business Eco nom ics- V (T. Y .B.Com. : SEM-V)
Business Economics - V (T.Y.B.Com. : SEM-V)
III.
III.Inward
Inw ardororoutward
out wa rd investment
inv est me nt
1. Inw ard for eig n dire ct inv est me
1.
Inward nt is a typ ica l for m of what
com mo foreign direct investment is a typical form of what
nly is term ed as FDI. Her e, inv est me nt of for eig n cap
commonly is termed as FDI. Here, investment of foreign capital ital
occurs
occ urs in local
local resources.
res our ces .
2.
2. Ou twa rdFDIFDis
Outward I isalso
alsoreferred
refe rredtotoas
as"direct
"di rec tinvestment
inv est me nt abroad"
abroad".
In this cas e it is the loc al cap ital , wh ich is bei ng
In this case it is the local capital, which is being invested inv este d in
in
som e fore ign res our ce. Ou twa rd FD I ma y also find
some foreign resource. Outward FDI may also find useuse in the
in the
imp ort and exp ort dea ling s wit h a for eig n cou ntry
import and export dealings with a foreign country..Outward Ou twa rd
FDI
FD I flourishes
flou rish es under
und er government
gov ern me nt backed
bac ked insurance
ins ura nce at
atrisk
risk
coverage.
cov era ge.
IV. Acc ord ing to the Wo rld Trade org ani zat ion the re are
IV. According to the World Trade organization there are three three
main
main categories of FD
cat ego ries of FDI:
I:
1.
1. Equ itycapital
capitalororthe
thevalue
val ueofofthe
Equity theMNC's
MN C'investment
s inv est me ntin in
shares
shares
of an ent erp rise in a for eig n cou ntry . An equ_ity cap
of an or
enterprise in a foreign country. An equity capital italstake
stak eof
of
10% mo re of the ord ina
10% or more of the ordinary shares ry sha resoror voting
vot ing power
pow er in in an
an
inc orp ora ted ent erp rise , or its equ iva len t in anunincorporated
uni nco rpo rate d
incorporated
ent erp rise , isenterprise, or its equivalent in an
nor ma lly con
enterprise, is normally considered sid ereas
d as a thr esh old
a threshold forfor
thethe
control
control
of
of assets.
ass ets . This
Th is cat ego ry inc lud es bo th mergers and
acquisitions and "Green category includes both mergers and
acquisitions and "Greenfield" .field" investments
inv est me nts(the
(the
creation
cre atioofn new
of new
facilities). Me rge rs and acq uis itio ns are an imp ort
facilities). Mergers and acquisitions are an important antsource
sou rce of
of
FD I for dev elo ped
FDI for developed countries, although
cou ntri es, alth oug h the
the relative
rela tiveimportance
importance
var ies
varies considerably.
con sid era bly .
2.
2. Rei nve ste d earnings
Reinvested are
earnings-a re the MNC's
the MN share
C'·s sha re of affiliate
affi liat eearnings
earnings
not dis trib ute d as div ide nds or rem itte d to the
not distributed as dividends or remitted to the MNC. MN C. Such
Such
reta ine d pro fits by affiliates are ass um ed to be
retained
the profits by affiliates are assumed to be reinvested
affiliate. in in
rein ves ted
the affi liate.
3.
3. Oth er cap ital ref ers to sho rt or long-t erm bor row ing and
Other
len din gcapital refers to short
of fun ds bet we en the or long-term borrowing and
lending of funds between the MNC MN Candandthe
theaffiliate.
affiliate.

B. Benefits
Be ne fit sof
ofFDI
FDItotothe
theHost
Ho st Country
Co un try
1.
1. IncreasedInvestment:
InvestmentFDI
: FDcan
Increased I can con trib ute
contribute toto
Gross
Gro ss Fixed
Fix ed Capital
Capital
For ma tion(total
Formation (totalinvestment
inv est me ntinina a host
hos t economy).
eco nom y). FDI
FD Iprovides
pro vides
additional capital,, but
add itio nal cap ital bu t at the same
the sam time
e tim it does
e it doe s not
not increase
inc rea sethe
the
ext ern al deb t, wh ich is the case wit h fore ign cre dits
external debt, which is the case with foreign credits and andloans.
loa ns,
I
Foreign Investment
Foreign India
Investment in India 57
57
2.
2. Transfer of new .tech no1ogy: FDI F of new
transfer of new
Transfer
t hnO1 of new technology: DIallows
allowsthe
thetransfer
technology• in the
particularlinythe
particularly form
form of new
of new varieties of capital
escapital
varietiof
.ec t og i;-
_t atcannot
mptu ds--that achievedthrough
can notbebeachieved l investments
financiainvestments
throughfinancial
inputs
or
or trade m goods
ra e in services.
and services.
goo ds and
3.
3. Contr. ibu.tion to bal f a positive
makaepositive
Contribution to balance
ancof payments:
e opayments: cancan
FDIFDI make
. .
to balan f payments by contributing toward
contribution. .nto balanceceofo payments
con trib utio by contributing toward
debt repayments,boost exp
boostexport marketsand
ortmarkets produce
andproduce
debt_servicing
servicingrepayments,
foreign
for eig n exchange
exc han ge revenue.
rev enu e.Subsidiaries
Subsidiariesof Trans-National
ofTrans-National
Corporations , which g the
brinthe t portion
vasportion of FDI , are
Co~porations(TNCs),
(TNCs)which bring vast of FDI, are
estimated
esti ma tedtotoproduce
pro duc earound
aro unda third d of
a thirof total l global
totaglobal exports.
exports.

Social generatesand exp and s

andexpands
4.
4. Soc~al development:
dev elo pm ent :FDI,
FDI,where
whereit itgenerates
businesses,
?us1nesses, can
.canhelp
hel pcreate
cre ateemployment, e wages and
, raiswages
em plo ym entraise and
income.
mcome.
Infrastructure: business
5.
5. Infrastructure:"Greenfield"
"Greenfield"investments
investmentinto
s intonewnewbusiness
sectors infrastructure development and
sec tors can
can stimulate
stim ula tenew
newinfrastructure development and
developmentcan
Thesedevelopments
t economies.These
hoseconomies. also
s canalso
technologies
technologiesininhost
result environmentabenefits s butonly
l benefitbut they
wherethey
onlywhere
res ultininsocial
socialand
andenvironmental
ill over"
ove r" intointohost
hos tcommunities
communitiesand businesses. Parent
andbusinesses. Par ent
"spill
"sp
com pan ies can sup por t their
can support subsidiaries-by ensuring
foreign subsidiaries
their foreign
companies by
in ensuring
place.InIn
resources
an reso urc es and
and infr astr uct
infrastructure ure are
are in place.
adequate
ade qua te hum human
investment researchand developmen(R&D)
.anddevelopment t(R&D) from
particular-
particular investment inin
research from
com pan ies can inn
stimulate innovation
can stimulate ova tion in.p rod uct ion and
par entcompanies
parent in production and
techniques in
pro ces sin gtechniques inthe country.
host country.
thehost
processing
Stim ula te dom esti c.ent erp rise s: Stimulate domestic enterprises
6. Stimulate domestic enterprises: Stimulate domestic
6.
-serviceenterprises
s, increase
to pro duc e bet ter qua lity of the goo ds and
to produce better quality of the goods and services, increase
em plo ym entand
employment .create new
andcreate newjobs.
jobs.

7. Imp ort sub stit utio n: Pro duc e substitutes for imports to improve
to imp rove
7. Import substitution: Produce substitutes for imports
the
the trade
trad e balance.
balance.
ula te exp ort s: Stimulate
Stim ulate exports
exports and/or oriented
exp,ortoriented
and /orexport
8.
8. Stim
that help
capacities wh ich gen era te an inw ard flow of earnings
Stimulate exports: capacities which generate an inward flow of earnings that help
with
wit h the trad e balance.
the trade balance.
·t· . FD I can alsoals o increase
inc rea se the com pet itio
the competition and
nand
9. Competition:
9. Com pet 1 10n . FDI domestic market and decrease d h f'
ecre ase the
t e profit
pro 1t
'ti' the domestic market and. . • th d
of the ti'
com pet i ven ess
competitiveness · of
with
wi't h the mo positionin
nopolistic position omes c
mthee domestic
of erp nse s monopolistic
of tthe enterprises
he ent
market.
market.
 Business Economics -
58
58 Business Economics -VV(T.
(T.Y.B.Com. :: SEM
Y.B.Com. -V)
SEM-V
·t I dev elo pm ent Re cip ien ts of FD I oft en
10.
10. Human cap t a development: ··Recipients
Hu ma ncapital · of
theFDI
newoften
bus
gain
gain
em lo eetraining
employee trai nin gininthe
thecourse
cou rseofofoperating in
the new businesses.
ope rat ing . esses,
Jch
which yco ntr ibu tes to hu
contributes to human capital development dev elo pm entin the
w
ma n cap ital thehost
host
cou ntr y.
country. Better managerial
Bet ter ma •al ski lls inc rea se the pro
nag en skills increase the productive
duc tiv euse
useof
of
a cou
country's
ntr y'sresources.
res our ces .
Revenue:
11. Revenue:
11. Prof1·tgenerated
Profits s gen era·ted
byby FDcontribute
FDI I con trib ute
to corporate taxtax
to cor por ate
revenues
rev enu es in the hostt cou
the hos country.
ntr y•
12. Sectoraldevelopment:
12. Sectoral dev elo pm ent :FDI
FDcan further
fur thetarget regional
I can r tar get reg ionand
al and
sectoral development.
sec tor al dev elo pm ent .
13.
13. Better
Better allocation
all oca tio n of
ofthe
theresources
res our ces and
an d exploitation
exp loi tat ionofofthe
the
production
pro duc tio n capacity.
cap aci ty.
14. Growth
14. Gr ow th of ofproduction
pro du cti on and
an d revitalization
rev ita liz ati onofofthe
thecurrent
cur ren t
capacities.
capacities.
15. Access to bet ter ma nag em ent tec hni que
15. Access to better management techniquess and
andpractices.
pra ctic es.
C.
C. Costs
Costs of
of FDI
FDI to
to Host
Ho st Countries
Co un tri es
FD I has the fol low ing adv ers e effe cts on ho st
FDI has the following adverse effects on host countrycou ntr y: ·:
1. Competition:
Competition: MNCs
MN Cs drive
1. dri ve out
ou t local
loc al competitors.
com pet ito rs.
2.
2. Balance of Payments: MN C ear nin gs and im por
Balance of cap
Payments: MNC earnings and imports ts hu
hurt thert host
the host
cou ntr y's ital
country's capital account in the balance
acc oun t in the bal anc e of
of payments.
pay me nts .Imports
of Imports
of intermediate
int erm edi ate goo ds, ma nag em ent fee
goods, management fees, s, royalties,
roy alt ies , profit
profit
repatriation,
rep atr iati on,capital
cap italandand int ere st rep aym ent s on loa ns can limit
the eco nom ic gai interest repayments on loans can limit
the economic gainn to
to hos
hostt eco
economy.
nom y.
3. Trade
3. :Trade Balance:
Balance: If MN Cs im por t a hig h per cen t of com
there is If eMNCs pon ent s
the re is a negative
neg ativ effectimport
effect on
ontrade a high
tra de percent of components
balance.
bal anc e.
4.
4. De pen den cy: A dev elo pin g cou ntr y ma y bec
Dependency:
on foreign A developing country may become om edependent
dep end ent
on for eig n technology
tec hno log y sources.
sou rce s.
5.
5. Div ers ion : Th ere cou ld be a dis tur ban ce of dom
Diversion: There could beire
a cte
disturbance est iceconomic
of domestic econo!llic
pla ns iri fav our of FO i-d d act
plans in favour of FDI-directed activities.
ivit ies .
66.- Sovereignty
Sov ere ign ty and Au ton om y: Ke y eco nom ic dec
isio ns ma de by
'for eig ner s' affe ct loc al com mu nit ies and the
government.
gov ernaffect
'foreigners' meand hothesthostcou
nt.Autonomy: Key economic decisions made by local communities and ntry's
country's
 Foreign Investm
Foreign ent in
Investment in India
India 59
7.
7. Socia l impact: Benefits of FDI are felt by small portio n of the
Social impact:
population,
popul ation, Benefits of FDI are felt by small portion of the
e.g.,
e.g., where emplo ymen and trainin g is given to
more where employmenttand training is given to
more educated,
educa ted, typica lly wealt hy
typically wealthy elites
elites or there
there is
is an
an urban
urban
emphasis,
emph asis, wage
wage differentials
differ ential s (or
(or dual
dualeconomies)
economies)between
betwe en
incom
income groupss will
e group willincrease.
increase.
8. Cultural impact: Negat ive cultur al impac t may occur
8.
Cultural impact: Negative cultural impact may occur withwith
inves tment direct ed at non-traditional goods. For example, if
investment directed at non-traditional goods. For example, if
financial resour ces are divert ed away from food and subsistence
financial resources are diverted away from food and subsistence
produ ction towar ds more sophisticated products. It encourages
a
a culture
production of
cultu re towards
consumore sophisticated products. It encourages
of consumerism
meris m that
that can
can also
also have
have negative
negat ive
environmental
enviro nmen tal impacts.
impacts.
9.
9. Local small and
Local small and rural business: Small scale and rural busine
rural business: Small scale and rural businesses sses
have less capac ity to attrac
have less capacity attractt foreigforeignn invest ment and
investment and bank
bank credit
credit//
loans, and
loans, andas
asaaresult
resultcertain
certaidomestic
n domestic businesses may either
businesses may either
be forced out of business
be forced busin ess oror to
to use more
more informal
informal sources of
sources of
finance. FDI
finance. FDIininretail
retail sectorinin
sector India
Indiahashas
raised a debate
raised a debaton
e on
negative
negat iveeffects
effects on
onretail
retailsector.
sector.
10. Inappropriate techniques: Foreign techn ology / organisational
10. Inappropriate techniques: Foreign technology /organisational
techni ques may actuallybe
techniques may actually inapp ropria tetotolocal
beinappropriate localneeds
needs (capital
(capital
intensive)
intens ive) and
and have
have aa negative
negat ive effect
effect on
on local
localcompetitors,
comp etitor s,
especially smaller
especially small erbusiness
business who
whoareare less able
ableto
tomake
makeequiv
equivalent
alent
adaptations.Similarly
adaptations. Similarlyexternal
extern alchanges
changesininsuppliers,
suppliers,customers
custom ers
and other comp eting firms are not necessarily an impro veme nt
and other competing firms are not necessarily an improvement
on the
on the original
origin aldomestic-based
dome stic-b asedapproaches.
approaches.

4.3 MULTINATIONAL CORPORATIONS

(MNCs)

INTRODUCTION
INTRODUCTION
Multin ationalCorporations
Multinational Corpo rationor
s orMNCs
MNCs have
have beenplaying
been playinag dominant
a domin ant
role globally
role globa lly and
and have
havebeen
beenintegrating
integr atingthetheworld
worldeconomy.
econo my.
However,their
However, theirrole
roleand
andcontribution
contri butionto to
thethe process
process of of
growth
growtand
h and
development of less devel oped regions are of controversial. MNC s
development of less developed regions are of controversial. MNCs
have
have therefore
therefore evoked
evoke dpassions
passio nsofofananextreme
extremenationalistic
nationalistic
variety
variet y
across
across the political
politicalspectrum.
spectr um.
 A.
A . Detinition
U e ti n it io n
A multinational
A m u lt in at io n al co rp o ra
ti o n is a c o rp o ra ti o n
a nd o th er as sets m ·corporation
t le is a corporation tha~has
that h a sits
it sfacilities
facilities
a as t o n e c o u n tr y o
andhother assets in at least one country other
th e.than
r th.a n it s h o m e countr
Such
5 co m p an ie s h av e offices a n d / its
. home country.
o r fa ct o ri es m d if fe re n .y.
; ~ ucompanies
sually havehave
a centralized h e aor
offices and / factories in differenttcountries
countries
d officewherew h e rethey
th eco-ordinate
and
globusually have
al m an ag a centralized
em en t. V er y la rghead office y co-ordinate
e m u lt in at io n al s h a v e
global
exceedmanagement.
th o se of m a n yVery
sm allarge multinationals have budgets b u d g ethat
ts that
l co u
exceed those of many small countries. n tr ie s.
M N C s ar e n o w officia
lly d e si g n a te d b y th
MNCs
"t ra n snare
at io now
n al coofficially
rp o ra designated by the eUnited Nations
U n it e d N at io nas
s as
"transnational corporations" or ti o n s" o r TNCs.
T NC s.
Nearly
N ea rl y all
al l major
m aj o r multinationals
m u lt in at io n al s are
ar e A m er ic an , Ja p a n
E u ro p ea n . E x am p le s
in cl u d e N ik e, American,
C o
Japanese e seoroWest
r West
ca -C o la , W al -M ar t, A
European. H oExamples
Toshiba, Honda
Toshiba, n d aand
a n dBMW.
BM include
W. Nike, Coca-Cola, Wal-Mart, AOL, OL,
r
Multinationals in In
Multinationals in India
dia
There
T h er e ar e m an y m u lt in
the are many multinational at io n al co m p an ie s o p
e ra ti n ginin
th e British p er io d . S o m companies operating India
In dsince
ia since
e o f th e ea rl ie st M N C s ar e S ie m en s, GE India,
S ta nBritish
ch ar t,period.
H in d uSome ofn il
the
Stanchart, Hindustanst a n U evearliest
Unilever, er , C as MNCs
Castrol,
tr o l, et
are
c. S
Siemens, GE India,
u b se q u e n tl y many
m o re st ar te d o p er at in g
in In d ia . T h ey in cl uetc. d e M ic ro so ft , IBM,many
Subsequently
C o rp o ra ti o n , Pepsico, Nokia
more started operating
Corporation, ines
Pepsico, Nestle,
N India.
tl e, CThey
o ca include
-C o la , P Microsoft, IBM, Nokia
Coca-Cola, Proctor ro ct o r and
a n d Gamble.
G am b le .
M o st o f th e M N C s co
Most n ce n tr at ed in
goods.of the MNCs concentrated
goods. intheth e p ro d u c ti o n o f co
production of consumer nsumer
M u lt in at io n al s in
Multinationals in India,
In d ia , a s in o th e r d e
ad v an ta g es a n d d is ad v v e lo p in g c o u n tr ie s ha
asg es
an ta in other developing
a s st a te d b el o w . countries have
ve
advantages and disadvantages a as stated below.
B. R o le / Advantages
of M
N C s /f N C s
B.
1.
Role / Advantages of MNCs/TNCs
1. Direct
D ir e c t e m p lo y m e n t:
e m p lo yemployment: The
T h e100
1 0 0 la rg e s t T N C s p
employment ro v id ed
p e rslargest
o n s a t hTNCs provided
m e n t to 14.3 m il li o n
T h o u g h th is re p re se n ts ome a n d abroad -
to 14.3 million o n ly apersons
ro u n d 3 at
p e r c e n t o f thabroad.
home and
la b o u r force, em p lo y m e world's
Though this represents
ce n.t o.f th e w o rl d 's la b o only
en t in around
T N C 3 per cent of the
s ac co u n ts fo r n ea rl y world's
. u r force, em p lo y m e t · 10 per
.
act1v1t1es w o rl d w id e
a n d cl o n m n o n -a g n·cu1tural
co uforce,
countries ies alone.
ntremployment se to 20 p erc ein non-agriculut,
labour aloinnTNCs
e. accounts for cent of the world's labour force, employment nt 1n
• d ev nearly lo
e 10 pe
per d
activities worldwide and close to 20 percent in developed
 InvestmentininIndia
Foreign Investment India 61
2.
2. Indirect
Indire ct employment:
emplo yment :TNCs
TNCsalso alsocontribute
contri bute indirectly
indire ctly to
to
emplo yment genera tion in develo ping countr ies throug h
employment generation in developing countries through
backward
backward linkages
linkages such
such as
as the purchasing
purchasing of raw materials,
materials,
parts
parts and
andcomponents
compo nentsfrom
fromsub-contractors
sub-co ntracto rsand
andexternal
extern al
suppliers. The
suppliers. Theimportance
impor tanceofofthese
theseeffects
effects has grown
grownininrecent
recent
years as firms
years as firms increa singly rely on nation al and global
increasingly rely on national and global
outsourcing for technological, cost or flexibility reasons.
outsourcing for technological, cost or flexibility reasons.
3.
3. FOi: The
The top
top100
100 TNCs
TNCscontrol
FDI: controlabout
about one-third
one-third ofof the
the world
world
foreign direct investment (FDI). More than 40 per cent of MNC's
foreign direct investment (FDI). More than 40 per cent of MNC's
assets are located outsid e their home
assets are located outside their homecountr ies. MNCs
countries. MNCs provid
providee
invest ment that does not have to be financed by local savings,
investment that does not have to be financed by local savings,
which can be used for buildin gother
which can be used for building otherassets
assetsininthe
thecountry.
country.
4.
4. Techn ology:MNC
MNC capital
Technology: capital brings
brings with
with it up-to-datetechnology
it up-to-date technology
which shouldbe
which should hardtotodevelop
behard develo pdomestically
domesticallyororeven
eventransfer
transfer
to home-owned
to home- owned firms.
firms.Besides
Besidesthe
thetechnology
technologymay
maynot
not
bebe
commercially
comm erciall y available.
available.
5.
5. Higher income:
Higher income: MNCs
MNCsprovide
provid ehigher
higherpaying
payingjobs
jobs than
than might
might
be availab
available to local inhabitants and
le to local inhabi tants andthus
thusraise
raisethe
thestandard
standa rdofof
living.
6.
6. Foreign networking
netwo rkingand
Foreign andaccess
access to
to foreign
foreign markets:
markets: MNCs
MNCs
enable foreig
enable foreignn netwo rking by
networking by linking
linkingthethelocal
localeconomy
economy with
with
the world econo my in ways
the world economy in ways that
that would
would bebe hard
hard to accomplish
to accomplish
by firms of purely
purely local
local origin.
origin.
7.
7. Skills:
Skills:MNCs
MNCsprovide
provid etraining in in
trainin g advanced
advan cedworker
workeand
r and
manag ementskills
management skillsthat
thatcome
comeduedueto
to being linked
linked with
withthe
theglobal
global
market. These
market. These are
are skills
skillsthat
thatcannot
canno tbe
bepurchased
purcha sedfrom
fromabroad.
abroad .
8.
8. Externalities:MNCs
MNCs pass
Externalities: pass onon many
many benefito
benefits thethe
ts to host country
host countr y
which they
which they cannot
canno t take
take away
away asas part
partof
oftheir
theirown
ownincome.
income.
Benefits such as
Benefits as transfe rs of
transfers of general
genera l knowledge
knowl edgeand
andofofspecific
specific
technologies
techno logies inin produ
production and distrib
ction and distribution, industrial
ution, indus trial
upgrad ing, work
upgrading, workexperience
experi enceofofthe
thelabour
labourforce,
force,introduction
introd uction
of modern
of mode rn management
mana geme nt and and accounting
accou nting methods,
metho ds,
establ ishme nt of
establishment of financ
finance related and
e related and trading
tradin g networks
netwo rks andand
upgrad ing telecommunications
upgrading teleco mmun ication s services.
services.
 •I
9.
9. Competitiveness: MNCs
Co mp etit ive nes s: MN affect
Cs affe the .host
ct th~ hos t country's
co~ ntry 's
com peti tive nes
competitiveness by s by raising
rais ing the
theproductivity
pro duc tivi tyofof
capital and
cap ital and
ena ble the host
enable the hos t country
cou ntry to
toattract
attr actnew
newcapital
cap italononfavourable
favourable
terms.
term s.
10. Industrialization:
10. Industrialization: Ma ny
Many small
smacountries
ll cou ntricould
es coube
ld said to have
be said to have
beg un indu stri aliz atio n wit h MN C inv estm ents . Typically, such
begun industrialization with MNC investments. Typically, such
fore ign direct
foreign dire ct investment
inv estm ent beginsbeg ins with
wjt hthe
theassembly
ass em blyofof
-c omp one nts imp orte d from
components imported from the
the source country.
sou rce cou ntry .
11.Contacts:
11. Contacts:MNCs
MN Cs areare
anan imp orta nt
important form
formof of
contact between
con tact more
betw een more
and less
less dev
developed
elop countries.
ed cou ntri es.
12.
12. Higher
Hig herproductivity:
productivity: Firms
Firm s with
wit h foreign
fore ign equity
equ ityparticipation
participation
hav e bee n fou nd to exh ibit mu ch hig her leve ls of productivity
have been found to exhibit much higher levels of productivity. .
13. Tec hno logy diff usio n: MN Cs may also pro vid e technolo
13. Technology diffusion: MNCs may also provide technologygy
diffusion thro ugh labo ur turn ove r as dom esti c emp loy ees mov
diffusion through labour turnover as domestic employees movee
from foreign
foreign to domestic firms.
dom esti c firm s.
14. We alth creation: MN Cs cha nne l phy sica l and fina ncia l
14. Wealth creation: MNCs channel physical and financial capital
capital
to cou ntri es wit h cap ital sho rtag es. As a con seq uen ce, wealth
to countries with capital shortages.
is created, new As a consequence, wealth
cre ated , which
wh ich yields
yie lds new jobs job s directly
dire ctly and
andthrough
thro ugh
"cro wdi ng- in" effects. Thr oug h free mar ket init iati ves , MNCs
"crowding-in" effects. Through free market initiatives, MNCs
create
crea te wealth,
wea lth, which
whi chprovides
pro vid esthe
theincome
inco meflow
flow necessary
nec essa ry for
for
wel
welfare improvements.
fare imp rov eme nts.
15.
15. Generation of revenue:
Gen era tion of revenue: New
New tax
tax revenues
rev enu esarise
aris efrom
fromMNC
MNC
gen erat ed inco me, allo win g dev elop ing cou ntri es to improve
generated income,
thei r infr astr uctu resallowing developing countries to improve
and to stre ngt hen the ir hum an capital.
their infrastructures and to strengthen their human capital.
16. Reduction
16. Red uct ion of of poverty
pov ert y and
and resolution
res olu tion of ofconflicts:
con flic ts: By
By
improving
imp rov ingthe
theefficiency
efficiency ofof cap ital flows,
capital flows, MNCs
MN Csreduce
red uceworld
world
pov erty lev els and pro vid e a pos itiv e ext ern alit y that
poverty levels and provide a positive
con sist ent wit h the Uni ted Nat ion s' (UN) externality that isis
mis sion _ countries
consistent
are encouragedwith
enc our age d tothe United
to cooperate Nations'
coo per ateand (UN)
andtotoseek mission countries
are see k peaceful
pea cefu lsolutions
solutionstoto
exte rna
external l and internallconflicts.
inte rna conflicts.
17. Env iron
17.
Environment men t friendly
frie ndl ytechnologies:
tech nol ogi es: MN Cs hav e provided
dev elo pin g cou ntri es wit h mu ch nee ded env iron men tall
developing countries with much needed environmentally MNCs have provided
Y
frie ndly tech nologies. If dev elop ing cou ntri es des ire to escapf
friendly technologies. If developing countries desire to escape
Foreign Investment
Foreign inIndia
Investment in India 63
severe conditions
severe co~ditionsof
ofpoverty,
poverty,they
theyneed
needtotoprivatize,
privatize, deregulate,
deregulate,
protect pnvate propertyrights,
protect private property rights,and
andestablish
establish aa rule
rule of
of law
law ---the
the
MNCs will
MNCs willthen
thenprovide
providethe
the capital.
capital.
18.
18. Infrastructure: MNCs have helped
Infrastructure: MNCs have helped to to build
build up up
thethe infrastructure
infrastructure
of countries.
of countries. They fillininthe
They fill theinvestment
investmentgap
gapfor
formuch
muchneeded
needed
infrastructure.
infrastructure.

C.
C. Disadvantages
Disadvantages of MNCs
MNCs
1.
1. Monopolypower:
power:somesomeMNCsMNCs
Monopoly areare larger
larger andand often
often more
more
powerful
powerful than
than the
the countries
countries they
they invest
investin
inand
andtherefore
thereforeseek
seek
to control policies in
in their
theirfavour.
favour.
2.
2. Limitedskill
skilldevelopment:
development: MNCs only further
Limited MNCs only further lowlow level
level skill
skill
development
developmentin inLDCs.
LDCs.
3.
3. Profitsrepatriated
repatriatedininforeign
foreign exchange: Profits
Profits exchange: Profits of of MNCs
MNCs areare
repatriated
repatriated in
inforeign
foreignexchange
exchangeusually
usuallyAmerican
Americandollars
dollarsthat
that
developing
developing countries
countries cannot
cannot afford to lose.
lose.
4.
4. Environmental
Environmentaldamage:
damage:MNCs
MNCswork
workwith
withlower standards
lower standardsfor
for
labour
labour and
and environment
environmentinindeveloping
developingcountries.
countries.
5.
5. Loss
Loss of
of revenue:
revenue:Very
Veryoften they
often bargain
they forfor
bargain advantages in in
advantages
terms of tax
terms tax rebates
rebates and
andtax
taxholidays
holidaysthus thusdepriving
deprivingthethe
governmentsof
governments ofdeveloping
developingcountries
countriesofofmuch
muchneeded
neededrevenue.
revenue.
The repatriated
The repatriatedprofits
profitsbecome
becomeaapart
partofofthe
thedeveloped
developednation's
nation's
national
national income.
income.
6.
6. Exploitation:
Exploitation:MNCs
MNCssecure access
secure accesstotocheap
cheaplabour
labourand raw
and raw
materials
materials form LDCs
LDCsand
andboost
boost their
their own
ownprofits.
profits.
7.
7. Inappropriatetechniques
techniquesofofproduction
productionand
Inappropriate andproducts:
products:MNCs
MNCs
have been criticized for
for using
usingcapital
capitalintensive
intensivetechniques
techniquesinin
countries that
that are
are labour
labourabundant
abundantand
andfor
forproducing
producingproducts
products
that appeal
that appeal to the urban
urban elite
elite instead
instead of
ofproducing
producinggoods
goodsfor
for
mass consumption.
consumption.
 17

SOCIAL
2 INFRASTRUCTURE:
EDUCATION, HEALTH
AND FAMILY
WELFARE IN INDIA

2.1 Introduction to Social Infrastructure

2.2 Social Infrastructure and Inclusive Growth in India
2.3 Importance of Social Infrastructure
2.4 Government Policies and Programmes
(A) Education
(B) Health and Family Welfare

2.1 INTRODUCTION TO SOCIAL

INFRASTRUCTURE

For any nation to achieve economic growth and development, its

resources need to be utilised in an optimum manner. Resource
utilization depends upon two types of infrastructure, physical and
social. Physical infrastructure includes the transport,
communication, water and energy distribution networks that
support productive activities like manufacturing, farming and
generating services.
 18 Business Economies- V (T.Y.B.Com. : SEM-V)
Social infrastructure refers to the creation and maintenance of
facilities and structures that support the delivery of social services
to the people. It consists of facilities,
places, programmes, policies,
and
projects, services, networks and personnel that maintain
improve standard of living and quality of life of people.
and
Types of social infrastructure include education, healthcare
central
family welfare. They are required at local, regional, state and
levels. They go beyond providing the basic economic needs of the
people and are aimed at improving the quality of people's lives
and developing human capital.

2.2 SOCIAL INFRASTRUCTURE AND

INCLUSIVE GROWTH IN INDIA
With the introduction of the massive structural reforms programme
in India in 1990s, the role of the government underwent a major
change. Prior to 1990s, India was a mixed economy, where the
private and the public sectors co-existed. The public sector
enterprises employed a very large number of workers, providing
them with not only income but also job security and welfare
services. The social sector was almost entirely supported by
government financing. Programmes that benefitted the large masses
of the population included the Public Distribution System,
government funded primary and higher education, health and
family welfare infrastructure in urban and rural areas. These led
to the establishment of a welfare state that provided socially
significant services to the large masses of the people either free or
at a very low cost.

After increased
with the reformsglobalisation
of 1991, India experienced
of high GDP growth along
the economy. As a result of these
two phenomena, human development and the social sector
underwent certain changes, such as:

(a) Private sector investment in education and health increased,

making these services more expensive.
Social Infrastructure : Education, Health & Family Welfare in India 19

(b) Government began to reduce subsidies and support to the social

sector in relative terms, though the actual expenditure
increased.

With reduced role of the public sector, job security in the formal
industrial sector came down significantly.

(d) Informal jobs increased, but with much less security. This
reduced the guaranteed welfare benefits to the poor.

Due to increased privatisation of social sector, many of the

services, like education, health, insurance had to be now
purchased at market determine prices which became
unaffordable to the poor.

The marginalised sections of the population belonging to the

Scheduled Castes, Scheduled Tribes, Other Backward Castes,
women, religious minorities, small farmers, micro-
entrepreneurs physically challenged people, all would find it
difficult o be part of the growth process under the NEP.

In other words, the growth that India would experience did not
benefit all the people but a few who were educated, skilled and
earned sufficiently high income to afford the market determined
prices of social services. The poor had to make do with job insecurity
and poor quality of government supported social services. Thus
growth, under a market-oriented system was bound to be non-
inclusive. This would result in poor quality human resources. High
quality human resources are absolutely essential for achieving high
rate of economic growth. Therefore, in order to make growth more
inclusive and provide a safety net to those who were negatively
affected by the NEP 1991, the government enacted legislations like
National Rural Employment Guarantee Act 2005, Right to Education
Act 2009, introduce targeted education and health programmes to
meet the human development challenges posed by the economic
reforms. These attempts are made to establish a social infrastructure
that will support the changing needs of the human resources in India.
In the Indian context, social infrastructure include, the primary,
secondary and higher education system, the primary healthcare
centres, government run hospitals and family welfare services. It
 Business Economics - V (T. Y.B.Com.: SEMAW
20
resources and the
includes the physical infrastructure, the human
in services.
intellectual capital necessary to provide social
Like India, many less developed countries, 1980s, implemented
structural adjustment
of increased poverty,
support of the International Monetary Fund or economic 'reform' programmes with the and the World Bank.

In the process, many of them faced problems

inequality and discrimination. Thus, in 1990, the United
the structural Nations
adjustment
called for the member nations to carry
Thatout
is, the UN insisted that mere
programmes with a human face.
economic growth should not be the aim of any newup
came policy,
with but
the
growth should include everyone. The UN
Millennium Development Goals in 2000, with eight goals that have
measureable targets, to improve the lives of the poorest people.
gave high degree of importance
Amongst various areas, these goals
to children, food security, nutrition, environment and gender
equality. The member nations had to create social infrastructure to
meet these targets.

2.3 IMPORTANCE OF SOCIAL

INFRASTRUCTURE

In the context of India, the social infrastructure is aimed at reducing

poverty and inequality of opportunities, improving delivery of
education and healthcare and providing a life of dignity to the
vast majority. According to Prof. Amartya Sen, these factors will
enhance 'elementary capabilities' of the people which will help the
process of inclusive growth.

The following
infrastructure in points bring out the significance of social
a country like India:
1. Human
Development: Human development is the process of
expanding peoples' choices and
opportunities and improving
their quality of living. Without social infrastructure, human
development is not possible to achieve. Human development
levels of nations are measured by the Human
Index (HDI) developed by the UNDP. It is a composite statistics Development
Social Infrastructure : Education, Health & Family Welfare in India 21

of life expectancy, education and per capita income. India was

ranked 131 in 2016 HD Report among 188 countries with a score
of 0.624 and was placed in medium human development level.
An improvement in HDI ranking for India will be possible only
if the social infrastructure put in place is able to improve
education, health and expand people's social and economic
opportunities.
2. Economic Growth: Improvement in education system,
healthcare facilities and provision of basic needs of the people
is necessary to develop human resources. A productive
workforce can make better utilisation of resources and
contribute to economic growth. If education and skill
development is available to all the people, either free or at a
low cost, it will help increase their productivity at work.
Similarly, affordable healthcare helps to increase work
show that
productivity. Most studies and research findings
there is positive correlation between human development and
economic growth.

3. Positive Externalities: Positive externality is a benefit enjoyed

Education, healthcare
by a third party as a result of a transaction.
and family welfare services provided through social
externalities. The services not only
infrastructure have positive
as a whole.
benefit the targeted beneficiary but also the society
For example, if people in urban slums are provided training on
sanitation and health care, it will help prevent the spread of
diseases in the locality.

4. from
Quality of Life: Quality of life refers to the state of general well
being of individuals and society. It includes life satisfaction
health, comfort, education, income, family, social, religiousformandof
psychological conditions. Social infrastructure, in
education and healthcare, is essential to improve the quality of
lives of the people. Investment in health reduces death rate,
helps control communicable diseases
crucial and
role inimproves living
improving the
condition. Education plays a
quality of human capital. The income earning capacity of people
can be improved through education and healthcare.
22 Business Economics - V (T.Y.B.Com.: SEM-V)
basic social
5. Productive efficiency: Availabilitysanitation,
of adequatedisease control
infrastructure like drinking water, of nutritious food,
systems, family welfare services, provision This
life expectancy and promotes healthy lifestyle. of people,
increases improves physical and intellectual capabilities
leading to higher productive efficiency and economic growth.
6. Better resource utilization: Utilization of capital and other
resources depends on the capability of human resources.
Improvements in knowledge and skills of working population
leads to better utilization of all other resources. Educational
institutions promote research and development which plays
an important role in improving resource utilization.
7. Higher aspirations: With improved education, people aspire
for better standards of living and work towards it. They also
demand better quality of services from the government and
more accountability from elected representatives. This helps
people to make more educated choices. The collective educated
choices in peoples' economic, social and political lives help in
improving the entire community.
8. Social change: Education is expected to enlighten people's
minds. Spread of education is essential to bring about changes
in social relationships between people, reduce social
discrimination, promote social harmony and reduce social
conflicts.

2.4 GOVERNMENT POLICIES AND

PROGRAMMES

Human development has been one of the priorities of the

government since Independence. The Five-Year Plans were launched
to create not
only economic infrastructure but also social
infrastructure necessary for human development. Both education
and healthcare are merit goods.
private sector, they are so criticalThough these are provided by the
to human

deserve government funding so that their coverage can include the development that they
 23
Social Infrastructure : Education, Health & Family Welfare in India
entire population. Keeping this in mind, the Government of India
has created public education and public health infrastructure spread
across the country. Public expenditure on these sectors has been
increasing though it is still a small proportion of the GDP. Education
and Health are both State subject and the programmes are
implemented by the State Government with funding from the
Central Government.

The important programmes and policies in the education and public

healthcare sectors are discussed below:

A. Education

India is a nation of young people. According to census 2011, youth

population in the age group 15-24 in India constitutes 19.1% of total
population. In 2020, this will reach 34.33%. This is being considered
as a major demographic dividend for India. To reap the benefits of
the demographic dividend to the full, India has to provide education
to its large population, and that too, quality education. The young
population of India, if well equipped with education and skills, can
contribute effectively to the development of the economy.
Education is the most crucial investment in human development.
a
Education is universally recognized as central component of
human capital.

Objectives of Education Policy

A broad objective of the National Policy on Education (NPE) of 1986

modified in 1992 has been that education should play a positive
role in the following areas (i) correcting social and regional
imbalances, (ii) empowering women, and (üii) securing rightful placehas
of HRD
for the disadvantaged and the minorities. The Ministry
prepared a Draft National Education Policy, 2016 to meet the
changing dynamics of the people's requirement with regard to
quality education, innovation and research.
India is committed to the United Nation's "Millennium Development
Goals" and "Education For All".
24
Business Economics - V (T.Y.B.Com. : SEM-V)

Government Policy Measures to Promote Education

1.
Sarva Shiksha Abhiyan (SSA)/Right to Education (RTE): Free
education for all children between the age of 6 and 14 years has
been made a fundamental right under the RTE Act 2009. The
Act makes it mandatory that every child has a right to
elementary education of satisfactory and equitable quality in a
formal school which satisfies certain essential norms and
standards.

SSA was launched in 2001-02. It is implemented in partnership

with the states. It aims at improving the performance of the
school system and providing quality elementary education to
all children in the age group of 6-14 years. It also seeks to bridge
gender and social gaps at primary and elementary education.
It has also provided drinking water facilities, constructed large
number of toilets and also supplied free textbook to children.
2. National Programme for Education of Girls at Elementary
Level (NPEGEL): This programme was approved in July 2003.
Its aim is to provide support for education of underprivileged
disadvantaged girls at the elementary level. This programme
provides for setting up of a 'model school' in every cluster with
more intense community mobilization and supervision of girls
enrolment in schools.
3. Kasturba Gandhi Balika Vidyalaya (KGBV): This scheme was
launched in July 2004 to set up residential schools at elementary
level for girls belonging to the SC, ST, OBC and minorities. It is
implemented in educationally backward blocks (EBBs) where
rural female literacy is below 30 percent and in selected urban
areas where female literacy is below the national average. It is
funded on cost sharing basis between the Centre and the states
in the ratio of 75 : 25. There are KGBVs in 28 states and union
territories.

4. National Programme of Mid-Day Meals in Schools The

centrally sponsored Mid-Day Meal Scheme was revised and
universalized at primary level with effect from September, 2004.
It makes a provision for providing cooked meals to children
 25
Social Infrastructure : Education, Health & Family Welfare in India

studying in government, government aided and local body

schools. It has played major role in increasing school
enrolment and school attendance.

5. Rashtriya Madhyamik Shiksha Abhiyan (RMSA) : It is a

centrally sponsored scheme of the MHRD, launched in March
2009 to improve access to secondary education and to improve
its quality. The objectives of the scheme are to achieve an
enrolment ratio of 75 percent for classes IX and X within 5 years
and to improve quality of education at secondary level.
6. Inclusive Education for the Disabled at Secondary Stage
IEDSS] : This scheme was launched in 2009-10 replacing the
earlier Scheme of Integrated Education for Disabled Children
(LEDC). It provides central assistance for inclusive education
of disabled children studying in classes IX - XII in government,
local body and government aided schools. The aim of the
scheme is to facilitate continuation of education of children with
special needs upto higher secondary level. The scheme provides
for personal requirements of the children in the form of assistive
devices, helpers, transport, hostel, learning material and
scholarship. It is now subsumed in the RMSA.
7. Model Schools Scheme : A scheme for setting up 6000 model
schools as benchmarks of excellence at block level with one
school per block was launched in November 2008. It's aim is to
provide quality education to talented rural children.
8. Saakshar Bharat (SB) / Adult Education : The National Literacy
Mission (NLM) was recast as Saakshar Bharat (SB). Saakshar
Bharat was launched on 8 September 2009. The main
programmes of NLM include:
(i) Total Literacy Campaign to provide basic literacy to the
non-literates.

(üi) Post Literacy Programme for the reinforcement of the

literacy skills to the non-literates and

(üii) Continuing Education Programme to provide facilities for

life long education to the community at large.
 V(T.Y.B.Com. : SEM-V)
Business Economics
26

Since the literacy levels remain uneven across states, districts,

social groups and minorities, the government has started to
focus on backward areas and target groups.

9. Higher and Technical Education: Higher and technical

education includes graduate, post graduate, doctorate degree
courses inthe broad streams of Arts, Science, Commerce, Law,
Technology, Medicine and Pharmacy. A country that aims at
lead
higher economic and social achievements must invest heavily
is important
higher and technical education. Such investments will
in to the creation of a knowledge based economy. It
to see that good quality higher and technical
accessible and affordable
to all. Keeping this education
in mind, the
is

government provided fully funded higher education through

the central and state level university system. Government
are
grants, through the University Grants Commission (UGC),
given to the universities and education trusts to provide higher
has set
education. Through the plan period, the government
up several central and state universities, premier institutions
like the IITs, IIMs, NITs, AIIMS and Medical Colleges, Indian
Institute of Sciences, National Law Universities and
Agricultural Universities. At present there are 16 IITs, 13 IIMs,
12 National Law Universities, 7 AIIMS and 47 Central
Universities. There is also the provision of acquiring degrees
through distance learning in most of the universities.

Along with the government supported system, there are now

private universities that provide higher and technical education,
but at a much higher price. These universities have been
permitted to enter the sector to increase the access to higher
education. They are required to strictly follow government
guidelines. The Higher Education Policy is implemented by the
Department of Higher Education under the Ministry of Human
Resources Development. To maintain the quality of higher
education, the government set up National Assessment and
Accreditation Council (NAAC) in 1994, as an autonomous body
under the UGC. The NAAC is involved in assessing universities
and college, assigning grades to them and providing guidelines
for improvement. All India Council for Technical Education
(AICTE) was set up in 1945 as a national-level apex advisory
 27
Social Infrastructure : Education, Health & Family Welfare in India

body to conduct a survey on the facilities available for technical

education.

Some of the objectives of the Department of Higher Education

are:

(i) To increase the Gross Enrollment Ratio in higher education

to 30% by 2020.

(ii) To establish new higher educational institutions.

(üii) To provide higher education opportunities to socially

deprived people.

(iv) To remove regional imbalances in access to higher

education.

(v) To improve teacher quality, infrastructure facilities and

research output through planned expenditure allocation.

(vi) To promote collaboration with foreign universities and

governments to set up high quality institutions for teaching
and research.

(vii) To promote development of Indian languages.

10. Rashtriya Uchchatar Shiksha Abhiyan (RUSA): RUSA is a

Centrally Sponsored Scheme launched in 2013 that aims at
providing funding to eligible state higher educational
institutions. RUSA would create new universities through
upgradation of existing autonomous colleges in a cluster, create
new model degree colleges, new professional colleges and
provide infrastructural support to universities and colleges. It
aims at improving faculty quality, research output, innovation
in education, vocationalisation of higher education, capacity
building in higher education and reform educational
institutions.

B. Health and Family Welfare

Public healthcare services are an essential requirement for achieving
economic development. Healthcare services are also provided by
the private sector, hence it is a merit good. But in a developing
 28 Business Economics - V (T.Y.B.Com. : SEM-V)

country, not many people can afford expensive private healthcare

services. Therefore, most people use public healthcare service. India
has a vast and elaborate network of public healthcare system. There
healthcare infrastructure
are two aspects to public healthcare : (a)
These are discussed here
and (b) healthcare policy and programmes.
I. PUBLIC HEALTHCARE INFRASTRUCTURE
The Indian public healthcare infrastructure is organised as follows:
1. Primary Level: At this level healthcare is provided by Sub
Centres and Primary Health Centres.
(a) Sub Centres (SC) - are located in underdeveloped and
remote rural areas, each covering a population of 3000 to
5000 population. Besides providing basic healthcare, they
also educate the people about healthy living. SCs are
entirely funded by the Central Government.

(b) Primary Health Centres (PHC) these exist in larger

villages with population between 20000 and 30000. These
are clinics with doctors and paramedics. They too help
spread health education. PHCs are funded by State
Governments.

2.
Secondary Level: At this level, there are Community Health
Centres and District Hospitals

(a) Community Health Centres (CHC) - these are primarily in

semi-urban areas covering between 80000 and 120000
people. Patients referred by SCs and PHCs can come to
CHCs for further treatment. CHCs refer patients to General
Hospitals. They are entirely funded by the State
Governments.

(b) Sub-District Hospitals (SDH) and District Hospitals

the lower
(DH) are hospitals that treat patients referred by
- theselevel
health centres. They provide
comprehensive secondary healthcare services and have
beds ranging between 100 and 500. As of March 2015, there
were 763 functioning DHs covering all the 714 districts in
India. (Source: https://community.data.gov.in)
Social Infrastructure : Education, Health & Family Welfare in India 29

Tertiary Level: Health infrastructure at this level includes the

All India Institute of Medical Sciences and Medical College and
Hospitals.

(a) All India Institute of Medical Sciences (AIIMS) these

are sepcialised hospitals under the central government.
They are the country's premier medical research institutes.
There are AIIMS at New Delhi, Bhopal, Bhubaneshwar,
Jodhpur, Raipur and Rishikesh. There are Regional Cancer
Centres that are joint responsibilities of the Central and
the State Governments.

(b) Medical Colleges and Hospitals these are state

government owned and funded. They play a very
significant role in providing general and specialised
healthcare services. They also are state level premier
medical colleges.

Indian Public Health Standards (IPHS): The IPHS were

published in 2007 to provide a reference point for the
functioning of SCs, PHCs, CHCs, SDH and DHs. IPHS are a set
of uniform standards that should be followed by the health
centres and hospitals to make public healthcare services more
effective. The standards are revised from time to time.

Though the public health infrastructure is well designed, it is

not adequate to provide the growing and complex healthcare
needs of the population. The quality of public health services
is also an area of concern. According to the World Health
organisation, the Physicians Density per 1000 population in
India was 0.758 in 2016. This is highly inadequate for providing
high quality health care services. Maternal and child mortality
rates continue to remain high and life expectancy at birth (2016)
for males is 67.4 years and for females is 70.3 years, much lower
than other developing nations.

II. PUBLIC HEALTH PROGRAMMES AND POLICY

Currently the government's expenditure on public health is only
1.15% of GDP, which is considered to be low for a country with a
large population and high income inequality. In order to expand
30 Business Economics - V (T.Y.B.Com. : SEM-V)

access to good quality healthcare service through the public

its
healthcare system, the government needs to review and reform
healthcare policies and programmes. Some of the programmes and
below.
policies currently being implemented have been discussed
1. National Health Mission (NHM); The NHM was launched in
2013 with the aim of providing universal access to equitable,
affordable and quality healthcare services through the
healthcare infrastructure. The NHM includes the National Rural
Health Mission (NRHM) and the National Urban Health
Mission (NUHM). Under NHM, the state governments would
have the flexibility to plan and implement state specific action
plans. The NHM proposes to strengthen the public healthcare
infrastructure through the following measures:

(a) Adoption of Indian Public Health Standards

(b) Quality improvement in public health infrastructures
(c) Defining quality standards

(d) Mandatory creation of Hospital Management Societies

(e) Bridging the existing skill gaps in healthcare personnels

2. Communicable Diseases Programmes: Control of
communicable diseases is important for developing countries,
as poor living conditions can spread these diseases rapidly. The
Ministry of Health and Family Welfare implements
programmes like the HIV/AIDS programme through the
Department of AIDS Control. The programme includes training
of staff, guidelines for testing and treatment and providing
counselling support. Similarly there are programmes like the
National TB Control Programme, National Vector Borne Disease
Control Programme, National Leprosy Eradication Programme.
It is important to monitor the incidence of such diseases and
control their spread. The monitoring is done through the
Integrated Disease Surveillance Project which was set up with
World Bank
laboratory support
based, with disease
IT enabled the objective of maintaining
surveillance system to
monitor disease trends and to prevent epidemics.
 31
Social Infrastructure : Education, Health & Family Welfare in India
Non Communicable Diseases, Injury and Trauma
Programmes: Under these, the Ministry of Health and Family
Welfare implements programmes like the National Oral Health
Programme, National Mental Health Programme, National
Programme for Prevention and Control of Deafness, National
Programme for Control of Blindness. Two important
programmes in this category are:

(a) Universal Immunisation Programme: This was launched

in 1985. The programme aims to increase the vaccination
coverage to prevent disease like childhood TB, diphtheria,
tetanus, measles etc. This programmes has been quite
successful.

(b) Pulse Polio Programme: In order to eradicate polio, the

Pulse Polio Programme was launched in 1995. It is
implemented through administering polio drops to
children in the age group 0-5 years, under two yearly
rounds and additional multiple rounds. The programme
has been by and large successful. The last reported case of
polio was in 2011.
4. Pradhan Mantri Swsthya Suraksha Yojana (PMSSY): The
PMSSY was announced in 2003 with the objectives of correcting
regional imbalances in public health infrastructure and improve
the quality of medical education. These were proposed to be
implemented by setting up of new AIIMS and upgrading
government medical colleges in phases. Currently six AIIMS
are functional, one is under construction and thirteen more have
been announced.

5.
Poor Patients-Financial Support: The Rashtrya Arogya Nidhi
(RAN) was set up in 1997 to provide financial support to
patients who are below poverty line and are suffering from
major life threatening diseases like cancer, cardio-vascular
diseases, kidney diseases, orthopaedic problems etc. Financial
assistance to such patients is released in the form of one-time
grant given to the hospital where the patient is undergoing
treatment.
 32 Business Economics- V (T.Y.B.Com.: SEM.1)

6.
Healthcare of the Elderly (NPHE):
National Programme for
With increase in life expectancy, the proportion of the elderly
is increasing. Many of
population to total population in India
The NPHE was
or no financial
the elderly populationsupport.
belong to low income category with little launched in 2010 to
issues of the elderly
address the various health related
includes setting up of special
population. The programme
geriatric (related to the elderly) services in the public health
infrastructure.

7. Rashtryia Swasthya Bima Yojana (RSBY): The RSBY was

launched in 2008 to provide social health security to workers
in the unorganised sector. It was initially designed to provide
health insurance coverage to below poverty line workers, but
now the coverage has been expanded. It covers construction
workers, street vendors, licensed railway porters, MNREAGA
workers, beedi worker, domestic workers, sanitation workers,
mine workers, rickshaw pullers, rag pickers and auto/taxi
the insurance scheme is shared
drivers. The premium cost of
between the Central and State Governments. The beneficiary
7 30000.
is entitled to annual hospitalisation cost up to
and Adolescent
8.
Reproductive, Maternal, Newborn, Child
Health (RMNCH+A): India became the first country in the
world to launch the National Family Planning Programme
(NFPP) in 1952. The main focus of the programme was to lower
fertility rate and slow population growth. In the initial years,
the Family Planning Programme was separated from the
National Health Programme (NHP). Later, the NFPP was
integrated in to the NHP and began to be known as the Family
Welfare Programme. Today, the family welfare programmes
are not just restricted to family planning or population control,
but includes measures that help maternal and child care and
nutrition programmes. Even the immunization programme is
a part of family welfare. RMNCH+A approach to family welfare
was launched in 2013. The primary aim of the programme is to
provide integrated health services to women, children and
adolescents. Some of the intervention under RMNCH+A are
immunization programmes, programmes for increasing
nutrition, iron and folic acid supplements among adolescents
and providing prenatal and post natal care to women.
 33
Social Infrastructure : Education, Health & Family Welfare in India
Some of the objectives of RMNCH+A are:

(a) Reduce Total Fertility Rate to 2 by 2017

(b) Increase proportion of births in government hospitals and
with skilled birth attendants

(c) Increase exclusive breastfeeding rate

(d) Reduce the prevalence of under-five children who are
underweight

(e) Reduce unmet need for family planning methods among

eligible couples at an annual rate of 4.5%

(f) Reduce anaemia in adolescent boys and girls at annual rate

of 3.8%

(g) Raise child sex ratio in the 0-6 years age group
9. National Health Policy 2017: The policy was announced with
the goal of achieving the highest possible level of well-being
for all ages, disease. prevention and universal access to
healthcare. Some of the specific goals are :

(a) Increase life expectancy to 70 years by 2025.

(b) Reduce infant mortality rate to 28 per 1000 births, by 2019.

(c) Achieve global target of 2020, termed as target of 90:90:90,

for HIV/AIDS 90% of all people living with HIV know
their HIV status, 90% of all people diagnosed with HIV
infection receive sustained antiretroviral therapy and 90%
of all people receiving antiretroviral therapy will have viral
suppression.

(d) Reduce prevalence of blindness to 0.25 per 1000 by 2025.

(e) To increase health expenditure of the government to 2.5%

of GDP by 2025.

(f) To achieve preventive and promotive health by improve

environment through Swachh Bharat Abhiyan, substance
abuse prevention programme, women empowerment.
34 Business Economics - V (T.Y.B.Com. : SEM-V)

REVIEW QUESTIONS

1. Define social infrastructure. Discuss the role of social infrastructure

in promoting inclusive growth in India.
2. Discuss the significance/ importance of social infrastructure.
3. Discuss the important government policies and programmes in the
area of education.
4 Discuss the important government policies and programmes in the
area of health and family welfare.

OBJECTIVE QUESTIONS
A. Explain the following:
1. Social infrastructure 2. Human development
3. HDI ci-
4. Positive externalities
5. Quality of life 6. Right to Education Act
7. NPEGL 8. KGBV
9. RMSA 10. IEDSS
11. Model School Scheme 12. Saakshar Bharat
13. RUSA 14. Sub Centres
15. Primary Health Centres 16. Community Health Centres
17. AIIMS 18. IPHS
19. NHM 20. PMSSY
21. RAN 22. NPHE
B. Choose the correct answer and rewrite the statements:
1. Which of the following is true of social infrastructure?
(a) It includes the education and health network
(b) It is aimed at improving quality of life
(c) It is an investment in human capital
(d) All the above
2.
Which of the following describes the change in India after 1991?
(a) Reduced private investment in education and health
(b) Increased job security
(c) Reduced subsidies to social sector in relative terms
(d) Increased formal jobs creation
 35
Education, Health & Family Welfare in India
Social Infrastructure :
3. According to the Human Development Report 2016, India's HDI rank
iS among 188 countries.
(b) 125
(a) 131
141 (d) 100
(C)
Which of the following is not true of the Right to Education Act?
(a) Free education to all children between 6 and 14 years
(b) It was enacted in 2009
(c) It IS an adult literacy programme
(d) It is aimed at providing quality elementary education
5. The scheme for providing residential schools as elementary level for
girls is
(a) National Programme for Education of Girls at Elementary Level
(b) Model Schools Scheme
(c) Rashtriya Madhyamik Shiksha Abhiyan
(d) Kasturba Gandhi Balika Vidyalaya
6. The scheme for improving access to secondary education is
(a) National Programme for Education of Girls at Elementary Level
(b) Model Schools Scheme
(c) Rashtriya Madhyamik Shiksha Abhiyan
(d) Kasturba Gandhi Balika Vidyalaya
7. Community Health Centres are located at the level of public
health infrastructure.
(a) Primary (b) Secondary
(c) Tertiary (d) None of the above
8. AIIMS are at the . level of public health infrastructure.
(a) Primary (b) Secondary
(c) Tertiary (d) None of the above
9. The provides a reference point for the functioning of the public
health centres.
(a) Indian Public Health Standards
(b) Indian Public Health Guidelines
(c) Indian Public Health Manual
(d) Indian Public Health Rules
10. Which of the following is programme aimed at controlling the spread
of communicable diseases?
(a) National Oral Health Programme
(b) National Mental Health Programme
(c) National TB Control Programme
(d) National Programme for Prevention and Control of Deafness
 36 pausines Ecmnonics V OT X B ComsSEmay,
11. wea tund thaitfinuncialy supports poor pottens aufering thole
major life threatening illnesses.
(a) Rashtriya Swasthya Bima Yojana
(b) Rashtriya Arogya Nidhi
(c) Pradhan Mantri Swasthya Yojana
(d) All the above
12. Rashtriya Swasthya Bima Yojana provides health insurance coverage
to
(a) Workers in the unorganized sector
(b) Workers in the organized sector
(c) The entire population
(d) Only women and children
Ans.: (1) - (d), (2) - (c), (3) - (a), (4) - (c), (5) - (d), (6) - (c), (7) - (b), (8) - (c).
(9) - (a), (10) - (c), (11) - (b), (12) - (a)
C. State whether the following statements are true or false, giving
reasons for your answer:
1. Social infrastructure in a country fulfills only the basic economic needs
of the people.
India has benefited all.
2. Economic reforms programme in
3. Government support in the social sector is necessary in a country
undergoing major economic reforms.
4. Social infrastructure has positive externalities.
5.
India ranks quite high in HDI.
6. Investment in social sector can improve utilization of resources.
7. Sarva Shiksha Abhiyan aims at improving the school system.
8.
Mid Day Meals Programme has been a success.
9. The Government of India does not have any programme for the
differently abled children.
10.
Saakshar Bharat Mission is aimed at primary education.
11. AICTE and NAAC were set
up to improve the quality of higher and
technical education.
12. The public health infrastructure
13. is provided in a three tier system.
The public health system in India has no flaws.
14.
National Health Mission includes health programmes for the urban
population only.
15.

16. Mission. The HIV/ AIDS programme is an important part of the National Health
Universal
have been Immunization Programme and the Pulse Polio Programme
quite successful.
 37
Social Infrastructure : Education, Health & Family Welfare in India
17. The Government of India has no health programme for the elderly
population.
18. Rashtriya Swasthya Bima Yojana covers a wide range of unorganized
sector workers.
19. India was the first country to launch a National Family Planning
Programme.
20. The Family Planning Programme in not integrated with the National
Health Programme.
21. The Family Welfare Programme in India only covers women and
children.
Ans.:
1. False; For Reasons : Refer Section 2.1.
2. False; For Reasons: Refer Section 2.2.
3. True; For Reasons : Refer Section 2.2.
4. True; For Reasons : Refer Section 2.3.
5. False; For Reasons Refer Section 2.3.
6. True; For Reasons . Refer Section 2.3.
7. True; For Reasons : Refer Section 2.4.
8. True; For Reasons Refer Section 2.4.
9. False; For Reasons. Refer Section 2.4.
10. False; For Reasons : Refer Section 2.4.
11. True; For Reasons Refer Section 2.4.
12. True; For Reasons : Refer Section 2.4.
13. False; For Reasons Refer Section 2.4.
14. False; For Reasons : Refer Section 2.4.
15. True; For Reasons : Refer Section 2.4.
16. True; For Reasons : Refer Section 2.4.
17. False; For Reasons : Refer Section 2.4.
18. True; For Reasons : Refer Section 2.4.
19. True; For Reasons : Refer Section 2.4.
20. False; For Reasons : Refer Section 2.4.
21. False; For Reasons : Refer Section 2.4.
 72

NATIONAL
5 AGRICULTURAL
POLICY - 2000

5.1 Objectives
5.2 Main Features
5.3 Implications of New Agricultural Policy 2000

agricultural sector inthe

theneed
post
Based on experience of the to
independence period, the government of India realised
revamp theagricultural sector to meet the challenges at home as
well as in the changing global scenario in the 21st century. Its
Agriculture is the base for the development ofthe most
other essential
sectors.
importance lies in the fact that it provides
It is however discouraging to
consumption goods for the people. was
note that since independence agricultural growth on an average
less than 4 percent. In certain years the growth rate was even
negative.
The Government plays an important role in removing or reducing
the constraints faced by the agriculturists. With the objectives of
to achieve
establishing an appropriate and conducive environment
a higher growth rate the Government of India announced a National
Agricultural Policy on 28th July 2000.
 73
National Agricultural Policy - 2000

5.1 OBJECTIVES

The national policy seeks to "actualise the vast untapped growth

potential of Indian agriculture, strengthen rural infrastructure, to
support faster agricultural development, promote value addition,
accelerate the growth of agro business, create employment in rural
areas, secure a fair standard of living for the farmers and agricultural
workers and their families, discourage migration to urban areas and
face the challenges arising out of economic liberalisation and
globalisation."
With these broad aspects of National Agricultural Policy, the
following objectives were stated.
To achieve a growth rate of more than 4 percent per annum in
agriculture.
To introduce the required structural changes.

To bring in necessary reforms.

To make efficient use of resources.

To sustain higher growth rate with necessary supporting

services • Technological, environmental and economic.

To make agriculture more market oriented.

To achieve equity, that is, all the farmers should benefit from
the positive changes in agriculture.
The above objectives would be achieved with the help of measures
like agricultural research, human resource development, post
harvest management and marketing.

5.2 MAIN FEATURES

The National Agricultural Policy 2000 has incorporated the following

main features :
74 Business Economics - V (T.Y.B.Com. : SEM-V)

Private Participation
Private enterprieses would be encouraged through contract farming,
land leasing arrangements, technology transfer, capital inflow, and
assured markets for crop production, especially of oilseeds, cotton
and horticulture crops.

The areas of private investment and participation have become

have entered
wider. Big business firms including multinationals
agriculture and other related activities. Private sector is expected to
promote research by investing more, to benefit farmers through
better seeds and technology. Agriculture will be modernised and
commercialised which in turn will attract more educated youth to
this sector.

Competitive Approach
Under the WTO, agriculture everywhere has become more
liberalised with less quantitative restrictions (QRs). There is more
international competition in this sector. Accordingly the focus of
the government'! new policy is on the efficient use of resources and
technology, adequate availability of credit to farmers and their
protection from seasonal price fluctuation. Keeping in mind the
progressive dismantling of QRs on imports as per the WTO
guidelines, the new policy has recommended formulation of
commodity wise strategies and arrangements to protect farmers from
adverse impact of undue price fluctuation in the world market.
Efforts are undertaken in all forms to promote exports.

Efficiency in Agriculture
In the changed world economic scenario, it is inevitable for farmers
to depend less on government support through subsidies and other
concessions but more on efficiency, cost reduction and competitive
spirit thus treating the age old agricultural activities more like a
business rather than way of life.
Tax Reforms

Changes in tax structure or level would be introduced by reviewing

the excise duty on materials such as farm machinery and
 75
National Agricultural Policy - 2000

implements, fertilizers or any other input and activities. The structure

of tax on foodgrains and commercial crops would also besubsidies.
reviewed.
Tax concessions would be better than unwarranted
Widespread subsidies as existing now not only impose heavy
financial burden on the tax payers but also encourage and develop
a dependencia psychology among the farmers. The new tax law in
the form of GST which was rolled out on 30 June at midnight is
expected to
be favourable to farmers.

Internal Trade

Internal movements and trade in agricultural commodities will be

liberalised by progressively reducing the existing restrictions in
whichever manner they may be, including tax. This will encourage
the market to play its role in the determination of agricultural prices.
Government would also enlarge coverage of commodity future
markets to minimise the wide fluctuations in commodity prices as
also for hedging their risks.

Plant Varieties and Seeds

Protection through legislation would be provided to encourage
research and breeding new varieties. Government would require to
enact appropriate legislation for this purpose. It is necessary to
protect poor fariners from exploitation by the multinationals through
their patent rights. The other areas that require encouragement for
development are animal husbandry, poultry, dairy and agriculture.

Infrastructure Facilities
Rural electrification, new and renewable resources of energy for
irrigation, rural and farm credit are some of the areas of infrastructure
where the government will actively involve in providing these
services. Increase in productivity of agriculture cannot be achieved
unless the required inputs are made available. Energy is the most
important input for the progress of any economic activity. Electricity
is one of the important forms of energy required for the
modernisation of agriculture.
 76
Business Economics - V (T. Y.B.Com. : SEM-Y)
National Livestock Breeding Strategy
The
new agricultural policy plans to
meat, meet the requirement of milk,
egg
animals as and live stock products and enhance the role of draught
a source of energy for farming operations.
Finance
Credit as we know is
progress. The the most important requirement for agricultural
government has promoted a variety of financial
institutions to provide credit on easy terms to the farmers. However,
aare
good number of farmers, specially the small and marginal ones,
yet to
be brought within the reach of institutional finance. Efforts
finance
will be undertaken to bring this section under the institutional
through various schemes.
Insurance Scheme

seeds
right from sowing of An insurance toscheme
policy post-harvest operations,
to be introduced including
to cover the activities
market fluctuations in the prices of agricultural produce. Crops
due to provides the hedge against the risk which farmers face
insurance
the crop failure owing to natural calamities or pests. Other
areas which
livestock haveand
species been accorded priority are horticulture crops,
acquaculture.
Transform the
Indian Agriculture

The agricultural policy attempts to transform the agricultural sector

a fromAafour
one. less percent
productive into a modern, dynamic and more productive
growth has been targeted in order to have
enough supply of agricultural commodities. It is necessary to support
the agricultural sector with all the required changes in technology,
It is necessary
input supply, taxtoreforms, structural and institutional changes.
the competition invitalise the agricultural sector so that it can face
the liberalised global economy. India is primarily
an agricultural country which is now undergoing a structural
change. In the agricultural sector there is ample scope not only to
increase its productivity and bring it to international level but also
 77
National Agricultural Policy - 2000
to avail of comparative advantage in the production of many
commodities and have a greater share in the world trade.

Rural Development

The general changes in the agricultural sector and in the related

activities will help promote rural development. Development of
tiny, cottage and small scale industries in the rural side would reduce
the seasonal and disguised unemployment.

If the new policy succeeds in all the aspects mentioned above, the
agricultural sector will be more attractive even for the educated
youth for settling down and accepting agriculture as a career.

Indian agriculture poses numerous challenges and opportunities.

The 2000 policy addresses these challenges and attempts to increase
the existing opportunities for the vast population that depends on
this sector.

The Central Government in recent years has made provisions to

improve the quality and quantity of all major agricultural inputs.
Special attention is given to promote agricultural research and
education through the Indian Council of Agricultural Research
(ICAR). Agricultural extension service through Kisan TV was
provided on new farming technique, water conservation and organic
irregation, fertilizers and mechanisation aspects of agriculture.
Through all these measures, it is hoped that the agricultural sector
will achieve the targeted growth of 4 percent.

5.3 IMPLICATIONS OF NEW AGRICULTURAL

POLICY - 2000

India has the second largest arable land, next to USA. It has a vast
potential to exploit and improve the agriculture sector. Yet we have
not succeeded in achieving the goals and targets laid down in our
Five Year Plans and the agricultural policies announced now and
then. The NAP 2000, has laid down targets as well as certain
measures to achieve these targets. The policy (2000) implies that the
agricultural sector requires to undergo many changes, as explained
below :
 78 Business Economics - V (T.Y.B.Com. : SEM-V)

Increase Productivity : Performance of agriculture below the target

than not only the
is due to low productivity, which is much less
developed countries but even many of the developing countries. To
improve productivity, agriculture requires to be supported by a
other
sufficient amount of quantity of qualitative inputs besides,
supporting services.
Increase in Investment : A huge amount of investment is required
to provide infrastructure facilities to the agricultural sector. It
includes irrigation, electricity, roads, markets, warehouses and so
on. Capital formation of this sector, at present is only 16.4 percent
of GVA of agriculture and allied sector. The public sector
contribution is a mere 2.8 percent.

Private Investment : Incentives should be provided to promote

private investment in the above mentioned sector. A public-private
partnership (PPP) could be promoted for this purpose.
Research and Development : At present our research and
development programmes have not succeeded in providing
sufficiently good qualitative inputs such as seeds, fertilizers, tools
and inputs. More resources are required to be alloted to improve
our research and development programme.

Extension Programme : Agricultural universities and research

institutes should be made to train and educate farmers in effective
methods of cultivation and better use of input resources.

Appropriate Technology : It is not advisable to adopt imported

technology from developed countries. Technology, appropriate to
our environment must be developed and used.

Area Specific Development Strategy : In a vast country like India,

with the difference in the quality of soil, weather and environment,
it is necessary to develop area specific strategy to promote
agricultural growth.

Use of Wasteland : India, according to estimates, has 79.5 million

hectares of wasteland which is required to be utilised for agriculture
and afforestation.

Service Co-operatives : Small and marginal farmers are not in a

position to purchase equipment, quality seeds and other inputs. To
National Agricultural Policy - 2000 79

provide these services, service co-operatives are required to be

established. Marketing services too can be provided by these co-
operatives. Unfortunately co-operative movement has not been very
successful in India.

Land : Reformers : Land to the tiller is the main objective of Indian

land reforms. Yet the marginal farmers in many parts of the country
specially in parts of northern states, have not been successful in
obtaining the ownership of the land they cultivate. They are helpless
in establishing their rights vis-a-vis powerful landlords. Suitable
actions must be taken to effectively implement the land reforms.
Change in Attitude : Agriculture in India is treated as a way of life
and not a commercial venture. Though such an attitude is
undergoing a change, yet it is not strong enough to transform the
agricultural sector.

Price Policy Government of India has a price policy under which

it announces the yearly procurement policy. It, however, has not
succeeded in providing sufficient income to the farmers. Many of
the farmers suicides are attributed to the unremunerative prices
hence the low income. Farmers are demanding implementation of
Swaminathan formula of agricultural policy.

India at present is world's 2nd largest producer of farm output. It is

the largest producer of milk, pulses and spices, fresh fruits and
vegetables. It has the largest area under wheat, rice and cotton
cultivation. It is the 7th largest exporter of agricultural commodities.

With the New Agricultural Policy and the various measures for
effective implementation, India can emerge as a major player in the
global agricultural field. The major challenge faced by India is the
effective implementation of the policy.

REVIEW QUESTIONS

1. Explain the main features of the National Agricultural Policy 2000.

2. How does the National Agricultural Policy 2000 aim at making Indian
agriculture modern and dynamic?
3.
What are the implications of New Agricultural Policy.
 80

4. Write short notes on: Business Economics - V (T.Y.B.Com. : SEM-y

(a) Objectives and achievements of agricultural policy 2000

(b) Main features of agricultural policy 2000
(©) Agricultural policy 2000
(d) Implication of New Agricultural Policy, 2000.

OBJECTIVE QUESTIONS
A.
1. Choose
The the correct answer and rewrite the statements:
objective of National Agriculture Policy 2000 is to achieve
agriculture growth rate of
(a) 3%
5%
(b) 4%
(c)
2.
The new policy aims to
(a) liberalise internal trade
(c) both (b) exports
3.
Theabove
(a) average
4%agricultural growth rate since 2000 is
(b) less than 4 percent
(c) 4 percent
Ans.:
B. (1) - (b), (2) - (c), (3) - (b)
Fill in the blanks :
1.
2. Agricultural policy 2000 encourages .
3.
participation.
The new
The policy aims
problems of at facing
andthe challenges of and
effectively tackled.
farmers are required to be
C.
Ans.:reasons:
(a) private, (b) liberalisation and globalisation, (c) marginal and small
1. State whether the following statements are true or false with
economy.
2.
Agricultural growth has not brought structural change in Indian
3. attention to agriculture.
During the last few years, the government of India is giving more
Ans.:
1.
It is necessary to bring change in attitude among the Indian farmers.
2.
False; For Reasons : Refer Section 5.2.
3.
True; For Reasons Refer Section 5.2.
True; For Reasons : Refer Section 5.3.
 1) NEW
NEW ECONOMIC POLICY 1991
ECONOMIC POLICY 1991
Content:-
Content:-
Introduction
Introduction
The Rationale
RationaleofofNew
NewEconomic
EconomicPolicy 1991
Policy 1991
Important Policy Changes
Important Policy Changes in
in NEP
NEP 1991
1991
1.1
1.1 INTRODUCTION
INTRODUCTION
The year 1991 is one
one of
of the
the most
mostsignificant
significantone
oneininthetheeconomic
economic history
history of of
India. The
India. The economy
economy underwent
underwent some
some major shifts in
major shifts in its
itspolicies
policiesand
and
functioning.
functioning.
Since 1951,
Since 1951,when
whenIndia
Indiaadopted
adoptedthe
thefive
fiveyear
year plans,
plans, the
the economy
economy was
was functioning
functioning
mixed economy,
as a mixed economy,with
withgovernment
governmentcontrolling
controlling some
some of of
thethe
mostmost strategic
strategic
industrialsectors.
industrial sectors. There
There were
were several
several controls
controls of the
of the government
government overover the use
the use of of
resources by
resources bythe
theprivate
privatesector.
sector.These
Thesewere
wereininthe
theform
formofofindustrial
industrial licensing,
licensing,
importslicensing
imports licensingand
andcontrols,
controls,foreign
foreign exchange
exchange regulations,
regulations, public
public
monopolyin
monopoly insectors,
sectors,MRTP
MRTPAct,Act,control
control over
over the
the banking
banking sector
sector and and capital
capital
market.
market.
The reason
The reasonwhy
whythe
themixed
mixedeconomic
economicsystem
systemand
and the
the socialistic
socialistic pattern
pattern ofof economy
economy
was followed
was followed was
was because
because India
India was
was an underdeveloped
underdevelopedeconomy, economy,with withmass
mass
poverty and
and unemployment.
unemployment.The Theplanners
plannersdecided
decidedthat thattotolift
liftthe
theeconomy
economyout outofofthis
this
state of
of underdevelopment,
underdevelopment,it itwaswasnecessary
necessarythat thatthe thegovernment
government controlled and and
regulated the
regulated the use
useofofscarce
scarceresources
resourcesand anduse
use them
them forforthe the benefit
benefit ofof
thethe
people.The
people. Theprivate
privatesector
sectorwas
wasnotnotgiven
given a free
a free hand handto to operate
operate a purely
a purely market
market
oriented economy
oriented economybecause
becauseititwas
wasbelieved
believedthat
thatit itwould
wouldexploit
exploitpeople
peopletotoachieve
achieve itsits
profit oriented goals.
profit goals. The
Themain
mainobjective
objectiveofofthe
theplanned
plannedgrowthgrowthstrategy
strategywas
waslarge
large
scale industrialization
scale industrializationthrough
throughpublic
public sector,
sector, control
control of of imports
imports to promote
to promote
local industries,
local industries,regulate
regulatethethefinancial
financialsector
sector toto divert
divert resources
resources to to
thethe weaker
weaker
sections of
sections ofsociety
societyand
andkeep
keepprivate
privatemonopoly
monopoly under
under check.
check.
Though the
the objectives
objectives of
of the
the planners
plannerswere
weretotouplift
upliftthe
thepoor
poorand
andcreate
createemployment
employment
and seemed
and seemedappropriate
appropriatefor
forthe
thenation,
nation,the
themassive
massivegovernment
government controls
controls over
over the
the
nation’s resources
nation's resourcesbrought
broughtininseveral
severalproblems.
problems.These
Thesewerewerein in the
the form
form ofof
corruptionby
corruption bypublic
publicservants,
servants, shortage
shortage ofof resources,
resources, high
high cost
cost of production
of production
and high
and highprices.
prices.India
Indiawas
wasaahigh-cost,
high-cost,less
lessefficient
efficienteconomy
economy thatcouldn't
that couldn’t
competein
compete inthe
theinternational
internationalmarket.
market.
The public
publicsector
sectorenterprises
enterprises played
played a very
a very significant
significant role
role in creating
in creating
employmentand
employment andproviding
providingseveral
several goods
goods and
and services
services at low
at low cost.
cost. however,
however,
mismanagementof
due to mismanagement ofresources
resources,lack
,lackofofaccountability
accountabilityand
andexcessive
excessive focus
focus onon
social objectives,
social objectives, many
manyofofthese
theseenterprises
enterprisesmademadelosses
lossesandand become
become a burden
a burden
to
to the
the taxpayers.
taxpayers.
Becauseof
Because ofall
allthese
theseproblems,
problems,inin1980s,
1980s,the
thegovernment
government had
had begun
begun to to bring
bring in in
some measures
some measuresofofliberalization
liberalization
of of
thethe economy
economy from
from government
government control.
control. ButBut
measures were
these measures were small
small steps and
and they
they did
didnotnotmake
makeany
anysignificant
significant
differencetotothe
difference theway
waythe
theeconomy
economyfunctioned.
functioned.AllAll this
this changed
changed in in 1991,
1991, when
when
certain events
certain events forced the government
government to totake
takethe
themajor
majorstep
stepofofintroducing
introducingfarfar
reachingreform
reaching reform programmes
programmes for for all sectors
all sectors of economy.
of economy. These
These reforms
reforms are are
generallyreferred
generally referredto
toas
asthe
theNew
NewEconomic
EconomicPolicy,
Policy, 1991.
1991.
1.2
1.2 THE
THE RATIONLE
RATIONLEOF
OFNEW
NEWECONOMIC
ECONOMICPOLICY
POLICY
(NEP)1991
(NEP)1991
Despite some
Despite some liberalisation
liberalisationmeasures
measuresintroduced
introducedinin1980s,
1980s,theretherewas
wasnono major
major
change in
change in the
the industrial,
industrial,trade
tradeand
andfinancial
financialmarket
marketpolicies
policiesininIndia.
India.Unlike
Unlike China,
China,
India did
India did not
not undertake
undertake gradual
gradualeconomic
economicreforms
reformstotoopen
openupupthetheeconomy
economytoto
foreign competition,
competition, reduce
reduce government
governmentcontrol
controlover
overphysical
physicalandandfinancial
financial
resources.The
resources. Themanagement
management ofof the
the economy
economy byby
thethe government
government became
became
increasinglyproblematic
increasingly problematicininterms
termsofofefficient
efficientuse
useofofresources,
resources,ultimately
ultimately resulting
resulting in in
major crises
major crisessituations
situationsinin1990-91.
1990-91.These
Thesecrises
crisesresulted
resultedinin forcing
forcing the
the government
government
to undertake
undertake somesomeboldboldand
anddrastic
drasticreform
reformmeasures
measurestotostabilize
stabilizethetheeconomy
economy and
and
bring in
bring in structural
structural reforms.
reforms.
Thus in
in 1990-91,
1990-91, India
Indiafaced
facedeconomic
economiccrisis
crisisininfollowing
followingways
waysand
and they
they provided
provided
the reasons
reasons for
for the
the implementation
implementationofofthe
theNew
NewEconomic
EconomicPolicy.
Policy.
1. Fiscal
1. FiscalCrisis
Crisis:-The :-The fiscalsituation
fiscal situationininIndia
Indiahad
hadbeenbeen under
under mounting
mounting pressure
pressure
especiallysince
especially since1980s
1980sdueduetotowidening
wideninggap gapbetween
betweenthe therevenue
revenue andand
expenditure of of the
the government.
government.The Thelong-term
long-termtrendtrendininthe
thegovernment
governmentfinances finances
revenuegeneration
indicated that the revenue generationhad hadbeen
beenlowerlowerthan
thanthetheexpenditure
expenditure
requirements,leading
requirements, leadingto torising
risingfiscal
fiscaldeficit.
deficit.The
Theworsening
worseningofoffiscal
fiscalsituation
situationwas was
mainlydue
mainly dueto tovery
verysignificant
significantincrease
increaseininnon-development
non-developmentexpenditure
expendituresuch such asas
payments, defence
interest payments, defenceexpenditure,
expenditure,subsidies
subsidiesand andsosoon.on.AsAs a consequence
a consequence
the fiscal
fiscal deficit
deficit rose
rose to
to 7.7
7.7percent
percentof ofGDP
GDPinin1990-91.since
1990-91.since the
the fiscal
fiscal deficit
deficit
was financed
was financedthrough
throughborrowings,
borrowings,the theinternal
internaldebt
debtofofthethecentral
centralgovernment
government
was 48.6%
was 48.6% of of GDP
GDPinin1990-91.since
1990-91.sincethe thedebt
debthas
hastotobebeserviced,
serviced, thethe interest
interest
burdenof
burden of the
thegovernment
governmentrose rosetoto2929percent
percentofofrevenue
revenueexpenditure
expenditureofofthe the
Central Government
Central Governmentinin1990-91.1990-91.High Highfiscal
fiscaldeficits
deficitsininthe
the1980s
1980swere were one
one of of
thethe
causes of
root causes of the
the crisis
crisis of
of 1991.
1991.Reducing
Reducingthe thefiscal
fiscaldeficit
deficitwaswasanan important
important
macroeconomicobjective
macroeconomic objectiveofofthe
theNewNewEconomic
EconomicPolicy.Policy.

2. Balance
2. Balanceof ofPayments
PaymentsCrisis Crisis1- :-
TheThe Gulfcrisis
Gulf crisisofof1990
1990led ledtotoan
an
unprecedentedcrisis
unprecedented crisisininthe
thebalance
balanceofofpayments.
payments.The The balance
balance of of payments
payments
crisis reached
crisis reached its
its peak
peakininthethesummer
summerofof1991 1991when
when the
the foreign
foreign exchange
exchange
reserves had
reserves hadfallen
fallentotoabout
aboutUS$
US$1 1billion.
billion.The
The payments
payments crisis
crisis became
became evident
evident
in 1990-91 when
when thethe oil
oil prices
pricesincreased
increaseddue duetotothe
theGulf
Gulfwar.
war.This
Thisresulted
resulted in in
worsening of
worsening of current
current account
account deficit
deficit which
which rose
rosetoto9.7
9.7billion
billionUSUSdollars
dollarsi.e.
i.e.3.2%
3.2%
of
of the GDP
GDPinin1990-91.
1990-91.ThereTherewaswasalso
alsoa deterioration
a deterioration in in
thetheinvisibles account
invisibles account
 to lower
due to lower remittances.
remittances.Foreign
Foreignreserves
reservesstarted
startedtotodecline
declinefrom
from$3.1
$3.1 billion
billion in in
August 1990
August 1990to to$896
$896 million
million in
inJanuary
January1991.1991.The Themain
main factor
factor responsible
responsible forfor
thethe
sharp fall
sharp fall in
in reserves
reserveswas wasthethesharp
sharprise
riseininthe
theimports
importsexpenditure
expendituredue due toto
oiloil
rise. However,
price rise. However,the thebalance
balanceofofpayments
paymentscrisis crisisofof1990-91
1990-91was wasnotnot simply
simply
to aa deterioration
due to deterioration on onthe
thetrade
tradeaccount,
account,ititwas wasalso
alsodue
duetotoadverse
adverse
developmentson
developments onthe
thecapital
capitalaccount
accountreflecting
reflectingthe theloss
lossofofconfidence
confidenceininthethe
government’sability
government's abilityto
tomanage
managethe thesituation.
situation.Political
Politicaluncertainty
uncertaintyininthe
thecountry,
country,
coupled with
with rising
rising fiscal
fiscal deficits
deficits and
and rising
rising inflation,
inflation, also
alsoled
ledto
toloss
lossofof
international
international confidence.
confidence.
India’s access
India's access to to commercial
commercialborrowings
borrowingsfrom fromabroad
abroadtotally
totallydried
driedupupasasthe
the
credit rating agencies
agencies down down graded
gradedIndia.
India.AtAtthe
thesame
sametime,
time,there
therewaswas anan
outflow of non-resident Indian Indian deposits.
deposits. AAcurrent
currentaccount
accountdeficit
deficit of
of $9.7
$9.7billion
billioninin
became almost
1990-91 became almostimpossible
impossibletotofinance.
finance.
Thus, by June
June 1991,
1991,the thebalance
balanceofofpayments
paymentscrisiscrisishadhad become
become
overwhelminglyaacrisis
overwhelmingly crisis ofof confidence,
confidence, absence
absence of confidence
of confidence in the
in the
government’sability
government's abilityto tomanage
managethe thebalance
balanceofofpayments
payments problems.
problems. A default
A default
on payments
payments had
hadbecome
becomeaaseriousseriouspossibility
possibilityininJune
June1991.
1991.
default is
A default is essentially
essentiallyaafailure
failuretotorepay
repaydebts,
debts,butbutitsitsconsequences
consequencesare are
never confined
never confined to to debt.
debt. AA default
defaultin inpayments
paymentsleads leadstotoaabreak
breakdowndowninin credit
credit
availabilityand
availability andnormal
normalpayments
paymentsarrangements.
arrangements. Suppliers
Suppliers become
become reluctant
reluctant to to
goods and
sell goods and services
servicesand andinsist
insistononadvance
advancepayments
payments through
through banks
banks of of their
their
own country.
own country. This
Thisleadsleadstotosevere
severetrade
tradedisruption
disruptionwhich
whichininturnturnforces
forcessevere
severe
and prolonged
prolonged imports
imports reduction
reduction andand leads
leadsto toshortages,
shortages,industrial
industrialdislocation,
dislocation,
severe possibility
severe possibility for
for the
the Indian
Indianeconomy.
economy.

3. High
3. High Inflationary
InflationaryPressure
Pressure:-:-The Thewholesale
wholesaleprices
pricesini
iniIndia
Indiarose
rose at
at an
an annual
annual
8.2 percent
rate of 8.2 percent during
during the
the period
period 1981-81
1981-81toto1993-94.
1993-94.InIn1990-91
1990-91the therate
rateofof
inflation crossed
inflation crossed double
doubledigit
digitmark
markandandstood
stoodatat10.2
10.2percent.
percent.The
The inflationary
inflationary
rice in price
price was
was due
duetotoraising
raisingofofadministered
administeredprices
pricesespecially
especiallythe
theprices
pricesofof
petroleum products
petroleum products and
andindirect
indirecttaxes
taxeson
oncommodities
commoditiesand andservices.
services.TheThe
averageannual
average annualrates
ratesononinflation
inflationwere
werequite
quitehigh
high between
between 10%10% and
and 14% 14%till till
1994-95.
1994-95.

1.3
1.3 IMPORTANT
IMPORTANT POLICY
POLICY CHANGES
CHANGESIN
IN(NEP)
(NEP)1991
1991

Thenew
The newgovernment
governmentunder
underthethePrime
PrimeMinistership
Ministership ofof P.V.Narasimha
P.V.Narasimha Rao,Rao,
which assumed
assumedoffice
office in
injune
june1991,
1991,took
tookthe
thefollowing
followingpolicy
policymeasures.
measures. They
They
relied on
on aa combination
combinationof ofmacroeconomic
macroeconomicstabilization
stabilizationand
andstructural
structuralreforms
reforms
industrial and
in industrial andtrade
tradepolicy.
policy.Together,
Together,thethepolicies
policies are popularly
popularly termed
termedat
at
LPG policies
LPG policiesasasthey
theyresulted
resultedinin liberalization,
liberalization, privatization
privatization andand
globalization
globalization of the
the Indian
Indian Economy.
Economy.

A. MACROECONOMIC
MACROECONOMICSTABILISATION
STABILISATION(DEMAND
(DEMANDMANAGEMENT):-
MANAGEMENT):-
Thesemeasures
These measuresare
areshort-term
short-termmeasures
measuresaimed
aimedatat demand
demand management
management to to
return
return to
to low
low and
and stable
stableinflation
inflationand
andaasustainable
sustainablefiscal
fiscaland
andbalance
balanceofof
paymentsposition.
payments position.The
Themeasures
measuresconsisted
consisted
ofof the
the following:-
following:-
(1) Control
Control of
of inflation
inflation
(2) Fiscal correction
Fiscal correction and
and
(3)
ENO
Improvementininbalance
Improvement balanceofofpayments
paymentsposition
position

(1) ControlofofInflation:-
Control Inflation:- A combination
A combination of of policies
policies such
such as as fiscal
fiscal andand
monetary policies
monetary policieswere
wereundertaken
undertakentotobring
bringdown
downthe
thehigh
highinflation
inflationrate.
rate.
Fiscal deficit
Fiscal deficit was
wasbrought
broughtdown
downfrom
from7.7%
7.7%ofofGDP
GDP in in 1990-91
1990-91 to to 4.9%
4.9% in in
1995-96. RBI continuedwith
RBI continued withtight
tight monetary
monetarypolicy
policyaimed
aimedatatmaking
making
borrowing costlier
borrowing costlier by
by raising
raisingBank
BankRate,
Rate,CRRCRR and
and SLR.
SLR. It was
It was donedone
to to
reduce money
reduce moneysupply
supplyandandcontrol
controlinflation.
inflation.SLR
SLRwas
was raised
raised from
from 38%38% to to
38.5% in September
September1990. 1990.The
TheCRR
CRR was
was raised
raised to to
15% 15% in July
in July 1989.
1989.
The bank
bank rate
rate was
wasraised
raisedtoto12
12%%ininOctober
October1991
1991to to
curb
curbexcessive
excessive
Later the
liquidity. Later the RBI
RBIstarted
startedtotobring
bringdown
downCRR
CRR and
and SLR
SLR in ainphased
a phased
manner
manner on on the
thebasis
basisof
ofrecommendations
recommendationsofofthetheNarasimham
Narasimham committee.
committee.
In order to
to improve
improve the the supply
supplyposition
positionof ofessential
essentialcommodities
commoditiesthe the
government had
government hadallowed
allowedtheirtheirimports.
imports.Thus,
Thus,thetheinflation
inflationrate
ratewas
was
brought down
brought down to to 8%
8% inin 1995-96
1995-96 and andfurther
further to
to 4.6%
4.6% in in1996-97.
1996-97.
(2)
(2) FiscalCorrection:-Fiscal
Fiscal Correction:-Fiscal reforms
reforms were
were introduced
introduced since
since 19911991 to correct
to correct
the growing
the growing fiscal
fiscal imbalance.
imbalance.To Tothis
thisend,
end,government
governmentintroduced
introduced
expenditurereforms
expenditure reformstotoreduce
reducenon-productive
non-productivepublicpublicexpenditure
expenditurebyby
cutting down subsidies,
subsidies, defence
defence expenditures
expendituresand andadministrative
administrative
expenditures.Government
expenditures. Governmentreducedreducedthe thebudgetary
budgetarysupport
supporttotopublic
public
enterprisesand
enterprises andalso
alsoundertook
undertookrepayment
repaymentofofold oldpublic
publicdebt
debtininorder
ordertoto
reduce
reduce the
the interest
interest burden.
burden.
Measureswere
Measures weretaken
takentotoincrease
increasetax taxrevenue
revenue through
through taxtax reforms.
reforms.
Taxeswere
Taxes wererationalized
rationalizedand andsimplified.
simplified.InInthe
the area
area of of direct
direct taxes
taxes thethe
reforms brought
reforms brought inin aaregime
regimeofofmoderate
moderatetax taxrates.
rates.The
Themaximum
maximum rate
rate of of
personalincome
personal incometax taxhas
hascome
comedowndownfrom
from56% 56%atatthe
thestart
startofofthe
thereform
reform
to 30% in 1997-98.
1997-98. The The rate
rateof
ofcorporation
corporationtax taxon
onIndian
Indiancompanies,
companies,
which varied
which varied from
from 51.75%
51.75%toto57.5%
57.5%inin1991-92
1991-92 depending
depending upon
upon thethe nature
nature
company ,has
of the company ,hasbeen
beenunified
unifiedand
andreduced
reducedtoto35%.35%.TheThemaximum
maximum rate
rate
of custom duty,
duty, which
which waswasasashigh
highasas250%
250%beforebeforethethereforms,
reforms,had had been
been
to 40% in
reduced to in 1997-98.
1997-98. InIn 1994-95, service tax was
1994-95, service was introduced.
introduced.
(3)
(3) Balanceof
Balance ofPayments
PaymentsAdjustment:-Measures
Adjustment:-Measureswere weretaken
takentotoimprove
improve
the balance
balance of of payments
paymentsof ofthe
thecountry.
country.The
Therupee
rupeewas
wasdevalued
devalued byby 18-18-
19% in
19% in July
July1991.
1991.This
Thiswas
wasfollowed
followed byby the
the introduction
introduction ofof liberalized
liberalized
exchangerate
exchange ratemanagement
managementsystem system(LERMS)
(LERMS) in 1992-93.
in 1992-93. Under
Under this,
this, a a
dual exchange
dual exchangerate ratewas
wasfixed
fixedunder
underwhich
which40%
40%ofofforeign
foreignexchange
exchange waswas
surrendered at
to be surrendered atthe
theofficial
official rate
rateand
andthe
theremaining
remaining60% 60%can canbebe
converted at
converted at aamarket
marketdetermined
determinedrate.rate.Subsequently
SubsequentlyIndia
India adopted
adopted thethe
 exchangerate
unified exchange ratesystem
systeminin1993-94
1993-94andandIndia
Indiamoved
movedtotomanaged
managed
exchangerate
floating exchange ratesystem.
system.
Efforts were
were made
madeto to increase
increaseexports.
exports.InInorder
ordertotobring
bringabout
about
technological upgradation
technological upgradation in inthe
theexports
exportssector,
sector,imports
importswere
wereliberalized.
liberalized.
direct investment
Non-debt creating foreign direct investment and
andportfolio
portfolio investments
investmentsinto
into
country. The
country. Theabove
abovemeasures
measureshelped
helpedtotoimprove
improvethethe balance
balance of of
paymentsposition
payments positionofofthe
thecountry.
country.

B. STRUCTURAL
STRUCTURALREFORMS REFORMS(SUPPLY (SUPPLYSIDE SIDEMANAGEMENT)
MANAGEMENT)
They are
They arelong-term
long-term measures
measurestaken takentotoimprove
improvethe thesupply
supplyside sideofofthethe
economy.They
economy. Theyaimed
aimedatatremoving
removingatatremovingremoving thethe bottlenecks
bottlenecks and
and obstacles
obstacles
in the
in the growth
growth path
path ofof the
the economy.
economy.These Thesemeasures
measures were:-
were:-
Industrial
(1) Industrial reforms reforms
(2 Public sector
(2) sector reforms
reforms and and disinvestment
disinvestment
12)
(3) TradeTradeand andcapital
capitalflowsflowsreforms
reforms
(4)
(4) Financial
Financial sector
sector reforms
reforms
(1) Industrial
IndustrialSectors
Sectors Reforms:-The
Reforms:-The industrial
industrial development
development of country
of the the country
was influenced
was influenced by byIndustrial
IndustrialPolicyPolicyResolutions
Resolutionsofof1948 1948and and 1956.
1956. These
These
policy resolutions
policy resolutions had hadhelped
helpedto tobuild
buildaastrong
strongand anddiversified
diversifiedindustrial
industrial
sector in India.
India. AtAtthethesame
sametime, time,the theindustrial
industrialpolicies
policieshad hadresulted
resultedinin
rising cost,
rising cost, rising
rising industrial
industrialsickness
sicknessand andstagnating
stagnatingindustrial
industrialgrowth
growthdue duetoto
excessivegovernment
excessive governmentcontrol controlover overindustrial
industrialpolicypolicymeasures
measuressince since 1985.
1985.
The
The momentum
momentumof ofindustrial
industrialsector
sectorreforms
reformsincreased
increasedwith withthe
the
announcementof
announcement ofNewNewIndustrial
IndustrialPolicy Policyinin1991
1991 (NIP).The
(NIP). important
The important
sector reforms
industrial sector reforms introduced
introduced in in July
July1991
1991are arethethefollowing:-
following:-
(a) Abolition
Abolitionof ofIndustrial
IndustrialLicensing:-The
Licensing:-The newnew policyabolished
policy abolished
licensing for
industrial licensing for all
all industries,
industries,except
except18 18industries.
industries.AtAtpresent
present
there are
there areonly
onlyfive fiveindustries
industriesunder undercompulsory
compulsorylicensing.licensing.They Theyare are
alcohol, cigarettes,
cigarettes, hazardous
hazardouschemicals,chemicals,electronic
electronicaerospace
aerospaceand and
defence equipment
defence equipment and andindustrial
industrialexplosives.
explosives.
(b) Permitted
Permittedforeign foreigninvestment
investmentand andforeign
foreign technology:- The
technology:- The NIPNIP
encouragedforeign
encouraged foreigndirectdirectinvestment
investmentand andforeign
foreigntechnology
technologyimports imports
priority industries. The
in high priority The number
numberof ofindustries
industrieseligible
eligibleforforforeign
foreign
direct investment
investment has has beenbeenexpanded.
expanded.Initially,
Initially,FDIFDI waswas allowed
allowed uptoupto
51%.Subsequently
51%. Subsequentlythis thislimit
limitwas
was raised
raised to to
100100%% forfor many
many
industries.
industries.
(c) Reduced
Reduced the the roleroleofofpublic
publicsector:-
sector:-The Thenew newpolicy
policy reduced
reduced the
numberof
number of industries
industriesreserved
reservedfor forpublic
publicsector
sectorfrom from17 17toto33atat
present. The
present. Theindustries
industriesthat thatarearereserved
reservedfor forpublic
publicsector
sectoratatpresent
present
are (1)
are (1)atomic
atomicenergy,
energy,(2) (2)substances
substancesnotified notifiedbybyDepartment
Departmentofof
AtomicEnergy
Atomic Energyand and(3) (3)railway
railwaytransport.
transport.Thus Thuscore coreindustries
industries like
like iron
iron
and steel,
and steel, electricity,
electricity, air airtransport,
transport, etc. etc. and
andevenevenstrategic
strategicindustry
industrylike like
defence production
defence production are areopened
openedup upforforthe
theprivate
privatesector.
sector.
 (d) Removalof
Removal ofMRTP
MRTPlimit:- limit:-UnderUnderthe theMonopoly
Monopoly and and Restrictive
Restrictive TradeTrade
Practices (MRTP)
(MRTP)Act Actlargelargecompanies
companieswith withassets
assetsofof100 ₹ 100
crore crore
and and
abovewere
above werenot notallowed
allowedtotoexpand expandtheir theiractivities
activitieswithout
withoutthe the
government permission.
government permission.This Thisrestricted
restrictedgrowth,growth,expansion
expansionand and
efficiency of such firms. The The newnewpolicy
policyremoved
removedthis thisthreshold
thresholdlimit.limit.
This eliminated
eliminated the the requirement
requirementof ofprior
priorapproval
approvalofofgovernment
governmentfor for
large industrial
large industrial houses
housesfor forexpansion,
expansion,establishment
establishmentofofnew new
undertakings, mergers,
undertakings, mergers,takeover takeoverand andamalgamation.
amalgamation. TheTheMRTPMRTP ActAct
now replaced
is now replacedby byCompetition
CompetitionAct, Act,2002.
2002.
(2)
(2) Public
Public Sector
SectorReforms
Reformsand andDisinvestment:-
Disinvestment:- TheThepublic
publicsector
sector
enterprises constitute
enterprises constitute aamajor majorsegment segmentofofindustrial
industrialactivity
activityininIndia.
India.ItIthas
has
provided India
provided Indiawith
withaalargelargeand anddiversified
diversifiedindustrial
industrialbase,base, generated
generated
employment and
employment and earned
earnedforeignforeignexchange
exchangethrough throughexports
exportsand andimports
imports
substitution. At the same same time time the the performance
performanceof ofpublic
publicsector
sectorenterprises
enterprises
have suffered
have suffered due dueto tomounting
mountinglosses, losses,fallfallininefficiency,
efficiency,causing
causinga a drain
drain onon
government’s budget.
the government's budget. Since 1991,
Since 1991,theretherehavehavebeen beenmajormajor
changesin
changes inthe
thepublic
publicsectorsectorpolicy policyininIndia.
India.The Thepublic
publicsector
sectorreforms
reforms
consistedof
consisted of 'disinvestment'
‘disinvestment’involving involvingsale saleofofaaportion
portionofofthe thegovernment
government
equity in
equity in public
public sector
sector enterprises
enterpriseswhile whileretaining
retainingmajority
majoritycontrol
controlwith withthe
the
government attempting
government attempting to to improve
improvethe theperformance
performanceofofpublic publicsector
sector
enterprises.Other
enterprises. Othermeasures
measuresintroduced introducedwere wereraising
raising ofof fresh
fresh equity
equity directly
directly
by public sector from the market, market, greater
greater competition
competition from fromnew newprivate
private
enterprises and
enterprises andgiving
givinggreater
greaterfinancial
financialand andoperational
operationalautonomy
autonomy toto public
public
enterprises.
enterprises.
(3)
(3) Trade and
Trade andCapital
CapitalFlows FlowsReforms:-Reforms:-The Thegovernment
governmenttook tookthethe following
following
reforms in
reforms in the
the external
externalsector sectorto toopen
openup upthetheIndian
Indianeconomy
economytotoforeign foreign
competition and
competition and foreign
foreign investment.
investment.
(i) Liberalisation
Liberalisation ofof imports:-
imports:- Imports
Imports controls
controls were were virtually
virtually
abolishedexcept
abolished exceptfor forsome
someconsumer
consumergoods. goods.
(ii) Reductioninin
Reduction tariff
tariff structure:-
structure:- TheThe peak peak imports
imports dutyduty on non-
on non-
agriculturalproducts
agricultural productswas wasreduced
reducedfrom frommore
morethen then300 300%%toto150 150inin
1991-92. It was was further
further lowered
lowered to to 20%
20%in in2004-05
2004-05 and and to to 10%
10%inin
2007-08.
2007-08.
(iii) Promotionof
Promotion ofexports:-Various
exports:-Variousincentives incentivesare areprovided
provided to
exporters in
exporters in the
the foreign
foreigntrade tradepolicies
policiesof ofthe
thegovernment.
government.
(iv)
(iv) Changesin
Changes inexchange
exchangerate ratepolicy:-
policy:-The Theexchange
exchangerate ratewaswas
allowed to
allowed to be
bedetermined
determinedby bydemand
demandand andsupply
supplyininthe theforeign
foreign
exchangemarket
exchange marketsince since1993.
1993.ThisThis would
would help
help toto ease
ease thethe balance
balance
payments problems.
of payments problems.The TheRBIRBIintervenes
intervenes ininthethe foreign
foreign exchange
exchange
market to
market to reduce
reduce excess excessvolatility
volatilityininthe theforeign
foreignexchange
exchangemarket market
to stabilize the exchange
exchangerate rateof ofrupee.
rupee.
(v) Introduced
Introducedcurrent currentaccount accountconvertibility:-
convertibility:-The Thegovernment
government
introduced convertibility
introduced convertibility of rupee*, rupee*,first first on
on trade
tradeaccount,
account,and and
subsequently on
subsequently on the the entire
entirecurrent
currentaccount
accountininAugust
August1994. 1994.ThisThis
 increasedthe
increased theavailability
availabilityofofforeign
foreignexchange
exchangetoto exporters,
exporters,
and for
importers and for studies
studies abroad,
abroad,travel,
travel,medical
medicalexpenses
expensesand
and
SOso
on.
(vi) Liberalisedcapital
Liberalised capitalinflows:-
inflows:-The Thegovernment
governmenthas hasliberalized
liberalized
capital inflows
capital inflowsin inthe
theform
formof ofForeign
ForeignDirectDirectInvestment
Investment(FDI) (FDI)andand
ForeignPortfolio
Foreign PortfolioInvestment
Investment(FPI). (FPI).Foreign
Foreign Portfolio
Portfolio Investors
Investors areare
allowed to
allowed to invest
investininallalltypes
typesofofsecurities
securitiestraded tradedininthe theprimary
primaryand and
secondary markets.
secondary markets.
The rupee
rupeecould
couldbe beconverted
convertedtotoforeign foreigncurrencies
currencies at at
market
market
determind
determind rates ratesand andnot notcentral
centralbank bankdetermined
determinedrates. rates.
Similarly,external
Similarly, externalcommercial
commercialborrowings
borrowings(ECBs)* (ECBs)* norms
norms have
have beenbeen
liberalized in
liberalized in terms
terms of of expanding
expandingthe thelistlistof
ofeligible
eligibleborrowers
borrowersand andend-use
end-use
raised through
of funds raised through ECBs. ECBs.
(4)
(4) Financial Sector
Financial Sector Reforms:-
Reforms:- TheThefinancial
financialsectorsectorreforms
reforms thatthat
were were
introduced by by the
the government
governmentsince sincethe theearly
early1990s
1990sare areaimed
aimedtotomake make thethe
Indian financial
Indian financialsector
sectorstrongstrongand andtransparent.
transparent.The TheIndian
Indianfinancial
financial sector
sector
consists of
consists of banking,
banking,insurance
insuranceand andcapital
capitalmarket.
market.
government appointed
The government appointedaacommittee
committeeunder underthe thechairmanship
chairmanshipofofM.M.
Narasimhamtotoexamine
Narasimham examineallallaspects
aspects ofof financial
financial system
system in in India.
India.
The Narashimham
The NarashimhamCommittee Committeesubmittedsubmitteditsitsreport reportininDecember
December 1991.
1991. In In
a1997,
1997,the
thegovernment
governmentappointed appointed aa secondsecond committee on banking banking sector
sector
reforms under
reforms under the the chairmanship
chairmanshipofofM. M.Narasimham.
Narasimham.The The committee
committee
submitted aa second
submitted secondreport reportininApril
April1998.
1998.Banking
Bankingsector sectorreforms
reformsare are based
based
on the recommendation
recommendationof ofthese
thesecommittees.
committees.
(A) Banking Sector Reforms
Bankingsector
Banking sectorreforms
reformswere werefirst
firstinitiated
initiatedinin19921992based basedononthe the
recommendations
recommendationsof ofNarasimham
NarasimhamCommittee. Committee.
The important
important reforms
reforms introduced
introduced in in the
the banking
bankingsector sectorsincesince19911991are:-
are:-
(i)
(i) LoweringofofSLR:-
Lowering SLR:- Statutory
Statutory Liquidity
Liquidity RatioRatio (SLR)
(SLR) hashas
been been
reducedgradually.
reduced gradually.As AsononApril
April2018,
2018, it is
it is 19.5%.
19.5%.
(ii) Loweringof
Lowering ofCRR:-
CRR:-The TheCashCashReserved
ReservedRatio Ratio(CRR)
(CRR)was wasreduced
reduced
gradually from
gradually from 15 15% %inin1991
1991toto4.5% 4.5%ininJune June 2003.
2003. This
This hashas
releasedmore
released morefunds fundsfor forleading
leadingtotoother othersectors.
sectors.As Ason onApril
April2018,
2018,
CRR
CRR is is 4%.
4%.
(iii) Deregulationof
Deregulation ofInterest
InterestRates Rates:-:-Scheduled
Scheduledcommercialcommercial banks banks
have now
have nowthe thefreedom
freedomtotoset setinterest
interestratesrateson ontheir
theirdeposits
deposits
subject to minimum
minimum floor floor rates
ratesand andmaximum
maximumceiling ceilingrates.
rates.This
Thisisis
expected to
expected to bring
bring healthy
healthycompetition
competitionamong amongthe thebanks
banksand and
encourage their
encourage their operational
operationalefficiency.
efficiency.
(iv) Introduction
Introductionof ofPrudential
PrudentialNorms:- Norms:-Prudential
Prudentialnorms normsare arerelated
related
to recognition of income, income, classification
classification of of assets
assetsand andprovisioning
provisioning
of bad debts in in accordance
accordancewith withinternationally
internationallyaccepted accepted
accounting practices.
accounting practices. This Thiswillwillensure
ensurethat thatthethebooks
booksofofthe the
commercial banks
commercial banksreflect
reflecttheir
their financial
financialposition
positionmore moreaccurately.
accurately.
(v) Introductionof
Introduction ofCapital
CapitalAdequacy
AdequacyNorms:- Norms:- Capitaladequacy
Capital adequacy
ratio measures
measuresaabank's bank’scapitalcapitalininrelation
relationtotoitsitsrisk-weighted
risk-weighted
assets. ItIt promotes
assets. promotesfinancialfinancialstability
stabilityunder
underBased
BasedIII,III,it itmust
mustbebea a
minimum
minimum of of 8%.
8%.
(vi)
(vi) Accessto
Access toCapital
CapitalMarket:-
Market:-Nationalised
Nationalised commercial
commercial banks are
allowedto
allowed toaccess
accesscapitalcapitalmarket
marketfor forfunds,
funds,through
throughpublic publicissues.
issues.
(vii) Entry
Entry ofof New
New Private
PrivateSector SectorBanks:-
Banks:-Government
Governmenthas haspermitted
permitted
the entry
entry ofof new
new private
private sector
sector banks.This
banks.Thishas hasprovided
provided
competition to the public sector banks. banks.
(viii) Freedom
Freedomof ofOperations:-
Operations:-Scheduled Scheduledcommercial
commercial banks have
been given
given freedom
freedom to to open
opennew newbranches
branchesand andupgrade
upgradeextension
extension
counters.They
counters. Theyare arealsoalsopermitted
permittedtotoclose closenon-viable
non-viablebranches branches
than in
other than in rural
rural areas.
areas.Bank Banklending
lendingnormsnormshave have been
been also
also
liberalized.
liberalized.
(ix) SpecialRecovery
Special RecoveryTribunals:-The
Tribunals:-The governmenthas
government hasset setup
upSpecial
Special
RecoveryTribunals
Recovery Tribunalstotofacilitate
facilitatequicker
quickerrecovery
recoveryofofloan loanarrears.
arrears.
(B) Capital Market
Capital Market Reforms:-
Reforms:-
Capitalmarket
Capital marketisisthe themarket
marketwhere wherelonglongtermtermfunds
fundscan canbebe raised
raised
through debt
through debt andand equity.
equity.AlongAlongwith withreforms
reformsininthe thebanking
bankingsector,
sector,
reforms were
reforms were alsoalsointroduced
introducedininthe thecapital
capitalmarket.
market.The Theimportant
important
reforms introduced
reforms introduced in in the
the capital
capitalmarket
marketare:- are:-
(i) SEBI
SEBI as asStatutory
StatutoryBody:- Body:-Securities
Securitiesand andExchange
Exchange Board Board
of India (SEBI)
(SEBI)was wasset setupupinin1988
1988and andit itwas
was made
made a a
statutory body in January January1992. 1992.SEBI SEBIisisauthorized
authorized toto
regulate all
regulate all merchant
merchantbanks bankson onissue
issueactivity,
activity,lay layguidelines
guidelines
and supervise
supervise and andregulate
regulatethe theworking
workingofofmutualmutualfunds
fundsandand
overseethe
oversee theworking
workingof ofstock
stockexchanges
exchangesininIndia. India.
(ii) PrimaryMarket
Primary MarketReforms:-
Reforms:-CompaniesCompaniesraising raisingcapital
capital in
in the
primary market
market are arerequired
requiredtotodisclose
discloseall allinformation.
information.
Companiesare
Companies areallowed
allowedtotodetermine
determinethe thepar parvalue
value ofof shares
shares
issued by
issued by them.
them.Stricter
Stricternorms
normshave havebeen
beenintroduced
introducedininallall
aspectsof
aspects ofInitial
InitialPublic
PublicOffering
Offering(IPO).
(IPO).
(iii) OnlineTrading
Online Tradingand andDematerialised
Dematerialised Trading:-SEBI
Trading:-SEBI hashas
introduced online online trading
trading andand dematerialised
dematerialisedtrading. trading.This
Thisisis
expected to
expected to lead
leadto toreduction
reductioninintime timeand
andcost costand and
elimination
elimination of of various
variousrisks risksassociated
associatedwith paper based
with paper based oror
physical settlement.
physical settlement.
(iv) Rolling Settlement:-:-SEBI
Rolling Settlement SEBIhas hasintroduced
introduced rollingrolling
settlements from
settlements from January
January2000. 2000.UnderUnderthisthissystem
systemthe the
trading cycle
cycle has has beenbeenshortened
shortenedtotoaaday dayand andtrades
tradesareare
settled within 2 working days. days. This
Thisisisexpected
expectedtotoincreaseincrease
the efficiency
the efficiency and and integrity
integrity ofof the
the securities
securities market.
market.
 (v) Investmentsby
Investments byFlls:-
FIIs:-Foreign
ForeignInstitutional
Institutional Investors (FIIs) (FIls)
are allowed
are allowedto toinvest
investininall alltypes
typesofofsecurities
securitiestraded
tradedininthe the
primary and
and secondary
secondarymarkets.markets.
(vi) Investor Protection:-
Investor Protection:- Measures
Measures have been
have beentaken
takenfor the
for the
investor protection.
investor protection. For For this
this purpose
purposethe theInvestor
InvestorEducation
Education
and protection
protection Fund Fund (IEPP)
(IEPP)has hasbeenbeenestablished
established in in
Oct.2001.
Oct.2001.
(vii)
(vii) Derivative Trading:-Trading
Derivative Trading:-Trading in equity
in equity derivatives
derivatives waswas
introduced in
introduced in 2000.
2000. There
Thereare arenow
nowfour fourequity
equityderivative
derivative
products in IndianIndian capital
capital market,
market,namelynamelystockstockoptions,
options,
stock futures, index futures futures and and index
indexoptions.
options.
(viii) Establishmentof
Establishment ofNSE
NSE:-:-National
NationalStockStock Exchange
Exchange of of India
(NSE)
(NSE) waswasset setup upininNovember
November1992. 1992.It Itstarted
starteditsitsoperations
operations
in 1994.
1994. ItIt has
hashelped
helpedto tobring
bringtransparency
transparencyand andoperational
operational
secondary market
efficiency in the secondary marketoperations.
operations.
(ix) Setting up
Setting up of ofNational
Nationalsecurities
securitiesClearing
Clearing Corporation
Corporation
(NSCC):-
(NSCC):- The TheNSCCNSCCwas wasset setupupinin1996.
1996. It guarantees
It guarantees all all
trades on
trades on NSE.
NSE.Thus Thuseveryeverytrade
tradethatthattakes
takes place
place is is freed
freed
from the risk of the counter party party defaulting.
defaulting. ThisThis hashasended
ended
the risk of
of failures
failures leading
leadingto toaapayment
paymentcrisis.crisis.
(x) Strengtheningthe
Strengthening theGovernment
GovernmentSecurities SecuritiesMarket:-
Market:-AA
number of
number of measures
measureswere weretakentakentotostrengthen
strengthenthe the
governmentsecurities
government securitiesmarket.
market.They Theyare arethetheintroduction
introductionofof
the auction systemsystem for for the
the sale
saleof ofgovernment
governmentsecurities
securities, ,
setting up
setting up of of the
the Securities
SecuritiesTradingTradingCorporation
CorporationofofIndia Indiaandand
so on.
(C) Insurance
(C) InsuranceSector SectorReforms:-
Reforms:-
Insurance
Insurance sectorsector was
wasthe themonopoly
monopolyofofthe thegovernment
governmentuntil untilrecently.
recently.
Reforms in
Reforms inthe
theinsurance
insurancesector sectorcommenced
commencedwith withthethepassing
passingofofthe the
Insurance Regulatory
Insurance Regulatoryand andDevelopment
DevelopmentAuthority Authority(IRDA)
(IRDA) ActActof of 1999.
1999.
The IRDA
The IRDAAct Actended
endedthe themonopoly
monopolyofofthe thegovernment
government in in
thethe
insurance
insurancesector.sector.This
This is doneby
s done byencouraging
encouragingprivate privateinvestment
investmentinin
insurance sector.
the insurance sector.The TheIRDAIRDAhas has given
given licences
licences to to a number
a number of of
private sector
private sector companies
companiesto tododoinsurance
insurancebusiness
businessand andoutoutofofwhich
whicha a
number of
number of them
them have
havestarted
startedbusiness.
business.The Thegovernment
governmenthas has raised
raised
the foreign
the foreign equity
equity investment
investmentcapital capitalininan anIndian
Indianinsurance
insurancecompanycompany
from
from 26%26% to to 49%.
49%. Financial sector
Financial sector reforms
reformshave have
led to significant broadening
broadening and anddeepening
deepeningofoffinancial
financialmarkets
marketswith with
the introduction
the introduction of many many new newinstruments
instrumentsand andproducts
productsininbanking,
banking,
insuranceand
insurance andcapital
capitalmarkets.
markets.
The new
The neweconomic
economicpolicy policyhashascreated
createdananencouraging
encouraging environment
environment
for investment
investment and innovation. Indian industries have startedtotoattract
and innovation. Indian industries have started attract
foreign portfolio
foreign portfolio investments
investments and andequity
equityparticipation
participationininnew newventures.
ventures.
India has
India has started
started to
to experience
experiencehigher highergrowth
growthratesratesininthethepost-reform
post-reform
period.Indianeconomy
period.Indian economyISisnow
nowmuch
muchmore
moreintegrated
integratedwith
withthe
theworld
world
economy.
Sustainable
Sustainable
Development

By- Ravindra Phadke

Aims:
Aims:
● Economic
Economic
Development
● Social Development
● Environmental
Environmental
Development
United Nations
United Nations (UN)
(UN)
September
September 2015
2015
189 Countries
189 Countries
17 SDG'S:
SDG’s:

United Nations
Nations Development
Development(UNDP)
(UNDP)
Goals
Goals 2000
2000

6
“ Leaving No
No One
One Behind"
Behind”
NO
17 SDGs
POVERTY ND
ZERO

HUNGER

MMN
 C
3. GoodAND
17 SDGs
GOOD HEALTH
4
WELL-BEING
Health & 4. Quality Education
QUALITY
EDUCATION

Well Being

M
 C
GENDER
17 SDGs
EQUALITY
5. Gender Equality
OP
LEAN WATER
AND SANITATION

6.Clean Water & Sanitation

e
 AFFORDABLE AND
CLEAN ENERGY
7. Affordable & Clean Energy
17 SDGs
C
ECENT WORK AND
ECONOMIC GROWTH

8. Decent Work & Economic growth

9 10
INDUSTRY, INNOVATION REDUCED
AND INFRASTRUCTURE
17 SDGsINEQUALITIES

Goal 9. Industry, Innovation & Infrastructure Goal 10. Reduced inequality

=
 SUSTAINABLE CITIES RESPONSIBLE
11 AND COMMUNITIES
17 12
SDG’s CONSUMPTION
AND PRODUCTION
Goal 11: Sustainable Cities & Communities Goal 12: Responsible consumption &
production

n 20
13
CLIMATE
ACTION
14
17 SDGs
LIFE
BELOW WATER

Goal 13: Climate Action Goal 14: Life below water

 LIFE PEACE, JUSTICE
15 ON LAND
17 16
SDGsAND STRONG
INSTITUTIONS
Goal 15; Life on Land Goal 16 : Peace & Justice
 17 PARTNERSHIPS
FOR THE GOALS
Goal 17:
Partnership to
achieve the goals
Thank
You