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Syllabus es
Section 1 Macroeconomic Policies
and Their Impact 1
Section 2. Policies and Performance in
Agriculture 20
Section 3. Policies and Performance
in Industry 32
Section 4 Trends and Performance
in Services 51
59
Model Test Paper (Examination style)
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ADDITIONAL QUESTIONS AS PER NEW SYLLABUS
Q.1. What do you mean by Land Reforms? What are their and how far
hey have been achieved? ee
‘Or, Discuss the main Land Reforms which have been undertaken in India since
independence.
‘Ans. Land reforms are reforms which involve changing the laws, slations and
customs regarding land ownership. These changes are brought about by affecting the
size of operational holdings. The size of operational holdings can be affected either by
regrouping or reorganising the existing holdings or by bringing about changes in the
‘ownership of land. When operational holdings are affected through regrouping and
reorganisation, the land reforms involved are joint cooperative farming and
consolidation of holdings. On the other hand, when operational holdings are affected
through changes in the ownership of land, the relating land reforms are ceiling on
land holdings and abolition of intermediaries. In short, land reforms may be defined
as the changes which relate to the size of holdings and ownership of land.
There are two basic objectives of land reforms namely (a) development of
agriculture or increase in agricultural productivity and (b) promotion of social justice
or to safeguard the interest of the actual cultivators, ie, tiller of the land should be
the owner of the land. By bringing land reforms, size of the operational holdings are
made economically viable and actual cultivators are made the owners of land. As
such per hectare yield is increased and the exploitation of the farmers by the big
Zamindars is curbed leading to social justice.
‘Most of the holdings in India are of very small size. According to Agricultural
‘Census of 2005-06, the average size of operational holding is 1.23 hectares and about
83% holdings are of less than 2 hectares in size. Besides, these holdings suffer from.
the problem of sub-division and fragmentation. Therefore, any step or land reform,
which would improve the size of operational holdings, will be an appropriate step in
the direction of improving agricultural productivity. Similarly, any step in the
direction of conferring the right of ownership will also be a step towards promotion
‘of social justice. Thus, in short, land reforms improve the size of holdings and provide
social justice. In both these directions many land reforms have been undertaken in
India. We discuss them below:
1. Consolidation of Holdings. It is a process of reorganisation of land under which more
than one holdings belonging to a single owner and situated in different corners of a village are
brought together and consolidated at one place. As such the problem of fragmentation of
land is removed and on account thereof the size of operational holdings is improving.
_ Though a beginning in this direction was made as back as in 1921, but the actual
has been very slow. So far only 500 million hectares of land has been
"covered under it which is a very small percentage of total land. Except for the States.
“of Punjab, Haryana, Delhi and Western U-P., the progress of this land reform has
‘been negligible. The most important single cause responsible for unsatisfactory
is the non-availability of adequate and complete revenue records.
Farming. Under this, owners of small holdings of land jointly cultivate
iretaining the right of ownership with them and share the income in the proportion of the
‘holdings. As a result of this, for the purposes of cultivation, the size of the land
Jlarge and the problem of sub-division is eliminated. The progress has been very
y and tardy. At the end of June 1969, only 0.4 per cent area was covered by these
, which indicated failure of the programme.
on of Zamindari System. This system of land tenure was introduced in
‘India in the year 1793. Under this system the land revenue was permanently settled (ci) @ SHIV DAS DELHI UNIVERSITY SERIES
but in turn the Zamindars could charge any rent from the actual cultivators. It hye
been pointed out that at times the actual rent was 40 times more than the revent®
which was to be paid to the Government 7
This system was politically bad, socially undesirable and economically unviable
Therefore, steps regarding its abolition were taken after the adoption of ou,
‘Constitution in 1950.
4. Ceiling on Land Holdings. This implies that a maximum ceiling or limit is fixeg
on the area of land beyond which an individual cannot own. Land in the ownership
of an individual over and above the prescribed ceiling is declared as surplus land,
is acquired by the Government and distributed among the landless. The ceiling ig
imposed on present and future holdings both. Ceiling on present holdings means
land in excess of prescribed ceiling is declared as surplus and involves redistribution,
‘whereas ceiling on future holdings means that in future no one would be allowed to
own land beyond the prescribed ceiling.
The basis of ceiling is now a family instead of an individual. The progress of this
land reform has been very unsatisfactory.
Reasons for the slow progress are as follows:
(i) Adequate and up-to-date revenue records are not available.
(ii) There is a lack of necessary political will.
(ii) The lobby of rich and influential farmers has been an active hinderance in
the way of implementing these reforms.
(iv) Benami transactions make the implementation of these reforms virtually
ineffective and impossible.
Tenancy Reforms. As an off-shoot of Zamindari System, many agriculturists were
working as tenants. They used to pay exorbitant rents and had no security of their
tenancy. They could be ejected from the land at any time. Virtually, they were tenants
at will. Governments of various States took various steps to safeguard the interests of
the tenants but the situation continues to be as it was. Of course, with the abolition of
Zamindari System, the situation has easened somewhat.
Conclusion. Though there have been a lot of legislative enactments pertaining to
land reforms but because of faulty and inadequate implementation, things have not
changed much.
Q. 2. “Land to the tiller” as a slogan has failed. What has political will got to do
‘it? What are the other reasons for failure of land reforms in India?
Ans. One of the basic objectives of land reforms has been “land to the tiller” in
letter and spirit. The major hurdles in this regard have been existence of
intermediaries in the form of Zamindars, Mahalwaris and Ryotwaris, absence of
security to tenureship and ownership rights to tenants.
The presence of intermediaries .created two agricultural classes—the absentee
landlords and the non-owner cultivators or tenants or actual tillers where the former
exploited the latter because of lack of State intervention
Similarly, there was no security to tenureship because of absence of any law to
protect the tenants. There was informal or oral tenureship wherein the tiller was left
to the mercy of the landlord to continue. Often the rents were high due to lack of
tion. Redistribution of land to the actual tiller was not done.
The lack of land reforms as stated above, is one of the major reasons for
backwardness and low productivity of agriculture in the country. In order to
‘overcome this, the Government initiated the move to abolish intermediaries, provide
security to tenureship and implement ceiling on holdings for equity in land etc,
i after i ». However, even 65 years after independence the
land reforms have not been very successful in fulfiling the goal of “Land to the ADDITIONAL QUESTIONS AS PER NEW SYLLABUS ™ (vii)
tiller”. One major reason is lack of political will. Even the Government has not
created a situation in which representations from the landless, small and marginal
farmers can be made in the local Panchayat bodies, let alone assemblies and
‘ministries. Lack of political will is also reflected in the fact that the agricultural labour
and small farmers, who constitute a vast majority in rural areas, are totally
unorganised. There is no Trade Union formed to address their problems.
Lack of political will also reflects lack of voice of/for the actual tiller who toils in
the field for landlords. Unfortunately, the Government in majority cases is
represented by the elite group of the society who do not take effective measures to
solve the problems of giving land to actual tiller by transferring ownership since this
‘may jeopardise their own interest.
Other reasons for failure of land reforms:
(@ Judicial intervention to settle disputes regarding amount of compensation for
abolishing the intermediaries, interpretation of land reform laws etc. have
taken endless time period and have obstructed the implementation process.
(ii) Megal transfer of land in the names of relatives has made the land ceiling
process virtually non-functional. Alongwith it, there is large misuse of
‘exemptions of ceiling laws through misclassification of land. Even there is
confusion in definition of family units to implement ceiling.
(iil) In many States, land records are not properly maintained. Regular surveys of
land are not done.
(i) Rampant corruption in Government administration has spoiled the system
and the victims are poor landless who could not bribe the corrupt officials to
get justice.
Q. 3. What is Uneconomic Unit of Cultivation? Explain the factors affecting it.
What measures have been adopted to improve the size of cultivation during the
period under planning. [2001
Ans. Size of economic holdings in India. Firstly, we should know the meaning of
uneconomic unit (or holding) of cultivation. A holding, which is not economic, is
uneconomic. Therefore, we should now know the meaning of an economic holding.
In simple terms, an economic holding is one which will provide for an average family
for the minimum standard of living considered satisfactory.
Operational holdings in India. The details of the size and number under the
‘operational holdings are furnished in the given table:
(or the year 1991)
‘Number in Millions | Area in million hectares
‘Number % ‘Area %
3] 58 5 6
uM 33 o7 a
8 7 45 a
in the year 1990-91:
‘marginal holdings in the total holdings was very high, ie.
covered only 15% of the total area,
-of small holdings was 34 and they covered 41% of the area. (cil) © SHIV DAS DELHI UNIVERSITY SERIES
3. Thepercentage ofthe medium holdings was 8 and they covered 27% of hy
4. The percentage of large holdings was 2 and they covered 17% of neat
From the above itis evident, that most of the holdings are uneconomic or
size) In 1990-91, the average size of holdings was only 1.5 hectares, It has aa
substantial over the years. Most ofthese holdings were not only extremely
but were also fragmented into a number of tiny plots so that cultivation on
be carried out only by labour intensive techniques. In majority of them trac
methods of cultivation were being used. Such holdings can be termed as i
units of cultivation. These have low productivi .
cannot be adopted on these and the possibilities of increasing. agricul
productivity is very limited
Causes of sub-division and fragmentation of holdings. Subdivision refers to yy
division of land among heirs on the death of the owner ofthe land. With the passing
each generation the land gets subdivided further and further and after
generations only tiny plots are left. What is worse, each heir may get a part of
individual field of the owner. Thus, a person may get one tiny plot at one place, an
tiny plot at a second place, and so on. This leads to fragmentation of holdings
The causes of subdivision and fragmentation of holdings in India are enumerated belo
(a) Laws of Inheritance. The Laws of Inheritance in India are such that all children
either sons or daughters have an equal share in the property of their father. The
inevitable consequence of this Law of Inheritance is that farms get split up further
and further with every passing generation. |
(©) Pressure of population. The population of India has been increasing at a very
rapid pace while land under agriculture has increased only marginally. Because of
the unsatisfactory expansion of the non-agricultural sector and its inability to absorb |
the rising population, more and more people have been forced back on agriculture, |
This too has resulted in sub-division of holdings. |
(©) Decline of joint family system. Previously land was held together even though !
the number of family members increased from generation to generation, the breaking. |
Up of joint family system has led to sub-division and fragmentation of holdings with
the passing of each generation,
(@) Farmers’ indebtedness. Most of the farmers in India are neck-deep in debts, |
Frequently, they are forced to either sell of parts of their land or transfer it to money- |
lenders to pay off the debts. Thus, the land continues to get sub-divided and
fragmented quite frequently.
(©) Psychological attachment to land. In India, all persons of a rural household are
Psychologically attached to the land. Every son wants to have a share in father’s land
and is not willing to accept payment in licu of the land. This too leads to sub-division
‘and fragmentation of holdings even when it could have been avoided,
(f) Practice of crop-sharing. In India many land-owners do not cultivate the land
themselves, Instead they lease it out to various tenants. Though the size of holdings
‘on ownership basis remains the same, they are divided into small pieces on
‘operational basis.
Measures undertaken for improving the size of cultivation during the planning period:
1 Consolidation of Holdings 2. Joint Cooperative Farming
__3. Ceiling on land holdings
Note: These are land reforms and have been discussed in detail in O.1, Page ().
te SECTION 1
as falter greta € economic growth after the reforms of 1991 Why
wo Jn 19967 Also discuse the sectoral comporition of tr
‘er the past 2 decades, bi me
increases following the Fifth Pay Cor
2002-03 because
mmission. Growth ;
of a sharp, drought-induced fallin agricultural outpuc
Growth of Real GDP
However, in the mid 2000s the economy has performed exceedingly well with
sconomic growth soaring to 9 per cent or higher in the last three years, 2005-06 to
2007-08. The proximate drivers of this growth spurt included the sustained
investment boom, cumulative productivity enhancing effects of reforms, an
unusually buoyant international economic environment and a demand-and-
technology driven acceleration of modern services output.
Inspection of the sectoral composition of growth shows that the slowdown was
confined to agriculture and industry; services continued to grow fast and even
accelerated. Moreover, the expansion of services accelerated further in the years
after propelled by high rates of growth in communications (especially
telecom), business services (especially information technology) and. finance
Industry picked up steam from 2002-03 and continued to grow robustly right
through
3. Agricultural growth remained variable, substantially
on weather conditions. —
2 SHIVA DELHI UNIVERSITY SERIES # . )
Growth of Real GDP.
Industry y
Services 45.4 54.1 49.8 68.3 636
GDP (Factor Cost) 100.0 100.0 100.0 100.0 | i009
The exceptionally rapid growth in India’s services sector is reflected in he
contribution of this sector to overall economic growth since 1991-92. In the f
Years between 1991-92 and 1996-97 services contributed just about half of
growth in GDP. In the subsequent five years to 2001-02 the sector's contribution
rose sharply. Equally noteworthy is the low and declining contribution of
agriculture to GDP growth after 1996-97, even though over half of India’s la
force is still employed in this sector. In the six years after 2001-02 agriculture
contributed only 7 per cent of total growth of GDP.
The composition of GDP growth shows that the increase in aggregate
investment expenditure between 1991-92 and 1996-97 accounted for nearly 30 per
Se SEGDP growth achieved during these years and reflected a significant rise
she, share of investment in GDP. With the investment ratio declining in the next
Sve years the contribution to growth from investment demand dropped to just a)
Fer cent. However, the surge in investment between 2001-02 and 2007-08, raised
the investment rate above 37 per cent of GDP by 2007-08 and contributed an
Gtsordinary 57 per cent of total GDP growth over this period. Governmem
‘Spending and Private Consumption have played a countercyclical role in
sustaining the growth.
2. 2. Write a short note on the external sector/capital inflows after the
reforms.
Ans. Following the reforms in the external sector, foreign investment flows
have been encouraged. Reflecting the strong growth prospects of the Indise
€conomy, the country has received large investment inflows, both direct and
io, since 1993-94 as compared with negligible levels till the early 1990s,
account deficits remained modest - averaging one per cent of GDP since 1991-92
and in fact recorded small surpluses during 2001-04, With capital flows
in excess of the current financing requirements, the overall balance of
recorded persistent surpluses leading to an increase in reserves
‘such large accretion to reserves, penton. could be. copsainesd reflecting.
appropriate policy responses the Reserve Bank and the Government.
The emergence of foreign ee surplus lending to continuing and large
accretion to reserves since the mid 1990s has been a novel experience for India
after experiencing chronic balance of payment problems for almost four decades.
These surpluses began to arise after the opening of the current account, reduction
in trade protection, and partial opening of the capital account from the early to
a '
MACROECONOMIC POLICIES AND THEIR IMPACT #3
mid 1990s. The exchange rate flexibility practiced since 1992-93 has been an
important part of the policy response needed to manage capital flows. The
downturn in the Indian business cycle during the early part of this decade led to
the emergence of a current account surplus, particularly because the existence of
the relative exchange rate insensitive remittance flows. Consequently, foreign
exchange reserves grew by more than US $120 billion between April 2000 and
April 2006.
‘The management of these flows involved a mix of policy responses that had to
keep an eye on the level of reserves, monetary policy objectives related to the
interest rate, liquidity management, and maintenance of healthy financial market
conditions with financial stability. Decisions to do with sterilisation involve
judgements on the character of the excess forex flows: are they durable, semi-
durable or transitory. This judgement itself depends on assessments about both
the real economy and of financial sector developments. Moreover, at any given
time, some flows could be of an enduring nature whereas others could be of short
term, and hence reversible. On an operational basis, sterilisation operations
through open market operations (OMOs) should take care of durable flows,
whereas transitory flows can be managed through the normal daily operations of
the LAF. By 2003-04, sterilisation operations, however, started appearing to be
constrained by the finite stock of Government securities held by the Reserve
Bank. Accordingly, an innovative scheme in the form of Market Stabilisation
‘Scheme (MSS) was introduced in April 2004 wherein Government of India dated
securities/Treasury Bills are being issued to absorb enduring surplus liquidity.
‘Three overarching features marked the transition of India to an open economy.
First, the administered exchange rate became market determined and ensuring
orderly conditions in the foreign exchange market became an objective of
‘exchange rate management. Second, as already indicated, vicissitudes in capital
flows came to influence the conduct of monetary policy. Third, lessons of the
balance of payments crisis highlighted the need to maintain an adequate level of
foreign exchange reserves and this in turn both enabled and constrained the
conduct of monetary policy. From hindsight, it appears that the strategy paid off
with the exchange rate exhibiting reasonable two-way movement.
Q. 3. Write a short note on FRBM (Fiscal Responsibility & Budget Manage-
ment) Act.
‘Ans. India practices fiscal federalism with distinct demarcation of powers
between the central and state governments. Since 1991, both the centre and states
have initiated significant fiscal reforms as an integral part of ongoing initiatives
launched in the aftermath of the balance of payments (BOP) crisis in 1990. The
reforms aim at improving efficiency, productivity and competitiveness of Indian
industries and imparting dynamism to the overall growth process. For fiscal
consolidation, the central government enacted the Fiscal Responsibility and
Budget Management (FRBM) Act, 2003. The FRBM Act, 2003 and FRBM Rules,
2004 came into force with effect from 5 July 2004. The Act mandates the central
government to eliminate revenue deficit by March 2009 and to reduce fiscal
deficit to 3 per cent of GDP by March 2009. Under the Act, the central 4m SaADEUMUNVERSTY semES 7 it
th Houses of Parliai
government is required to lay before bot farliament a Med
Fiscal Plicy Statement, a Fiscal Policy Strategy Statement and a Macs”
Framework Statement along withthe Annual Financial Statement angisc™™)
for Grants, The FRBM Rules, 2004 specify reduction of revenue defiit bya
cent of GDP or more and reduction of gross fiscal deficit by 03 per cent
or more every Yet no assumption of ational debt exceeding 9 per GeO
GDP for 2004-05; progressive reduction of this limit by at least one *
point of GDP in each subsequent year; and no central government Baran
‘excess of 0.5 per cent of GDP in any financial year. in
The rules also require quarterly review of the fiscal situation, Seg
transparency in the budgetary process, rules, accounting standards and pee
and projection of four fiscal indicators (namely revenue deficit, fiscal etc, gt
Tevenue, and total debt as a proportion of GDP) for the medium term. The
‘mandate the central government to take appropriate corrective action in case
Tevenue and fiscal deficits exceed 45 per cent of the budget estimates, or toa
Ron-debt receipts fall short of 40 per cent of the budget estimates at the eng
fist half of the financial year. Medium-term projections presented along With te
Budget for 2005-2006 are given in table below.
Medium-term Rolling targets for Fiscal Indicators
as Percentage of GDP at Current Market Prices
us 2004-05 | 2005-06 [2006-07
abe
DN Revised | Budget | Target
1. Revenue Deficit 27 27) 20
2. Fiscal Deficit 45 43 38
3. Gross tax revenue 98 106 ma
4. Year-end debt stock 68.6 68.6 68.2
Q. 4 Analyse India’s external balance position in the post liberalisation
Period.
Ans, The current account deficit rose to a record 3 per cent of GDP in 1990.9]
preceded by the balance of payments crisis of 1991. However, since economic
liberalisation, India’s external balance position has been comfortable throughout
the period 2000-01 to 2007-08, ranging between a high of 2:3 per cent of COPin
2003-04 and low of minus 1.5 per cent in 2007-08. Moreover, the relative health of
Gurrent account balance has been concurrent with a marked rise of India's
grerchandise trade to GDP ratio from 23 per cent in 2000-01 to 35 per cent in
2007-08, as the country continued to deepen its integration with worl economy
and, more recently, rising oil prices bloated the import bill. Three important
‘observations can be made. First, the growth of service exports has been strong
throughout the period, especially of IT software. Software exports increaset
more than six fold. Combined with continued buoyancy in current transfers
(remittances from abroad), the ratio of “net invisibles” increased by three times,
Tt was this robust growth in invisible earnings which took the current account
balance into unfamiliar (for India) positive territory for three successive years,
2001-02 to 2003-04. After that, rapid growth of non-oil imports (sucked in by the OOOO
MACROECONOMIC POLIGES AND THEIR IMPACT = 5
investment-led growth spurt) and a steadily rising oil import bill took the current
account back into deficit. This is the second noteworthy trend: between 2003-04
and 2007-08 India’s merchandise trade deficit to GDP ratio rose steeply from 2.3
per cent to 7.7 per cent. And this happened despite strong growth of exports,
averaging over 20 per cent a year in dollar terms, The third major development
has been on the capital account of the balance of payments. From 2002-03 to 2007-
08 India experienced a sustained and unprecedented surge in net foreign capital
inflows, which soared tenfold. Since over the period 2002-3 to 2007-08 the
current account was close to balance, the bulk of the net inflows went to swell the
country’s foreign exchange reserves. These reserves rose from $76 billion in
March 2003 to $310 billion in March 2008. The main forms of capital inflow were
foreign direct and portfolio investment and external commercial borrowing by
Indian companies.
Q. 5. Write a short note on Domestic Saving-Investment and Deficits,
Ans. The combined (Centre and State) fiscal deficit has been quite large over
the past three decades. The combined fiscal deficit had climbed above 9 per cent
of GDP in the years preceding the 1991 economic crisis. Rising fiscal profligacy
was generally seen as an important contributory factor to that crisis, Nine
Concerted efforts by the central government brought the deficit down to a
manageable 6.5 per cent of GDP by the mid-1990s. This consolidation was
reversed in the next five years because of Fifth Pay Commission, low revenue
buoyancy and weak expenditure control policies. By 2001-02 the fiscal deficit was
nearly 10 per cent of GDP, and the revenue deficit was at a record 7 per cent.
A sustained effort at fiscal consolidation resumed after 2002-03 and brought the
combined fiscal deficit down to 5 per cent of GDP in 2007-08 and the revenue
deficit to just one percent. Large fiscal deficits tend to preempt loanable funds,
foster high real interest rates and crowd out productive investment. Not
coincidentally, periods of declining fiscal deficit have been associated with
acceleration in economic growth (1992-97 and 2003-2008), while periods of rising
deficits correlate with slowdowns (1997-2002 and, perhaps, 2008 onwards)
The years between 2002-03 to 2007-08, have also witnessed a remarkable
transformation in the level and composition of aggregate savings and investment
in the economy. First, the total investment rate remained at about 24 per cent in
between 1991 to 2003. In the next five years it rose steeply to 36 per cent in 2006-
07. Second, this unprecedented jump in the aggregate investment rate was
matched by an almost equal spurt in domestic savings from 23.6 per cent of GDP
in 2000-02 to 34.8 per cent in 2006-07. The composition of the massive rise in
domestic savings is also quite novel for India.
Households contributed the most to domestic savings, with its share rising
steadily as a ratio of GDP over the past two decades. But this category of savers
only accounted for an additional 2 per cent of GDP between 2000-02 and 2006-07.
‘The remainder of the increase came from private companies and the public sector
(government and enterprises). The contribution of private corporate savings
more than doubled because of extraordinary growth in corporate earnings after
2003-04 and the surge in corporate investment from under 6 per cent of GDP in (6 SHIVA DELHI UNIVERSITY SERIES " ”
2000-02 to 14 per cent in 2006-07. But the biggest contributor to the sa
explosion after 2001-02 has been public savings, which went from minus 19°
cent of GDP in 2000-02 to plus 3.2 per cent in 2006-07, a massive turnaround
53 per cent of GDP. The bulk of this improvement occurred in government ¢f
all levels), with only modest increases in the enterprise sub-sector. Basically, jy.
turnabout was driven by reductions in revenue deficits of central and sta
governments during this period. In a nutshell, the huge 12 per cent of GDP rise jy
the gross investment rate over the last six years was largely funded ny
unprecedented increases in corporate and government savings.
Q. 6. Examine the Fiscal Consolidation process undertaken by the govern,
ment in the early 2000s. What prompted this action?
Ans. By 2001-02, the combined fiscal and revenue deficits of the central ang
state governments had attained record levels of 9.9 per cent and 7 per cent yp
GDP, respectively. Growth had slowed and aggregate savings and investmeng
ratios had dropped markedly from earlier peaks. Government dissavings hag
risen to an unprecedented level. The growing need for fiscal consolidation
became urgent.
In order to achieve fiscal discipline, the Fiscal Responsibility and Budget
Management (FRBM) was enacted. The FRBM Act targeted elimination of the
centre’s revenue deficit by 2008-09 and a reduction of the fiscal deficit to 3 per
cent of GDP. It also specified minimum improvements towards these targets each
year. The second major policy initiative at the central level was a concerted and
sustained programme to raise the tax GDP ratio through better application of
information technology and other means to strengthen tax administration. About
three quarters of this increase came from direct taxes, notably corporate and
personal income taxes, whose share in total central government tax revenues rose
to an unprecedented 50 per cent in 2007-08 from 37 per cent in 2001-02.
At the state level, the big improvements in fiscal consolidation occurred after
2003-04. Four major factors were at work. First, the remarkable growth in central
tax revenues, noted above, also benefited the states, which received about 30
percent of these revenues under the tax devolution formulae mandated by the
Finance Commissions, Second, following the recommendations of the Twelfth
Finance Commission (TFC), the non-tax revenue receipts of the states were
buoyed by larger transfers of devolution grants from the central government.
Third, the TFC recommendations on debt relief and debt write-offs also catalyzed
the adoption of fiscal responsibility laws by nearly all the states, since these
benefits were made conditional on enactment of such laws. Fourth, nearly three
quarters of the states reformed their sales taxes to a set of broadly uniform state
value-added taxes in April 2005.
Q. 7. Discuss the annual inflation trend in the past two decades.
Ans. The following broad generalisations can be made about inflation in India
~ in the past two decades. First, inflation has been in the “comfort zone” of around
5 per cent or less in nearly every year since 1998-99, Second, if one focuses on the
WPlor five-year averages of any index, inflation has been subdued since 1996-97.
Third, in the current decade, the GDP deflator has averaged just over 4 per cent, a ————
MACROECONOMIC POLIGES AND THEIR IMPACT #7
with only two years in which the rate ha
1d despite the global commodity
of 2008, the annual rate on inflati
s crept above 5 per cent. Even in 2007-08
Price shock which hit India by the first quarter
ion reflected in the GDP deflator was only 4.1
‘as not a significant macro policy problem right
administered interest rates, directed credit
Programmes, weak banking structure,
» lack of proper accounting and risk
management systems, and lack of trans,
mechanism of monetary policy.
‘What have been the major contours of the financial sector reforms in India?
+ Removal of the erstwhile existing financial repression
+ Creation of an efficient, productive and profitable financial sector
* Enabling the process of price discovery by the market determination of
interest rates that improves allocative efficiency of resources
* Providing operational and functional autonomy to institutions
+ Preparing the financial system for increasing international competition
+ Opening the external sector in a calibrated manner; and
* Promoting financial stability in the wake of domestic and external shocks.
The basic emphasis of monetary policy since the initiation of reforms, has been
to reduce market segmentation in the financial sector through increased
interlinkages between various segments of the financial market including money,
Sovernment security and forex market. The key policy development that has
automatic monetisation of the government's fiscal deficit since April 1997. Short-
term interest rates have emerged as the key indicators of the monetary policy
stance. A significant shift is the move towards market-based instruments away
from direct instruments of monetary Management. In line with international
trends, the Reserve Bank has put in place a liquidity management framework in which market liquidity is managed through a mix of Open Market (ine
repo) Operations (OMOs), changes in reserve requirements and ling
facilities, reinforced by changes in the policy rates, including the Bank Rea"ing
the short term (overnight) policy rate. In order to carry out these ne and
operations effectively, the Reserve Bank has initiated several mongcn’ttt
strengthen the health of its balance sheet. SS ty
Q 9% Discuss the objectives behind the monetary policy reforms,
instruments were used to undertake these reforms? Wha
Ans. Objectives behind the reforms in the Monetary Policy Framework:
1. Twin objectives—(i) maintaining price stability and (ii) eng
availability of adequate credit to productive sectors of the econome"®
support growth continue to govern the stance of monetary policy
the relative emphasis on these objectives has varied depending on ft
importance of maintaining an appropriate balance.
2. Reflecting the increasing development of financial market and
liberalisation, use of broad money as an intermediate target has been ie
emphasised and a multiple indictor approach has been adopted,
3. Emphasis has been put on development of multiple to transmit liquidity
and interest signals in the short-term in a flexible and bi-diretion
manner.
4, Increase of the interlinkage between various segments of the financial
market including money, government security and forex markets,
Instruments used to undertake the reforms:
1. Move from direct instruments such as—administered interest rates,
reserve requirements, selective credit control to indirect instruments such
as—open market operations, purchase and repurchase of government
securities for the conduct of monetary policy.
2. Introduction of Liquidity Adjustment Facility (LAF), which operates
through repo and reverse repo auctions, effectively provide a corridor for
short-term interest rate. LAF has emerged as the tool for both liquidity
management and also as a signalling devise for interest rate in the
overnight market.
3. Use of open market operations to deal with overall market liquidity
situation especially those emanating from capital flows.
4, Introduction of Market Stabilisation Scheme (MSS) as an additional
instrument to deal with ending capital inflows without affecting short
term liquidity management role of LAF.
Developmental Measures:
1. Discontinuation of automatic monetisation through an agreement
‘between the Government and the Reserve Bank of India.
Rationalisation of Treasury Bill market,
"Introduction of delivery versus payment system and deepening, of inter
bank repo market.
6. Introduction of Primary Dealers in the government securities market to
play the role of market maker. 7. Amendment of Securities Contracts Regulation Act (SCRA), to create the
regulatory framework.
* Deepening of government securities market by making the interest rates
on — Securities market related. Introduction of auction of government
securities.
eemeoPment of riskéree yield curve in the government securities
market as a benchmark for related markets
e Pure inter-bank call money market. Non-bank
Participants to participate in other money market instruments.
* Introduction of automated screen-based trading in government securities
through Negotiated Dealing System (NDS),
Setting up of risk-free payments and system in government securities
pirough Clearing Corporation of India Limited (CCIL),
Phased introduction of Real Time Gross Settlement (RTGS) System.
: Deepening of forex market and increased autonomy of Authorised
ler.
Institutional Measures:
fo (cation of a separate Financial Market Depaftment within the RBI
2-10. Write a short notes on Liquidity Adjustment Facility.
the underlying value of these variables and gives rise to confusing signals Since
both the exchange rate and interest rate are the key prices reflecting the cost of
sree eyeat is Particularly important forthe efficient functioning of the economy
that they be market determined and be easily observed. The Reserve Bank hax
therefore, put in place a liquidity management framework in the form of
Liquidity Adjustment Facility (LAF) for the facilitation of forex and ‘money
market transactions that result in price discovery sans excessive volatility. The
LAF coupled with OMOs and the Market Stabilisation Scheme (MSS) has
Provided the Reserve Bank greater flexibility to manage market liquidity in
- consonance with its policy stance.
The introduction of LAF had several advantages:
* First and foremost, it helped the transition from direct instruments of
‘monetary control to indirect and, in the process, certain dead weight loss
for the system was saved.
* Second, it has provided monetary authorities with greater flexibility in
determining both the quantum of adjustment as well as the rates by
responding to the needs of the system on a daily basis.
* Third, it enabled the Reserve Bank to modulate the supply of funds on a
basis to meet day-to-day liquidity mismatches.
2 fe itenabled the Reserve Bank 9 afect demand for funds through
policy rate changes. 10 SHIVA DELHI UNIVERSITY SERIES
* Fifth and most important, it helped
rates. "Y Mag
LAF has now emerged as the principal operating instrument of ih
policy. Although there is no formal targeting of a point overnight interest tary
the LAF is designed to nudge overnight interest rates withi ms
ma specified con
the difference between the fixed repo and reverse repo rates currently being a
basis points. The evidence suggests that this effort has been largely sn.
with the overnight interest rate moving out of this corridor for
stabilise short-term mon ‘
only a few
Periods. The LAF has enabled the Reserve Bank to de-emphasise targeting
bank reserves and focus increasingly on interest rates. This has helped
reducing the cash reserve ratio (CRR) without loss of monetary control a
Q 11. What is Market Stabilization Scheme (MSS)?
Ans, Market Stabilisation Scheme (MSS) was introduced in April 2004 Whee,
Government of India dated Securities/Treasury Bills are being issued to a
enduring surplus liquidity. These dated securities/Treasury Bills are the san
those issued for normal market borrowings and this avoids segmentation of the
market. Moreover, the MSS scheme brings transparency in regard to
associated with sterilisation operations. It is 1
relevant to note that the MSS hy,
Provided the Reserve Bank the flexibility to not only absorb liquidity but also,
inject liquidity in case of need. This was evident during the second hall of 2008,
06 when liquidity conditions became tight in view of strong credit demand,
increase in Government's surplus with the Reserve Bank and outflows on
account of bullet redemption of India Millennium Deposits (about US $7 billion).
In view of these circumstances, fresh issuances under the MSS were suspended
Between November 2005 and April 2006. Redemptions of Securities Treasury
Bills issued earlier—along with active management of liquidity through repo
reverse repo operations under Liquidity Adjustment Facility ~ provided liquidity
to the market and imparted stability to financial markets, With liquidity
*SeesEREEEIIEEE
ASASHESL EXEL SES:
Time
— Cumulative Investment & crore)
Figure 1: Cumulative FI Investment and the Sensex TT
Ano TER MeNCT 11.
conditions improving, it was decided to again start issuing securities under ae
we com May 2006 onwards. The issuance of securities under the MSS has thu
enabled the Reserve Bank to improve liquidity management in the system, to
maintain stability in the foreign exchange market and to conduct monetary policy
in accordance with the stated objectives. The Indian experience high!
Furthermore, interest rates on both deposits are Tending of banks have been
Progressively deregulated,
Various Reforms in the Banking Sector:
- Measures to Promote Competition
* Granting of operational autonomy to public sector banks, reduction of
Public ownership in public sector banks by allowing them to raise capital
from equity market up to 49 per cent of paid-up capital,
* Transparent norms for entry of Indian private sector, foreign and joint-
venture Banks and Insurance companies, Permission for foreign
investment in the financial sector in the form of Foreign Direct
Investment (FDI) as well as portfolio investment, Permission to banks to
diversify product portfolio and business activities,
* Roadmap for operations of foreign banks and guidelines for mergers and
amalgamation of private sector banks, and Banks and Non-Banking
Financial Corporations.
* Guidelines on ownership and governance in private sector banks.
2. Measures to Enhance the Role of Market Forces
* Sharp reduction in pre-emption through requirement, market
determined pricing for government securities, disbanding of
administered interest rates with a few exceptions and enhanced
transparency and disclosure norms to facilitate market discipline.
* Introduction of pure inter-bank call money market, auction-based repos-
Teverse repos for short-term liquidity management, facilitation of
improved payments and settlement mechanism,
. Etec Advancement in dematerialisation and markets for securitised
assets, 3. Prudential Measures
* Introduction and phased implementation of international best
and norms on risk-weighted capital adequacy requirement, a.
income recognition, provisioning and exposure.
* Measures to strengthen risk management through recognition
different components of risk, assignment of risk-weights to various 4
classes, norms on connected lending risk concentration, application
marked-to-market principle for investment portfolio and limits’ gy
deployment of fund in sensitive activities.
* Know Your Customer (KYC) and Anti Money Laundering guideli
roadmap for Basel Il, introduction of capital charge for market ry
higher graded provisioning for NPAs, guidelines for ownership and gover
nance, securitisation and debt restructuring mechanisms norms, ete.
itutional Measures
Setting up of Lok Adalats (People’s courts), debt recovery tribunals, asset
reconstruction companies, settlement advisory committees, corporate
restructuring mechanism, etc. for quicker recovery /restructuring. |
Promulgation of Securitisation and Reconstruction of Financial Assets
and Enforcement of securities interest (SARFAESI) Act, 2002 and its
) subsequent amendment to ensure creditor rights.
Practices
counting.
Setting up of Credit Information Bureau of India Limited (CIBIL) for
information sharing on defaulters as well as other borrowers.
Setting up of Clearing Corporation of India Limited (CCIL) to act as
central counter ‘party for facilitating payment and settlement system
relating to fixed income securities and money market instruments
5. Supervisory Measures
* Establishment of the Board for Financial Supervision as the apex
supervisory authority for commercial banks, financial institutions and
non-banking financial companies.
* Introduction of CAMELS supervisory rating system, move towards risk-
based supervision, consolidated supervision of financial conglomerates,
ling of off-site surveillance through control returns.
* Recasting of the role of statutory auditors, increase in internal control
through strengthening of internal audit.
* Strengthening corporate governance, enhanced due diligence on
important shareholders, fit and proper tests for directors.
‘6. Measures Related to Technology Enhancement
* Setting up of INFINET as the communication backbone for the financial
‘sector, introduction of Negotiated Dealing System (NDS) for screen-
trading in government securities and real Time Gross Settlement
‘System. , ts
the achievements of the Banking system in the post reform
‘Comment on the productivity, asset quality and efficiency of the
An assessment of the banking sector shows that banks have experienced
a eit a SS
significant improvement in capital ai
distinctly visible. It is note
the adoption of international best practic
and productivity gains have
[MACROECONOMIC POUDIES AND THEIR IMPACT #13
strong balance sheet growth in ‘ ‘i
re the post-reform period in an environment of
sPerational flexibility. Improvement in the financial health of banks, reflected in
\dequacy and: improved asset quality, is
‘worthy that this progress has been achieved despite
s in prudential norms, Competitiveness
also been enabled by proactive technological
"1995 [2000-2005
1. Number of Commercial Banks a western
2 Number of Bank Offices of 64.234| 67868 6633
which Rural and semi-urban tea0n| $7993 | a7
aan 602 | 47,693 | 47,401
3. Population per office (0008) 15
4 Per capita Depost 420 | st | 10099
5. Per capita Credit (%) 2320 | 4:555 | 10,135
6. Priority sector advances (per 20 |) ses lteag)
cent)
7. Deposits (per cent of national | st | 6s
Income)
In the post-reform period, banks have consistently maintained high rates of
growth in their assets and liabilities. On the liability side, deposits continue to
account for about 80 per cent of the total liabilities. On the asset side, the shares
of loans and advances on the one hand and investments on the other hand have
seen marked cycles, reflecting banks’ portfolio preferences as well as growth
cycles in the economy. The share of loans and advances declined in the second
half of 1990s responding to slowdown in investment demand as well as
tightening of prudential norms. With investment demand again picking up in the
past 3-4 years, banks’ credit portfolio has witnessed sharp growth. The overall
capital position of commercial banks has witnessed a marked improvement
during the reform period. Ilustratively, as at end-March 2005, 86 out of the 88
commercial banks operating in India maintained CRAR at or above 9 per cent.
Despite tightening norms, there has been considerable improvement in the asset
it in
quality of banks. Improvement
the credit appraisal process, upturn of the
‘business cycle, new initiatives for resolution of NPLs (including promulgation of
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act),
'NPLs enabled by greater profitability,
‘and greater provisioning and write-off of
have kept incremental NPLs low. In consonance with the objective of enhancing efficiency and productivity of .
through greater competition—from new private sector banks and
‘share of public sector banks in total assets of commercial banks. Notwithstan
‘such transformation, the public sector banks still account for nearly
‘challenges of competition, as reflected in their increased share in the
Profit of the banking sector. This suggests that, with operational Sexi,
banks, What is most encouraging is the very significant improvement o°Bl
productivity of the Indian banking system, in terms of various produce ™®
in real terms from %54 million in 1992 to £173 million in 2005, exhibiting
annual compound growth rate of more than 9 per cent. a
Ans. Foreign Direct Investment (FDI) involves foreign investors |
controlling and lasting stake in productive enterprises unlike foreign
by foreign investors only to seek returns on investments and not managemey
control. FDI inflows are generally associated with multinational
flows generally come as capital bundled with technology, skills, and
‘even market access. Therefore, they are widely perceived an
‘of several foreign banks—there has been a consistent decline”,
‘of assets and income. Public sector banks have also responded to the
sector banks are competing relatively effectively with private sector and
indicators. The business per employee of Indian bank increased ove they
Q. 14. Write a short note on Foreign Direct Investment
investments that represent minor equity or debt holdings through Stock mag
(MNEs) that have operations and_production facilities across the won ny
for expediting the industrial development of receiving (or host) countries,
developing countries, therefore, have a welcoming attitude towards MNEs
FDL India’s case is atypical in this context. After following a somewhat restrict
policy towards FDI in the first forty years of Independence, India has lil
her FDI policy regime considerably since 1991 besides opening new sectors ig
FDI such as mining, banking, insurance, telecommunications,
construction and management of ports, harbours, roads and highways, and
defence equipment. This liberalisation has been accompanied by i
inflows. It has also been accompanied by changes in the sectoral composition,
sources, and entry modes of FDI. The increasing recognition of India’s locat
advantages in knowledge-based industries among MNEs has also led
increasing investments by them in software development and in global
‘centres set up in India to exploit these advantages.
Q. 15. Write a short note on Foreign Institutional Investment.
Ans. In 2004-05 portfolio investments in India accounted for about 62 per cent
of total foreign investment in the country and at about 1.29 per cent of GDP well
‘current account deficit (0.95 per cent of GDP). Foreign Institutional
accounted for about 97.5 per cent of this. Ever since
Indian equity markets to foreigners, FIl investments have
£2,600 crore in 1993 to over %48,000 crore in 2005,
that portfolio flows benefit the economies of recipient
‘worldwide have been more than a little uneasy about SS
\MACAUECONOMIC POUCES AND THER IMPACT # 15
such investments. Often referred to as hot money, they are known to stampede
out at the slightest hint of trouble in the host country leaving an economic wreck
in their wake, like in Mexico in 1994, They have been blamed for exacerbating
Period. India’s country risk rating did not seem to affect FIl flows.
Q. 16. Discuss the surge in capital inflow in the economy between 2003-04 to
2007-08,
Ans, Between 2002-03 and 2007-08 the level of net foreign capital inflows into
India rose Tenfold. This unprecedented surge in external capital was both « cause
and consequence of the country’s remarkable boom in investment and growth
during the years 2003-04 to 2007-08. However this extraordinary spurt in capital
inflows posed major challenges for management of the exchange rate, capital
controls, monetary policy and inflation. Confronted by rising capital inflows (at
levels much higher than the current account deficit), the Reserve Bank (RBI) and.
government had the following basic options:
+ allow the nominal (and real) exchange rate to appreciate;
* undertake unsterilised intervention, that is, maintain the nominal
exchange rate through purchases of the surplus funds to augment
reserves, with consequent increases in money supply and resultant
inflationary pressures;
* conduct sterilized intervention, that is, forex purchases combined with
compensatory sale of government securities by RBI to negate (or
| moderate) the increase in reserve money;
, * loosen restrictions on outflows of capital;
* tighten restrictions on inflows of foreign capital;
* undertake some combination of the above policies.
India has followed a “managed float” since 1993, with fairly active intervention —e S
by the RBI to moderate market-driven volatility and maintain a yeah,
exchange rate. The RBI conducted sterilization operation and issued G-sec yt
the new “Market Stabilization Scheme” (MSS), jointly established }.
government and RBI in March 2004. MSS operations were backed by the Ree
short-term liquidity management through its Liquidity Adjustment Paci
well as occasional increases in the cash reserve ratio (CR), especially in
years. Outflows of capital were also significantly liberalised during this pec
encouraging a hefty increase in cross-border acquisitions by Indian companigt
There was.also a minor tightening of external commercial borrowing guiding
in 2007 and the prudential rules for participatory notes issued by foreign
institutional investors. The success of this approach in containing nomina}
real appreciation ofthe rupee during most ofthis capital surge may be gauged
the trajectory of the real effective exchange. The rewards came in the form ¢
sustained high growth of both merchandise and services exports, which wey
integral elements of the overall economic growth story during this pergy
Incidentally, a significant part of the massive spurt in capital inflows in 20064
and 2007-08 was in the form of external commercial borrowings.
Q. 17. Briefly discuss the Acts that inform labour laws in India.
Ans. After independence, labour laws continued to be influenced more by the
desire to protect labour, which had originated in. nationalism, than by
considerations of efficiency in labour markets and dispute settlement, Thy
} principle of protection was subsumed under the pursuit of ‘social justice’, ang
‘employment security was enhanced in the formal sector by a range of new laws
and case laws. Big business implicitly traded off labour market flexibility for a
trade regime that offered them a high degree of import protection. After the
economic reforms started in the 1990s and protection was reduced, the lack of
flexibility became a serious issue. The present legal framework consists of major
acts, and a number of minor, usually state-level acts. Industrial relations are
governed by the Trade Unions Act, 1926, which specifies the conditions that a
trade union needs to satisfy in order to be recognised under the act, and the
Industrial Disputes Act, 1947, (IDA), which sets out the institutions for
adjudication of disputes. The IDA imposes significant restrictions on employers
regarding retrenchment and exit. In units employing more than 100 workers,
retrenchment requires, seeking authorisation from the government, Such
authorisation is rarely granted. In the event of retrenchment, longer tenure
workers are given priority to stay. In addition, retrenched workers receive
priority in case of new recruitment. Closure also requires prior authorisation,
Working conditions are governed principally by the Factories Act, 1948; the
Industrial Employment (Standing Orders) Act, 1946, The Factories Act governs
the health, safety and welfare of workers in factories.
Q. 18. How are restrictive labor policies evaluated? Is the Indian legal frame-
work especially restrictive by comparison with other developing countries?
Ans. Doing Business, 2004, a publicly available database based on a detailed
study of employment laws across the world provides information on legal
‘Telated to hiring, hours of work and retrenchment of workers across a MACROECONOMIC POUDIES AND THEIR IMPACT #17
large number of countries in the world. Such provisions are then ranked with
scores that are higher, the more protective of workers the labour laws.
A first index (restrictions on hiring) measures how difficult it is for employers
fo hire workers other than with indefinite, permanent contracts. A higher score
indicates higher difficulty to hire through alternative contracts. A second index
(restrictions on hours of work) measures legal provisions pertaining to hours of
work. It compares overtime, restrictions to nij the work-
day and workweek, Cees cetrctions to night work and length of the
obtain in that event although not one to one, as
costs on firms that are not transferred to workers
(for example, the cost of legal fees). Finally, the rigidity of employment index
Provides a summary indicator of different aspects of labor legislation across
than tay, According to the latter, Indian laws are more protectve of worker,
than the international average or the average of a group of comparator countries,
Danbosed by large developing economies and countries in East and South Aci.
Disaggregating among different indicators, it emer;
stand of the law in India comes from
countries). Instead, Indian labour laws impose more administrative hurdles to
initiate a dismissal than almost anywhere else in the world. In a scale of 1 to 100,
India scores 90 in the restrictions of dismissals index, well above the international
norm, the average of the group of comparators, or the average in developed
economies. Yet, there are signs of weakening law enforcement, ineffective end
corrupted inspections, and rising recourse to contract labour. A shift in the stand
of the judiciary might be also contributing to a more flexible application of the
law.
Q. 19. What strategies do firms use to cope with strict labour legislation?
Ans. While labour-law enforcement is in general weak, laws that force firms to
seek and obtain permission from the government prior to retrenchment are well
enforced. Thus, still today, few firms seek permission to retrench, and for those
who do, permission is rarely granted. Hiring labour to contractors and
subcontracting non-core activities to other companies provides flexibility to firms
that seek to manage their labour force in an uncertain and volatile context.
Perhaps not surprisingly the use of contract labour has increased substantially
during the nineties climbing from 15 to 25 per cent of manufacturing labour force
Another loophole actively exploited by employers is that voluntary retirements
(VR) require no permission from the State. Fallon and Lucas (1991) reported that
offers of one month pay per year of work in exchange of retirement were not
‘unusual. Q. 20. What was the effect of this complex and overly restrictiy,
on economic outcomes?
~ wal
rat
Ans. While labour legislation is introduced with the objective of improys
workers’ welfare, there may be a number of adverse consequences on eer Vig
outcomes, and in turn, on workers’ well being, because it can generate. ‘one
effects; (i) hold-up effects; and/or (i) rigidity effects. Price effects occuy Pree
legislation increases the cost of labour, thus reducing employers’ incenyjq’™®™
hire workers. Hold-up effects occur when legislation makes it easier for one <°
to appropriate the return of the investment of the other party, thereby req ea"
the incentives of the latter to invest. This is the case, for instance, when leg ae
increases workers’ ability to initiate and sustain industrial disputes, whi
lead to lower returns on the investments of employers. Finally, rigidity ttt
occur when legislation makes the adjustment of labour (or other factors)
costly and difficult. Legislation that increases the price of labour or genet
expropriation effects is expected to have a negative effect on the di
labour. Besley and Burgess (2004) found labour legislation to have imy
adverse effects on output and employment, particularly in the regisns
manufacturing sector. It is found that legislation both that (i) makes
disputes costly and (ii) retrenchment costs high through the VB clause bj
economic activity against registered manufacturing and in favour of sectors
as agriculture, construction or nontegistered manufacturing, in which the ID
does not apply. Dispute-related regulations cost more jobs in capital-intensive
industries, while retrenchment-related regulations have a higher job impact ie
labour-intensive industries. In addition, rather than a reduction in the number of
jobs in existing plants, job losses are due to a decline in the number of factories,
This suggests that labour laws are important in shaping incentives for new firms
to enter the market. It also indicates that any positive gains in preserving jobs in
existing factories were outweighed by the new factories that were not created,
Job-security regulations can lead to distributive conflicts. It is found that
amendments that increase the cost of retrenchment have a positive effect on
earnings per worker, although they do not have a positive effect on the total
wage bill—that is the ar-ount of resources that goes to workers—or the labour
share—that is, the share of value added that goes to workers. This is because the
increase in wages is offset by a decline in employment. This indicates that while
some individual workers benefit by receiving higher earnings, others are worse
off due to reduced access to manufacturing jobs.
‘Q. 21. What are some transformations/solutions that can be implemented to
make labour laws more efficient and meaningful?
Ans. It is necessary to consolidate all Acts into a single law on labour relations
dealing with the following aspects: (i) wages and conditions of work; (i) social
security; (iii) hiring and termination procedures; (iv) trade unions; (v) industrial
5; (v1) health and safety provisions.
of industrial disputes should be rationalised in several ways.
” —that is those disputes that are based on a legal right—and ee
an THER weKCT 19
‘ —need te
qinterest disputes” —those which are not based on any existing rights r
be distinguished.
would imply the following steps:
1, Strengthening compensation for setrenchevert and firm closure. The
current compensation contemplated in IDA is well below the standards of
developing countries, and although in line wine those prevalent in
developed countries, workers in industrial couric have access to other
forms of unemployment insurance.
2. Reduce incentives of
IDA which gives discretion to labour courts and tribunals to reinstate the
worker should be eliminated,
Possible. Labour policy should assist workers to that end.
5. Eliminating the provisions related to seeking government permission for
retrenchment and closure.
Contract labour should not constitute a form of avoidance of labour laws.
Contracting out work allows firms to concentrate in their core business wel
improve overall competitiveness. Enacting comprehensive labour reforme is
Tequired to reduce the incentives to over-rely on this type of employment and
improve the welfare of contract labor workers,
Strengthen labour inspections and labour-law enforcement. Firms devote too
much valuable time to deal with inspections, while inspectors enjoy inordinate
Powers to extract unofficial payments, Inspections should be targeted and
publicly pre-announced.
aw, SECTION 2
@. 1, Examine the trends in food prices in the past 10 years. Why has
become a cause of concern?
‘Ans. Food inflation, based on the Wholesale Price Index (WPI) for food artic
and food products, entered double digits in 2009. The increase in prices is poy
restricted to a few commodities, and it is being experienced across the board; ths
exception being edible oils. Inflation at the retail level, which ultimately is whay
matters for consumers, is more serious than wholesale prices. This is
going to aggravate food and nutrition deficiency which remains at a very high
level (Deaton and Dreze 2009). The average rate of annual inflation, based on
the WPI (1993-94) was close to 6% during 1994-95 to 2004-05. After 2005, food
prices increased at a much faster rate than non-food prices, except in 2008 when
the prices of commodities spiked in India and in the-global market. Food and
non-food prices showed a disparate movement after January 2009 as shown in
the figure below.
Not food
Inflation (10¥) during various months, January 2006 to January 2010 in *)
‘On an annual basis, food prices in 2009 increased by more than 12% over 2008,
in contrast to the 1.76% decline in non-food prices. These trends show that the
real prices of food (food prices relative to non-food prices) declined during the
period 1993-94 to 2004-05 and increased after 2005. Within the food group, the
highest inflation is observed in the case of pulses and the lowest in the case of
edible oils. The acceleration in food inflation and the abnormally high level of
food prices towards the end of 2009 have been caused by several factors relating
toa shock in supply, trade, global prices, food management, speculative activities
and demand. Thus, the main cause of an increase in food prices in 2008 was the various reports on climate change,
floods and droughts in the future.
shocks. There are only two ways to address demand and supply imbalances
arising out of such shocks, viz., cross border trade and by maintaining an
adequate inventory. Except for a buffer stock of rice and wheat by public
agencies and sugar stock by various agencies, there is no arrangement in the
country to carry large inventories of other food items. Because of this, the stock to
consumption ratio for most of the commodities in the country remains low and
not large enough to go beyond the next harvest.
Q. 3. Given the trends in food inflation, what long term strategies should be
adopted to contain food inflation in the long run?
Ans. Long-term inflation depends upon the pace of growth in domestic
Production in relation to the growth in demand, This involves three aspects:
(i) level or magnitude of growth of output;
(ii) year to year fluctuations; and
‘composition of growth.
The trend in growth of food output (i, output of food crops and
wee Presented in the figure below. 195
190
385 $$$.
1976-80 1986-90 1996-2000 2006-09
Trend in per person production of foodgrains (in kgs)
On the demand side, India's population is rising annually by 1.4% and pep
capita demand is showing robust growth due to improvements in per canig
income and also because the present level of nutrition and food intake are y,
low compared to the requirement for a healthy diet. These changes suggest thay
the deceleration in food production growth is not reversed food prices would
remain under strong pressure from the demand side. Food storage capacity in the
country is very low and the quality of storage infrastructure is not suitable foy
keeping food beyond a few months. This is particularly true for semi-perishable
and perishable foods. While production of horticultural and livestock products ig
rising at a relatively high and stable rate, production of food grains shows slow
and fluctuating growth. Despite a rising food subsidy, cereals are showi
double digit inflation. On a per capita basis, production of food grains declined
by about 5% between the early 1990s and the triennium 2005-06 to 2008-09 (ee
figure above). Another important concern relating to long-term inflation is that
the average cost of production of major crops is showing an increase even in
regions with low productivity, which have a large potential for growth. This kind
of growth necessitates an increase in food prices. Only technology led growth can
help in checking high food inflation in the long run. The main reason for a sharp
surge in food prices during 2009 is the supply shock due to the drought in 2009
and the carryover effect of low growth of food production in 2008-09. As the
frequency of such shocks is expected to rise, we need to have an effective food
management strategy to deal with them. India needs to explore various options
for price stabilisation like maintaining buffer stocks and using trade. We need to
invest heavily in expanding storage capacity for various types of foods in both
the public as well as private sectors. Due to fluctuations in growth, export of
some commodities in one or two years is followed by their imports, which
invariably involves a variation in costs and prices. As India is a net exporter of
food, a part of what is now exported needs to instead become part of domestic
stabilisation stock. There is a need to change regulation in food markets t
| encourage and involve the private sector in the food market, trade and stock
Management for price stabilisation along with active participation of public
agencies. The risk of such players resorting to hoarding and speculative trade can
oo | POLICIES AND PERFOMANCE IN AGRICULTURE = 23
Beshiesked by establishing a food market regulator. India also needs to set up a
Stone institutional mechanism for an early warning system relating to food
“mand, supply and price situation. The long-run food scenario is causing
een pers ‘The falling share of eas to works
re en Sotee
mt jistribution of the benefits of
nee Ecc the cere fae Ont eto in
vane ding an important role to the,
‘ee ea inet ot proving impart othe p
fatringha corded ae
:
i
i
Fa msn ithe sine and roth ofthis str lieth
penser Ts th pate oor mor ga ccc
re mc nan mansnctaring. Four dss ses in the le
min Pe pues scorn the infstalzaton of the Sonam) Rays |
“195657 to 189-70—both public and pevate sector functioned, but public
ctor dominated:
(i Soto 1970-2 gradual decline in the role of the public sector, an,
the private sector was severely conte; |
(i) SASK to TLSB—a gradual relation of controls and a slow
etazaal ofthe ple Sctor an
(Ge) 1990.98 cmrarde private eto given greater freedom and assigned the
leading role in indus growth |
8. Discus the role of manufacturing in economic growth. How has
iroymen wages nd oupa n the manaactaring set performed ore
‘Ans. The Contibution of Manufacturing to Indi’s Economic Growth in the
1960 and 198, the Indian eenomy was tate of 58 percent per annum,
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