UNIT III Indian Economy

The differences between developed and under-developed countries.

Characteristics of Developed countries are as follow:-

1. Average income per capita of the population is generally high.

2. Education level is high of average population.
3. Life expectancy of the population is high.
4. Population growth rate per year is relatively low.
5. The death rate per year is relatively low.
6. Life-style market economy is relatively high .
7. Economic activity in most industry sectors, as well as export commodities.
8. The majority of the population lives in cities.
9. Relatively high level of population health.
10. Post-industrial economies
11. High level of industrial development
12. High level of efficient citizens
13. Low levels of unemployment
14. Higher education rates
15. Technological advantages
16. Better roads
17. Stable governments
18. Good health care
19. Human and natural resources are fully utilized
20. High level of per capita income
21. High Human Development Index (HDI)
22. Increased life expectancy
23. Low birth rates
24. Low death rates
25. Good housing conditions
26. Safe water supplies
27. Abundant food supplies
28. Easy to access advanced medical services

• Countries like United States, Japan, Germany, France comes under Developed countries

The characteristics of developing countries are as follow :-

1. Average income per capita of the population were generally low.

2. Education levels low average population.
3. Life expectancy lower average population.
4. Population growth rate per year is quite high.
5. The mortality rate is relatively high population per year.
6. Livelihoods of the population is generally patterned agrarian.
 7. Commodity exports of raw materials, rather than processed ingredients.
8. The majority of the population live in rural areas.
9. Low levels of population health.
10. High unemployment figures.
11. In the process of industrialization
12. Low level of efficient citizens
13. Higher levels of unemployment
14. Lower education rates
15. Often contain undeveloped rural villages
16. Unstable governments
17. High level of birth rates
18. High level of death rates
19. High infant mortality rate
20. Dirty, unreliable water supplies
21. Poor housing conditions
22. Poor nutrition
23. Diets that are short in calories and/or protein
24. Poor access to medical services
25. Endemic disease in some countries
26. Low to medium standard of living
27. Limited technological capacity
28. Unequal distribution of income
29. Factors of production are not fully utilized

• Countries like Mexico, Brazil, South Africa, Thailand , India comes under developing countries

Indian economy is an under developed economy in which Agriculture is the back bone of Indian
economic. 60% of India’s population are on the below poverty line. Mineral resources are not fully
utilized. Majority of the people of India are leading a poverty line. Indian economic is affected by it.
Countries which are on the part of progress and which have their potential for development are called
developing economic. So India is termed as developing economy by modern views.

The important features of Indian economy:

 Agrarian Economy: Even after six-decades of independence, 58% of the work force of India is
still agriculturist and its contribution to Gross National Product (GNP) is approximately 17.5%.
 Mixed Economy: Indian Economy is a unique blend of public and private sector, i.e. a mixed
economy. In its entire plan period, the government has invested 45% capital in public sector.
However major sources and resources of production are still in the hands of private sector
(approximately 55%). After liberalization, Indian Economy is going ahead as a capitalist
economy or market economy.

Reasons for underdevelopment of India

1. Low per capita income:

Under developed economy is characterized by low per capital income. India per capital income is very
low as compared to the developed countries. For example the capital income of India was 460 dollar, in
2000. Where as their capita income of U.S.A in 2000 was 83 times than India. This trend of difference of
per capita income between under developed and advanced countries is gradually increasing in present
times. India not only the per capita income is low but also the income is unequally distributed. This mal-
distribution of income and wealth makes the problem of poverty in ore critical and stands an obstacle in
the process of economic progress

2. Heavy Population Pressure:

The Indian economy is facing the problem population explosion. It is clearly evident from the total
population of India which was 102.67 cores in 2001 census. It is the second highest populated country
China being the first. India’s population has reached 110 cores. All the under developed countries are
characterized by high birth rate which stimulates the growth of population; the fast rate of growth of
population necessitates a higher rate of economic growth to maintain the same standard of living. The
failure to sustain the living standard makes under developed countries poor and under developed.

3. Pre-dominance of Agriculture:

Occupational distribution of population in India clearly reflects the backwardness of the economy. One of
the basis characteristics of an under developed economy is that agriculture contributes a very large
portion in the national income and a very high proportion of working population is engaged in agriculture

4. Unemployment:

There is larger unemployed and under employment is another important feature of Indian economy. In
under developed countries labour is an abundant factor. It is not possible to provide gainful employment
the entire population. Lack of job opportunities leads the unemployed population into agriculture fields.

5. Low Rate of Capital Formation:

In backward economics like India, the rate of capital formation is also low. capital formation mainly
depends on the ability and willingness of the people savings, since the per capita income is low and there
is mal-distribution of income and wealth the ability of the people to save is very low in under developed
countries for which capital formation is very low .

6. Poor Technology:

The level of technology is a common factor in under developed economy. India economy also suffers
from this typical feature of technological backwardness. The techniques applied in agriculture, industries
are outdated.

7. Backward Institutional and social frame work:

The social and institutional frame work in under developed countries like India is hopelessly backward,
which is a strong obstacle to any change in the form of production. Moreover religious institutions such
as caste system, joint family universal marriage affects the economic life of the people.

8. Under utilization of Resources:

India is a poor land. So our people remain economically backwards for the lack of utilization of resources
of the country.
9. Price instability:

Price instability is also a basis feature of Indian economy. In almost all the underdeveloped countries like
India there is continuous price instability. Shortage of essential commodities and gap between
consumption and productions increase the price persistently. Rising trend of price creates a problem to
maintain standard of living of the common people.

10. Income Disparities:

The gap between wealth and poverty is exceedingly wide in India. A handful of rich persons get a
relatively large share of the total income while the large mass of poor population gets a relatively small
portion of it. Inequalities of income distribution are to be observed both in the rural and urban sectors of
the economy. Inequalities of income are to be seen in the form of unequal distribution of land in the
agricultural sector and concentration of economic power in non-agricultural sector.

 India’s planning for development (5-year plans)

After independence, India launched its First FYP in 1951, under socialist.
The process was influence of first Prime Minister Jawaharlal Nehru and is began with setting up of
Planning Commission in March 1950 declared objectives of the Government to promote a rapid rise in
the standard of living of the people by efficient exploitation of the resources of the country, increasing
production and offering opportunities to all for employment in the service of the community. The
Planning Commission was charged with the responsibility of making assessment of all resources
of the country, expand deficient resources, formulating plans for the most effective
and balanced utilization of resources and determining priorities. The first Five-year Plan was launched in
1951 and two subsequent five-year plans were formulated till 1965, when there was a break because of
the Indo-Pakistan Conflict. Two successive years of drought, devaluation of the currency, a general rise in
prices and erosion of resources disrupted the planning process and after three Annual Plans between 1966
and 1969, the fourth Five-year plan was started in 1969.

Formation of the planning commission

The Planning Commission was set up in March 1950 to promote a rapid rise in the standard
of living of the people by utilizing the resources of the country, increasing production and
offering employment opportunities to all.

The Planning Commission has the responsibility for formulating plans as to how the
resources can be used in the most effective way.

Functions of the planning commission

 Assessment of resources of the country

 Formulation of Five-Year Plans for effective use of these resources
 Determination of priorities, and allocation of resources for the Plans
 Determination of requisite machinery for successful implementation of the Plans
 Periodical appraisal of the progress of the Plan
 To formulate plans for the most effective and balanced utilization of country's resources.
To indicate the factors which are hampering economic development. The Eighth Plan could not take off
in 1990 due to the fast changing political situation at the Centre and the years 1990-91 and 1991-92 were
treated as Annual Plans. The Eighth Plan was finally launched in 1992 after the initiation of structural
adjustment policies.
For the first eight Plans the emphasis was on a growing public sector with massive investments in basic
and heavy industries, but since the launch of the Ninth Plan in 1997, the emphasis on the public sector has
become less pronounced and the current thinking on planning in the country, in general, is that it should
increasingly be of an analytical in nature.

Twelfth Five Year Plan (2012-17)

Faster, Sustainable and More wide-ranging Growth ( 9 % growth )

The Twelfth Plan commenced at a time when the global economy was going through a second financial
crisis, government of India launched its Eleventh Plan. The crisis affected all countries including India.
Our growth slowed down to 6.2 percent in 2011-12 and the deceleration continued into the first year of
the Twelfth Plan, when the economy is estimated to have grown by only 5 percent . The Twelfth Plan
therefore emphasizes that our first priority must be to bring the economy back to rapid growth while
ensuring that the growth is both wide-ranging and sustainable. The broad vision and aspirations
which the Twelfth Plan seeks to fulfill are reflected in the subtitle: ‘Faster, Sustainable and More
Inclusive Growth’. Inclusiveness is to be achieved through poverty reduction, promoting group equality
and regional balance, reducing inequality, empowering people etc whereas sustainability includes
ensuring environmental sustainability , development of human capital through improved health,
education, skill development, nutrition, information technology etc and development of institutional
capabilities , infrastructure like power telecommunication, roads, transport etc .

The policy challenge in the Twelfth Plan is to immediate challenge is to reverse the observed deceleration
in growth by reviving investment as quickly as possible. This calls for urgent action to tackle
implementation good infrastructure which are holding up large projects, combined with action to deal
with tax related issues which have created uncertainty in the investment climate.

Although planning should cover both the activities of the government and those of the private sector, a
great deal of the public debate on planning in India takes place around the size of the public sector plan.
The Twelfth Plan lays out an ambitious set of Government programmes, which will help to achieve the
objective of rapid and inclusive growth. In view of the scarcity of resources, it is essential to take bold
steps to improve the efficiency of public expenditure through plan programmes. Need for fiscal
correction, reduction of subsidies as per cent of GDP while still allowing for targeted subsidies that
advance the cause of inclusiveness etc .

Achieving sustained growth would require long term increase in investment and savings rate . Bringing
the economy back to 9 per cent growth by the end of the Twelfth Plan requires fixed investment rate to
rise to 35 per cent of GDP by the end of the Plan period. This will require action to revive private
investment, including private corporate investment, and also action to stimulate public investment,
especially in key areas of infrastructure especially, energy, transport, water supply and water resource
Management. Reversal of the combined deterioration in government and corporate savings has to be a
key element in the strategy.
The First Five Year Plan (1951-56):
This plan became operational only four years after Independence. The main thrust of the plan was on
agriculture because the country was facing shortage of food-grains at that time. Therefore, the emphasis
was on increasing capacity of existing industries rather than starting new ones. Cotton textile, sugar,
vanaspati, cement, paper, chemical and engineering industries showed some progress.

Some of the new industries that emerged during this plan were newsprint, power looms, medicines, paints
and varnishes and transport equipment. In spite of the top priority given to agriculture, irrigation and
power generation in the first five year plan, industrial production showed 40 per cent increase as
compared to 30 per cent increase recorded by grain production. As a matter of fact, the First Five Year
Plan laid down the basis for future progress of industries.

The Second Five Year Plan (1956-61):

This plan laid emphasis on the development of basic and heavy industries and defined the key-role which
the public sector was to play in the economic development of the country. A comprehensive Industrial
Policy Resolution was announced on 20th April 1956.

This resolution had industrial development as major thrust. Iron and steel, heavy engineering, lignite
projects and fertilizer industries formed the basis of industrial planning. In addition to the expansion of
pre-existing steel plants at Jamshedpur, Kulti-Bumpur and Bhadravati, three new state owned plants at
Durgapur, Rourkela and Bhilai were either initiated or completed.

The Chittaranjan Locomotive Workshop, The Hindustan Shipbuilding Yard (Vishakhapatnam), The
Sindri Fertilizer Factory and the Hindustan Machine Tools Limited (HMT) plant at Bangalore were
expanded. A heavy electrical equipment manufacturing plant was established at Bhopal. Two new
fertilizer plants at Nangal and Rourkela were set up.

The Third Five Year Plan (1961-66):

This plan laid stress on the expansion of basic industries like steel, chemicals, fuel, power and machine
building. The basic philosophy behind this plan was to lay foundation for a ‘self-generating’ economy.
The Hindustan Machine Tools Limited had only one factory in the Second Plan and this number rose to
five in the Third Plan.

Heavy Machine Tools plant at Ranchi was also completed. Machine building, locomotive and railway
coach making, shipbuilding, aircraft manufacturing, chemical drugs and fertilizers industries also made
significant achievement.

However, the achievement fell short of the target to a great extent due to the following reasons:
(i) Untimely monsoon rains, severe drought in 1965 and bad weather conditions.

(ii) India’s war with China in 1962 and with Pakistan in 1965.

(iii) Non-availability of foreign credit.

(iv) Inability of rigid administrative rules to cope with such abnormal situations.

The Annual Plans:

The Fourth Five Year Plan was deferred and Annual plans were adopted for a period of three years (1966-
69). Not much headway was made due to resource crunch. The index of industrial production increased
only by 1.7 per cent and 0.3 per cent in 1966-67 and 1967-68 respectively. However, things improved in
1968-69 and the industrial production rose by 7 per cent.

The Fourth Five-Year Plan (1969-74):

Indian Economy started recovering from recession at the beginning of the Fourth Five Year Plan. But the
growth rate showed wide yearly fluctuations from peak of 7.3 per cent in 1969-70 to zero growth in 1973-
74 as against the stipulated annual growth rate of 8-10 per cent.

Agro-based industries such as sugar, cotton, jute, vanaspati showed uneven growth due to shortage of raw
materials and difficult power situation. Metal-based industries and chemical industries also suffered
setbacks.

However, a significant progress was reported by some other industries like alloys and special steels,
aluminum, automobile tyres, petroleum refining, electronic goods, machine tools, tractors and heavy
electrical equipment. Public sector undertakings also showed good progress. Efforts were made to
accentuate the process of industrial dispersal through regional and local planning process.

The Fifth Five Year Plan (1974-79):

The main emphasis of this plan was on rapid growth of core sector industries and increase the production
of export oriented articles and articles of mass consumption. The average annual rate of growth was 8.21
per cent. The public sector had assumed much importance.

Steel plants at Salem, Vijaynagar and Vishakhapatnam were proposed to create additional capacity. Steel
Authority of India (SAIL) was constituted. Drug manufacturing, oil refining, chemical fertilizers and
heavy engineering industry made good progress.

The Sixth Five Year Plan (1980-85):

This plan marked a watershed in the development process which was initiated three decades ago with the
commencement of the first plan. Although considerable growth was achieved during the first five plans,
much thought could not be given to quality, cost competitiveness or needs of modernisation. Thus high
cost, low quality production structure had emerged.

The period 1950-80 marked the first phase of industrialization. The second phase started with the
commencement of the Sixth Five Year Plan. It was felt that large domestic and foreign market remained
to be exploited for industrial growth.

This was possible only if our industries were efficient, globally competitive, cost effective and
modernized. For this purpose liberalization was initiated. The average annual growth rate was 5.5 per cent
which fell short of the initial target of 8 per cent.

Targets of capacity creation had been achieved for industries like aluminum, zinc, lead, thermoplastics,
petro-chemicals, electrical equipment, automobiles and consumer durables. Production targets were
achieved in industries like petroleum, machine tools, automobiles, T.V. receivers, etc. Shortfall in
production was reported for coal, steel, cement, non-ferrous metals, drugs and pharmaceuticals, textiles,
jute manufacture, commercial vehicles, railway wagons, sugar, etc.
Seventh Five Year Plan (1985-1990):
This plan registered an annual growth rate of 8.5 per cent as against the target of 8.7 per cent. The plan
aimed at developing a ‘high tech’ and electronics industrial service base. Industrial dispersal, self
employment, improving the exploitation of the local resources, proper training were the main plans.

Annual Plans:
Eighth five year plan (1990-95) could not take off due to fast-changing political situation at the centre.
The new Government which assumed power at the Centre in June, 1991, decided that the Eighth Five-
year Plan would commence on 1 April 1992 and that 1990-91 and 1991-92 should be treated as separate
Annual Plans. The impact of liberalisation was felt on industries, along with other sectors of economy.

Eighth Five Year Plan (1992-97):

The major policy changes initiated in the industrial sector in 1991 included removal of entry barriers,
reduction of areas reserved exclusively for public sector, rationalisation of approach towards monopolistic
and restrictive practices, liberalization of foreign investment policy and import policy, removing regional
imbalances and encouraging the growth of employment intensive small and tiny sector.

The period immediately following the reforms was marked by low growth rates and even stagnations in
the major industrial sectors. However, the growth rate$ quickly recovered and the index of industrial
production increased by 6 per cent. The general annual growth rate in major sectors of industry was 12
per cent in 1995-96.

Ninth Five Year Plan (1997-2002):

Industrial growth improved marginally to 6.6 per cent in 1997-98 but fell to 4.1 per cent in 1998-99. This
decline was probably caused by poor performance in mining and manufacturing sectors. The overall
industrial output grew by 6.7 per cent in 1999-2000, which again fell to 4.9 per cent in 2000-01 mainly
due to fall in manufacturing sector.

The growth rate of consumer goods including durables and non-durables accelerated to 7.9 per cent
during 2000-01. The growth rate of basic goods, capital goods and intermediate goods declined
drastically and it was estimated at 3.8 per cent, 1.4 per cent and 4.5 per cent respectively during the year
2000-01.

Six core and infrastructure industries, viz., electricity, crude oil, refinery, coal, steel and cement, having a
weight-age of 26.7 per cent in the average Index of Industrial Production (IIP) grew by 5.3 and in 2000-
01 compared to 9.1 per cent in 1999-2000.

The main factors responsible for slowdown of industrial growth during the year 2000-01 were lack of
domestic demand for immediate goods, low inventory demand for capital goods, high oil prices, existence
of excess capacity in some sectors, business cycle, inherent adjustment lacks in industrial restructuring
and calamity like Gujarat earthquake, and high interest rate with an adverse impact on private investment,
and slow down in the world economy.

Tenth Five Year Plan (2002-07):

The Tenth Five Year Plan is still continuing. This plan targets a Gross Domestic Product (GDP) growth
rate of eight per cent and the growth target for industrial sector has been set at ten per cent. Presently,
Indian Industry, especially the manufacturing sector, is recording a consistently high growth rate which
shows robustness of Indian Industry, particularly automobile/auto components and pharmaceutical sub-
sectors.
For sustaining pace of growth and investment, several initiatives have been launched for modernising,
technology upgradation, reducing transaction costs, increased export thrust, so as to enhance its global
competitiveness and achieve balanced regional development.

Further, in order to give export thrust, Department of Commerce has launched major initiatives such as
Assistances to States for Infrastructure Development for Exports (ASIDE). Market Access Initiatives
(MAI), Special Economic Zones (SEZs) Policy, Modernisation of Director General of Foreign Trade
(DGFT), etc.

For a balanced industrial development, industrial policy packages have been announced for special
category states of Uttaranchal, Himachal Pradesh, Jammu and Kashmir and North East states. Social
scarcity issues have been addressed through insurance cover for workers in handloom, agro and rural
industrial and processed marine product sector.

Textile industry is a major employment intensive sector for which special schemes/packages were
introduced. Technology Upgrading Funds Scheme (TUFS) is one such scheme which is expected to
improve the access for decentralized powerloom sector. Textile Canter Infrastructure Development
Scheme (TCIDS) will take care of infrastructure development aspect of textile industry.

Manufacturing sector has a share of 79.36 per cent in the Index of Industrial Production (IIP). During the
year 2002-03, the IIP grew at the rate of 5.8 per cent as compared to 2.1 per cent in 2001- 02.
Manufacturing sector registered a growth rate of 6.0 per cent as against 2.8 per cent during 2001- 02. As
per the use-based classification, production of basic foods, capital goods, intermediate goods and
consumer goods exhibited higher increase during 2002-03 as compared to 2001-02.

 Mixed Economy: Public Sector Undertakings and Private Enterprises

A mixed economy is an economy that includes a variety of private and government control; reflecting
characteristics of both capitalism and socialism. The mixed economy always involve a degree of private
economic freedom mixed with a degree of government regulation of markets .As the name suggest this
type of economy consist of Public Sector Undertakings and Private Enterprises, means that economy or
country has private and public sector both . they all run in the umbrella of the economy. There are some
freedom but some restrictions also acc to the rules and regulation of the country . Mixed economies as an
economic ideal are supported by people of various political persuasions and laissez-faire capitalism is
there.

A mixed economy has many of the characteristics of market, command and traditional economies. The
United States is a mixed economy because its Constitution protects the requirements of a market
economy, including ownership of private property, limitations on government interference, and
promoting innovation. However, the Constitution also encourages the government to promote the general
welfare. This allows the ability to effect a command economy, where needed. many American traditions
still guide economic policy.
1. Mixed Economy

A mixed economy seeks to have all the advantages of a market, command and traditional economy with
little of the disadvantages. Therefore, most mixed economies have three of the six characteristics of the
market economy: private property, pricing and individual self-interest.

Mixed economies also have a command economy in certain areas. Most allow government to have a
command role in areas that safeguard the people and the market itself. An increased governmental role
depends on the priorities of the people. Many mixed economies also allow centralized planning and even
government ownership of key industries, such as aerospace, energy production and even banking. Some
mixed economies encourage the government to centrally manage health care, welfare, and retirement
programs.

Most of the world's major economies are now mixed economies. It would be difficult to avoid, thanks to
globalization. A country's people are best served through international trade -- oil from Saudi Arabia,
consumer products from China, and food from the U.S. As soon as businesses within a country are
allowed or even encouraged to export, the government must give up some control to free market forces.

Second, the global economy is primarily free-market based. There is very little government control,
although some regulations and agreements have been put into place. However, there is no world
government today that has the power to override a country's sovereignty and create a global command
economy.

Advantages of a Mixed Economy

A mixed economy can enjoy the advantages of a market economy.

1. It can efficiently allocate goods and services where they are needed, by allowing prices to measure
supply and demand.

2. It also rewards the most efficient producers with the highest profit, ensuring that customers are getting
the best value.

3. It encourages innovation that meets customer needs more creatively, cheaply or efficiently.

4. It automatically allocates capital to the most innovative and efficient producers. They, in turn, can
invest the capital in more businesses like them.

A mixed economy also minimizes the disadvantages of a market economy. A larger governmental role
allows fast mobilization in priority areas, such as defense, technology or aerospace. Since a pure market
economy rewards those that are most competitive or innovative, leaving others at risk, the expanded
governmental role can make sure these less competitive members are cared for and valued.
Disadvantages of a Mixed Economy

A mixed economy can also take on all the disadvantages of the other types of economies, depending on
which characteristics are emphasized. If it has too much free market, it can reward the competitive
members of society and leave others without any government support. Central planning might do
extremely well in mobilizing forces for defense, creating a government-subsidized monopoly or oligarchy
system. This could also put the country into debt, slowing down economic growth in the long run.
Businesses that are already successful can lobby the government for more subsidies and tax breaks. The
government's role of protecting the operation of the free markets might mean not enough regulation, and
ultimately taxpayer-funded bailouts of businesses that took on too much risk.

Public Sector Undertakings

Public enterprise, a business organization wholly or partly owned by the state and controlled through a
public authority. Some public enterprises are placed under public ownership because, for social reasons,
as country aim is the welfare of the people. The Utilities (gas, electricity, etc.), broadcasting,
telecommunications, and certain forms of transport are examples of this kind of public enterprise.

Although the provision of these services by public enterprises is a common practice in Europe in the
United States private companies are generally allowed to provide such services subject to strict legal
regulations. In some countries industries such as railways, coal mining, steel, banking, and insurance have
been under public undertaking. In communist countries (Welfare state) most forms of production,
commerce, and finance belong to the state; in many newly independent and less-developed countries,
there is a very large public-enterprise sector.

Role of public sector undertakings in our national economy

Public sector undertakings are of recent origin but are deep rooted and are today playing a vital role in our
economy. With the increase of work and tendency for nationalization, need and requirement of public
sector enterprises has considerably increased. It is felt that through the public sector undertakings,
effective government control can be run and managed for the welfare of the community as a whole.

There cannot be two opinions about the need for establishment of public sector enterprises in the
developing countries like India. The private enterprises are always in search of profit and this motive
leads them to fields where the returns are high and certain. In the developing countries, this tendency has
many drawbacks. First more capital is injected into the same type of business, competition increases and
with it costs go up. With increasing costs, prices also increase and markets are hit. Secondly development
in the underdeveloped nations is usually lop-sided and is restricted to certain fields of production. As a
result, people are seldom self-sufficient in respect of their needs and remain virtually slaves to foreign
trades.

The government can float an undertaking on the principle of minimum profits or on a no profit or loss
basis. These activities fall beyond the private business enterprises and hence government undertakings in
industry are desirable or rather necessary in a developing country. The economy of such a nation needs to
be duly controlled and unless and until capital acquires free movement and various channels to cater to
different needs and improve the standards of living, a free economy in a country would not work well.

There are many loopholes in the public enterprises. Since public undertakings have a tendency to be
manned by civil servants, particularly drawn from government departments, a sense of ease and
irresponsibility arising out of inefficiency and lack of technical knowledge and experience becomes
associated with public undertakings.

The administration efficiency falls to low levels. A private enterprise has to work efficiently in order to
stand against the competition as well as to create and maintain goodwill. Every employee has to show his
work and prove his worth daily to keep the job. It is not so in governmental organizations. There is no
personal interest for a manager to keep a watch over the workers and things being done in a leisurely
manner.

It is only the government which has the power to raise funds, the like of which can never be raised by a
private businessman without upsetting the basic economic democracy or without causing undue
concentration of wealth. The existence of public sector is also important for coordination in various
economic activities and for creating a spirit of patriotism and loyalty among citizens, workers and
managers with a view to raising general standards. In a mixed economy like India, public enterprises
should have greater plans.

For the more efficient working of the public enterprises, the attitude of the government towards public
enterprises is very important. Much more important is the role of civil servants working in public sector
undertakings and controlling these undertakings in the government departments.

Division of the Economy into Public and Private Sectors

At the time of Independence, activities of the public or were restricted to a limited field like irrigation,
power, railways, ports, communications and some departmental undertakings. After Independence, the
area of activities of the public sector expanded at a very rapid speed. To assure the private sector that its
activities will not unduly curbed, two industrial policy resolutions were issued in 1948 and 1956
respectively.

These policy resolutions divided the industries into different categories. Some fields were left, entirely
for. the public sector, some fields were divided between the public and the private sector and some others
were left totally to the private sector. A glance at the division of fields of industrial activity into the public
and private sectors clearly brings out, that while heavy and basic industries were kept for the public
sector, the entire field of consumer goods industries (having high and early returns) was left to the private
sector.

Outside the industrial field, while most of the banks, financial corporations, railways, air transport,oil,
mining, gas industries, iron and steel, heavy electrical plant etc., are in the public sector, the entire
agricultural sector (which is the largest sector of the economy) has been left for the private sector.

The question was rises why were the heavy and basic industries like iron and steel, heavy engineering,
heavy electrical plant, etc., selected for development in the public sector while quick-yielding consumer
goods industries were left for the private sector?
Industrial programmes of government that emerged after 1955 were built around two assumptions :

(i)private investment in relatively simple goods would be promoted by shutting out imports as well as
through excess capacity at home, with a consequent boost to profits as private investment was in the
nature of heavy investment and could be promoted by adopting a policy of protection against imported
substitutes. As the raw materials has to be import .

(ii) public investment, being autonomous of profits, would take place in basic areas which had long hard
periods, for long run , low or no profits, a large foreign exchange component, complex technology and
equally complex problems of co-ordination. Investments in low profit yielding and heavy investment
requiring industries were in the nature of 'autonomous investment' and could, accordingly, be undertaken
only by the State .As the no profit no loss can be bear by government only any private firm , industry will
be crushed in this circumstances

Role of Public Sector in the Indian Economy

Public sector in India has been criticized by a number of supporters of the private sector who have chosen
to shut their eyes towards the achievements of the public sector. Following description should be
sufficient to convince one that public sector has played a definite positive role in the economy.

1. Public sector and capital formation.

The role of public sector in collecting savings and investing them during the planning era has been very
important. During the first and second plans of the total investment, 54 % was in the public sector and the
remaining in the private sector. The share of public sector and the remaining in the private sector. The
share of public sector rose to 60 percent in the third plan but fell thereafter. However, even then it was as
high as 45.7 per cent in the seventh plan. With increasing trends of liberalization in 1990s, the share of
public sector in total investment fell drastically to 34.3 per cent in the eighth plan (i.e., only one-third)
and further to 29.5 per cent in the Ninth Plan. This reflects the increasing importance that is now being
accorded to the private sector.

The nationalized banks, State Bank of India, Industrial Development Bank of India, Industrial Finance
Corporation of India, State Financial Corporations, LIC, UTI etc., have played an important role in
collecting savings and recruitment of resources. However, savings in the public sector itself are not much.
In fact, there has been a precipitous fall in the share of public sector in gross domestic savings. During the
period of Sixth Plan as a whole, public saving was 23.7 per cent of total domestic saving and this fell to
14.8 per cent during the period of the Seventh Plan and just 9.2 per cent in the Eighth Plan (at 1999-2000
prices). During the first year of the Ninth Plan, 1997-98, share of public sector in total savings was just
7.5 per cent. Savings in the public sector were negative in all other years of the Ninth Plan. The first year
of the Tenth Plan, i.e., 2002-03 also recorded negative savings in the public sector. However, things have
distinctly improved since. In 2003-04, savings in the public sector were Rs. 29,521 crore which rose
significantly to Rs. 1,37,926 crore in 2006-07 and Rs. 2,12,543 crore in 2007-08. The share of public
sector in total savings was 3.6 per cent in 2003-04 which rose significantly to 9.3 per cent in 2006-07 and
further to 11.9 per cent in 2007-08. The share of public sector in gross domestic capital formation
(GDCF) which was 44.6 per cent during Sixth Plan fell to 31.7 per cent during Eighth Plan. It is estimated
to have declined further to 27.3 per cent in the Ninth Plan and 22.2 per cent during the Tenth Plan.

2. Development of infrastructure.
The primary condition of economic development in any underdeveloped country is that the infrastructure
should develop at a rapid pace. Without a sufficient expansion of irrigation facilities and power and
energy, one cannot even think of agricultural development. In the same way without an adequate
development of transportation and communication facilities, fuel and energy, and basic and heavy
industries, the process of industrialization cannot be sustained. India had inherited an undeveloped basic
infrastructure from the colonial period.

After Independence, the private sector neither showed any inclination to develop it nor did it have any
resources to make this possible. It was comparatively weak both financially and technically, and was
incapable of establishing a heavy industry immediately. These factors made the State's participation in
industrialization essential since only the 'government could enforce‘ a large-scale mobilization of capital,
the co-ordination of industrial construction, and training of technicians. The government has not only
improved the road, rail, air and sea transport system. Thus the public sector has enabled the economy to
develop a strong infrastructure for the future economic growth. The private sector also has benefited
immensely from these investments undertaken by the public sector.

3. Strong industrial base.

The share of the industrial sector (comprising manufacturing, construction, electricity, gas and water
supply) in Gross Domestic Product at factor cost has increased slowly but steadily during the period of
planning. The share of the industrial sector in GDP at factor cost rose from 15.1 per cent in 1950-51 to
24.0 per cent in 1980-81 and further to 25.8 per cent in 2008-09. This shows the increasing importance of
the industrial sector in the Indian economy. Not only this, the industrial base of the Indian economy is
now much stronger than what it was in 1950-51. There has been significant growth in the defense
industries and industries of strategic importance. The government has strengthened the industrial base
considerably by placing due emphasis on the setting up of industries in the following fields — iron and
steel, heavy engineering, coal, heavy electrical machinery, petroleum and natural gas, chemicals and
drugs, fertilizers, etc. Because of their low profitability potential in the short run, these industries do not
find favour with the private sector. However, unless these industries are set up, the consumer goods
industries cannot progress at a sufficiently rapid pace. Therefore, the production of consumer goods
industries in the private sector is also likely to suffer if the State does not invest in heavy and basic
industries.

4. Removal of regional disparities:-

The government in India has sought to use its power of setting up of industries as a means of removing
regional disparities in industrial development; In the pre-Independence period, lost of the industrial
progress of the country was limited in and around the port towns of Mumbai, Kolkata and Chennai. Other
parts of the country lagged far behind. After the, initiation of the planning process in the country in 1951,
the government paid particular attention to the problem and set up industries in a number of areas
neglected by the private sector. Thus, a major proportion of public sector investment was directed towards
backward States. All the four major steel plants in the public sector—Bhilai Steel plant, Rourkela Steel
Plant, Durgapur Steel Plant and Bokaro steel Plant were set up in the backward States. It was believed
that the setting up of large-scale public sector projects. in the backward areas would unleash a propulsive
mechanism in them and cause economic development of tie hinterland. These considerations also guided
the location if machinery and machine tools factories, aircraft, transport equipment, fertiliser plants etc.

5. Check over concentration of economic power :-

In a capitalist economy where the public sector is practically non-existent or is of a very small size,
economic power gets increasingly concentrated in a few hands and inequalities of income and wealth
increase. During the four and a half decades of planning in this country, it has been said time and again
that the expansion of public sector will help in putting a brake on the tendency towards concentration of
wealth and economic power in the private sector. Public sector can help in reducing inequalities in the
economy in a number of ways. For instance (i) profits of the public sector can be used directly by the
government on the welfare programmers of the poorer sections of community; (ii) public sector can adopt
a discriminatory policy by supplying materials to small industrialists at low prices and big industrialists at
high prices; (ii) public sector can give better wages to the lower staff as compared to the private sector
and can also implement programmers of labor welfare, construction of colonies and townships for
laborers, slum clearance, etc:; and (iv) public sector can orient production machinery towards the
production of mass consumption goods. Performance of the Public Sector

Private Sector in the Indian Economy

Government of India opted for a mixed economy in which both public and private sectors were allowed to
operate. For example,
the 1948 Industrial Policy Resolution divided industries into four categories:

 three industries in which State was given a monopoly;

 Six industries where State was to have the exclusive right to set up new units but
existing private sector units were allowed to operate;
 eighteen industries where regulation and direction was necessary; and
 all other industries (not included in the above three categories) where private
sector was allowed the freedom to operate. However, the private sector had to
operate within the provisions of the Industries (Development and Regulation)
Act. 1951 and other relevant legislations. In this context, the Industrial Policy
Resolution 1956 stated, ―Industrial undertakings in the private sector have
necessarily to fit into the framework of the social and economic policy of the
State and will be subject to control and regulation in terms of the Industries
(Development and Regulation) Act and other relevant legislation.

The Government of India, however, recognizes that it would, in general, be desirable to allow such
undertakings to develop with as much freedom as possible, consistent with the targets and objectives of
the national plan. When there exist in the same industry both privately and publicly owned units, it would
continue to be the policy of the State to give fair and nondiscriminatory treatment to both of them. The
Resolution also emphasized the mutual dependence of public and private sectors. While State could start
any industry not included in Schedule A and Schedule B, the private sector could be allowed to produce
an item falling within schedule A. In fact, the 1956 Resolution emphasized not only the mutual co-
existence of private and public sectors but also provided for their mutual co-operation and help.
The private sector took full advantage of the loopholes and exceptions in the legislation and the elbow
room‘ allowed by the 1956 Resolution to set up industries even in areas exclusively reserved for the State
sector. In fact, with the passage of time, more and more concessions were granted to the private sector to
expand its business activities. Less intervention was done for private sector so that private sector should
work efficiently. However, the 1991 policy had also opened the doors to multinationals and increased
competition from abroad as tariffs were reduced. , many domestic producers suddenly discovered their
market shares shrinking drastically as their goods failed to meet foreign competition both on grounds of
quality and price. The corporate world also saw significant changes with many old businessmen being
knocked out from their top positions and a number of new industries were making their mark.

Role of the Private Sector in an economy

1.The dominant sector.

Despite the rapid progress of the public sector in the period of planning, private sector is the dominant
sector in the Indian economy as would be clear from a glance. As the profit with low investment was seen
after Globalization and the public sector industries were far behind

2. Importance for development.

In western countries, private entrepreneurs have played an important role in economic development so
much and moving force behind the industrialisation process is high. The private entrepreneur is guided by
the profit motive. He is responsible for the introduction of new commodities, new techniques of
production, assembling the necessary plant and equipment, labour force and management and organising
them into a going concern. The private entrepreneur acts as an innovator who revolutionises the entire
method of production. Such activities help the process of industrialisation and economic development. It
was because of this reason that the industrial policy resolutions of 1948 and 1956 of the government gave
immense opportunities to the private sector to expand its activities. In the new liberalised scenario that
has emerged after the announcement of the new industrial policy in 1991, private sector has been assigned
the dominant role in industrial development.

3. Extensive modern industrial Sector.

A number of modern industries have been set up in the private sector. Important consumer goods
industries were set up in the pre-Independence period itself. Particular mention in this regard can be made
of the cotton textile industry, sugar industry, paper industry and edible oil industry. These industries were
set up in response to the opportunities offered by the market forces. They were highly suitable for private
sector since they ensured early returns and required less capital for establishment. Though the engineering
industries did not make an appearance in the pre-Independence period yet a start was made by Tata in the
field of iron and steel industry at Jamshedpur. After Independence, a number of consumer goods
industries were set up in the private sector. Today India is practically self reliant in its requirements for
consumer goods. According to the 1956 resolution, "industries producing intermediate goods and
machines can be set up in the private sector." As a consequence, chemical industries like paints,
varnishes, plastics etc. and industries manufacturing machine tools, machinery and plants, ferrous and
non-ferrous metals, rubber, paper, etc. have been set up in the private sector.

4. Potentialities due to personal incentive in the small sector.

Small and cottage industries have an important role to play in the industrial field. These industries employ
labour intensive techniques and are, accordingly, important from the point of view of providing
employment opportunities. In India, all small and cottage industries are in the private sector. Personal
initiative plays a decisive role in small-scale industries. With the help of a small capital, the small
entrepreneur uses his resources efficiently to earn maximum profit. Such management is not available to
public sector enterprises. The government has reserved a large number of items for production in the
small-scale sector. This sector is granted loans at concessional rates of interest and marketing outlets are
also provided.

Problems of the Private Sector

1. Profit generation is the main motive. Industrialists in the private sector operate with the sole motive of
maximizing profits. Consequently, they are interested in investing only in those industrial sectors where
quick profit generation is possible. Therefore, they tend to invest in consumer goods industries and ignore
investments that are crucial for building up a proper industrial infrastructure. Since lack of infrastructure
and capital goods industries plagued the Indian economy after Independence, while private sector was
reluctant to invest in these areas, the public sector had to step in. Thus, for a considerable period of
planning, while the public sector bore the responsibility of developing the capital goods and basic
industries and industrial infrastructure (electricity and power, transportation, communications etc.), the
private sector concentrated on consumer goods industries; where investments were low and profits high.
Thus, a-number of economists allege that in the initial phase of Table 3 Top ten private sector companies
– ranked on the basis of market capitalization

 Globalization and opening up of Indian Economy

Liberalization, Privatization and Globalization (LPG model)

The term globalization means International Integration. Opening up of world trade, development of
advanced means of communication, internationalization of financial markets, growing importance of
MNC's, population migrations and more generally increased mobility of persons, goods, capital, data and
ideas. It is a process through which the diverse world is unified into a single society. It is to open the gate
for the outer world to do investment, to trade with us, to exchange the technologies.

the process of globalization not only includes opening up of world trade, development of advanced means
of communication, internationalization of financial markets, growing importance of MNCs, population
migrations and more generally increased mobility of persons, goods, capital, data and ideas but also
infections, diseases and pollution. The term globalization refers to the integration of economies of the
world through trade and financial flows, as also through mutual exchange of technology and knowledge.It
also contains free inter-country movement of labor ( human resources ).

In context to India, this implies opening up the economy to foreign direct investment by providing
facilities to foreign companies to invest in different fields of economic activity in India, removing hurdles
and obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign
collaborations and also encouraging them to set up joint ventures abroad; carrying out massive import
liberalization programs by switching over from quantitative restrictions to tariffs and import duties,
therefore globalization has been identified with the policy reforms of 1991 in India
Indian economy had experienced major policy changes in early 1990s.

The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG
model) aimed at making the Indian economy as fastest growing economy and globally competitive. The
series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at
making the economy more efficient.
Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted to almost
$1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and had
become unsustainable; foreign investors and NRIs had lost confidence in Indian Economy. Capital was
flying out of the country and we were close to defaulting on loans. Along with these bottlenecks at home,
many unforeseeable changes swept the economies of nations in Western and Eastern Europe, South East
Asia, Latin America and elsewhere, around the same time. These were the economic compulsions at
home and abroad that called for a complete overhauling of our economic policies and programs. Major
measures initiated as a part of the liberalization and globalization strategy in the early nineties included
the following:

Globalization means opening gate for the world to trade with us.

Liberalization means to liberal our Fiscal policies so that it became easy to trade . Liberalization refers to
the relief of government regulations for foreign investors.

Privatization refers to the participation of private entities in businesses and services and transfer of
ownership from the public sector (or government) to the private sector as well. Under the privatization
scheme, most of the public sector undertakings have been/ are being sold to private sector

Globalisation is the new word that has come to dominate the world since the nineties of the last century
with the end of the cold war . The frontiers of the state with increased confidence on the market economy
and renewed faith in the private capital and resources, a process of structural adjustment to the influences
of the World Bank and other International organisations have started in many of the developing countries.
Also Globalisation has brought in new opportunities to developing countries. Greater access to developed
country markets and technology transfer hold out promise improved productivity and higher living
standard.

But globalisation has also thrown up new challenges like growing inequality across and within nations,
instability in financial market. Another negative aspect of globalisation is that a great majority of
developing countries remain removed from the process. Till the nineties the process of globalisation of
the Indian economy was constrained by the barriers to trade and investment liberalisation of trade,
investment and financial flows initiated in the nineties has progressively lowered the barriers to
competition and hastened the pace of globalisation

the process of globalisation not only includes opening up of world trade, development of advanced means
of communication, internationalisation of financial markets, growing importance of MNC's, population
migrations and more generally increased mobility of persons, goods, capital, data and ideas but also
infections, diseases and pollution

Impact on India:

India opened up the economy in the early nineties following a major crisis that led by a foreign exchange
critical situation that dragged the economy close to defaulting on loans. The response was of Domestic
and external sector policy measures partly prompted by the immediate needs and partly by the demand of
the multilateral organisations. The new policy system radically pushed forward in favour of a more open
and market oriented economy.

Major measures initiated as a part of the liberalisation and globalisation strategy in the early nineties
included crushing of the industrial licensing regime, reduction in the number of areas reserved for the
public sector, amendment of the monopolies and the restrictive trade practices act, start of the
privatisation programme, reduction in tariff rates and change over to market determined exchange rates.

Over the years there has been a steady liberalisation of the current account transactions, more and more
sectors opened up for foreign direct investments and portfolio investments facilitating entry of foreign
investors in telecom, roads, ports, airports, insurance and other major sectors.

The Indian tax rates reduced sharply over the decade from a weighted average of 72.5% in 1991-92 to
24.6 in 1996-97.Though tax rates went up slowly in the late nineties it touched 35.1% in 2001-02. India is
committed to reduced tax rates. Peak tax rates are to be reduced to be reduced to the minimum with a
peak rate of 20%.

GDP Growth rate:

The Indian economy is passing through a difficult phase caused by several unfavourable domestic and
external developments; Domestic output and Demand conditions were unfavourably affected by poor
performance in agriculture in the past two years. The global economy experienced an overall recorded an
output growth of 2.4% during the past year growth in real GDP in 2001-02 was 5.4% as per the Economic
Survey in 2000-01. The performance in the first quarter of the financial year is5.8% and second quarter is
6.1%.

Export and Import:

India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million
respectively. Many Indian companies have started becoming respectable players in the International
scene. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In
2000-01 Agricultural products valued at more than US $ 6million were exported from the country 23% of
which was contributed by the marine products alone. Marine products in recent years have emerged as the
single largest contributor to the total agricultural export from the country accounting for over one fifth of
the total agricultural exports. Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and coffee
are the other prominent products each of which accounts fro nearly 5 to 10% of the countries total
agricultural exports.

Amartya Sen and many other have pointed out that India, as a geographical, politico-cultural entity has
been interacting with the outside world throughout history and still continues to do so. It has to adapt,
understand and contribute. This goes without saying even as we move into what is called a globalised
world which is distinguished from previous eras from by faster travel and communication, greater trade
linkages, denting of political and economic sovereignty and greater acceptance of democracy as a way of
life.

The implications of globalisation for a national economy are many. Globalisation has intensified
interdependence and competition between economies in the world market. This is reflected in
Interdependence to trading in goods and services and in movement of capital. As a result domestic
economic developments are not determined by domestic policies and market conditions.They are
influenced by both domestic and international policies and economic conditions. It is thus clear that a
globalising economy, while formulating and evaluating its domestic policy cannot afford to ignore the
possible actions and reactions of policies and developments in the rest of the world. This constrained the
policy option available to the government which implies loss of policy autonomy to some extent, in
decision-making at the national level.

 FDI

An investment made by a company or entity based in one country, into a company or entity based in
another country. Open economies with skilled workforces and good growth prospects tend to attract
larger amounts of foreign direct investment than closed, highly regulated economies.

The investing company may make its overseas investment in a number of ways - either by setting up a
subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or
through a merger or joint venture.

Foreign direct investment ( FDI ) is direct investment by a company in production located in another
country either by buying a company in the country or by expanding operations of an existing business in
the country.

Why FDI ? To take advantage of cheaper wages in the country. Special investment privileges such as tax
exemptions offered by the country . To gain tariff-free access to the markets of the country or the region.

An example of foreign direct investment would be an American company taking a majority stake in a
company in China. Another example would be a Canadian company setting up a joint venture to develop
a mineral deposit in India.

Foreign direct investment (FDI) is an investment in a business by an investor from another country
for which the foreign investor has control over the company purchased. The Organization of
Economic Cooperation and Development (OECD) defines control as owning 10% or more of the
business. Businesses that make foreign direct investments are often called multinational corporations
(MNCs) or multinational enterprises (MNEs). A MNE may make a direct investment by creating a
new foreign enterprise, which is called a Greenfield investment, or by the acquisition of a foreign
firm, either called an acquisition or Brownfield investment.

Advantages and Disadvantages:

Advantages
 Access to markets. FDI can be an effective way for you to enter into a foreign market. Some
countries may extremely limit foreign company access to their domestic markets. Acquiring or
starting a business in the market is a means for you to gain access.
 Access to resources. FDI is also an effective way for you to acquire important natural resources,
such as precious metals and fossil fuels. Oil companies, for example, often make tremendous
FDIs to develop oil fields.
  Reduces cost of production. FDI is a means for you to reduce your cost of production if the
labor market is cheaper and the regulations are less restrictive in the target foreign market. For
example, it's a well-known fact that the shoe and clothing industries have been able to drastically
reduce their costs of production by moving operations to developing countries.
 Source of external capital and increased revenue. FDI can be a tremendous source of external
capital for a developing country, which can lead to economic development.
For example, if a large factory is constructed in a small developing country, the country will typically
have to utilize at least some local labor, equipment and materials to construct it. This will result in new
jobs and foreign money being pumped into the economy. Once the factory is constructed, the factory
will have to hire local employees and will probably utilize a least some local materials and services.
This will create further jobs and maybe even some new businesses. These new jobs mean that locals
have more money to spend, thereby creating even more jobs.

Additionally, tax revenue is generated from the products and activities of the factory, taxes imposed on
factory employee income and purchases, and taxes on the income and purchases now possible because
of the added economic activity created by the factory. Developing governments can use this capital
infusion and revenue from economic growth to create and improve its physical and economic
infrastructure such as building roads, communication systems, educational institutions and subsidizing
the creation of new domestic industries.

 Development of new industries. Sometimes a local firm can develop a strategic alliance with a
foreign investor to help develop a new industry in the developing country. The developing
country gets to establish a new industry and market, and the MNE gets access to a new market
through its partnership with the local firm.
 Learning. This is more of an indirect advantage. FDI exposes national and local governments,
local businesses and citizens to new business practices, management techniques, economic
concepts, and technology that will help them develop local businesses and industries.

Advantages of foreign direct investment

 It can stimulate the economic development of the country in which the investment is made,
creating both benefits for local industry and a more conducive environment for the investor.
 It will usually create jobs and increase employment in the target country.
 It will enable resource transfer, and other exchanges of knowledge whereby different countries
are given access to new skills and technologies.
 The equipment and facilities provided by the investor can increase the productivity of the
workforce in the target country.

 causes a flow of money into the economy which stimulates economic activity 
 employment will increase 
 long run aggregate supply will shift outwards 
 aggregate demand will also shift outwards as investment is a component of aggregate demand 
 it may give domestic producers an incentive to become more efficient 
  the government of the country experiencing increasing levels of FDI will have a greater voice at
international summits as their country will have more stakeholders in it 

Disadvantages

Unstable economic conditions. Much of FDI takes place in the developing world, which is just
developing its economic systems. The market conditions in the developing world can be quite unstable
and unpredictable.

Unstable political and legal system. A bigger problem may be unstable or underdeveloped political and
legal systems. A company may have to deal with a corrupt or unstable political system. Additionally, the
legal system may be underdeveloped.

 Foreign direct investment can sometimes hinder domestic investment, as it focuses resources
elsewhere.
 Occasionally as a result of foreign direct investment exchange rates will be affected, to the
advantage of one country and the detriment of the other.
 Foreign direct investment may be capital-intensive from the investor’s point of view, and
therefore sometimes high-risk or economically non-viable.
 The rules governing foreign direct investment and exchange rates may negatively affect the
investing country.
 Investment in certain areas is banned in foreign markets, meaning that an inviting opportunity
may be impossible to pursue.

 inflation may increase slightly 

 domestic firms may suffer if they are relatively uncompetitive
 if there is a lot of FDI into one industry e.g. the automotive industry then a country can
become too dependent on it and it may turn into a risk that is why countries like the
Czech Republic are "seeking to attract high value-added services such as research and
development (e.g.) biotechnology)

Two Types of FDI:

Two Types of FDI
1. Inward foreign direct investment. ( investment which comes in the country )
2. Outward foreign direct investment. Direct investment excludes …Investment through
purchase of shares. FDI is one example of… International factor movements.

Types of FDI ( In Other Sense ):

Types of FDI ( In Other Sense ) Horizontal FDI arises when a firm duplicates its home country-based
activities at the same value chain stage in a host country through FDI. Platform FDI Vertical FDI takes
place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms
perform value-adding activities stage by stage in a vertical fashion in a host country. Whereas Horizontal
FDI decrease international trade as the product of them is usually aimed at host country, the two other
types generally act as a stimulus for it.
REGULATED BY :
Regulated by F I P B (foreign investment promotion board) of the dept of commerce under ministry of
finance.

At least 10% of shares of Co; needed to qualify as FDI Mauritius has been the largest direct investor in
India.(US$20 billion) The United States is the second largest investor in India.(US$6 billion) U.S is the
worlds largest recipient of FDI . • Mumbai and New Delhi are two major cities where FDI inflows is
heavily concentrated FDI inflows for January-December 2010 stood at $21 billion $ 27.5 billion during
January-December 2011 period Retailing is the single largest component of the services sector in terms of
contribution to GDP.

Why do we need it::

Why do we need it: We are the second highest producer of fruits and vegetables in the world but still we
are not able to utilize is properly because of inadequate infrastructure facilities. It will reduce pre-harvest
wastage/losses and thus help control food inflation It will create 1.5 million more jobs in 5 years. Apart
from the huge number of indirect employment. It will increase competition which is always beneficial for
the customer. It will remove the middleman from the equation. It will reduce costs which in turn will
reduce prices.

FDI in INDIA:
FDI in INDIA Foreign direct investment (FDI) in India has played an important role in the development
of the Indian economy. India is the second most important FDI destination (after China) for transnational
corporations during 2010–2012. Sectors which attracted higher inflows were services,
telecommunication, construction activities and computer software and hardware. Mauritius, Singapore,
the US and the UK were among the leading sources of FDI. Starting from a baseline of less than $I
BILLION in 1990, FDI in India in 2010 was $44.8 BILLION and $50.8 BILLION FDI approved in India
is upto 51% from 2012. On 14 th September 2012, GOI allowed FDI; in aviation upto 49%, in broadcast
sector upto 74%, in multi-brand retail upto 51% and in single-brand retail upto 100%

Sector -Wise FDI Inflow from April, 2000 to November, 2013

S. No Sectors Amount of FDI %age with total

Inflows (In US$ FDI Inflows
million)

1 Services Sector 38,713.32 18.55

2 Construction 22,969.45 11.00
Development
3 Telecommunicatio 12,888.72 6.17
ns
4 Computer 12,220.28 5.85
Software &
 Hardwar
5 Drugs 11,570.50 5.54
&Pharmaceuticals
6 Chemicals(OTHE 9,362.40 4.49
R THAN
FERTILIZERS)
7 Automobile 9,133.26 4.38
Industry
8 Power 8,357.23 4.00
9 Metallurgical 7,780.61 3.73
Industries
10 Hotel & Tourism 6,825.56 3.27
11 Petroleum& 5,483.63 2.63
Natural Gas
12 Food Processing 5,230.08 2.51
Industries
13 Trading 4,236.54 2.03
14 Information & 3,639.93 1.74
Broadcasting
15 Electrical 3,276.62 1.57
Equipments

FDI in CHINA:
FDI in CHINA FDI in China, also known as RFDI ( Renminbi foreign direct investment) in last decade
reaching $85 BILLION in 2010. China is second largest recipient of FDI globally. FDI into China fell by
over one-third in 2009 due the Global Financial Crisis but rebounded in 2010.

FDI in USA:
FDI in USA is the world’s largest recipient of FDI. FDI totaled $194 BILLION in 2010. Countries with
fewer capital controls and greater trade with the USA also invest more in US equity and bond markets

New Economics Initiative

A new dawn for startups
 PM Narendra Modi launched the ‘Stand Up India’ scheme under which banks will offer loans in
the range of Rs 10 lakhs to Rs 1 crore to Dalits and women. Under this scheme, 1.25 lakh banks will
provide loan to 1.25 lakh young people from marginalised communities.
 The government will shortly unveil a blueprint for startups to ease the process of setting up new
venture.

 The MSME ministry also said that 292 PSUs in India have been mandated to procure 20 per cent
of their requirements from MSME sector.
 The government has permitted 100 percent FDI in the marketplace format of e-commerce
retailing. However, as per the guidelines issued by the Department of Industrial Policy and Promotion
(DIPP), the same has not been given to inventory-based model of e-commerce.
 Betterment of environment and infrastructure
 Varanasi will soon get solar-powered 11 E-boats and 1,000 E-rickshawsas a part of Pradhan
Mantri Ujjwala Yojana. According to PM Modi, E-boats will not only help reduce pollution, but will also
ensure higher incomes for those who earn their livelihoods through such boats.
 India has grown from 1,500 MW of solar power to 10,000 MW per annum in a short span of
time. India Power Minister Piyush Goyal said that during 2015-16, 7,012 villages have been electrified
under Deen Dayal Upadhyaya Gram Jyoti Yojna scheme (launched last year).

 Government has signed a $1.5 billion loan agreement with World Bank to give a fillip to Swachh
Bharat Mission (SBM).

Government for poor

 The ‘Pradhan Mantri Ujjwala Yojana’ scheme, launched at Ballia in Uttar Pradesh, will
provide free LPG connections to five crore women from below poverty line (BPL) in the next three
financial years. PM Modi thanked 90 lakh people of India for giving up LPG subsidies for the benefits of
poor who use wood for cooking.
 The government will leverage the benefits of Aadhaar and Jan Dhan Yojana accounts to
address the financial inclusion of 40 unorganised workers such as insurance and pension.
 The Government of India in association with other state governments will be soon working
on Gramoday Se Bharat Uday Abhiyan campaign. The objective of the campaign is to amplify
Panchayati Raj System to boost social harmony in the villages, promote rural development, foster
farmers’ welfare and enhance the livelihoods of the poor.
Agricultural productivity
 Announcement to construct five lakh farming pools to address the substantial drop in the ground
water table in some parts of the country. PM Modi urged the farming community to create small
reservoirs, use less fertilizer, and switch to modern technology.
 According to the Groundwater Surveys and Development Agency (GSDA), the water table level
has dropped to one meter in about 540 villages across 13 talukas in Pune district.

 Launch of e-NAM, the e-trading platform of National Agriculture Market, which will allow 21
mandis across eight states initiate e-trading on a pilot basis.
Sports: FIFA Under-17 World Cup
 India will host the FIFA Under-17 World Cup football tournament next year. 24 teams from
across the world will participate in the tournament.

 PM invited suggestions from public on the creation of logo, slogans, songs, and souvenirs for the
FIFA event.

 PM also encouraged youths of India to get indulged in and become the ambassador of the FIFA
Under-17 World Cup, 2017.

Education: quality improvement

 The government will facilitate an enabling regulatory architecture to 10 public and private
institutions.

 PM Modi reiterated that the regulatory framework will not get mingled with the existing
University Grants Commission and All India Council for Technical Education. It will have complete
autonomy in academic, administrative and financial matters, making world-class degree courses
accessible to Indians.
 Apps development
 The Department of Industrial Policy and Promotion (DIPP) has launched a portal and mobile
application to help startups get registered online in a day. With this launch, startups can avail up-to-date
information on various notifications or circulars issued by various government ministries/departments.

 Announcement to develop a master app UMANG (Unified Mobile App for New-age
Governance). The app is likely to integrate 200 public services including passport services, income tax,
e-Post, Women safety and more.
Bilateral trade pact

The recent bilateral talks between PM Narendra Modi and Maldives President Abdulla Yameen
led to a defence corporation pact and other agreements in the fields of taxation, tourism, space
research and conservation.

Affordable housing
As many as 2,508 cities in 26 states have been identified to provide affordable housing to the
urban poor under ‘Pradhan Mantri Awas Yojana’ scheme.
The NDA (National Democratic Alliance) government will commemorate its completion of two
years on 26th of this month. Time has come to analyse the achievements and failures of UPA
versus NDA government. This second anniversary celebration will focus on its accountability
and transparency of actions on employability, rural development, agricultural development, ease
of doing business, bi-lateral trading, women safety and smart cities, quality education and more.