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Table of Contents
1. Introduction to Economy 5
2. National Income 11
3. Economic Growth and Development 25
4. Money Supply 47
5. Banking (Part I) 61
6. Banking (Part II) 71
7. Inflation 93
8. Financial Market 107
9. Taxation 121
10. Government Budgeting 155
11. External Sector 189
12. Economic Planning 227
13. Industries 257
14. Financial Inclusion 295
15. Global Economic Institutions 339
16. Agriculture and Food Managements 353
17. Infrastructure 415


1 Introduction to Economy
Economics governments decide how much to contribute

• The term ‘economics’ derives from two to agricultural subsidies, and agricultural
Greek words, ‘eco’ meaning home, and infrastructure.
‘nomos’ refers to accounts. The subject • Economics provides us with valuable
has developed from being about how to knowledge for arriving at decisions in
maintain the family accounts into the everyday life.
wide-ranging subject of today. • With the help of economics, we can
• The scope of economics has expanded evaluate government policies, and their
steadily since the 18th century, but at a likely outcomes. It provides us with valuable
faster rate since then. It was only in the 18th insights into the state of the economy.
century that Economics grew as a separate • Broadly, it tries to answer the following
field of study when leading philosophers three questions:
tried to answer questions on the driving
o What goods and services to produce?
force of various economic activities, and
o How do we produce these goods and
debated the role that governments should
services?
play with regard to this.
o Whom to produce these for?
• There are a number of definitions of
Economics:
o Economics is a social science concerned Branches of Economics
with meeting people’s needs, and Economics is generally divided into two main
desires through the optimal distribution branches, Microeconomics and Macroeconomics.
of limited resources with multiple uses. Microeconomics
o It is the science which studies human • Individual agents in the economy, such as
behaviour as a relationship between households, workers, and enterprises, are
ends and scarce means, which have the subject of microeconomics.
alternative uses.
• For example, if a person earns 50,000 INR
o By extension of our basic definition, monthly, how much should he save and
economics is concerned with the how much should he spend? How should
effective use of various natural
he allocate his expenditure budget between
resources to maximise societal welfare
different goods and services, given his
at the national and societal levels.
unique likes and dislikes?
• The goal of economics is to strike a balance
• Microeconomics believes in the rational actor
between scarcity and choice. Economics
model. In this model, individual actors are
seeks to reconcile boundless desires with
considered rational beings who make rational
finite resources.
calculations to maximise their utility (well-
being) through their economic decisions.
Significance of Economics
People and governments must make choices
Macroeconomics
because resources are limited. Economics
helps us know how societies, governments, • Macroeconomics is a field of economics
businesses, households, and individuals that studies the entire economy.
allocate these scarce resources. For example, • It focuses on broad concerns such as GDP
from the limited budget for agriculture, growth, unemployment, price inflation,
Introduction to Economy 5
government deficits, and export and import are necessary for ensuring a free and fair
levels. market for all participants. At times this
• Macroeconomics tries to understand what role is compared to that of an umpire.
drives the business cycle from boom to bust, o Examples of Capitalist economies are
or from growth to the recession, and what the USA, UK, Germany, Singapore etc.
controls economic indicators such as gross • Command economy: Following the
domestic product, unemployment, and Bolshevik Revolution in the former Soviet
inflation.These two are linked closely as the Union (1917), this type of economic system
behaviour of households or consumers or
arose, inspired by the theories of German
firms depends upon the state of the nation
philosopher Karl Marx (1818–1883). In the
as well as the global economy and vice
People’s Republic of China, it was perfected
versa. For example, business sentiments
(1949). Other Eastern European countries,
depend on the state of the economy.
such as Poland and Yugoslavia, adopted
Types of Economic Systems
this economic framework.
Economies can be further characterised into
o We can see two different forms of state
three types, based on the role of government
economies in this. First, the socialist
and ownership.
economy was identified in the former
• Free market economy: Free market Soviet Union, and the communist
economies are also known as capitalist economy was identified in pre-1985
economies. Before understanding the China.
Capitalist economy, we need to understand
o The collective ownership of the
the concept of “Capitalism”.
means of production was emphasised
o Capitalism is often believed to as an
in a socialist economy (property
economic system in which private
and assets). It also acknowledged
players or organisations own, and
the government’s significant role in
control property in accordance with
economic management. In a Socialist
their interests, and demand and supply
economy, all the factors of production
freely establish prices in markets in a
are under the ownership and control of
way that can serve the best interests of
the community, as indicated by State.
society.
So, all the factories, machinery, plants,
o The essential element of capitalism is
capital etc. are owned by a community
the motive to make a profit. It is this
indicated by State.
logical self-interest that can lead to
economic success and prosperity. o The communist economy, on the other
hand, called for state ownership of all
o In a capitalist economy, capital assets,
for instance, mines, factories, and property, including labour, as well as
hospitals, can be privately owned and absolute state control over the economy.
controlled. Labour is purchased for o The government makes all of the critical
money wages. Capital gains accrue choices about production, supply, and
to private owners, and prices allocate prices. Centrally planned economies,
capital and labour between competing centralised economies, and non-market
uses. economies were all terms used to
o The government’s role in such an describe these types of economies.
economy is limited to regulation and o It’s important to remember that for Karl
control measures. The other measures Marx, socialism was merely a stage on
by the government, such as ensuring the way to communism. But, it never
free competition, consumer rights, etc., did occur in reality in any State.
o Basically, these kinds of economies o This is usually done to address

came in reaction to the challenges issues of under-developed markets or
prevalent in the capitalist economic enhance equitable distribution across
system. citizens.
• Mixed economy: Mixed economy is o India follows the Mixed economy system.
a combination of a capitalistic and Thus, the property is owned by the
socialistic economy, wherein both the state as well as private entities, and the
market and government decide the decisions are also taken jointly by both.
allocation of resources. Sectors of Economy
o Apart from private firms and consumers, According to the ‘three-sector hypothesis’, the
the government may itself choose economic activities are broadly classified into
to produce or consume to affect the three broad categories:
resource allocation and distribution.
Primary Sector Secondary Sector Tertiary Sector

• Agriculture, forestry, fishing, • The Secondary sector adds • This sector encompasses
mining, and other economic value to natural resources all economic operations
activities that make direct by transforming the raw that create various services,
use of natural resources are material into valuable such as education, banking,
included. products. insurance, transportation,
• The services in this sector • For example, cotton fibre and tourism.
are entirely dependent from the plant is used • The activities in this sector
on the availability of the to spin yarn, and weave help in the development of
natural resource in order to cloth. Sugarcane from the primary and secondary
keep day to day operations farms is used as a raw sectors.
running. material to make sugar or • This sector is also called
• This sector forms the base gur. We convert the Earth the service sector.
for all the other sectors of into bricks, which are then • In India, the tertiary sector
the economy. used to make houses and contribution is the largest
• In India, the primary buildings. in terms of share of GDP at
sector, particularly the • As these activities are 54% at current prices, and
Agricultural sector, provides associated with industries, it employs 29% of the total
employment to almost 53% this sector is also called workforce.
of the entire workforce the manufacturing or
currently working, and industrial sector.
its contribution to GDP • In India, the manufacturing
is around 20% at current industry provides
prices. employment for almost
18% of the entire workforce
currently working. The
contribution of the
industrial sector to GDP
is around 26% at current
prices.
Table 1.1: Sectors of Economy
Sector-wise contribution to the GDP of India (2021): (Data from Ministry of Statistics and
Programme Implementation)
Fig.1.1: The Sectoral Contribution to GDP (Current)
Economies based on the Shares of the economy but India has leapfrogged from an
Particular Sector in GDP agrarian economy to a service economy.
• Agrarian economy: If the primary sector • The trend in sectoral contribution to GDP in
accounts for 50% or more of the economy’s India.
total production (GDP), the economy is
considered agrarian. India had an agrarian
economy at the time of independence.
• Industrial economy: An industrial economy
is one in which the secondary sector
contributes 50% or more of the overall
production (GDP) of the economy. The
bigger the secondary sector’s participation,
the higher the level of industrialisation.
• Service economy: A service economy is
Fig.1.2: Changing Share of Various Sectors in GDP
one in which the service sector provides
50% or more of the economy’s total output • The following reasons can be attributed to
(GDP). this shift
‘India is a Service economy in terms of o India with educational investment
contribution to GDP but the Agrarian economy toward secondary and higher education
in terms of dependency/employment.’ produced a group of highly educated
India’s Direct Transformation from Primary workers who have largely worked in the
Sector to Services:- service sector.
• The natural economic movement for a o Well educated human resources, fluent
country is to go from an agrarian economy in English and the availability of skilled
to an industrial economy to a service cheap labour force (E.g., Cheap labour
force in IT industry as compared to some the emergence of various e-commerce

of the developed western countries) are platforms is an example of how the
some of the reasons for the rapid growth digital revolution can lower transaction
of the service sector in the country. costs and increase productivity, which
o On the other hand, low growth in the is ultimately responsible for the growth
Secondary sector can be attributed in the service sector.
to License Raj, restrictions on foreign o Some of the other important factors
investment, stringent labour laws, and are:
lack of skilled labour etc. ■ An increase in per capita income-
o Even after the LPG reforms, the lack of leads to an increase in demand for
availability of infrastructure, transport, various services related to education,
power, and communication severely health etc.
impacted the manufacturing and ■ Increase in tax revenue of the
industrial sectors. These factors also government in the form of service tax.
created a base for service sectors. As ■ Rampant migration-of rural population
compared to the secondary sector, to semi-urban and urban regions.

2 National Income
National Income Accounting For example, the Air India flight between
• National income accounting is a book- Japan and China is part of the domestic
keeping system that a government uses to territory of India.
measure the level of the country’s economic • Fishing vessels, oil and gas rigs, and
activity in a given time period. floating platforms operated by a resident
• National income accounting is not a proven of a country in the international waters.
and well-established science, but it helps in For example, Fishing boats are operated by
getting informed insights about the national Indian fishermen in the international waters
income, and about the functioning of the of the Indian Ocean.
income. • Embassies, Consulate, and Military
• Important criteria or income calculation establishments of a country located abroad.
methods are Gross Domestic Product Goods
(GDP), Gross National Product (GNP), and • Goods, in simple terms, are material things
Gross National Income (GNI). that satisfy human needs. Goods can be
• The data of national income accounting classified as:
gives very useful data regarding the level of • Goods can be further classified as:
income (income inequality) of the masses,
o Final Goods
living standards, comparison between
o Consumption/Consumer Goods
the different sectors of the economy and
their contribution to national GDP. The o Capital/Producer Goods
national income accounting also gives us o Intermediate Goods
information about the contribution made by Final Goods
the different sectors within the economy. • These are the goods that are meant
Based on the data of these various income for final use or final consumption. They
accounting methods helps in analysing, and do not pass through any more stages of
determining the stability of the economy. production or transformation.
• This information on national income • A final good is thus a product that the
accounting and contributors for the same consumer finally uses.
is helpful in determining the impacts of the
• For example, shirts are a final good, and
various economic policies on the various
bricks used for the construction of houses
sectors of the economy.
are final goods.
Gross Domestic Product (GDP)
Consumption/Consumer Goods
• GDP is the final value of all the goods and
• Consumer goods are those final goods, which
services produced within the geographical
are bought for consumption by consumers.
limit of the country in a financial year. For
example, India’s GDP is calculated from 1st • For example, food, clothing etc.
April to 31st March. Capital/Producer Goods
What is the Domestic Territory? • Capital goods are those final goods,
• It includes the political/geographical which help in the production of other goods.
boundaries of the country, including • They do not get transformed during the
territorial waters and airspace. production process rather, they make
• Ships and aircraft owned, and operated by production possible.
residents between two or more countries. • For example, tools, machinery, vehicles, etc.
National Income 11
Intermediate Goods Financial/Fiscal/Accounting Year

• Intermediate goods are the goods that are • It is a period of 12 months, used by
utilised as an input for the production of governments, businesses, and other
final goods. organisations in order to calculate budget,
• For example, copper is used for making profit, losses, etc.
utensils, steel sheets are used for making • In India, this period starts on 1st
automobiles, etc. April and ends on 31st March.
Reason Behind Accounting Only Final Goods • A financial year is equally divided into 4
• The final value of the goods includes all the quarters.
value added during the process of making Q1 = 1st April-30th June
the final products. This means all the value Q2 = 1st July-30th September
of essential intermediate goods is already Q3 = 1st October-31st December
taken into account. For example, if the
Q4 = 1st January-31st March
cycle is the final output or product, then
intermediate goods like iron rods, chains, Critique of GDP
handlebars etc, are included in the final • To determine the growth rate of an economy.
pricing of that cycle. If these individual The growth rate of 6% means that the size
intermediate goods are counted during the of the economy has increased by 6% from
production process, then it will lead to the last year.
error or mistake of double counting and will • It is a quantitative concept, and its volume
result in false GDP numbers. indicates the ‘strength’ of the economy.
• Let us take an example of the agricultural But it does not tell anything about
sector. Suppose in a year a farmer produces Rs. the ‘qualitative’ aspects of the economy.
100 worth of potatoes. A Chips Company had to For example, GDP will talk about the value
buy Rs. 50 worth of potatoes to produce Chips of goods that a country produces, but it
worth Rs. 200. Now consider the following table: will not talk about the quality of goods
produced by the country. It also does not
- Farmer Chips company focus on any negative impacts this process
Production Value 100 200 has on the stakeholders.
Intermediate 0 50 • For example, pollution as a by-product of
Good Used economic activity is not considered while
calculating GDP.
Value added 100-0 = 200-50 = 150
• It is used for comparative analysis by
(Production Value 100
international organisations like the IMF, etc.
- Intermediate
Good) Potential Gross Domestic Product (GDP)
• It is a theoretical concept. It is an estimate
Total GDP when 100 + 200 = 300
of the value of the output that the economy
intermediate (Here, we can see the
would produce if labour and capital
goods are value of potato, i.e.
had been employed at their maximum
included Rs. 50 is counted twice
sustainable rates (at steady growth and
first in the farmer’s case
stable inflation).
and then for the chips
• The cost of the rising inflation can result in
Company)
an economy producing extra as compared
Total GDP when 200 - 50 = 150
to its potential level of production.
only Final Goods
• The potential labour force depending
are counted
on various demographic factors and
12 National Income
participation rates, the capital stock, • If the GDP is increased by the rise in prices
the non-accelerating inflation rate of and not an increase in production, it does
unemployment, and the level of labour not reflect this.
efficiency, decide this potential output • It also doesn’t reflect that if a business’s
which is very important to calculate the benefit is degrading another business.
output gap. • It does not reflect the uneven distribution
Why is GDP the Most Acceptable Indicator of money in the economy of the country.
Worldwide? • Some products that contribute to the
GDP stands for Gross Domestic Product. It is economy, like tobacco and liquor, have
defined as the total value of goods and services bad health effects on the citizens of the
produced within the boundary of the nation. country.
It is the most acceptable indicator worldwide • All products contribute differently to the
because of the following reasons: welfare of the nation, like clothes, and food,
• It is an almost correct indicator of the size directly to the economy but police and
of the economy of a nation. GDP per capita military services do not contribute much to
gives the correct data about the standard the economy, which is not reflected in the
of living of people. GDP.
• It helps the central banks, and economic • It does not reflect the effect of population
policymakers to see whether the economy change on the economy.
is expanding or contracting, and take the Net Domestic Product (NDP)
required action. • The Net Domestic Product (NDP) is nothing
• It is a formula-based method, so it allows but the annual measurement of the output
economists to see the effect of the changes of an economy to adjust to account for
in policy on the economy. depreciation. The NDP is counted as per the
• It can be calculated by any of the three following formula
approaches: NDP = GDP - Depreciation
o Expenditure method Different Uses of the Concept of NDP
o Income method • It is used to understand, and analyse the
o Value-added approach loss due to depreciation to the economy.
• It is easily convertible so the economies of • It is also used to show the achievement of
different countries can be compared most the economy in the area of research,
accurately. and development in reducing loss due to
• It can point out recession, and inflation in depreciation.
the economy. Depreciation
• Every asset has its own monetary value, which
Is GDP a Sufficient Indicator of Growth?
keeps on decreasing, and it happens due
GDP is not a sufficient indicator of growth due
to the use, wear and tear of that particular
to the following reasons:
good. The process of wear and tear leads to a
• It does include non-monetary and non- decrease in the monetary value of the goods,
market transactions like people working in which is also known as “depreciation”.
their houses.
• Every year some cost or money is deducted
• It does not include the products which are from the overall value of the goods, or it can
not bought in the market by the producers. be divided by the total cost of goods with
• It does not include the degradation caused their useful life. Hence, it is sometimes also
by the infrastructure or product to the called the annual allowance for wear and
environment. tear.
National Income 13
• In India, the depreciation rates for assets those who have stayed outside the country
are declared by the Ministry of Corporate for the past one year or more.
Affairs, Government of India. GNP = GDP + Net Factor Income from
GNP/GNI abroad
• Gross National Product/Gross National GNP = GDP + Money flowing from foreign
Income (GNP/GNI) is the monetary value countries - Money flowing to foreign
of all final goods and services produced by countries
the normal resident (explained below) of • Following are the products or items added
the country in a financial year regardless of to “Net Factor Income”.
production location.
• Residence, rather than citizenship, is the
a. Trade balance:
criterion for determining nationality in GNP
• It is the net outcome of the total imports
calculations, as long as the residents spend
and export (i.e., Export-Import) of a country
their income within the country.
in a year.
• As per the global accounting conventions,
• For India, in recent years, the trade balance
residents are generally those people who
has been negative (Since, Import > Export).
have lived in the country for the past one
year or more. Similarly, non-residents are • Trade during April-March 2021-22:
Table 2.1: Trade Balance
(The latest data for the services sector the money lent out and the net interest
released by the RBI is for February 2022. The paid on the borrowed money.
data for March 2022 is an estimation, which • That is the inflow of interest payment - the
will be revised based on RBI’s subsequent outflow of interest payment.
release.) • For India, it has always been negative (Since
b. Interest on external loans: for India Outflow of Interest Payment >
• In this account, the interest is counted by Inflow of Interest Payment).
the net inflow of the interest payment on
14 National Income
c. Private remittances:
• The Net outcome of the money inflow
by Indian nationals working outside, and
outflow by the foreign nationals working in
India.
• For India, it is positive since India is the
largest recipient of remittances in the world.
In the case of India, NFIA is negative. Hence, Fig. 2.1: Different Uses of the Concept of GNP
India’s GNP is lower than its GDP. A: Income earned by the normal resident from
Normal Resident the domestic territory.
• It refers to the individual who usually B: Income earned by the normal resident from
resides in a country, and whose economic abroad.
interest lies in that country. C: Income earned by the non-resident from the
• Normal Residents include: domestic territory of the country.
o Citizens and Non-Citizens (residing for Difference between GDP and GNP
more than 1 year)
o Institutions GDP GNP
• For example, Lisa, who is an American It measures the It measures the
National works in a software company in market value of market value of
Delhi for the past five years, is a normal all final goods and all final goods and
resident since her economic interest lies services produced services produced
in India, and her stay in India has been for within the domestic regardless of
more than one year. territory of a country. production location.
Different uses of the concept of GNP The focus on GDP The focus on GNP
is on domestic is on production by
• GNP is preferred to GDP by organisations
production. normal residents.
such as the World Bank because it indicates
both the internal as well as external strength It highlights the It highlights how
of the economy. strength of the the residents of the
country’s economy. country contribute to
the economy.
Table 2.2: Difference between GDP and GNP
Previous Years’ Question (PYQ) (2020, Mains)
Q. Define Potential GDP and explain its determinants. What are the factors that have been
inhibiting India from realising its potential GDP? (150 Words, 10 Marks)
Decoding the Question:
In the introduction, try to define the concept of potential GDP.
•
• In the body,
o Explain determinants of potential GDP.
o Discuss factors that inhibit India from realising its potential GDP.
Try to conclude by suggesting measures to mitigate the crisis.
•
National Income 15
Answer:
The Potential Gross Domestic Product (GDP) is defined in the OECD’s Economic Outlook publication,
as the level of output that an economy can produce at a constant inflation rate. It can also be
defined as the highest market value that can be produced by an economy over periods.
Determinants of Potential GDP:
• Raw materials: Availability of natural resources such as oil and gas, and available land.
• Capital stock: It includes machinery, plants, and assets that help in the production process.
It also includes public infrastructure owned, and provided by the government.
• Human capital: Education and skill level of the workers, the non-accelerating inflation rate
of unemployment (NAIRU), and the level of labour efficiency.
• Labour: The number of workers available in the country. The potential labour force depends
on demographic factors and participation rates.
• Information, computer and telecommunications (ICT) capital: Constant up-gradation in
these technologies is crucial, and for that, they need the strongest possible ecosystem of
R&D in a field like Artificial Intelligence, and Machine Learning.
• Technological knowledge: Expensive technology and a poor ecosystem for R&D in the country
makes the production process costly, and uncompetitive in the international market.
• Logistics and supply chain: Faster rate of transportation of raw materials and finished
products, efficient means of supply chain, and their management, cold storage, etc.
Factors inhibiting India from achieving its potential growth:
• Global slowdown: Trade War between USA and China slowed down trade prospects and
led to decreased global demand. Another factor is the protectionist approach adopted by
major countries hurting India’s trade.
• Decreased rate of saving in India: India’s overall saving rate has gone to a 15-year low this
household savings is also plunged. According to Central Statistics Office data, India’s gross
savings fell to 30.1 per cent of the gross domestic product in fiscal 2019 from 34.6 per cent
in fiscal 2012, and 36 per cent in 2007-08.
• Poorly skilled workforce: Though India has the largest working population in the world,
its workforce is poorly skilled. The unskilled population constraining is achieving India’s
potential GDP.
• Lower Investment from the private sector: The twin balance sheet problem led to lower
investment from the private sector, and large scale government borrowing led to crowding
out of the private sector.
• Impact of a pandemic: Covid-19 has Impacted India’s economic growth very badly, and
India recorded a negative growth rate of more than 23%. The lockdown and consequent
shutdown of almost all economic activities in the world lead the country to its lowest rate
of economic activities.
• Inequity: Inequality in society or inequitable growth rate of the economy affecting India’s
potential growth.
• Existence of a Large Informal Economy: For example, MSMEs do not get the best resources
available and available resources, especially talented skilled workforce, who do not go
and work for MSMEs. A recent survey found that only about 46% who are graduates are
employable anywhere with relevant skills.
Thus, if India wants to achieve its potential output/GDP, the factors that are affecting its
growth and determinants of its potential GDP need to be addressed on a priority basis. Though
potential GDP is a theoretical prediction that may always not be equal to the final output.
Various external factors may also be responsible for affecting predictions.
16 National Income
Net National Product (NNP) Factor cost:

• Net National Product (NNP) is the (Gross • It is the input cost that the producer has to
National Product (GNP) minus depreciation. incur in producing goods and services.
NNP = GNP - Depreciation • In factor cost, the cost of all the factors
• NNP is used to find the Per Capita Income is included, such as rent, wages, interest,
(PCI) of the country. etc. all is supposed to be paid for the land,
labour, capital, entrepreneurship etc.
PCI = NNP/total population of a nation.
• The factor cost helps producers to decide
Cost
the pricing of the commodity.
• Cost is the value of money that has been
Market Cost
used up to produce something or to deliver
• It is the cost at which the goods are sold in
a service.
the market.
• The value of total produced goods and
• It is derived by adding the Net indirect tax
services can be calculated either at factor
(E.g., GST) to Factor Cost (FC).
cost or at market cost.
Market Cost = Factor Cost + Net Indirect Tax
(Indirect tax - Subsidy)
• Market cost is used for determining actual
GDP transaction, i.e., GDP at Market Price =
GDP at FC + Indirect Taxes - Subsidy.
• For example, Ramesh sells 100 cakes. The
Fig. 2.2: Cost
cost of the production of cake is Rs. 9,
Ramesh sells 100 products.
Years Number Factor Cost Tax Subsidies Net Market Price GDP GDP
of per unit Indirect per unit at MP at FC
Products product Tax product
2014-15 100 9 2 1 2-1 = 1 10 1000 900
2015-16 100 9 3 1 3-1 =2 11 1100 900
Table 2.3: GDP at MP and FC
In January 2015 Government of India started

estimating GDP at Market Price.
• Generally, factor costs are used to measure
economic growth, whereas market prices
are used for actual transactions.
Relation Between Different Measures of
Iincome
• GNP = GDP + NFIA Fig.2.3: Diagrammatic Representation of the
Subcategories of Aggregate Income
• GNP = NNP (at MP) + depreciation
• NNP (at MP) = NNP (at FC) + Net Indirect NFIA: Net Factor Income from Abroad,
taxes D: Depreciation, ID: Indirect Taxes, Sub: Subsidies,
• NNP (at FC) = NI UP: Undistributed Profits, NIH: Net Interest
National Income 17
Payments by Households, CT: Corporate produced. Hence, the nominal GDP presents
Taxes, TrH: Transfers received by Households, a distorted picture of the actual growth.
PTP: Personal Tax Payments, NP: Non-Tax Real GDP
Payments, PI: Personal Income, PDI: Personal • Real GDP is GDP calculated at the market
Disposable Income prices at the base year.
• If we are comparing the GDP growth over
Current Price vs Constant Price two years, the nominal GDP growth might be
overestimated due to the effect of inflation.
Current price: The current price of any goods is
valued at the price of their year of production. It • Therefore, Economists use the prices of goods
helps in the counting of the actual transactions, from a base year to act as a reference point,
when comparing GDP from one year to another.
and GDP counting the current price helps us to
come to “Nominal GDP”. • For example, if 2011 were chosen as
the base year, then the real GDP for 2019
Constant price: The constant price is measured
is calculated by taking the quantities of all
on the fixed year or base year for all the goods
goods and services purchased in 2019, and
and services produced in a year, for example, multiplying them by their 2011 prices.
for measuring constant price in India base year
• Nominal GDP > Real GDP. (But in theory,
is chosen from 2011-12 from 2004-05. The
this is not always the case.)
growth at a constant price is important for
GDP Deflator
accounting economic growth of any country,
• GDP deflator measures the impact of
and it helps in accounting for the real GDP of
inflation on the gross domestic product
the country.
(GDP) i.e. how much a change in GDP relies
Nominal GDP on changes in the price level.
• The nominal GDP is based on the current • It is calculated by dividing nominal GDP by
market prices, and it takes into account real GDP, and then multiplying by 100.
all the changes happening in the ongoing
year due to the change in inflation and
deflation. • The GDP deflator can be viewed as
• Because nominal GDP is measured in a conversion factor that transforms real
current prices, growing nominal GDP might GDP into nominal GDP.
reflect a rise in prices as opposed to • The table below shows the relation between
growth in the number of goods and services Nominal GDP, real GDP, and GDP deflator.
Years Number of Current Base GDP at GDP at GDP Real GDP = Nominal GDP/
Products Price Year Current Base Deflator GDP Deflator) * 100
Price Price Price
2011-12 100 10 10 1000 1000 100 1000
2012-13 100 15 10 1500 1000 150 1000
2013-14 100 22.5 15 2250 1500 150 1500
Table 2.4: Relation between Nominal GDP, Real GDP, and GDP Deflator
18 National Income
Income Private Income = Earned income of private

• The income of a person has three forms. sector + Unearned
income of the private
sector (e.g. transfer
payment).
Domestic Income
• It is the total income earned in the domestic
Fig.2.4: Forms of Income territory during a financial year.
DI = NDPFC
National Income or NNP at Factor Cost
NDPFC = GDPFC - Depreciation
• National Income at Factor Cost = NNP at
Market Price - Indirect Tax + Subsidies. • Domestic Income can be calculated both at
current (Nominal DI), and constant (Real DI).
Personal Income (PI)
Base Year
• Personal Income is the part of the National
Income received by the household. • A base year is a year which is used as a
basis for comparison by a price index, such
• PI = NI - Undistributed profits - Net
as GDP growth, CPI etc.
interest payments made by the households
- Corporate Tax + Transfer Payment to • The base year is allocated the value of 100
the household from the government and in an index.
firms. • For example, to find the rate of inflation
Personal Disposable Income (PDI) between 2013 and 2018, 2013 is the base
year or the first year in the time set.
• If we are supposed to come to the PDI we
need to deduct the payment of direct taxes
from the person’s income. This is a very
important aspect of a person’s spending
as this income is used by the household
for his/her personal expenses, including
personal consumption. • The base year is changed periodically to
PDI = Personal Income (PI) - Personal tax take into account new goods and services
payment - non-tax payment in the economy.
National Disposable Income (NDI) Criteria for Selection of the Base Year
• NDI is the total income available for use by • A base year has to be a normal year without
all the residents of the country in a fiscal large fluctuations in trade, prices of
year. commodities and variables should be on
NDI =
NNP MP + Other current transfers average.
from the rest of the world • The base year chosen should not be very
NDI = NI + Net Indirect taxes + Transfer old (so as to better reflect the basket of
payment from the rest of the world items to be measured)
• NDI gives the idea of what is the maximum • Moreover, the year chosen should have data
amount of goods and services the domestic available for all the necessary variables.
economy has at its disposal. Data Collection Agency in India
Private Income Central Statistical Office (CSO)
• It is the total income (earned as well as • The Central Statistical Office (CSO) in
unearned) of the private sector during the the Ministry of Statistics and Programme
financial year. Implementation (MoSPI) is responsible for
National Income 19
macroeconomic data gathering, and record • GVA at Factor Cost + (production taxes
keeping. fewer production subsidies) = GVA at basic
• Release estimates of GDP, NI, GNP, NDP, Per prices
Capita Income, CPI, IIP etc. • GDP at Market Prices = GVA at basic prices
• The CSO coordinates with the various State + product taxes- product subsidies
governments and organisations to collect, • In the current series, the data for corporate
and compile data required to calculate GDP income is collected from the Ministry of
and other statistics. Corporate Affairs MCA-21 records, which
• For example, at the State level, State allow information even for small level
Directorates of Economics and Statistics firms.
(DESs) compile their respective State • It covers data on the financial sector from
domestic products and other indicators. stock exchanges, financial institutions and
• All the required data is collected and various regulators like the Securities and
aggregated by CSO, and used to arrive at Exchange Board of India (SEBI).
the final numbers. Production Taxes
“New GDP Series” 2015 • These taxes are imposed on production,
• The Central Statistical Office (CSO) came and are independent of the volume of
out with a new series of national accounts actual production.
with 2011-12 as the base year for computing • These are direct taxes.
National Account Statistics like GDP, GNP etc. • For example, Stamp duty, registration fees,
• The New GDP Series expanded the size and professional tax.
of the economy by broadening its base in Production Subsidies
the farm, corporates, and unorganised • These are paid by the government in
sectors. relation to production, and are independent
• The growth rate of the economy is now of actual production.
measured by GDP at market price, which • For example, Subsidies for railways, Input
will be called GDP as they are practised subsidies to farmers etc.
internationally. Earlier, GDP at factor cost Product Tax
was used for the calculation of GDP.
• Product Tax is paid per unit of output.
• The sector-wise estimate of Gross value
• These are Indirect taxes.
added is calculated at the Base Price
• For example, Sales tax, excise tax, service
instead of at the Factor cost.
tax etc.
In simple terms, for any product or commodity,
Product Subsidies
the base price is the amount receivable by the
producer from the purchaser for a unit of a • These are paid by the government per unit
product minus any tax on the product plus any of output.
subsidy on the product. • For example, food, petroleum, fertiliser
GVA at the basic prices includes the production subsidies to farmers etc.
tax, and there is no place for subsidies given Criticism of New Methodology
on the various commodities. • The 2011-12 series used, for the first time
On the other side, GDP at market prices an untested MCA21 database of the Ministry
comprise both production and product taxes of Corporate Affairs.
and excludes both production and product Positive of New Methodology
subsidies and GVA at factor cost consists of no • It confirms international standards, i.e.,
taxes and excludes no subsidies. based on the convention of IMF.
20 National Income
• It is based on more sources of data (for

Stages Farmer Baker
instance, MCA21 is a larger database for
industries). GVA (Gross 100 200 - 50 = 150
Value Added) =
Measurement of National Income
(Production value
• NI is the total income earned by the
- Intermediate
resident of India in a given financial year in
Good)
the country. The following three methods
Table 2.5: Product or Value-Added Method
are used for calculating national income.
Income Method
This method includes all the factors of the
production like rent, interest, royalties, profit,
wages, etc. in the territory of any nation for
Fig.2.5: Method for Measurement of National Income
saying entire India.
GDP = W + In + P + R
Product or Value-Added Method
W = Wage and salaries.
• This method accounts for national income
In = Interest payments.
by taking into consideration the value-
P = Gross profit.
added in the product in different stages of
the production system. R = Rent.
• In this method, NI is estimated by adding Expenditure Method
up the value addition of each firm for all • In this method, all the expenditure on
three sectors, namely Primary, Secondary consumer goods and investments, which
and Tertiary Sector. are produced within the domestic territory
• As this method emphasises the net value incurred by the household, government,
addition by every component in production, and firms are summed up to get NI.
therefore the following factors should be GDP = C + I + G + (X-M)
excluded or subtracted from the output of C = Private final consumption expenditure.
the enterprise. G = Government final consumption
• Net Indirect taxes, expenditure.
• Raw materials consumption and I = Expenditure on final Goods [
• Capital consumption Investment or capital formation]
X = Exports M= Imports X-M = Net Exports
• For example, Suppose, in a year, a farmer
produces 100 rupees worth of wheat for Items not Included in National Income
which he does not need any assistance or • The items that are not incorporated in the
input. Therefore, the entire amount of Rs. calculation of National income are :
100 is the contribution of the farmer. The • Intermediary goods = to avoid double counting.
baker had to buy Rs. 50 worth of wheat to • Transfer payments like gifts, scholarships,
produce bread worth Rs. 200. and remittances.
• Sale/Purchase of Old/Second-hand goods
Stages Farmer Baker
(but the broker commission is included).
Total production 100 200 • Black money.
Value
• Capital gains.
Intermediate 0 50 • Household services (only housewives
Goods Used services if paid are counted).
National Income 21
Facts Regarding National Income The Difficulty of Measurement of National

• In the year 1867-68, for the very first time, Income
an estimate of National Income (NI) was Following are the major difficulties in the
carried out by the great freedom fighter of measurement of National Income:
India, DadaBhai Naoroji. A detailed account • Non-valued transactions: These are
of the NI is given in his own book “Poverty transactions which are part of the output,
and Un-British Rule in India”. but do not come into the market.
• But VKR Rao carried out scientific NI For e.g., Farmer’s produce which is
accounting for the first time in 1931-32. consumed by him and his family is a part
• In 1948-49, the Ministry of Commerce of the output from his farm, but it never
carried out and officially came out with comes to the market, so there is a problem
figures of NI income. with giving this output a certain value
• The Government of India, under the • Lack of education: The majority of people
leadership of Dr P.C. Mahalanobis, founded are illiterate, and do not keep correct
a specialised committee for carrying out the records or no records of their production
task of NI accounting called the “National and sales, which is worth assuming.
Income Committe e” in 1949.
• Lack of specialisation in occupation: It
• Since 1956, the Central Statistical makes income calculation difficult in a
Organisation has been estimating National way as for e.g., - A farmer involved in crop
Income (NI) and related aggregates. These cultivation can also do side works like
are published in the Report titled ‘National fisheries, dairy, and poultry on a small scale
Accounts Statistics. but they are not included in the national
Factors Affecting National Income income calculation.
National Income is the total income of the • Lack of correct data: There is no proper
residents of a country in its economic boundary machinery for collecting the data in the
over the time period. country.
Factors affecting National income are as • Constant changes in stocks: The constant
follows: charges in stocks on a firm which can
• Natural resources and their importance in be addition or subtraction from current
the world economy production make, it difficult for the income
• Research and developments capabilities of estimate over the year.
the country • Calculation of reduction in value: There
• The efficiency of the worker, i.e., more the is no accepted rate or method for the
efficiency of the worker higher is income reduction of a value of a product so a
• Political stability, and political will i.e., the correct estimation of net income will never
stability of the government and ready to be correct.
give conditions for the setup of industries • Double counting: It is very difficult to avoid
• Foreign investment in the country double counting of values of a product
• Export of the country, i.e., Higher the export or service, which disturbs the income
greater is the income estimation.
• Imports of the country, i.e., Lesser the • The difficulty of the expenditure method:
import greater is the income It is difficult to estimate the national
• Capacity to develop more industries income by this method. All expenditures
• People will be towards investment are not recorded in the correct format, so
expenditure is not easy to estimate
22 National Income
Closed Economy vs Open Economy on the consumption and production

Closed Economy opportunities of others.
• A closed economy is an economy that has • Pollution is a traditional example of an
no economic relations with other countries externality. The producer of the goods
of the world. focuses on the cost and profitability and
• Due to this, the Gross domestic product does not pay attention to the indirect costs
and Gross national product are the same in to those who are harmed by pollution.
a closed economy. • Externalities are among the main reasons
Open Economy for which the governments intervene in the
economic sphere.
• An open-economy is an economy that has
economic relations with other countries of Economic Growth versus Developments
the world. Economic Growth Developments
• Due to this, Gross domestic product • It is the positive • It is qualitative
and Gross national product are not the changes in and quantitative
same in an open economy. economic changes in the
GDP and Welfare indicators. economy
• Countries with higher GDP per capita often • It refers to a • It refers
have a high score in various development positive change to poverty
and welfare indices. in the number eradication,
• Yet, there are various limitations to the of goods joblessness and
usefulness of GDP as the measure of welfare: and services inequality.
The distribution of GDP is not uniform produced.
• If the GDP of the country is rising the • It refers to an • It refers to
welfare may not rise as a consequence. increment in the positive change
This is because the rise in GDP may be income of the in life and
concentrated in the hands of very few nation standard of living
individuals or firms. Economic inequality is of people
not revealed by the GDP figures. • It refers to the • It takes into
Non-Monetary Exchange increment in account the
• Many activities in the economy are not the output of a social, economic
estimated in monetary terms. For example, country over the and political
the domestic services women perform years well being of the
at home are not paid for. In developing people
countries, where many remote regions are • It focuses on • It focuses on
underdeveloped, the exchange takes place production distribution
as barter exchange which is not registered
• It is the positive • It considers
as part of economic activity. This is the case
changes in one of positive effects
of the underestimation of GDP.
the components on citizens
Externalities
of GDP i.e.
• An externality is an economic term, which
• Consumption
refers to the benefits (or harm) a firm or
• Expenditure
individual causes to another for which they
are not paid (or penalised). • Investment
• In other words, externalities can be defined • Exports
as the indirect effects that have an impact
National Income 23
Economic Growth Developments Economic Growth Developments

• It is single- • It is • It is more • It is more
dimensional i.e. it multidimensional important for important for
focuses only on as it focuses developed developing
income on different countries countries
aspects of the • Poverty and • It is related to
life of people like inequality may ending poverty
social, economic remain and inequality
• It pre-required • It is a positive • Its Indicators are • Its Indicators
condition for effect on - GDP, GNI are - HDI, HPI,
development economic growth Balanced of
• It is for a short • It is a continuous trades.
period or limited process for a Table 2.6: Economic Growth versus Developments
period long term
• It may or may • It required
not require government
government interaction
interaction
24 National Income
3 Economic Growth and Development
Is a person’s well-being solely dependent on his • Economic development is quantitative as

economic well-being? Are people of countries well as qualitative progress in an economy.
with higher Economic growth happier? What • Once the concept of the ‘welfare state’ got
is the difference between development and established, development became a matter
economic growth? These questions are very of high concern for the governments of the
asked. But in the 1960s, economists made a world, policymakers and economists alike.
distinction between Economic growth and Inclusive Growth
Economic development. Inclusive growth is economic growth that is
Economic Growth distributed fairly across society, and creates
• An increase in an economic variable (like opportunities for all.
GDP, GNI, NI etc.) over a period of time is Component of Inclusive Growth
known as economic growth. • Skill development: To have growth with
• The concept of Economic growth is the full potential development of skills is
applicable both for an individual (increase in a must. Some of the government schemes
income), and for a Nation (with an increase for skill development are Pradhan Mantri
in goods and services produced by it over a Kaushal Vikas Yojana (PMKVY), Pradhan
period of time). Mantri Kaushal Kendras (PMKK) etc.
• Economic Growth focuses on the • Financial inclusion: Financial inclusion
quantitative aspects of the growth of the is the process of including everybody or
economy like GDP and NDP. giving financial services to everybody at an
• Though growth is a value-neutral term, i.e., it economical cost. Some of the government
might be positive or negative for an economy schemes for financial inclusion are Pradhan
for a specific period, we generally use it in Mantri Jan Dhan Yojana (PMJDY), Pradhan
the positive sense. If economists say an Mantri Mudra Yojana etc.
economy is growing, it means the economy • Technical development: Technical
is having a positive growth otherwise, they development is very important for inclusive
use the term ‘negative growth’. growth as it will help to tackle the problems
• Economic growth is a widely used term in areas like agriculture, manufacturing,
in economics, which is useful in not only health, governance, and education. Some
national level economic analyses and of the government schemes for technical
development are the Start-up India
policymaking, but also highly useful in the
initiative, the Make in India initiative etc.
study of comparative economics.
• Economic growth: India is currently one
Economic Development
of the fastest-growing economies in the
• The term economic development is a very
world, but it has slowed due to cyclic and
comprehensive term as it includes various
structural problems. India has targeted to
aspects of human development. Economic
become a $5 trillion economy by 2024-2025.
growth is just related to the GDP growth
• Social development: It is also important
of the country, but economic development
to improve the marginalised section of the
is improving the living conditions of people
society in the country to have inclusive
of the country by providing good education,
growth. Some of the government schemes
housing, health, social and other basic
for it are the Credit, Enhancement
infrastructure along with good purchasing
Guarantee Scheme for the Scheduled
capacity for the people.
Economic Growth and Development 25

Castes, National Scheduled Castes Finance • There is backwardness in the agriculture

and Development Corporation (NSFDC) etc. techniques.
Problems for Inclusive Growth • Illiteracy is still high in India.
• There is a high population in India, which is • Regional disparities in the country are major
in poverty. hindrances.
• There is high unemployment in India.
Q. Capitalism has guided the world economy to unprecedented prosperity. However, it often
encourages short sightedness and contributes to wide disparities between the rich and the
poor. In this light, would it be correct to believe and adopt capitalism to bring inclusive
growth to India? Discuss. (200 Words, 12.5 Marks)
• In the intro, you need to define the concept of capitalism the body:
o iscuss how capitalism led to short-sightedness and increased wide disparities
D
among the rich and poor.
o he second part discusses the feasibility of capitalism in bringing inclusive growth
T
in India
• Try to conclude the answer by writing how inclusive growth can be achieved.
Answer:
Capitalism is an economic system in which private individuals or businesses own capital
goods. The production of goods and services is based on supply and demand in the general
market—known as a market economy. A capitalistic market economy is often criticised for
promoting short-sightedness and increasing disparities between rich and poor. It is visible as:
• Impact on Small Enterprises: As capitalism in globalisation promotes greater integration
of world economies. The bigger size of industries, and use of technologies brought very
tough times for small enterprises as they are not able to compete with big corporations.
• Impact on employment: Capitalism can create job opportunities, but the Indian experience
has seen low job creation in the formal, organised sector.
• Inequality: Increased inequality is another distortion created by capitalism. The poor
got fewer resources to spend, but on the other hand, the rich have been busy doubling
their resources. This inequality is underlined by various reports like the Oxfam report on
inequality, even sustainable development goals also want to reduce inequality.
• rony capitalism: Crony capitalism is an indicator of the state of the economy where
C
success in business is determined by the mutual relationship between businessmen,
and government officials. This mutual relationship is hampering almost every system or
government machinery by increased corruption, fewer regulations, influencing governments
decisions etc.
• aves and have nots: Haves and have nots is a concept where both rich and poor class
H
exists, but rich the rich class has access to all the resources and benefits, which they use
for their progress and success. On the other hand, poor people become less as they have a
very limited capacity to make progress.
26
Economic Growth and Development
• nequal distribution of power and materialistic things: Unequal distribution of materialistic

U
things like pleasure time, tourism, having cars and own house etc. are some of the criticisms
of capitalism. But on the other hand, capitalism leads to the concentration of power among
a few people, and policies at the government level are created for their own benefits.
With the adoption of the New Economic Policy in 1991, India officially started showing reforms
toward evolving into a capitalist market economy. Afterwards, India was able to achieve a
higher economic growth rate, but its growth has not percolated down to the poorest section
of the society. Hence, there is a debate in India’s context about whether capitalism can be
used for bringing inclusive growth in India or not.
• Capitalism’s very nature is profit-making, and this is the only motive behind its every step.
Thus, bringing inclusive growth by the use of capitalism is very challenging as there will be
a very minimal role of the state. But some proponents say that,
• Capitalism promotes more wealth than any other economic system in the world, thus they
claim capitalism creates more prosperity.
• Even proponents of capitalism claim that benefits obtained are meant for ordinary people
or general public welfare.
• Capitalism also believes in the downward filtration theory, which means even though
some people are concentrating more wealth, they are using it to create more economic
opportunities for the general public by generating employment.
Thus, if India really wants to achieve Sustainable development goals, then it has to adopt a
new model of democratic capitalism approach-: Compassionate Capitalism, which means
“capitalism in mind and socialism at heart”, a creed which looks at fairness and at ensuring
that everyone is better off. In other words, focus on wealth generation with the distribution
of wealth.
Q. Comment on the challenges for inclusive growth, which include careless and useless
manpower in the Indian context. Suggest measures to be taken to face these challenges.
(200 Words, 12.5 Marks)
• In the Intro, try to define inclusive growth.
• the body,
o W
rite in brief about Challenges for Inclusive Growth in India, including careless and
useless manpower.
o Write a measure to meet the above challenges.
• Try to conclude with a way forward.
Answer:
Inclusive growth refers to economic growth that is distributed fairly across society and
creates opportunities for all. Quantitatively, it results in a reduction of disparities in per
capita incomes across different socio-economic groups, thereby, reducing poverty. It provides
for equality of opportunity, access to essential services by all in health and education etc.

Useless manpower relates to the presence of a large unskilled or adequately skilled labour
force. India is a highly informal economy, a large section of the labour force is without access
to social security and welfare schemes. Such a situation exposes them to various risks related
to health, life etc. without alternative cushioning support. That is why they are termed as
careless manpower.
Measures to meet the above challenges to Inclusive growth
• Primary education quality should be strengthened, and due to a lack of elementary
education, skill development programmes cannot be used to their full potential. The typical
heavy top of the Indian education system, and poor elementary education leads to skill
gaps and results in useless manpower.
• Skill development program: Skill training programmes like Pradhan Mantri Kaushal Vikas
Yojana, and the Skill India programme will build a strong, skilled labour force with certified
skills according to National Occupational Standard (NSO)
Gender budgeting: To focus on neglected sections relating to women. Labour force participation
of women is, as per the 2011 census, 26% women would be empowered if more women related
schemes such as Sukanya Samridhi Yojana, and Janani Suraksha yojana were implemented.
Q. What are the salient features of ‘inclusive growth’? Has India been experiencing such a
growth process? Analyse and suggest measures for inclusive growth. (250 Words, 15 Marks)
• In the Intro, try to define inclusive growth.
• In the body,
o Discuss salient features of inclusive growth.
o Discuss inclusive growth in India.
o Measures to ensure inclusive growth in India.
• Try to conclude with a futuristic outlook of inclusive growth.
Answer:
Inclusive growth can be defined as equal distribution of resources across society and people
and it also implies providing every person an equality of opportunity. The disadvantaged and
the marginal section of society are benefitted from inclusive growth.
Salient Features of Inclusive Growth:
• Participation: People are having greater say on what they want to do, they are also more
participative when it comes to economic aspects. This economic participation and greater
participation in policy formulations and their implementation lead to inclusive growth.
• Equity: All classes of people in society, especially poor or socially disadvantaged groups
are able to take advantage of these opportunities.
• Growth: Higher economic growth will create opportunity for all sections of society and
help reduce inequality of opportunity and economic inequality.
28
• Stability: Stable economic growth and a stable environment help businesses, communities,
and individuals to have sufficient levels of stability and confidence.
• Sustainability: Sustainable economic growth and development of social wealth over time
help maintain inter-generational well-being.
India and inclusive growth: India has witnessed higher economic growth but unfortunately it
did not convert it into inclusive growth for all. This is evident from the fact that since the tenth
Five Year Plan the theme of planning in India has been inclusive growth.
• Children: Huge number of children are still working in spite of many labour laws, which
leads to child crimes.
• Women: Lower sex ratio and high drop out rates in schools and increasing incidence of
violent crimes are reflective of the discriminatory practices against women. There are
evidences of high levels of anaemia as well during the adolescence period.
• SCs/STs and OBCs: There are many schemes that intend to distribute resources for SCs,STs
and OBCs but in reality the things are not good which is clear by observing poverty and
literacy rates among them.
• Disabled people: Affirmative action has been drafted through the law but has not yielded
practical results. The problem of accessibility in public, as well as private buildings and
transportation, adds to further exclusion.
To improve inclusive growth, need to take the following measures such as,
• Improving education in terms of its quality, accessibility, and affordability, for marginalised
sections of society.
• Need to focus on improving the skills of weaker sections and also improving women’s
labour force participation.
• Improving institutional capacities, designing policies, better targeting, reducing corruption
and legislative and policy reforms are needed.
• Improving policy implementation through an outcome-based approach.
• Creating awareness among people to increase their participation in the success of any
schemes.
• Divangyajans should be supported through aids and assistive technologies which make
them able to participate and take all available opportunities so that inclusive growth is
possible.
NITI Aayog’s Strategy for New India @75 pitches for inclusive growth through:
• Barrier free environment for the divyangjans.
• Providing essential services to the marginalised section of the society.
• Technology can be used for sustainable development by 2022-23.
• To enable migrants access city services.
• Inclusiveness for urban poor and slum dwellers.
• Making higher education more accessible for the most vulnerable groups.
Though the government has taken various steps and initiatives for achieving inclusive
growth still there are various hurdles which make it impossible for inclusive growth.
Making India a giant economy without addressing inequality is against the constitutional
objectives of economic, social, and political justice that needs to be achieved through
inclusive growth.

Q. It is argued that the strategy of inclusive growth is intended to meet the objectives
of inclusiveness and sustainability together. Comment on this statement. (250 Words,
15 Marks)
• In the introduction, define the concept of inclusive growth.
• In the body,
o Discuss the ideas of inclusiveness and sustainability.
o D
iscuss the role of inclusive growth in achieving objectives of inclusiveness and
sustainability.
• onclude with writing the need for inclusiveness and sustainability while focusing on
C
sustainable growth.
Answer:
According to the Organization for Economic Cooperation and Development (OECD), Inclusive
growth is economic growth that is distributed fairly across society and creates opportunities
for all. It refers to ‘broad-based’, ‘shared’, and ‘pro-poor growth’.
Triad of Inclusive Growth, Inclusiveness and Sustainability:
Inclusive growth must be based on Inclusiveness, which goes beyond mere economic
inclusion.
• Inclusiveness is a concept that encompasses equity, equality of opportunity, and protection
in market and employment transitions and is, therefore, an essential ingredient of any
successful growth strategy.
Former President of India Pranav Mukherjee asserted, “Inclusive growth should not be a mere
slogan but a fundamental driving force for sustainable development.”
• Sustainable development refers to the processes and pathways to achieve sustainability
(e.g., sustainable ecology, sustainable production and consumption, good government,
education etc.). Sustainability is a long-term goal for continuous inclusive socio-economic
and ecological growth.
Inclusive Growth to Realise Inclusiveness and Sustainability
• Reducing poverty: Growth which is ‘inclusive’ and “pro-poor”, the incomes of poor people
grow faster than those of the population, i.e., inequality declines. By focusing on inequality,
inclusive growth could lead to optimal outcomes for all households.
• Distribution of wealth: Inclusive growth helps the wider distribution of growth, which creates
demand in the economy and helps to lead to domestic demand-driven economic growth.
• Withstand external shocks: Inclusive growth builds strengths in the economy, and growth
becomes sustainable in the long term.
• Reduces vulnerability: Inclusive growth helps in reducing the vulnerability of all types
from the disasters of the present time and makes people, and the community future-
ready, this ensures both inclusiveness and sustainability.
30
• Improve quality of life: With better income distribution, the quality of life substantially
improves materially.
o e.g., people move away from unsustainable energy sources, such as cow dung, wood
etc. to clean energy sources, such as LPG.
• Change in development model: Sustainable development brings the environment into
its inclusion, thus causing minimum depletion of resources and going for a circular
economy.
• Resolving structural and fundamental issues: Inclusive growth addresses fundamental,
and structural challenges in society and in the economy.
o For example, women empowerment initiatives like Self Help Groups will bring changes
and enhance the participation of women in economic activity, which will further lead to
sustainability and inclusiveness.
It is due to this inter-relation between this triad of inclusive growth, inclusiveness, and
sustainability the government is aggressively focusing on the strategy of inclusive growth in its
various programs and policies.
o E.g., Jan Dhan Yojana has focused on financial inclusion for all.
Thus, inclusive growth is necessary to promote sustainable development and inclusiveness.
In the past two decades, India’s economic growth has been phenomenal, but it has
underperformed on socio-economic indicators and Human development Indicators.
Therefore, in India’s context, inclusive growth is an idea to realise the dream of sustainable,
and qualitative growth.
Q. Explain intergenerational and intragenerational issues of equity from the perspective of

inclusive growth and sustainable development. (150 Words, 10 Marks)
• In the introduction, try to define the concept of Equity/Inclusive growth.
• In the body,
o Explain inter-generational equity and issues.
o Explain intra-generational equity and issues.
• ry to conclude by evaluating the need for inclusive growth and sustainable development
T
in order to bring equity in intergenerational and intragenerational with respect to
India.
Answer:
Equity means just, fair, and equitable distribution of resources and benefits of the
opportunity. Inclusive growth refers to providing employment opportunities to reduce
poverty, having access to health and education facilities, providing equality of opportunity
and empowering the masses through appropriate education and skills. It also includes
environmentally friendly growth, aims for good governance, and helps in creating a gender-
sensitive society.

The intergenerational principle is the foundational principle that talks about justice and
equality among different generations in the conservation of the environment and its use.
Having its roots in the Stockholm declaration of 1972, It states that every generation holds
the Earth in common with members of the present generation and with other generations,
past and future. The Paris Agreement’s preamble shows the relevance of this principle in
current times.
Intergenerational Equity Issues:
• Intergenerational equity has become crucial in the present times, due to the growing
imbalance in the distribution of resources, the ongoing degradation of the environment
and the depletion of resources.
• Moreover, developed countries do not want to help developing or underdeveloped countries
to adopt green technologies, mitigation, and adaptation mitigation which underlines their
approach to economic prosperity at the cost of environmental degradation.
• In this context, the concept of sustainable development is introduced which refers to the
use of resources that should be done in such a manner that those resources shall also be
available to meet future needs.
Intragenerational Equity Issues:
• The concept of intragenerational equity provides rights and duties to every person of a
single generation to use and take care of the renewable and non-renewable resources
moderately among the members of the generation.
o F
or example, one can see there are a lot of differences in countries like India where
rich people get easy access to almost all resources and poor people do not get the
same access.
• Inequity arises from top growing people and bottom growing people in the economy which
need to be addressed through inclusive and sustainable growth.
• As per an Oxfam report, India’s economic growth is an example of jobless growth which
resulted in increased inequality between the same generation of the people.
• Welfare schemes like subsidies and reservations are some instruments to ensure social
justice but these measures interfere with the free market principle.
In order to realise environmental security only distribution of resources (both renewable and
non renewable) is not sufficient. Recycling and reusing the resources are equally important.
Abiding by the laws made by the government is equally important for environment protection.
Intergenerational and intragenerational equity are two hands of the doctrine of sustainable
equity, the concept of intragenerational equity possesses a procedure in respect of the
allocation of resources among the members of a generation.
32
Indicators of Economic Development • The first such team, which developed the
• There are various indicators to measure the HDI was led by Mahbub ul Haq and Inge Kaul.
level of economic development of a nation • The following dimensions are used for
are as follows : measuring Human Development among the
Net Economic Welfare (NEW) world countries:
• Net economic welfare (NEW) is a concept of o A long and healthy life: Calculated
a broader measure of economic welfare than by life expectancy.
gross national product (GNP) as it adjusts o Access to education: the education
GNP by subtracting from it “bad”, such as dimension is measured by means of years
pollution and by adding the value of beneficial of schooling for adults aged 25 years and
nonmarket activities such as leisure time. more, and expected years of schooling for
children of school entering age.
NEW = GNP + Value of Housewives Services
o Decent standard of living: Assessed
+ Value of leisure - Expenditure on defence -
by Gross National Income (GNI) per
Cost of Environment Degradation
capita adjusted for the price level of the
• This theoretical concept was given by the country.
economist Paul Samuelson. This concept • Based on the performance of the countries
exposed the limitations of the current on the above indicators, the UN takes
calculation methods of economic progress informed decisions and helps countries,
called GDP. who need assistance to improve rankings
• Practically, it is tough to estimate this. and overall conditions of the people in
Therefore, it was not widely adopted. particular countries, especially “Least
Developed Countries”.
Physical Quality of Life Index (PQLI)
• In 2010 UNDP introduced changes in the HDI
• PQLI measures countries’ social well-being
index made by changes in indices. The three
by using the following social indicators:
new indices are discussed in the following manner.
o Life expectancy at birth
o Life expectancy index (LEI): Measures
o Infant mortality rate
life expectancy. This dimension uses
o Literacy rate
life expectancy at birth as its indicator.
• These indicators are measured on a scale
It is defined as “the number of years
of 1 to 100; on this scale 1, represents the
a newborn infant could expect to live
worst social conditions, and 100 refers to
if prevailing patterns of age-specific
the best available social conditions.
mortality rates at the time of birth were
• Based on the average score of the above to stay the same throughout the child’s
indicators, the performance of the country life”. It is calculated using a minimum
is known as PQLI. value of 20 years and a maximum value
• The PQLI scale was developed by Morris of 85 years.
David Morris.
o Education index (EI): It is the average mean
Human Development Index years of schooling, and expected years
• The dilemma of measuring the developmental of schooling. Estimates for mean years
level of economies was solved once the United of schooling are based on the duration
Nations Development Programme (UNDP) of schooling at each level of education.
published its first Human Development Expected years of schooling estimates
Report (HDR) in 1990. The report had a human are based on two factors: enrollment by
development index (HDI), which was the first age at all levels of education, and the
attempt to define and measure the level of number of children of school age in the
development of economies. population for each level of education.

o Income index (II): It measures GNI per As the score of the HDI increased from
capita adjusted in Purchasing power 0.429 to 0.645 (annual HDI report 2020), if it
parity terms (PPP). UNDP shifted from counts in percentage form, then it is about
adopting GDP per capita to GNI per a 50% jump in India’s overall HDI score. This
capita because GNI per capita is suitable to substantial increase in score placed India
consider the well-being wellbeing of people above-average gainer in the South Asian
rather than the income of the country. region, the score of South Asia is about
• HDI is the geometric mean of the above 0.641 and above average with respect to
three indices. medium human developed countries with a
score of 0.631.
• The significant observance made by the HDI in
its report is that the unprecedented gap within
the countries is narrowing based on the scale
of “Basic Standard is narrowing”. As people
are coming out from poverty, hunger, and
Fig. 3.1: Human Development Index (HDI)
disease. But the newer challenges emerging
Classification of Countries on the basis of HDI: from climate change, rising inequalities to
HDI scores lie between 0 to 1 for different get access to quality education, emerging
countries. infectious diseases etc, are posing a threat to
the HDI, and SDG 2030 agenda.
• A score of 0-0.49 means low development
(For example, Mali). Changes in Human Development Report:
• A score of 0.5-0.69 means medium In 2010 United Nation, Development Programme
development (for example, India). (UNDP) introduced three changes in the HDI
report and these changes include indices
• A score of 0.7-0.79 means high development
such as the Multidimensional Poverty Index
(For example, China).
(MPI) and Gender Inequality Index (GII) and
• Above 0.8 means very high development
Inequality-adjusted Human Development
(For example, Norway).
Index (IHDI).
• Out of a total of 189 countries, India has
Inequality-Adjusted Human Development
ranked 131 on the Human Development
Index (IHDI)
Index 2020. The country fell into the
• In IHDI, the Human Development Index
category of medium human development
(HDI) is adjusted with inequalities in the
(With an HDI value of 0.645). In 2019, India’s
distribution of achievements in all the
rank was 129.
three components of HDI such as health,
education, and income.
• If there is a difference between HDI and
IHDI, it means there is a potential loss
in human development because of the
presence of inequality.
• Atkinson index is used to measure income
inequality.
Multidimensional Poverty Index
Fig. 3.2: India’s Performance in HDI over the Years • The global Multidimensional Poverty Index
(MPI) produced by the United Nations
• The performance of India in HDI from 1990 Development Programme (UNDP), and the
to 2019 has seen substantial improvement.
34
Oxford Poverty and Human Development living. These three dimensions are further
Initiative measure poverty by considering divided into ten other indicators like health
various deprivations experienced by (child mortality, nutrition), education
people in their daily lives, including poor (years of schooling, enrolment), and living
health, insufficient education ,and a low standards (water, sanitation, electricity,
standard of living. It helps in measuring cooking fuel, floor, assets).
poverty based on the “deprivation” at the • As per the above ten deprivations of MPI,
‘household level.’ along with the ‘individual any household is considered poor, if he/she
level’ deprivation measurement in terms is suffering from the deprivation of 1/3 or
of health, education, and standard of more of the weighted indicators.
Table 3.1: The dimensions, Indicators, deprivation cutoffs, and weights of the global Multidimensional Poverty Index
Gender Inequality Index (GII) • It uses the following three dimensions to

• It is an index for the measurement of gender measure gender disparity :
disparity.

Fig. 3.3: Gender Inequality Index (GII)
• The Gender Inequality Index (GII) provides Has Development Delivered Happiness?
insights into gender disparities in health, • In the past decades, the world has chased
empowerment, and the labour market. GDP growth to bring ‘posterity’ and
Unlike the human development index (HDI), ‘happiness’. We have succeeded in growing
however, higher values in the GII indicate global economic output. Yet ‘wellbeing’ and
worse achievements. ‘happiness’ indices have largely remained
• This index is a composite measure flat, inequality has increased, and natural
to quantify the loss of achievement within resources have been degraded.
a country because of gender inequality. • Our focus on GDP growth to achieve
• India has a Gender Development happiness has not worked in delivering
Index (GDI) value of 0.820. The Human happiness.
Development Report also calculates Gender • Happiness is a broader thing than
Inequality Index (GII) to highlight gender- development. The so-called ‘development’
based inequalities in the countries, taken for which the world has been striving
on three measures: economic activity, hard for the last many decades is capable
reproductive health, and empowerment. of delivering material happiness to
The GII value of the country was 0.488, mankind. Happiness has its non-material
which made it rank at the 123rd place side also.
out of the 162 nations. (Data from Human Indicators of Happiness
Development Report 2020)
There are various indicators to measure the
Gender-related Development Index (GDI) level of happiness of a nation. Some such
• Gender-related Development Index is an indicators are:
index to measure gender disparities with Gross National Happiness:
respect to three dimensions of HDI, i.e.,
• The Gross National Happiness index is
Health, Knowledge and Standard of living.
utilised to measure the collective happiness,
and well-being of a population.
• The term Gross National Happiness was
• It addresses gender gaps in life expectancy, coined in 1972 by the then king of Bhutan,
education, and income. Jigme Singye Wangchuck.
• More the GDI value, the lesser the gender • Gross National Happiness is based on
disparity. four dimensions: Sustainable economic
36
development, Good governance, Andhra Pradesh

Preservation of cultural values, and • Andhra Pradesh is the second state in the
Conservation of the environment. country after Madhya Pradesh to start the
• The objective of GNH is to achieve a happiness Index department.
balanced development in all facets of life • Its ‘Sunrise AP Vision 2029’ has taken
that are essential for happiness. Bhutan as a model to focus on matters
World Happiness Report including health, time use, education etc.
• World Happiness Report is a measure of Maharashtra
happiness, published by the United Nations • The Government of Maharashtra is
Sustainable Development Solutions contemplating introducing a separate
Network (UN SDSN) in 2012. ‘happiness ministry’ to encourage positivity
• It was developed by Helliwell, Layard, and in society.
Sachs. Social Progress Index
• The Report measures the happiness • The Social Progress Index offers a rich
and well-being of a country, and helps framework for measuring the multiple
to guide public policy based on the dimensions of social progress, benchmarking
following six parameters: success, and catalysing greater human
o Real GDP per capita (at PPP) wellbeing.
o Healthy life expectancy • The 2021 Social Progress Index ranks 168
o Social support countries on social progress.
o Freedom to make life choices Nutrition and Basic Medical Care 84.42
o Generosity Water and Sanitation 69.99
Shelter 80.63
o Perception of corruption
Personal Safety 61.20
• The report uses data from the Gallup World Access to Basic Knowledge 72.03
Poll. Access to Information and Communication 70.22
World Happiness Report 2022 Health and Wellness 60.18
Environmental Quality 55.27

• This is the 10th annual World Happiness
Personal Rights 60.16
Report, which ranks the 146 countries in
Personal Freedom and Choice 62.22
the world. Inclusiveness 42.22
• Finland has been named the world’s Access to Advanced Education 61.58
happiest country for the fifth year running, 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
followed by Denmark. Afghanistan was Fig. 3.4 Social Progress Index Score
ranked as the unhappiest nation, followed
by Lebanon, Zimbabwe, Rwanda and • The index is published by Social Progress
Botswana, respectively. India saw a marginal Imperative, and is based on the writing
improvement in its ranking, jumping three of Amartya Sen, Douglas North, and Joseph
spots to 136, from 139 a year ago. Stiglitz.
Indian State’s Happiness Initiative • Norway tops the 2021 SPI ranking, and
India is ranked 115th out of 168 countries.
Madhya Pradesh
Environmental Performance Index
• Madhya Pradesh became the first state to
announce its happiness department. • The Environmental Performance Index
is used to measure the environmental
• Madhya Pradesh, in collaboration with the
performance of a country.
Indian Institute of Technology (IIT)
Kharagpur developed a happiness index for • EPI highlights leaders and best practices
measuring the well-being of the people. and provides guidance for other countries

that want to be leaders in environmental • The World Bank every three years compares
sustainability. countries in terms of PPP.
• The index is prepared by Yale University • India is ranked third in the world on
and Columbia University in collaboration the basis of GDP (PPP) behind China and
with World Economic Forum (WEF). the USA.
• The First Environmental Performance Difference Between Market Exchange Rate &
Index Report was published in the PPP
year 2006. • The market exchange rate is the market
• The 2020 Environmental Performance price of one currency in terms of another
Index (EPI) provides a data-driven summary currency.
of the state of sustainability around the • Thus, the present market exchange rate for
world. Using 32 performance indicators Indian rupees is in the range of 65 to 70
across 11 issue categories, the EPI ranks rupees per U.S. dollar.
180 countries on environmental health, and • The market exchange rate depends on the
ecosystem vitality. demand and supply of these currencies in
• India has ranked 168 places out of 180 the open market.
countries in the Environment Performance • The PPP exchange rate measures the
Index 2020. relative purchasing power of different
• Denmark topped the index, and Liberia was currencies.
at the bottom of the index. • India ranks third, when GDP is compared
• Low scores on the EPI suggest the necessity in terms of purchasing power parity
for national sustainability efforts on a approximately at $11.40 trillion.
number of fronts, particularly protecting • Whereas India is the fifth-largest economy,
biodiversity, cleaning up air quality, and with a nominal GDP of $2.936 trillion.
reducing GHG emissions. • For Example, in GDP calculation at market
Purchasing Power Parity (PPP) price, India’s economy is well behind
• When making comparisons among Japan’s. However, price levels in Japan are
countries which use different currencies, much higher than that in India.
it is necessary to convert values, such • So, when the national income of the two
as national income (GDP), to a common countries is adjusted in terms of PPP, the
currency. This is done through purchasing Indian economy surpasses the Japanese
power parity (PPP). economy because of lower prices in India.
• Purchasing Power Parity states that Least Developed Countries (LDC)
the expenditure on a similar commodity • The United Nations has recognised
must be the same in both currencies when least developed countries (LDCs) as a
accounted for the exchange rate. category of States that are deemed highly
disadvantaged in their development
process, for structural, historical and also
geographical reasons.
• For example, Suppose the cost of a cake
in India is Rs. 250, and the cost of the • The classification of the least developed
same cake in the USA is $ 10. Therefore, country was introduced by the Economic
purchasing power parity will be 250/10 = Rs. and Social Council (ECOSOC) of UNO
25 per dollar. in 1971.
• Purchasing Power Parity (PPP) is very • The following three criteria are used by the
important and is used to compare the CDP to determine LDC status:
national income and standard of living.
38
o Per capita income (gross national o Develop a global partnership for

income per capita) development.
o Human assets (indicators of nutrition, India’s Achievement in MDGs
health, school enrolment and literacy) • India is a signatory to the Millennium
o Economic vulnerability (indicators Declaration accepted at the United Nations
of natural and trade-related shocks, General Assembly (UNGA) in September
physical and economic exposure to 2000, and has made its commitment toward
shocks, and smallness and remoteness). the eight important development goals.
• Economic Vulnerability Index (EVI): The • The goals of the MDGs converge with India’s
Economic Vulnerability Index is a composition own development goals to decrease child
of the following eight indicators: mortality, poverty and other concerns.
o Population size • India has witnessed significant improvement
o Remoteness toward the MDGs, with some goals having
o Merchandise export been met ahead of the 2015 deadline, but
o Contribution of agriculture to the Gross progress has been inconsistent.
Domestic Product (GDP) • For example, according to official national
o Homelessness owing to natural disasters estimates, India has achieved the target of
o Instability of agricultural production reducing poverty by half, but it is falling short
o Instability of exports of goods and services of achieving the target for reducing hunger.
o Share of the population residing in low Sustainable Development
elevation coastal zone • The UN World Commission on Environment
• At present, 46 countries are on the Least and Development (UNWCED) defines
Developed countries (LDCs) list. it as “the development that meets the
• Various International Organisations give demands of the current generation
special assistance to LDCs. without compromising the needs of future
• Criteria of LDCs are reviewed every three generations to meet their own needs.”
years by the Economic and Social Council • It is related to carrying capacity, which refers
(ECOSOC). to the capacity of the environment to absorb
• Countries may “graduate” out of the LDC the adverse impact of human activity.
categorisation after indicators exceed these • Sustainable development presents a
criteria in two consecutive reviews. framework to generate economic growth,
Millennium Development Goals (MDGs) achieve social justice, and preserve
• The United Nations Millennium Development environmental sustainability.
Goals (MDG) are eight goals that all 191 UN • It recognises that growth must be both
members had agreed to achieve by the year inclusive and environmentally sound to
2015. reduce poverty, and meet the needs of the
• The eight Millennium Development Goals: future generation.
o Eradicate extreme poverty and hunger. Dimension of Sustainable Development:
o Achieve universal primary education. There are three dimensions of Sustainable
o Promote gender equality and empower development-
women. • Economic dimension: Economic
o Reduce child mortality. dimension deals with encouraging
o Improve maternal health. businesses and organisations to increase
o Combat malaria, HIV/AIDS, and other investment, efficiency in production,
diseases. and economic growth.
o Ensure environmental sustainability.

• Social dimension: It deals with encouraging • Environmental dimension: It defines how

people to participate in environmental to protect ecosystems and air quality, and
sustainability. focuses on the elements that place stress
on the environment.
Fig.3.5: Sustainable Development
40
Indicators of Sustainable Development • Natural capital includes the world stock of

Green GDP all-natural assets like soil, air, water etc.
• The normal calculation of the progress made • Man-Made capital includes goods and
on the economic front is shown in the GDP services that are used to produce other
of the country. But during this achievement goods and services, such as machines,
of economic progress, the negative impact tools etc. it can also include ‘financial
on the environment is needed to count capital’ like money.
hence the concept of “Green Gross Domestic • It has emerged as the important leading
Product” was introduced. economic indicator of sustainable economic
• The economic cost of water pollution, and development.
land degradation is not incorporated in the Sustainable Development Goals (SDGs)
GDP. • They are a universal set of targets, goals
• For example, WWF’s Living Planet Report and indicators that UN members will be
finds that 25% of India’s total land is expected to use to frame their nation’s
undergoing desertification. This will have policies over the next 15 years (2015-2030).
a direct influence on the future food • Sustainable Development Goals (SDGs)
production, thus affecting our agrarian follow Millennium Development Goals,
economy as the country could see a
which expire in 2015.
decrease in crop production.
• To make development much futureproof
• The Ministry of Statistics and Programme
and the development process should
Implementation (MOSPI) set up an expert
be in consonance with the needs of the
group in 2011 led by Partha Dasgupta with
future or coming generations, the United
the mandate of developing a framework
Nations adopted the 2030 Agenda for
for a green national account in India. The
Sustainable Development which consist of
process is not yet completed.
17 SDG main targets, which are included
Genuine Saving with the 169 sub-targets with the use of
• Genuine Saving measures the sustainability 304 indicators.
of economic development. • The table below highlights 17 Sustainable
Genuine Saving = Gross Saving - Depreciation Development Goals (SDG) and India’s effort
in man-made capital - Depreciation in toward achieving each of them.
Natural capital
Goals Objective Description India Efforts

BY 2030, End poverty in all its - Mahatma Gandhi National Rural
forms everywhere. Employment Guarantee Scheme
Goal-1 No poverty (MGNREGA)
- National Social Assistance
Programme (NSAP)
Achieve food security, end - Targeted public distribution
hunger and better nutrition by system (PDS), National Nutrition
Goal-2 Zero Hunger
2030. Mission (NNM),
- National Food Security Act (NFSA)
Promote wellbeing and ensure - National Health Mission (NHM)
Good Health
Goal -3 healthy lives for all at all - Ayushman Bharat
and Well-being
stages.


Make Sure that all boys and - Sarva Shiksha Abhiyan (SSA)
Quality girls complete free, equitable - National Education Policy
Goal-4
Education and quality primary and
secondary education by 2030.
To attain gender equality and - Sukanya Samridhi Yojana
Goal-5 Gender Equality
empower all females. - Janani Suraksha Yojana
Ensure affordability, - Swachh Bharat Abhiyan.
availability and sustainable - National Rural Drinking Water
Clean Water and
Goal-6 management of water and Programme.
Sanitation
sanitation for every individual
by 2030.
Ensure access to reliable, - National Solar Mission.
Affordable and
Goal-7 affordable, sustainable and
Clean Energy
modern energy for all by 2030.
Promote sustained, inclusive, - National Skill Development
Decent Work and sustainable economic Mission,
Goal-8 and Economic growth. - Deendayal Upadhyaya Antyodaya
Growth Yojana,
- Atal Innovation Mission
Build resilient infrastructure, - Make in India
Industry,
promote inclusive and - Start- Up India
Goal-9 Innovation and
sustainable industrialisation
Infrastructure
and foster innovation by 2030.
Decrease inequality within and - National Mission for Empowerment
amongst countries by 2030. of Women : Rajiv Gandhi Scheme
for Empowerment of Adolescent
Reduced Girls (SABLA)
Goal-10
Inequality
- Kasturba Gandhi Balika Vidyalaya
(KGBV)
- PMKISAN
Make cities and human - Smart Cities Mission
Sustainable settlements inclusive, - Atal Mission for Rejuvenation and
Goal-11 Cities and resilient, secure, and Urban Transformation (AMRUT)
Communities sustainable. - Pradhan Mantri Awas Yojana
(PMAY)
Responsible Ensure sustainable - National Policy on Biofuels for
Goal-12 Consumption consumption and production managing the efficient use of
and Production patterns. natural resources.
Take important and urgent - National Action Plan on Climate
Goal-13 Climate Action action to tackle climate Change
change and its effects.
42

Conserve and sustainably - National Plan for the Conservation
Life Below utilise the seas, oceans of Aquatic Ecosystems
Goal-14
Water and marine reserves for
sustainable development.
Protect, restore, and promote - National Afforestation Programme
sustainable utilisation of - Project Tiger
Goal-15 Life on Land terrestrial ecosystems, - Project Elephant
combat desertification and
halt biodiversity loss.
Promote inclusive and - Development of Infrastructure
Peace and
peaceful societies for Facilities for the Judiciary
Goal-16 Justice Strong
sustainable development; give - Introduction of the AADHAR card
Institutions
access to justice for all.
Strengthen various means of - India’s membership in institutions
Partnerships
implementation and revitalise like the Shanghai Cooperation
Goal-17 to Achieve the
the international partnership Organisation, BRICS, and its New
Goal
for sustainable development. Development Bank.
Table 3.2: Sustainable Development Goals
The world has changed dramatically in increasing. Finally, governance is becoming

the last two decades, but there are four more complex, especially with the growing
shifts that are particularly serious. Firstly, influence of technology (SDSN, Action Agenda
we are closer than ever to eradicating Report 2014). Today’s problems will escalate
extreme poverty. Secondly, human societies quickly and dangerously, if we do not urgently
are causing more damage than ever to and radically change course. The Sustainable
the planet and the environment. Thirdly, Development Goals (SDGs) give us a plan to
inequality among and between countries is fight these challenges.
Q. “Access to affordable, reliable, sustainable and modern energy is the sine qua non to
achieve Sustainable Development Goals (SDGs)”. Comment on the progress made in India in
this regard. (150 Words, 10 Marks)
• In the Intro, try to write about Sustainable Development Goals briefly or highlight the
energy situation in India.
• In the body
o Firstly, discuss how SDG Goal 7 will help to achieve other Sustainable Development
Goals.
o Secondly, discuss India’s progress in achieving SDG Goal 7.
• Conclude with India’s energy future targets.

Answer:
The Sustainable Development Goals (SDGs), are a universal call to action to end poverty,
protect the planet and ensure that all people enjoy peace and prosperity by 2030. Access to
affordable, reliable, sustainable, and modern energy is Goal 7 of SDG.
• Affordable means the energy, which is cheap or subsidized, that is, the poor are also
benefited in the same way.
• Reliable energy means the developmental needs of the entire nation can rely upon it.
• Sustainable energy takes into the inter-generational equity aspect.
• Modern energy encompasses a huge spectrum of energy largely, which has low negative
externality on the environment and economy.
This access is the sine qua non to achieve Sustainable Development Goals as it is directly or
indirectly related to other goals such as innovation and infrastructure, sustainable cities and
communities, health and well-being, gender equality, industry, etc.
Energy Scenario in India
India is the 4th largest consumer of energy after the USA, China, and Russia, but it is not
endowed with abundant energy resources. According to the International Energy Agency (IEA)
2020, around 700 million people in India gained access to electricity between 2000 and
2018, reflecting strong and effective policy implementation. India has a crucial role to play in
achieving Sustainable Development Goals. It has done a commendable job in providing clean,
and efficient energy to people and achieving targets of inclusive growth. In this regard, India
has taken various steps like:
• Pradhan Mantri Ujjwalla Yojana: It aimed to provide LPG connections to 8 crores of BPL
households by 2020.
• Compulsory guidelines: The Ministry of Finance has issued mandatory guidelines for
adopting energy-efficient appliances in all central government buildings, which are
implemented by Energy Efficient Services Limited (EESL) by 2020.
• Deen Dayal Upadhyay Gram Jyoti Yojana: Under the scheme, the government has
committed to supply reliable and 24*7 power supply to the entire villages by 2019. Along
with this scheme, SAUBHAGYA Scheme was launched for 100% village electrification with
last mile connectivity. Till now, under both schemes, more than 75% of rural households
have electricity connections.
• Renewable energy: India’s share of renewable energy has constantly been increasing, and
now it is around three times as compared to 2007. On 30th November 2017 total installed
capacity in India was around 330 GW, out of which 18% was from renewable energy sources.
• Pradhan Mantri Urja Ganga Project: It aims to lay gas pipelines and connect western,
northern, and southeastern gas markets with major gas sources. Also, it aims to set up a
city gas distribution network even in small towns. It will increase access to the CNG gas
stations and direct to home cooking gas.
• New hydrogen exploration and licensing policy: To increase domestic oil and gas production
and immune India from global oil shocks.
• Ultra-mega power projects: Establishing 4000-megawatt projects, each using supercritical
technology, which will help in achieving SDG relating to good health and wellbeing, reduced
inequality, affordable and clean energy etc.
44
• UDAY- Ujwal Discom Assurance Yojana: Under this scheme, state governments are
encouraged to take all debt of financially distressed state electricity distribution companies
to make them supply affordable power to poor households.
Sustainable Development Goals can be the true scale on which the developmental progress
of any nation depends. With a population of 1.4 billion and one of the world’s fastest-
growing major economies, India will be vital for the future of the global energy markets. It
will strengthen the four pillars of India’s energy future, i.e., energy access, energy efficiency,
energy sustainability and energy security.


4 Money Supply
Money implies that if an individual needs one

• Money is a medium of exchange in general. goat in exchange for the cow, then in this
It is also referred to as currency. It is a condition, he/she has to sacrifice half of
medium in which the prices of various his/her cow.
goods and services are expressed. • Lack of standards for deferred
• Economically, each government has its payments: Deferred payments are those
own money system. Cryptocurrencies are payments that are made in the future (like
also being developed for financing and loans and interest). Since commodities are
international exchange across the world. used as the medium of exchange in a barter
system, it is difficult to make the deferred
• The inefficiencies of the barter system
payment since there is no standard for
prompted the necessity for money.
making such payments.
Barter System of Exchange
• Storage of wealth is difficult: If a community
• It is a system of exchange where the
relies solely on perishable items, storing
participants in a transaction directly exchange
wealth for the future may be impossible.
goods or services for other goods or services
Evolution of Money
in return.
Money went through a long evolution before
• For example, onion can be exchanged for
moving to the modern banking system. Some
potato, rice for pulses, etc.
of the major stages through which money has
• Barter systems can be bilateral or
evolved are as follow:
multilateral.
• Commodity money: In the earliest
• Bartering does not involve money; a person
period some commodities, for their use,
can buy items by exchanging an item.
were more sought than others. Such
Limitations of Barter System commodities assumed the role of currency
• Double coincidence of wants: The and were used as a medium for exchange.
coincidence of wants is an economic People used salt, rice, wheat, and cows
phenomenon where two parties each hold as commodity money. The inadequacy of
an item that the other wants, so they commodity money led to the evolution of
exchange these items directly without any metallic money.
monetary medium. If their wants do not • Metallic money: With the discovery of metal,
coincide, no exchange takes place. So, the it was used as the main standard of value
barter system has a limitation. because of its advantages like divisibility,
• Lack of a common measure of value: In easy transportation, etc. The problem of
a monetary system, money serves as a uniformity of weight, and purity of metals
measure of the value of various things so lead to the evolution of paper money.
that their worth can be compared; in a barter • Paper money: The invention of paper
economy, this vital role may be lacking. money was a very important stage in the
• Indivisibility of certain goods: The barter evolution of money. Paper money is printed
system of exchange was not applicable in and regulated by the Central Banks of the
the case of goods that lose their value if country (In India’s case, it is the RBI). The
divided into parts. For example, the value use of paper money has become universal
of one cow is equal to two goats. This along with Coins.
Money Supply 47
Fig. 4.1: Money
• Bank deposit: People keep a part of cash • Plastic money: Plastic money usually refers
in bank deposits which they can withdraw to debit and credit cards, and are considered
in the future through cheques. The cheque alternatives to cash for everyday payments.
has replaced paper money for the major They aim at removing the need to carry
portion of commercial transactions. A cash for everyday payments.
cheque is not money, as it is an instruction • Digital money: The latest type of money is
from a bank deposit holder to transfer the digital money. It is a currency available in
required money to another person’s account. digital/electronic form. Digital money can
Hence, the cheque itself is not money, and be transferred with the help of technologies
it performs the functions of money. like smartphones, and the Internet.
48 Money Supply
NITI Aayog’s Report for a Digitally Inclusive Bharat

About the report
• A paper titled ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’
was produced by NITI Aayog and Mastercard.
• The paper outlines roadblocks to India’s digital financial inclusion and makes solutions for
making digital services more accessible to the country’s 1.3 billion people.
• The paper addresses major concerns and possibilities, as well as policy and capacity-
building recommendations in the areas of agriculture, small business (MSMEs), urban
transportation, and cybersecurity.
• This research examines some major sectors and regions where digital disruption is required
to make financial services accessible to all.
The key issues addressed during the knowledge series were:
• Acceleration of digital financial inclusion for India’s underprivileged populations.
• Enabling SMEs to ‘get paid, get money, and get digital’ in order to gain access to clients and
maintain their viability.
• To develop trust and increase cyber resilience, policy and technical measures are needed.
• In India’s agriculture industry, unlocking the promise of digitisation.
• The components of a digital roadmap to make public transportation accessible to all citizens
Recommendations in the report:
• To encourage a level playing field for NBFCs and banks, the payment infrastructure must be
strengthened.
• Support for MSMEs: Digitising registration and compliance processes and diversifying credit
sources to allow MSMEs to expand.
• Creating information-sharing mechanisms, such as a “fraud repository” and ensuring that
online digital commerce platforms include alerts to educate users about the risk of fraud.
• Agricultural NBFCs should be able to access low-cost funding and use a phygital (physical
+ digital) approach to improve long-term digital outcomes. Land records will be digitised,
which will give the industry a significant boost.
• Mobility: To make city transit accessible to all with minimal crowding and lines by leveraging
current smartphones and contactless cards, and to strive for an inclusive, interoperable,
and completely open system similar to the London ‘Tube.’
Functions of Money commodity must have decreased in the

The major functions of money are as follows: sense that a unit of money can now
• Money is used as a medium of exchange purchase less of any commodity. We call
to make transactions go more smoothly. it a deterioration in the purchasing power
It does away with the inefficiencies of the of money.
barter system, such as the “coincidence of • Money serves as a store of value because
wants.” it may be used for immediate consumption
• Money serves as a unit of account. If as well as stored for longer periods of time,
prices of all commodities increase in terms and used for future payments. However,
of money which, in other words, can be to perform this function well, the value of
regarded as a general increase in the price money must be sufficiently stable. A rising
level, the value of money in terms of any price level may erode the purchasing power
Money Supply 49
of money. It may be noted that any asset • Standard of deferred payment: Deferred
other than money can also act as a store payments refer to those payments, which
of value, e.g., gold, landed property, houses are made in the future. Money has
or even bonds (to be introduced shortly). made deferred payments easier. Money is
However, they may not be easily convertible a key factor in lending and borrowing. This
to other commodities and do not have money function allows you to postpone
universal acceptability. payment to a later date.
50 Money Supply
Fig. 4.2: Classification of Money
Money Supply 51
New Umbrella Entity for Payment Systems

New Umbrella Entities (NUE):
• The NUE will be a non-profit organisation that will set up, manage, and administer new
payment systems, according to the RBI.
• Examples of payment systems include white label PoS, ATMs and Aadhar based payments.
NUEs will also operate
• clearing and settlement systems as well as develop new payment methods, standards, and
technology.
• Promoters of NUEs can be entities owned and controlled by Indians with at least three years
of expertise in the payment segment.
• Companies like Reliance, Ola, Paytm, Tata, Kotak Mahindra Bank etc. have expressed interest
in setting up NUEs.
• The decision was taken to expand the competitiveness of the payments system as currently,
the NPCI operates payment systems like Fastag, UPI, AEPS and RuPay.
• The private companies aim to secure a bigger share of the digital payments market by
setting up NUEs.
Properties of Money • Legal tender: Legal tender is a coin or

To fulfil its various functions, money should a banknote that is legally tenderable
have certain properties: for discharge of debt or obligation.
While usually, all denominations of the
• Fungibility: Fungibility is the ability of a
circulating paper money are legal tenders,
good or asset to be interchanged with
the denomination and amount in coins
other individual goods or assets of the
acceptable as legal tender vary from
same type. Its individual units must
country to country. This is also called
be capable of mutual substitution (i.e.,
lawful money. The legal tender money is of
interchangeability).
two types:
• Durability: Able to withstand repeated use.
o Limited legal tender money: This is a
• Portability: Easily carried and transported.
form of money, which can be paid in
• Divisibility: It can be broken down into discharge of debt up to a certain limit
smaller denominations. and beyond this limit, a person may
• Stability of value: Its value should not refuse to accept the payment, and no
fluctuate. legal action can be taken against it.
Types of Money Coins are limited legal tender in India.
• Full-bodied money: Full bodied money is o Unlimited legal tender money: In this
one whose value in money is the same as form of money, can be paid in discharge
the value in the commodity (intrinsic value). of a debt of any amount. A person who
For Example, gold coins, silver coins etc. refuses to accept this money, a legal
• Token money: Token money is one whose action can be taken against. Paper
value in money is much more than its value notes/currency are unlimited legal
as a commodity. For example, coins. tender in India.
• Representative full-bodied money: It is • Non-legal tender: It is a form of money,
a type of token money issued against an which is generally accepted, but legally
equivalent number of bullions (gold and is not bound to accept. Such as cheques,
silver) by Central Banks/governments. bank drafts, bills of exchange, postal orders
52 Money Supply
etc. are not legal tenders and are accepted • Unlike virtual currencies, e-RUPI is backed
only at the option of the creditor, lender, by the Rupee and can be used only for
or seller. It is also called optional money specific purposes.
because it does not have legal backing and • It will function similarly to a prepaid voucher
its acceptance is optional. that can be used at particular locations.
• Fiduciary money: It is the money that • The National Payments Corporation of India
is used for transactions based on trust built the technology, which will allow banks
between the payer and payee. For example, to issue vouchers through the platform.
the cheque is not a compulsorily accepted Potential Applications of e-RUPI:
mode of payment, but the transactions on • It can provide a leakage-proof mechanism
the trust are based on the mutual trust of for the delivery of welfare services.
the parties involved. • It can be used to provide medical and
• Fiat money: They do not have intrinsic value health-related services such as Ayushman
like gold or silver coin. Currency notes and Bharat, TB eradication programs, etc.
coins are called fiat money. The value of the • The private sector can also leverage it for
currency notes and coins is derived from the its CSR programs, and employee welfare
guarantee provided by the issuing authority programs.
of these items. Every currency note bears on Gresham’s Law
its face a promise from the Governor of RBI • Gresham’s Law state that “bad money
that if someone produces the note to RBI, drives out good money”.
or any other commercial bank, RBI will be
• When coins containing precious metals
responsible for giving the person purchasing
are used as legal money alongside metal
power equal to the value printed on the coins of the same denomination, the more
note. The same is also true of coins. valuable item (precious metal) progressively
• Near money: Near money is highly liquid fades out of circulation.
non-cash assets like cheques, demand • Good money is the money that shows little
drafts etc. difference between nominal value, and its
• Plastic money: Plastic money usually commodity value (value of a commodity
refers to debit and credit cards , and are like gold etc.).
considered alternatives to cash for everyday • Bad Money is the money whose commodity
payments. value is lower than the nominal value.
• Digital money: It is a currency available in • For example, A discounted product of
digital form and is a money balance noted inferior quality may drive out a non-
electronically on a stored-value card or discounted product of good quality in a
other devices. It is also called electronic price-sensitive market like India.
money or electronic currency. They may be Money Supply
centralised (E.g., digital wallets, debit cards,
• It is the total stock of all types of money
etc.) or decentralised (cryptocurrency).
(currency, deposit) held by the public at any
e-RUPI: Voucher Based specific point in time.
Digital Payment System
• It is very significant to note that the term
e-RUPI Features: public includes all the economic entities
• e-RUPI is a cashless and contactless digital except the government and the banking
payment system. system (this money is not in actual
• It will be delivered to the mobile phone of circulation in the economy and hence, not
beneficiaries in the form of an SMS or QR part of the money supply).
code.
Money Supply 53
• Cash, coins, and balances in checking and • Narrow money combines just the most
savings accounts, as well as other near- liquid assets, those that can be spent
money substitutes, can all be included in quickly (currency, checkable deposits).
the money supply. • Broad money combines a smaller number of
• It measures the total purchasing power in marketable assets (certificates of deposit, etc.).
the economy. • This scale represents how different types
Change in the Money Supply of money are influenced, and regulated by
• Changes in the money supply have long been monetary policy to varying degrees. Narrow
seen to be a key driver of macroeconomic measures are those that are most directly
performance and business cycles. influenced and controlled by monetary
• A rise in the money supply often decreases policy, whereas broader measures are less
interest rates (since more money means strongly linked to monetary policy.
more opportunities to receive loans, • The Reserve Bank of India (RBI) defines the
resulting in lower interest rates), which monetary aggregates as:
in turn stimulates spending by generating o Reserve Money (M0) =
more investment and putting more money
Bankers’ deposits with the Reserve
in the hands of consumers. Businesses
Bank of India (RBI) + ‘Other’ deposits
respond by expanding production and
with the RBI + Currency in circulation
ordering more raw materials. The need for
Another name for the Reserve money
labour rises as company activity rises. If the
is “High Powered Money” ,and also
money supply or growth rate of the money
Monetary base.
supply lowers, the opposite can happen.
o It is the total liability of RBI.
• Monetarism is an economic theory
o Currency in circulation includes Notes
that focuses on the macroeconomic effects
and Coins in circulation.
of the supply of money and central banking.
It is formulated by Milton Friedman. o Banker’s deposit with RBI is Bank’s
current account deposit with RBI.
The Velocity of Money
o Other deposits include the balances in
• It is the rate at which money is exchanged in
foreign central banks’ and governments’
an economy. The number of times a unit of
accounts, as well as the accounts of
money changes hands during the unit period
international organisations like the IMF.
is called the velocity of circulation of money.
o It can also be written as:
• It is related to the number of times that
money transfers from one transaction to Net RBI’s credit to the Government +
another. Simply put, it is the rate at which RBI’s claims on banks + RBI’s credit
people spend money. to the commercial sector + RBI’s
Monetary Aggregates net foreign assets + Government’s
• Money serves as a means of commerce, a currency liabilities to the public: RBI’s
unit of account, and a readily accessible net non-monetary liabilities.
store of value. Its diverse functions are
o M1 (Narrow Money) =
linked to a variety of empirical money supply
metrics. There is no single “proper” money Currency with the public + Deposit
supply measurement. Instead, there are a money of the public (Demand deposits
variety of measurements that are divided with the banking organisations) +
into broad and narrow monetary aggregates ‘Other’ deposits with the Reserve
along a spectrum or continuum. Bank of India (RBI)
54 Money Supply
o M2 = deposits from their customers. After

Savings deposits with Post office keeping a certain amount as a reserve,
savings banks + M1 banks distribute the remaining as loans for
injecting liquidity into the economy.
o M3 (broad money) =
• Mathematically, the money multiplier
M1+ Time deposits with the formula can be represented as:
banking system Money Multiplier = 1/r (Where r = Required
o It can also be written as: reserve ratio or cash reserve ratio.)
• The Central Bank of the country can
Bank credit to the commercial sector influence the money supply in the economy.
+ Net bank credit to the Government Purchases of government securities, such
+ Net foreign exchange assets of as treasury bills and government bonds can
the banking domain + Government’s boost the economy’s money supply.
currency liabilities to the public: Net • When the central bank reduces the money
non-monetary liabilities of the banking supply by selling securities on the open
sector (Other than Time Deposits) market, liquid funds are withdrawn from
o M4 = the banking system.
Bank Deposit
Entire deposits with post office
• A bank deposit is money kept in banking
savings banks (excluding National
institutions for future use.
Savings Certificates) + M3
• Bank deposit refers to liability owned by
Liquidity the bank to the depositor.
• Liquidity refers to the degree to which an Types of Bank Deposits
asset or security can be quickly bought Banks offer two types of deposit accounts.
or sold in the existing market at a price
• Demand deposit: The demand deposit
reflecting its intrinsic value. In other
account consists of funds that can be
words: the ease of converting it to cash.
withdrawn at any time. There are two types
• Cash is universally recognised as the most of demand deposit accounts:
liquid asset, while tangible assets, such as
o Current Account Demand Deposit:
real estate, fine art, etc. are all relatively
The money in the current account is
less liquid. available for immediate access. The
• Other types of financial assets, ranging current account deposit is used by
from equities to partnership units, fall at businesses to conduct their business
various places on the liquidity spectrum. transactions since, there are no
• The liquidity of this kind of measure is in constraints or restrictions on the
order M1>M2>M3>M4, i.e., M1 is the most number of transactions in a day. Bank
liquid, and M4 is the least liquid. does not offer interest rates on the
Money Multiplier current account demand deposit.
• Money multiplier is the ratio of the Broad o Saving Account Demand Deposit: Saving
account unlike a Current account
money (M3) to Reserved money (M0).
has restrictions on the number of
Money Multiplier = M3/M0
withdrawals as well as the amount of
• It depicts the relationship between the monetary withdrawal in a specific period. Bank
base and the economy’s money supply. offers fixed interest rates for saving
• It can also be considered as the amount account demand deposits.
of money that banks generate with each • Term Deposit/Time Deposit A term deposit
unit of money. Commercial banks accept account is used to hold money for a fixed
Money Supply 55
period. Money deposited in term deposits Cryptocurrency is that it is not controlled

cannot be withdrawn before its maturity, by any central authority (like the central
that is fixed at a particular time. There are banking system); instead, it uses
two types of term deposit accounts: decentralised control.
o Fixed deposit: A fixed account demand • Examples of cryptocurrencies are Bitcoin,
deposit allows a deposit to be made for Dogecoin, Litecoin, SOV, etc.
a specified period. Banks offer deposit
holders a fixed interest rate at a regular Note: The Finance Minister in Budget 2022
rate, which is higher than the Savings announced that there would be a tax of
account. 30% on income from cryptocurrencies. For
o Recurring deposit: In the recurring taxation purposes, cryptocurrencies have
deposit, a fixed amount is deposited now been included in the definition of Virtual
at regular intervals for a fixed term. Digital Asset (VDA).
The total deposit, along with interest,
Blockchain Technology
is payable on maturity by the bank.
• Blockchain technology is also called a
The rate of interest presented by the
distributed ledger technology wherein the
bank on this deposit is higher than the
data of any of the individuals are saved as
savings account but less than the fixed
blocks.
account deposit.
• The information related to the addition of
Liquidity Trap the block is shared with everyone on the
A liquidity trap is when monetary policy blockchain and which makes modification
becomes ineffective due to very low interest or hacking of the information difficult.
rates combined with consumers who prefer • A basic understanding of blockchain
to save rather than invest in higher-yielding technology can be related to this example.
bonds or other investments. While a liquidity Just imagine a Microsoft Excel sheet file in
trap is a function of economic conditions, it is your computer system with important details
also psychological since consumers are making of some transactions you made. You can
a choice to hoard cash instead of choosing refer to it as a ledger. Suppose your file is
higher-paying investments because of a negative copied to hundreds of your friends’ computer
economic view. A liquidity trap isn’t limited to systems, linked to each other, establishing a
bonds. It also affects other areas of the economy, network. The ledger in your computer system
as consumers are spending less on products has become a distributed ledger. After that,
which means businesses are less likely to hire. imagine this network of computer systems
Some ways to get out of a liquidity trap include is designed with technology to consistently
raising interest rates, hoping the situation update this Microsoft Excel sheet whenever
will regulate itself as prices fall to attractive you or your friends update the ledger.
levels, or increasing government spending.
Cryptocurrency
• It is a virtual or digital currency that is created,
stored, and transacted using blockchain
technology. The word ‘Cryptocurrency’ is
derived from an encryption technique,
cryptography. It is used to secure the
decentralised network.
• The most important characteristic of
Fig. 4.3: Benefits of Cryptocurrency
56 Money Supply
How Can One Get Cryptocurrency? India and Cryptocurrency

Cryptocurrency can be obtained in three ways: • India is necessarily a cash-based economy,
• Mining: It is the process of adding the but the ‘Digital India’ initiatives of the
transaction to the public ledger known as government have increased emphasis on
the blockchain. It is done using special digital currency.
software and high-speed computers. • In 2017, the Indian government formed a
• Payment: By selling goods to a person who committee headed by Subhas Chandra Garg
owns the cryptocurrency or the person who to study issues related to virtual currencies.
is involved in the process of mining. • The committee recommendation is as
• Purchasing: Purchasing cryptocurrency by follows:
using currency. o Banning of cryptocurrency: Due to
Bitcoin the risk and volatility associated with
• It is one of the most popular and used cryptocurrency.
cryptocurrencies in the world. Bitcoin o Digital ledger technology: The Report
was invented by Satoshi Nakomoto in the highlighted the positives of Digital
year 2009. Ledger Technology (DLT). DLT based
systems can be used by banks and
• The smallest unit to be recorded in
other financial firms for the process like
the blockchain of the bitcoin is known
fraud detection, loan issuance, etc.
as Satoshi.
o Other proposals: Committee suggested
1 bitcoin = 100 million Satoshi.
that the government should keep an
Cryptocurrencies around the World eye on ‘official digital currency’ as RBI
Venezuela Act 1943 permits the government to
• Venezuela adopted Petro Cryptocurrency in approve Digital Currency.
the year 2018. • The reasons as stated by the Subhash
• Venezuela adopted the Petro cryptocurrency Committee for banning cryptocurrency are
because Venezuela is facing hyperinflation. as follows:
Marshall Island o Volatile nature of cryptocurrencies
• Marshall Island adopted SOV or Digital (however, other investments are also
Sovereign in the year 2018. volatile, and this should be left to the
investors).
• SOV is also used as legal tender and provides
Marshall Island with its own currency. o These are used for transactions between
criminal groups and for criminal activities.
Note: o No government backing.
• In September 2021, El Salvador became Advantages of Cryptocurrency
the first country to allow consumers to • Easy to use: Since cryptocurrency uses
use the cryptocurrency (Bitcoin) in all modern technology like the Internet,
transactions, alongside the US dollar. smartphones etc. Funds can be transferred
• The decision led to large-scale protests directly between the parties without the
over fears it would bring instability and involvement of third parties like banks.
inflation to the impoverished Latin • Low transaction cost: Since cryptocurrency
American country. removes the third party like banks in the
• The International Monetary Fund (IMF) transaction it’s a lower transaction cost in
has urged El Salvador to reverse its comparison to the conventional banking system.
decision to make Bitcoin legal tender. • Transparency: In cryptocurrency, every
transaction is recorded on the blockchain.
Money Supply 57
Blockchain keeps the information about Disadvantages of CBDC

every transaction. • lt does not decentralise the economy as the
• Decentralisation: Since blockchain does not central bank controls data of transactions
store any information in a central location. between the banks and their consumers.
Information is distributed across networks of • The privacy of users was compromised to
computers making it difficult to tamper with. some extent.
Disadvantages of Cryptocurrency • Legal and regulatory issues act like
• Lack of knowledge: Most people do not limitations.
know what cryptocurrency is and how to CBDC vs Cryptocurrency
use cryptocurrency.
CBDC Cryptocurrency
• Volatility: Since cryptocurrency is not
regulated. Hence, its prices vary greatly They are managed by They are managed by
from one day to another. authorities like the computers.
RBI.
• Technology cost: Cryptocurrency saves
transaction costs, but for the transaction Transaction details The information
to make happen it requires a computer and are under the central of transactions
electricity making its adaptability difficult authority, and it is in the public
for a country like India. decides what to do domain and can be
Central Bank Digital Currency (CBDC) with the information. accessed by anybody
• The virtual form of a fiat currency created through blockchain
and regulated by the nation’s monetary technology.
authority or central bank is known as central Its value is much Its value can vary
bank digital currency (CBDC). It is a digital more stable as it much more as it
token or electronic record of a country’s is backed by an does not have any
official money. authority. authority to support
Advantages of CBDC it.
• It makes monetary policy and government Table 4.1: CBDC vs Cryptocurrency
functions easier to implement.
The money supply is, therefore, an important
• It connects the banks and consumers
macroeconomic variable. Its overall influence
without involving the third party so it
on the values of the equilibrium rate of
reduces the risk of the third party.
interest, price level and output of an economy
• It is possible to introduce privacy features
is of great significance. RBI regulates the
in a CBDC system.
money supply by controlling the stock of high
• It reduces the cost of financial inclusion of
powered money, the bank rate and reserve
the population of the country.
requirements of the commercial banks. It also
• It helps the central bank track the flow of sterilises the money supply in the economy
money under its jurisdiction, which helps to
against external shocks.
eliminate illegal transactions.
58 Money Supply
Q. How would the recent phenomena of protectionism and currency manipulations in world
trade affect the macroeconomic stability of India? (250 Words, 15 Marks)
• In the introduction, write about protectionism and currency manipulation.
• In Body,
o Reasons for increased protectionism and currency manipulation.
o Discussing the impact of protectionism and currency manipulation is affecting the
macro-economic stability of India.
• Conclude with suggesting ways to counter these menaces for global economic
governance.
Answer:
Protectionism refers to government policies that restrict international trade to help
domestic industries. Protectionist policies are usually implemented with the goal to improve
economic activity within a domestic economy but can also be implemented for safety or
quality concerns.
The currency manipulator term is used to recognise or notify those countries engaging in
unfair currency practices by devaluing their currency against the dollar purposely.
• The devaluation in turn lowers the cost of exports from that country. It then artificially
shows reduced trade deficits.
Increasing trend of protectionism and currency manipulations
• Recently, the trade war between China and the USA led to a rise in protectionist policies
and impacted developing countries like India on their macroeconomic policies.
o The high pace of China’s economic growth, and the widening of the US trade deficit
with China raised tensions between the two largest economies of the world.
• The USA removed India from the Generalized System of Preferences (GSP) list.
• Withdrawal of the USA from the Trans-Pacific Partnership (TPP).
• Other European countries are also getting involved in these trade wars.
• India’s withdrawal from signing the Regional Comprehensive Economic Partnership (RCEP)
treaty.
The effects of Protectionism and Currency Manipulation on Macro-Economic Stability of
India
• Global contraction in trade: Protectionism led to a slowdown in the global economy.
Decreased export from India will result in declining forex reserves and can potentially
lead to a balance of payment crisis, and devaluation of the currency.
• Currency war: The policy response of central banks globally to counter the effect of a
trade war is turning into a currency war.
o For example, the People’s Bank of China (PBoC) has allowed the Yuan to depreciate
to mitigate the effect of tariffs imposed by the US. This has resulted in the Rupee
strengthening by almost 6% on a relative basis against the Yuan.
Money Supply 59
• Impact on export: The relative Rupee strength not only makes our exports uncompetitive,
but also impinges on our domestic industry on account of import substitution as Chinese
imports become cheaper.
• Replacement of Indian export sectors: The sectors worst affected by Rupee overvaluation
would be the ones that export undifferentiated goods, as these goods can be easily
substituted by exports from other countries such as Vietnam, Bangladesh, and Sri Lanka.
Rupee overvaluation is, therefore, a significant concern as exports account for roughly 20%
of our GDP.
• Unemployment: Rising employment opportunities are essential from a macro-economic
perspective. If exports are increased, then it will help to improve the employment growth
rate, and this will lead to increased demand in the economy.
• Inflation: Currency manipulation results in costlier imports, which limits consumer choice,
and they end up paying more for the same limited products, which results in rising inflation.
Rising protectionism will limit consumers’ right to choose an overall global competitiveness
is a real factor behind keeping prices lower for goods.
• Economic growth: Rising trend of protectionism increased import costs and import-
dependent manufacturing units, producers must pay more for imports, and this will increase
the cost of production. The increased cost of production further reduces competitiveness
on a global level and consumers have to pay more for the same product.
• Current account deficit (CAD): In the absence of an export base the intermediate items
that form part of global supply chains become more, and put pressure on current account
balance sheets and widen CAD. Higher CAD puts pressure on the rupee and raises the cost
of borrowing.
• Impact on industries: Protectionism may promote inefficiency by the infant industry as it
will have no incentives to make itself efficient through the use of technology and long-
term investment.
The protectionist policy can be countered by applying higher import duties from a country, and
making it costly in the domestic market in order to save our domestic industries. But this is a
temporary measure. Though India has found itself on the USA’s currency manipulator list, India
actually does not follow the policy of currency manipulation. Therefore, in order to make free
trade a true reality, especially for developing and underdeveloped countries, the World Trade
Organization should play an active role and revive global best trade practices.
60 Money Supply
5 Banking (Part I)
Bank • By Act of Parliament in 1955, it was renamed

as State Bank of India.
• A bank is a financial institution that offers
its customers banking services and other State Bank of India
financial services. • In 1955, the Government of India
• Banking services include accepting deposits nationalised the Imperial Bank of India and
and giving loans. was given the name “State Bank of India”.
• Banks also offer a variety of financial • The State Bank of India was founded in
services, such as currency exchange and 1955 under the State Bank of India Act.
wealth management. • In the year 1959, the Government
• The Banking sector is one of the key drivers passed the SBI (Associates) Act, 1959
of the economy. It provides liquidity to the to nationalise eight private banks with
economy, which helps to create demand. good regional presence, and named them
For example, car loans provided by banks Associates of the SBI.
create demand for the car and hence, help • On 1st April 2017, the Government of India
in the growth of the automobile sector. merged five Associate banks and Bhartiya
• Due to the importance of banks for the Mahila Bank with SBI.
financial stability of the economy, banks • SBI became India’s largest bank, and one
are highly regulated in most countries. of the top 50 largest banks in the world
• Banking system is a group or network of after merging five partner banks: State
institutions, which provide financial services Bank of Bikaner and Jaipur, State Bank
to people. Banking system controls the of Hyderabad, State Bank of Mysore,
money supply in the economy. State Bank of Patiala, and State Bank
Evolution of Banks in India of Travancore.
• The General Bank of India, founded in 1786,
was India’s first bank, and the East India Nationalisation of Banks
Company established three other banks • Nationalisation is the process of transferring
known as Presidency Banks. private assets of the banking sector entities
o Bank of Calcutta (1806) under the control of the government.
o Bank of Bombay (1840) • Objectives of Nationalisation
o Bank of Madras (1843) o At the time of independence, there
o Bank of Hindustan was established in were many small banks in India. One
1870. of the reasons was to streamline the
functioning of banks.
o Allahabad Bank (1865) was the first bank
that was completely run by Indians. o To provide access to banking services to
the masses and reduce inequalities.
o Punjab National Bank Ltd was set up
o To provide social orientation to the
in 1894. It is the oldest existing bank
banking sector, i.e., to ensure adequate
established in India.
credit flow in agriculture and rural
o Central Bank, founded in 1911, was
sectors.
the first bank-owned and operated by
Banking Nationalisation Act of 1969
Indians.
• The Indian government nationalised 14
• All of the Presidency Banks merged in 1921
major Indian commercial banks with
to establish the Imperial Bank of India.
Banking (Part I) 61
deposits totalling more than 50 crores in o Union Bank of India

1969. o UCO Bank
o Allahabad Bank • Six more banks with deposits greater than
o Bank of India 200 crores were nationalised in 1980. These
banks were:
o Punjab National Bank
o Andhra Pradesh
o Bank of Baroda
o Corporation Bank
o Bank of Maharashtra
o New Bank of India
o Central Bank of India
o Oriental Bank of Commerce
o Canara Bank
o Punjab & Sind Bank
o Dena Bank
o Vijaya Bank
o Indian Overseas Bank
• The nationalisation of the Bank in 1980
o Indian Bank
became important to ensure that priority
o United Bank
sector lending reaches the poor through a
o Syndicate Bank wide branch network.
62 Banking (Part I)
Fig 5.1: Banking
Reserve Bank of India regulatory, and supervisory powers in order

• The Reserve Bank of India is the country’s to improve India’s banking system.
central bank. It is the regulator of the entire Functions of RBI
banking system in India. • The issuer of currency: The Reserve Bank
• The Reserve Bank of India was established of India is the sole agency in India that
on April 1, 1935, following the passage of the can issue currency and coinage, with the
RBI Act 1934. exception of the One-Rupee coin and note,
• The purpose of the RBI Act 1934 was to which are both issued by the Finance
issue notes and maintain reserves, but the Ministry. RBI prints, and distributes currency
Act did not cover banking regulations. along with regulating the flow of currency in
• Until 1949, when it was nationalised, the the economy.
Reserve Bank of India was a privately held • Banker of government: The Reserve Bank
bank. of India (RBI) provides banking services to
• The Banking Regulation Act of 1949 gave the both the Central and state governments.
Reserve Bank of India (RBI) a wide range of These services include deposits, loans, etc.
Banking (Part I) 63
• Bankers to the banks: RBI as the Central Bank ■ Bank Rate

of India, supervises the Commercial Banks ■ Repo Rate
of the country. RBI provides various services ■ Reverse Repo Rate
to these banks like loans to meet short and ■ Marginal Standing Facility (MSF)
long term liabilities, issuing licenses to banks
■ Open Market Operation
and lender of last resort etc.
o Qualitative instrument: Unlike
• Inflation targeting: RBI is tasked with the
quantitative tools, which have a direct
function of stabilising the rate of Inflation.
effect on the entire economy’s money
• Regulator of foreign exchange: RBI
supply, qualitative tools are selective
stabilises the value of Indian currency in
tools that have an effect on the money
the global economy. RBI manages India’s
supply of a specific sector of the
foreign currency assets and gold reserves.
economy.
• Developmental functions: RBI ensures ■ Margin requirement
credit availability to productive sectors,
■ Moral suasion
promotes financial inclusion, and sets up
various institutions like SIDBI, NABARD, etc. ■ Direct action
• Other functions: The Reserve Bank of India ■ Rationing of credit
(RBI) represents the Indian government Cash Reserve Ratio (CRR)
at the International Monetary Fund (IMF), • The Cash Reserve Ratio (CRR) is the
controls credit and monetary policy, and percentage of total deposits kept in cash
publishes monetary and banking data, with the Reserve Bank of India (RBI) by
among other things. commercial banks.
Credit and Monetary Policy • Banks are not permitted to use this fund
• Monetary policy is the Central Bank’s policy for commercial reasons, and the RBI does
for managing the proper amount of money not pay interest on CRR balances held by
supply, and demand in the economy. The banks.
primary purpose of monetary policy is • One of the main aims of CRR is to remove
to maintain price stability while seeking excess cash from the economy.
growth. • Cash Reserve Ratio (CRR) is determined by
• Credit Policy is a part of monetary policy. RBI. The current CRR is 4.5%. (As announced
It refers to the set of principles that in the RBI Governor’s Statement dated
determines whom and how much to lend? May 04, 2022, it was decided to increase
At what rate money is to lend? the Cash Reserve Ratio (CRR) of all banks
• The Reserve Bank of India (RBI) has the by 50 basis points from 4.00 percent to
authority to issue a monetary policy at any 4.50 percent of their Net Demand and
time, based on the state of the economy. Time Liabilities (NDTL), effective from the
• RBI uses a variety of measures to attain the reporting fortnight beginning May 21, 2022.)
desired level of credit and monetary policy. Statutory Liquidity Ratio (SLR)
• These tools are: • It is a minimum percentage of deposits that
o Quantitative instrument: Quantitative a commercial bank has to maintain in the
instrument deals with the quantity/ form of liquid cash, gold, or other securities.
volume of the money supply. These It is basically the reserve requirement that
instruments regulate or control the banks are expected to keep before offering
total volume of bank credit. credit to customers. These are not reserved
with the Reserve Bank of India (RBI), but
■ Cash reserve ratio (CRR)
with banks themselves. The SLR is fixed by
■ Statutory Liquidity Ratio (SLR)
the RBI. CRR (Cash Reserve Ratio) and SLR
64 Banking (Part I)
have been the traditional tools of the central in the bank rate can increase the money
bank’s monetary policy to control credit supply.
growth, the flow of liquidity, and inflation in Repo Rate (Ready Forward Contract)
the economy. The SLR was prescribed by • The interest rate charged by the RBI for
Section 24 (2A) of the Banking Regulation short-term loans to commercial banks is
Act, 1949. Liquid assets are assets that are known as the repo rate or repurchase rate.
readily converted into cash. For example,
• Banks obtain funds from the RBI by selling
Gold, government securities, etc.
securities and agreeing to repurchase them
• SLR’s primary goal is to manage bank credit, at a later date at a mutually agreed-upon
ensure that banks invest in government price.
securities, and save banks from insolvency.
• Government securities, corporate
• SLR is determined by RBI. The current SLR securities, or any other securities that the
is 18%. government allows for the transaction can
CAR SLR be utilised in repo rate.
Banks are allowed Banks are required • Bank usually uses this route to fulfill short
to keep CRR in cash to keep SLR in liquid term liquidity crunch.
only. assets (government • The policy rate is also known as the repo
securities, gold, etc.). rate. A change in the policy rate will have
The cash reserve is IN SLR, securities an impact on all other short-term interest
stored with the RBI are kept with rates in the economy, affecting economic
in CRR. the bank themselves. growth and inflation.
Types of Repo Rate
Banks do not earn SLR can bring
interest on CRR. interest to the banks. Repo rate is of two types based on maturity:
• Overnight repo: It refers to the repo with
Table 5.1: Difference between CRR and SLR
single-day maturity. Indian repo market is
Bank Rate
dominated by the overnight repo market.
• The Bank Rate is the interest rate that
• Term repo: It refers to repo that has a fixed
the Reserve Bank of India (RBI) charges
maturity longer than one day.
commercial banks and other financial
Reverse Repo
institutions for long-term loans.
• When the RBI borrows money from
• Commercial Banks, State Governments and
commercial banks, it pays them a rate of
Financial Institutions also use bank rates to
interest called a reverse repo.
borrow funds from RBI to meet their long-
term requirements. • A reverse repo is one kind of loan that is
designed to absorb excess liquidity in the
• Commercial banks’ lending rates are
economy.
influenced by the bank rate. Higher the
bank rate higher will be the interest rate • The reverse repo rate, set by the RBI, allows
charged by the banks. banks to earn interest on excess cash. This
serves two purposes:
• In 2012, the RBI linked the bank rate with
the Marginal Standing Facility (MSF). o Reduces excess liquidity from the
economy.
• The Reserve Bank of India (RBI) can use the
bank rates to control excess liquidity in the o Lower loan disbursal by banks hence,
economy and vice versa. By increasing the prevents bank losses due to NPA.
bank rate, loans taken by commercial banks • Increases in reverse repo will reduce the
become more expensive; this reduces the money supply by encouraging banks to park
reserves held by the commercial bank and their funds with the RBI in order to earn
hence, decreases the money supply. A fall interest, and vice versa.
Banking (Part I) 65
Liquidity Adjustment Facility (LAF) Reserve Bank of India in an emergency

• The Liquidity Adjustment Facility (LAF) is situation when inter-bank liquidity dries up
a facility provided by the Reserve Bank of completely.
India (RBI) to scheduled commercial banks • MSF allows banks to borrow up to 1% of their
that allows them to borrow money via Net Demand and Time Liabilities (NDTL)
repo or park excess funds with the RBI via overnight at a 1% interest rate. MSF is a last
reverse repo. resort for banks that have exhausted all
• The Liquidity Adjustment Facility (LAF) is other borrowing alternatives, including the
a tool used by the Reserve Bank of India Liquidity Adjustment Facility (LAF).
to manage commercial banking’s liquidity • Banks offer government securities to
demands. It helps banks correct day-to- RBI within the limits of the statutory
day liquidity imbalances. liquidity ratio (SLR).
• Components of LAF are: • The plan was implemented by the RBI
o Repo rate: Term Repo (for 14 and 7 days), with the primary goal of lowering overnight
Overnight Repo lending rate volatility in the interbank
o Reverse Repo: Overnight Reverse Repo market.
• The introduction of the Liquidity facility in Open Market Operation (OMOs)
India was based on the recommendation • Open market operation is the sale, and
of the Narasimham Committee on banking purchase of government securities in the
sector reform. open market by the RBI.
• It was introduced by the RBI in the year • The open market operation’s principal goal
2000. is to regulate the economy’s money supply;
How Repo Rate controls inflation? the RBI’s purchase of government securities
increases the money supply in the economy,
• High repo rates and reverse repo rates
whereas the sale of government securities
leave less money available to banks to
absorbs excess liquidity.
lend. Less availability of loans will restrict
the money supply in the economy. This is • Open market operations alter the
important when inflation is high, and there proportion of securities owned by the RBI
is a need to cut the rising price levels. But and commercial banks while keeping the
the increase in rates decreases the level of overall stock of securities constant. The
economic activity. RBI conducts open market operations
through commercial banks and does not
Repo Rate ↑ → Interest Rate ↑
deal directly with the public.
→ Consumption, Investment ↓ → Growth ↓
Rationing of Credit
• On the other hand, when inflation is under
control and economic growth is slow, RBI • Rationing of credit is a method through which
cuts repo rate and reverses repo rate. RBI set the limit on the number of loans,
This leaves more money with banks. More that can be made in a particular sector.
availability of loans will increase the money • Credit Rationing is used by RBI to regulate
supply in the economy. This is important credit flow, particularly in the case of
to increase the level of overall economic speculative activities.
activity. • It is generally of two types:
Repo Rate ↓ → Interest Rate ↓ o The variable portfolio ceiling: It refers
→ Consumption, Investment ↑ → Growth ↑ to the system by which the central
Marginal Standing Facility (MSF) bank fixes the ceiling or maximum
• A marginal standing facility (MSF) is a amount of loans and advances for every
window for banks to borrow from the commercial bank.
66 Banking (Part I)
o The variable capital asset ratio: It refers

• MCLR is based on the marginal cost of
to the system by which the central bank
funds, tenor premium, operating expenses,
fixes the ratio, which the capital of the
and cost of maintaining the cash reserve
commercial bank should have to the
ratio.
total assets of the bank.
Monetary Policy Committee
Moral Suasion
• The Monetary Policy Committee (MPC)
• Moral Suasion refers to the persuasion by
constituted by the Central government
RBI on scheduled commercial banks to
under Section 45ZB determines the
follow certain policies without any strict
policy interest rate required to achieve
action.
the inflation target. Under Section 45ZB
• Under Moral Suasion, RBI can issue
of the amended RBI Act, 1934, the central
suggestions, guidelines etc. for scheduled
government is empowered to constitute
commercial banks regarding particular
a six-member Monetary Policy Committee
policies.
(MPC) to determine the policy interest rate
Direct Actions required to achieve the inflation target.
• Direct Actions refer to strict actions taken The first such MPC was constituted on
by RBI against a scheduled commercial September 29, 2016.
bank. • The primary objective of the RBI’s monetary
• Under the Banking Regulation Act, 1949 policy is to maintain price stability while
RBI has the authority to take strict actions keeping in mind the objective of growth.
against any scheduled commercial bank Price stability is a necessary precondition
which does not adhere to the direction of to sustainable growth.
the RBI. • RBI will be responsible for containing
Marginal Cost of Funds Based Lending Rate inflation targets at 4% (with a deviation of 2%).
(MCLR) • MPC will have six members:
• The marginal cost of funds based lending o RBI Governor (Chairperson)
rate (MCLR) refers to the minimum interest o RBI Deputy Governor in charge of
rate of a bank below which it cannot lend, monetary policy,
except in some cases allowed by the RBI. o One official nominated by the RBI Board
• This new methodology replaces the base o The Government of India will propose
rate system introduced in July 2010. three members [committee chaired by
• RBI decided to shift from base rate to MCLR the Cabinet Secretary].
because the rates based on marginal cost o Members of the MPC will serve for
of funds are more sensitive to changes in four years and are not eligible for re-
the policy rates. This is essential for the appointment.
effective implementation of monetary
• The history of suggestions for setting up an
policy.
MPC can be tracked back to 2002, when the
Base Rate Y. V. Reddy Committee recommended an
• The base rate is the minimum rate of MPC to decide policy actions. Subsequently,
interest set by RBI below which banks are suggestions were made to set up an MPC in
not allowed to lend to its customer. 2006 by the Tarapore Committee, in 2007
Base Rate vs MCLR by the Percy Mistry Committee, in 2009 by
• Base rate calculation is based on the the Raghuram Rajan Committee and then
cost of funds, a minimum rate of return, in 2013, both in the Report of the Financial
operating expenses, and the cost of Sector Legislative Reform Commission
maintaining the cash reserve ratio. (FSLRC) and the Urjit Patel Committee.
Banking (Part I) 67
Monetary Policy Transmission o Private sector banks should be treated

equally with public sector banks. The
• Monetary policy transmission refers to the
ban on new private-sector banks should
process by which a central bank’s monetary
be eased, and the branch expansion
policy changes (Repo Rate) are passed through
licence policy should be abolished.
the financial system to affect the public.
o From 1991-to 92 levels, the statutory
• Monetary policy transmission is dependent
liquidity ratio (SLR) and cash reserve
on repo rate. How far changes in repo rate
ratio (CRR) should be gradually reduced.
can bring change in banks’ interest will
depend on monetary policy transmission. o Small and marginal farmers, the tiniest
The passing of rate changes by MPC is industrial sector, small traders, and the
crucial for regulating inflation, growth etc. weaker sections should be included in
the priority sector; the government’s
• To improve monetary policy transmission, RBI
share of public sector banks should be
introduced the Marginal Cost of Funds
disinvested to a certain percentage, and
Based Lending Rate (MCLR) system in 2016.
interest rates should be deregulated to
Limitation of Monetary Policy
suit market conditions.
• Large non-monetised economy: In rural
o The government should be more liberal
economy, many transactions are barter in
in allowing international bank branches
nature. Hence, the monetary policy fails to
to open, and Indian banks’ foreign
influence this large section of people.
operations should be streamlined; the
• Lack of financial inclusion: Non-banking RBI should be the major regulator of the
financial intermediaries like moneylenders country’s banking sector.
etc. operate in large numbers, they are not
Narasimham Committee II
under the regulation of RBI. This limits the
• The Government of India established a
effective transmission of monetary policy
committee on Banking Sector Reforms
changes.
(BSR) in 1998, which was chaired by M.
• Natural factors: Many natural factors like
Narasimham.
a cyclone, floods, unseasonal rains etc.
• The Narasimham Committee was
affect crop production hence inflation. For
established with the goal of launching the
example, the rising prices of onions cannot
second wave of financial reforms.
be controlled by monetary policy.
• The second report of the Narasimham
Banking Sector Reform
Committee focused on structural measures
Committee on Financial System (CFS)
to strengthen and stabilise the financial
• In the government of India, 1991 constituted system.
a nine-member committee headed by M.
• The following are the main recommendations
Narasimham.
of the Narasimham Committee Report II:
• The Narasimham Committee was formed
o Mergers between strong public sector
with the goal of increasing efficiency,
banks, as well as the closure of smaller
production, and profitability through
banks if rehabilitation is not viable.
“operational flexibility” and “functional
o The committee proposed creating an
autonomy.”
asset reconstruction fund to address
• The following are the primary
the problem of public sector banks’
recommendations of the Narasimham
large non-performing assets (NPAs).
Committee:
o Competition between the public sector
o Establishment of a four-tier banking
and private sector banks should be
structure, with SBI at the top, consisting
enhanced.
of three to four large banks.
68 Banking (Part I)
o Formation of the asset reconstruction • The Reserve Bank of India (RBI) undertook
fund to tackle the problem of huge non- its own version of ‘Operation Twist’ in 2019
performing assets of the public sector and 2020, using Open Market Operations to
banks. buy and sell government assets at the same
o Capital adequacy requirements should time (OMOs). The Reserve Bank of India will
be increased from their current level of acquire long-term government bonds while
8%, although the number should not be selling short-term government securities
specified. under this scheme.
o The Banking Sector Reform Committee Inverted Yield Curve
also stated that strong competition • The yield curve is upward-sloping because
between public and private banks is someone who lends to the government or
necessary. a corporation for one year (by purchasing a
one-year government or corporate bond)
Operation Twist can expect to receive a lower interest rate
• ‘Operation Twist’ refers to an economic than someone who lends for five or ten
situation in which the central bank uses years.
proceeds from the sale of short-term • Long-term debt instruments with the
securities to buy long-term government same credit rating have lower yields
debt instruments, lowering long-term than short-term debt instruments with
interest rates. the same credit quality, resulting in an
• In 1961, Operation Twist was introduced inverted yield curve. A negative yield
as a way to strengthen the US dollar, and curve is another term for an inverted yield
increase capital flow into the economy. curve.
Banking (Part I) 69

6 Banking (Part II)
In an economy, banks play a very important o Preference share capital.

role by offering a service to people to save, and • Tier 1 capital will be more in the form of
provide finance to businesses for investment equities.
and expansion. Bank loans to businesses are Tier 2 Capital
important for enabling economic growth. Loans • Tier 2 Capital/Supplementary capital is the
provided by banks to business has a certain capital that can absorb losses in the case
amount of risk associated with them, of non- of a bank’s failure, although it provides less
payment of loans. Central Banks of the world protection to depositors.
have adopted various tools to minimise the • Tier 2 capital refers to funds that are not
risk. Some of the tools are: reported on a bank’s financial statements.
• Cash Reserve Ratio (CRR) Tier 2 capital includes:
• Statutory Liquidity Ratio (SLR) o Subordinate debt,
• Capital Adequacy Ratio (CAR) o Revaluation reserve,
Capital Adequacy Ratio (CAR) o General loan-loss reserves, and
• It is the ratio of total capital to total risk- o Hybrid (debt/equity) capital instruments.
weighted assets in percentage terms. CAR • Most of the Tier 2 capital is in the form of
is the parameter to measure the financial debts and reserves etc.
soundness of the Bank. CAR ensures that
• At the end of 1974, in the aftermath of
banks have sufficient capital to meet the
serious disturbances in international
risk of future loss while also protecting
currency and banking markets (the failure
depositors and general creditors.
of Bankhaus Herstatt in West Germany), the
• It is also called the Capital Risk-weighted Basel committee (Committee on Banking
Asset Ratio (CRAR). Regulations and Supervisory Practices) was
• Risk-Weighted Assets (RWA) are assets established.
that have varying risk profiles. For instance, Basel Norms
an asset-backed by collateral would carry • Basel norms are standards set by the Basel
lesser risks as compared to loans, which Committee on Banking Supervision (BCBS).
have no collateral.
• BCSC is an international committee
• RBI introduced the Capital to Risk-Weighted established with the aim to develop
Assets Ratio (CRAR) systems for Indian standards for banking regulation.
Banks in the year 1992.
• In 2019, the BCBS has 45 members from 28
Tier 1 Capital jurisdictions, including central banks and
• Tier 1 capital, often known as core capital, is regulatory agencies responsible for banking.
the capital that permits a bank to withstand • Basel norms are agreed upon at Basel,
losses without having to close. Switzerland at the meeting of the Bank of
• The most significant criterion for measuring International Settlement (BIS).
a bank’s financial strength is Tier 1 Capital. • The BIS promotes cooperation among
• Tier 1 capital consists of reserves that are central banks with the common goal of
publicly available and appear on the bank’s guaranteeing global financial stability and
financial statements. These include: uniform banking laws.
o Share capital, • Basel committee’s decisions have no legal
o Undistributed profit, and force neither it is a multilateral organisation.
Banking (Part II) 71

The committee formulates supervisory • Under Basel III, the minimum requirement
standards and guidelines, and recommends for common equity has been increased from
best practices in banking regulations. 2% to 4.5 per cent of total Risk-Weighted
Basel I Assets (RWA).
• Basel I norms were agreed upon in Buffers introduced in Basel III Norms
the year 1988; hence minimum capital Capital Conservation Buffer (CCB)
requirement was imposed on banks. • It is a mandatory capital requirement
• In Basel I norms, the minimum capital for financial institutions, in addition to a
requirement was fixed at 8% of risk- minimum capital requirement.
weighted assets. • The minimum capital requirement is 9% in
• Basel I norm focused entirely on credit India.
risk (risk of default on loan). • The CCB would be 2.5% over and above the
• India adopted Basel I guidelines in 1999. minimum capital requirement.
Basel II • It is kept in the form of Tier 1 Capital, which
• Basel II norms were introduced in the is common equity.
year 2004, and were reformed versions of Counter-Cyclical Capital Buffer (CCCB)
the Basel I norm. • The capital held by a bank to cover business
• Basel II norms focus on three main pillars: cycle risks is known as the counter-cyclical
o Minimum capital requirement: Banks capital buffer.
should maintain a capital adequacy • These are additional provisions that banks
requirement of 8% of risk assets in any are expected to make during good times
way. to provide for capital erosion during bad
o Supervisory review: To manage and business periods.
monitor all three types of risks that a • The buffer may fluctuate from zero to
banking industry faces, namely market 2.5% of the total risk-weighted assets
risk, credit risk, and operational risk, (RWA) of banks.
banks must develop and implement • It is maintained in the form of common
improved risk management strategies. equity Tier 1 Capital.
o Market discipline: Banks must declare Challenges in the implementation of Basel III
their risk exposure to the central bank. Norms
• Presently banking system of India follows • Higher capital requirement for the bank:
Basel II norms. The public sector banks (PSBs) in India will
Basel III require large capital requirements under
• In the year 2010, Basel III guidelines were Basel III. This will be difficult for the banks,
released in response to the financial crisis because of the large number of bad loans
of 2008. on their books.
• Basel III aims at: • Mounting pile of stressed assets: The
o Improving the ability of the banking banking sector in India is facing challenges
sector to withstand shocks caused by due to low credit growth, deteriorating
financial and economic volatility. asset quality and low profitability.
o Improve banking sector governance and • Economic and policy changes: In India,
risk management. the banking domain is facing headwinds
because of policy and economic regulations
o Transparency and disclosure should be
like GST, demonetisation, Real Estate
enhanced.
(Regulation and Development) Act of 2016.
72 Banking (Part II)

Non-Performing Asset (NPA) banks (PSBs) have doubled in the last seven
• The asset is categorised as non-performing years to Rs 5.40 lakh crore in 2021 from Rs
when it ceases to generate income, i.e., 2.24 lakh crore in 2014.
when the borrower does not pay the interest • Bad loans across banks fell to a six-
or principal after a specific time. year low of 6.9% as of September 2021,
• Non-Performing Asset (NPA) shall be an according to the RBI’s Financial Stability
advance(loan) where: Report. But stress tests conducted by the
o Instalment and/or interest of principal banking regulator suggest that gross non-
remains unpaid for more than 90 days performing assets may rise again. Under a
in the case of a term loan. severe stress scenario, the gross NPA ratio
of banks may rise to 9.5%. This scenario
o Instalment and/or interest of principal
builds in a contraction of 2.1% in GDP in the
remains unpaid for two harvest seasons
second half of this year and a 1.1% rise in
but not more than two and a half years
the first half of next year.
in the case of an advance granted for
agricultural purposes. o For public sector banks, the gross NPA
ratio may rise from 8.8% currently to
• Any amount to be received remains unpaid
10.5% by September 2022, under the
for a period of more than ninety days in
baseline scenario.
respect of other accounts.
o For private banks, bad loans may rise
Categories of NPAs
from 4.6% to 5.2% over this period.
Banks must further categorise NPAs into the
• Banks’ declining profitability makes them
following three categories based on the length
more exposed to adverse economic shocks,
of time the asset has been a non-performing
putting customer deposits at risk.
asset:
• The increasing volume of Bank frauds is
• Sub-standard assets: Assets that have
swallowing all the economic development of
been non-performing for less than or equal
India and is producing financial indiscipline
to 12 months.
in the country. Big defaulters such as
• Doubtful assets: If an asset has been
Vijay Mallya, Mehul Choksi, and Nirav Modi
non-performing for more than a year, it is
usurps thousands of crores which not only
classified as a doubtful asset.
adds to growth in the quantum of Non-
• Loss assets: Loss assets are assets that Performing Assets (NPAs), but takes out the
have been classified as a loss by the bank, sizable reserves that could have otherwise
the RBI, or internal or external auditors, been utilised for the economic well-being
but whose value has not yet been totally of thousands of poor people willing to
written off. To put it another way, such an become entrepreneurs with banks’ support
asset is considered uncollectible. and plan to start up their small businesses.
Indian Banks and NPA Causes for Increase in NPAs
• Data on NPAs is regularly published by RBI • Excess expansion of corporate during the
as part of its Financial Stability Reports. boom period.
• As per Reserve Bank of India (RBI) data on • During the global financial crisis of 2008,
global operations, gross non-performing however, as the economy slowed, these
assets (GNPAs) of scheduled commercial companies’ ability to repay their debts
banks (SCBs) have declined from Rs. shrank. This contributed to India’s twin
9,33,779 crores (GNPA ratio of 9.07%) as on balance sheet problem, in which both the
31.3.2019 to Rs. 8,00,463 crores (GNPA ratio banking sector (which lends money) and
of 6.93%) as on 30.9.2021. The gross non- the corporate sector (which borrows money
performing assets (NPAs) of public sector and must repay it) are in financial trouble.

• Domestic and economic slowdown. Insolvency and Bankruptcy Code (IBC)

• Indiscriminate lending without proper • The International Business Code (IBC)
credit risk assessment. offers a time-limited process for resolving
• Political pressure to lend to particular insolvency in both firms and people.
enterprises. Insolvency refers to when a business or
• Long delays and gestation periods of several individual is unable to pay their debts.
infrastructure projects. • When a debtor (a person who owes money)
• External factors, such as decreases in global fails to pay, creditors seize the debtor’s
commodity prices, lead to slower exports. assets and have 180 days to settle the
Impact of NPAs on the Indian Economy insolvency. A financial creditor may initiate
Non-performing assets (NPAs) in the Indian the insolvency resolution process by filing
banking sector are one of the most serious, an application with the National Company
and widespread issues that have afflicted the Law Tribunal under the IBC.
entire banking system. • Within fourteen days, the National Company
• Profitability: NPAs have an influence on Law Tribunal must determine whether a
profitability since, on the one hand, banks default has occurred, and a Committee
stop earning income and, on the other hand, of Creditors (CoC) comprised of financial
they draw higher provisioning (amount creditors will be formed to make decisions
set aside in an organisation’s account) regarding insolvency resolution.
compared to standard assets. • The CoC has the option of reorganising the
• Capital adequacy: Banks are expected to debtor’s debt by developing a resolution
hold appropriate capital on risk-weighted plan or liquidating the debtor’s assets.
assets under Basel norms. As the number of • The Committee of creditors will appoint a
non-performing assets rises, risk-weighted resolution professional to draft and deliver
assets rise as well, forcing banks to boost a resolution plan to the CoC. This proposal
their capital. must be approved by the CoC, and the
• Liability management: In the light of heavy resolution procedure must be completed
non-performing assets, banks are more within 180 days. If the NCLT approves the
likely to cut deposit interest rates while extension, the procedure can be extended
increasing advance interest rates. This for up to ninety days. If the CoC does not
could stifle economic growth. approve the resolution plan, the debtor will
• Public confidence: The banking system’s proceed to liquidation. According to the IBC,
credibility has been severely harmed as a the resolution process must be completed
result of rising levels of non-performing within 330 days. This includes time spent
assets (NPAs), as it has harmed the general on any permitted extensions as well as time
public’s faith in the banking system’s spent on legal proceedings related to the
soundness. process.
What is being done to Manage the Issue of • The Debt Recovery Tribunal is the
growing NPAs? adjudicating authority with jurisdiction over
The actions are taken to prevent and resolve individuals, and limited liability partnership
NPAs can broadly be classified into two firms. Appeals from the Debt Recovery
kinds. First, several laws (such as the Insolvency Tribunal’s (DRAT) orders are heard by the
and Bankruptcy code) provide regulatory Debt Recovery Appellate Tribunal.
methods for resolving NPAs, and second, the • The National Company Law Tribunal (NCLT)
RBI prescribes and regulates remedial steps will be the adjudicating authority for
for banks for internal restructuring of stressed businesses and limited liability entities.
assets. Appeals from the NCLT order will be heard

by the National Company Law Appellate • Recognition: Banks must value

Tribunal (NCLAT). their various assets as far as possible close
• The administration of the Insolvency and to the true value, as the Reserve Bank of
Bankruptcy Code, 2016 has been transferred India has been emphasising.
to the Ministry of Corporate Affairs. • Re-capitalisation: Once they do so,
SARFAESI Act 2002 their capital position must be protected
through the infusion of equity as the banks
• SARFAESI (Securitisation and
have been demanding.
Reconstruction of Financial Assets and
Enforcement of Securities Interest) Act, • Resolution: The various underlying stressed
2002, was framed to address the problem assets in the corporate segment must be
of NPAs (Non-Performing Assets) or bad sold or rehabilitated as the government has
assets. been desiring.
• The statute empowers banks, and other • Reform: Future incentives for the private
financial institutions to recover loans sector, and corporates must be set-
by auctioning residential or commercial appropriate to prevent a repetition of the
properties. problem.
• Banks can confiscate collateral/securities Prompt Corrective Action (PCA)
(excluding agricultural property) without • To prevent commercial banks from going
the participation of a court in the event of bankrupt, the RBI has established various
loan default. trigger points for assessing, monitoring,
• The law does not apply to controlling, and corrective actions on weak
and unstable banks. PCA refers to the
o Unsecured loans,
process or mechanism through which such
o Loans below ₹100,000
activities are carried out.
o Where the remaining debt is below 20%
PCA Framework for Scheduled Commercial
of the original principal.
Banks
• The SARFAESI Act provides for
• Capital, Asset Quality and Leverage will be
the establishment of Asset Reconstruction
the key areas for monitoring in the revised
Companies (ARCs), which are to be
framework.
regulated by RBI. Asset Reconstruction
• Indicators to be tracked for Capital, Asset
Companies can buy securities from banks,
Quality and Leverage would be CRAR/
and financial institutions (ARCs).
Common Equity Tier I Ratio (the percentage
• The government has amended the
of common equity capital, net of regulatory
SARFAESI Act in 2016 to empower the Asset
adjustments, to total risk-weighted assets
Reconstruction Companies (ARC).
as defined in RBI Basel III guidelines), Net
• ARC is a specialised and dedicated financial NPA Ratio (the percentage of net NPAs to
organisation that purchases non-performing net advances) and Tier I Leverage Ratio
assets (NPAs) from financial institutions (the percentage of the capital measure to
and banks in order to help them clean up the exposure measure as defined in RBI
their balance sheets. guidelines on Leverage ratio), respectively.
• The RBI registers ARCs, and the SARFAESI • The PCA framework would apply to all banks
Act of 2002 regulates them. operating in India, including foreign banks
4R framework operating through branches or subsidiaries
The 4R formula (Recognition, Recapitalisation, based on breach of risk thresholds of
Resolution, Reform) was suggested by the identified indicators.
Economic Survey 2015-16 to resolve the NPAs • A bank will generally be placed under the
crisis. PCA framework based on the Audited

Annual Financial Results and the ongoing o If no breaches in risk thresholds in

Supervisory Assessment made by RBI. any of the parameters are observed as
RBI may impose PCA on any bank during per four continuous quarterly financial
the course of a year (including migration statements, one of which should be
from one threshold to another) in case the Audited Annual Financial Statement
circumstances warrant it. (subject to assessment by RBI);
• Exit from PCA and withdrawal of restrictions o Based on supervisory comfort of the
under PCA: Once a bank is placed under PCA, RBI, including an assessment on the
taking the bank out of PCA Framework and/ sustainability of profitability of the bank.
or withdrawal restrictions imposed under • Breach of any risk threshold (as detailed
the PCA framework will be considered: under) may result the invocation of PCA.
Table 6.1 PCA matrix - Parameters, indicators and risk thresholds

• When a bank is placed under PCA, one or Prompt Corrective Action (PCA) Framework
more of the following corrective actions for Non-Banking Financial Companies (NBFCs)
may be prescribed: • The PCA Framework for NBFC comes into
effect from October 1, 2022.
• The PCA framework is applicable to the
following category of NBFCs:
o All Deposit-Taking NBFCs [Excluding
Government Companies] (NBFCs-D)
o All Non-Deposit Taking NBFCs in Middle,
Upper and Top layers (NBFCs-ND);
[Including Investment and Credit Companies,
Core Investment Companies (CICs),
Infrastructure Debt Funds, Infrastructure
Finance Companies, Microfinance Institutions
and Factors]; but
[Excluding – (i) NBFCs not accepting/
not intending to accept public funds; (ii)
Government Companies, (iii) Primary Dealers
and (iv) Housing Finance Companies]
Table 6.2 Mandatory and Discretionary actions • Breach of any risk threshold (as detailed
under) may result in the invocation of PCA.
For NBFCs-D and NBFCs-ND(excluding CICs):
Indicator Risk Threshold-1 Risk Threshold-2 Risk Threshold-3
Upto 300 bps below More than 300 bps upto More than 600 bps
the regulatory 600 bps below regulatory below regulatory
CRAR minimum CRAR minimum CRAR minimum CRAR
[currently, CRAR <15%> BUT ->12%] [currently, CRAR<12% but ->9%] [currently, CRAR<9%]
Upto 200 bps below the More than 200 bps upto More than 400 bps
regulatory minimum Tier I 400 bps below the regulatory below the regulatory
Tier I Capital Ratio Capital Ratio minimum Tier Capital Ratio minimum Tier I
[currently, Tier I Capital [currently, Tier I Capital Ratio Capital Ratio
Ratio <10% but ->8%] <8% but -<6%] [currently,
Tier I Capital Ratio <6%]
NNPA Ratio >6% but -< 9% >9% but -<12% >12%

(including NPIs)
For CICs:
Indicator Risk Threshold-1 Risk Threshold-2 Risk Threshold-3

More than 600 bps More than 1200 bps
Upto 600 bps below the but upto 1200bps
regulatory minimum below regulatory
Adjusted Net Worth/ below regulatory
ANW/RWA [currently, minimum ANW/RWA
Aggregate Risk Weighted Assets minimum ANW/RWA
ANW/RWA<30% BUT ->24%] [currently, ANW/RWA
[currently, ANW/RWA<24% <18%]
BUT ->18%]
->2.5 times but <3 times ->3 times but <3.5 times -<3.5 times
Leverage Ratio
NNPA Ratio (including NPIs) >6% but -<9% >9% but -<12% >12%
Table 6.3 PCA matrix - Parameters, indicators and risk thresholds

Core Banking Solution (CBS)

• A core banking solution is a bank’s centralised system that enables consumers to do
business with the bank from anywhere, regardless of where their account is maintained.
• The CORE is an acronym for “Centralized Online Real-time Exchange”.
• For example, E-Kuber is the Core banking solution of the Reserve Bank of India.
Important Committees
PJ Nayak Committee
• RBI constituted the P.J. Nayak committee in 2014 to review the governance of the Board of
Banks in India.
• The Committee was presided by P J Nayak and its major recommendations are –
o The Bank Nationalisation Act, the SBI Act, and the SBI Subsidiaries Act should all be
abolished (1970, 1980). This is the case since the terms of these statutes require the
government to possess more than 50% of the banks.
o The government should establish a Bank Investment Company (BIC) as a key investment
company for holding equity holdings in banks it already owns.
o Bank Investment Company should be incorporated under the Companies Act 2013.
o This BIC will receive the government’s stake in banks. As a result, the BIC would take
over the role of parent holding company for all of these national banks, with the banks
becoming subsidiaries of the BIC. BIC will be a self-governing organisation with authority
to appoint its own board of directors, and make other important policy choices.
o The Bank Boards Bureau (BBB), a temporary organisation, will handle the BIC’s numerous
functions until the BIC is formed. Once BIC is established, the BBB will be phased out.
o The BBB will advise on board appointments, as well as the chairman and other executive
directors of financial institutions.
o The Government should consider decreasing its holding in public sector banks to less
than 50%, in order to restore a level playing field for different public sector banks.
Nachiket Mor Committee
• The “Committee on Comprehensive Financial Services for Small Businesses and Low-
Income Households” was set up by the RBI under the chairmanship of Nachiket Mor. The
committee was tasked with developing a clear vision for India`s financial inclusion and
deepening.
• Committee has outlined six vision statements for full financial inclusion, and financial
deepening in India:
o Universal Electronic Bank Account (UEBA): Every Indian citizen over the age of eighteen
will be provided with their own full-service, safe, and secure electronic bank account.
o Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges:
According to the Committee, every Indian resident should be within fifteen minutes of
walking distance of a payment access point.
o Sufficient Access to Affordable Formal Credit: Every low-income family and small
business would have access to a formally regulated lender, who could assess and meet

their financial requirements. Such a lender must also be able to provide them with a
comprehensive selection of appropriate credit products at a reasonable cost.
o Universal Access to a Range of Deposit and Investment Products at Reasonable Charges:
Every low-income family and small business would have access to providers who could
provide them with appropriate investment, and deposit solutions. They must be able to
access such services at a reasonable cost.
o Universal Access to a Range of Insurance and Risk Management Products at Reasonable
Charges: Providers would be able to supply appropriate insurance and risk management
products to every low-income family and small enterprises. These items must allow
them to manage risks, such as (a) commodity price changes; (b) human longevity,
disability, and death; (c) livestock death; (d) rainfall; and (e) property damage.
o Right to suitability: Every low-income household and small businesses would have
the legal right to receive only financial services that are appropriate for them, and she
would be able to pursue legal action if she believes that the proper procedures for
determining suitability were not followed or that gross negligence occurred.
• The committee’s key recommendations are as follows:
o The fast growth of bank accounts will be fueled in large part by Aadhaar.
o At the district level, deposits and advances as a percentage of gross domestic product
(GDP) are tracked.
o Adjusted the priority sector lending target to 50%, with sector, and region adjustments
based on lending difficulty.
Mission Indradhanush and smooth bank operations. Induction

of talent from the various private sectors
• In order to address the problems that
into public banks.
Public sector banks are facing, the
Indian government launched “Mission o Bank Boards Bureau (BBB): The PSBs
(Public Sector Banks) Appointments
Indradhanush,” a seven-pronged effort.
Board would be replaced by the Bank
• Mission Indradhanush attempts to improve
Board Bureau (BBB). It would provide
the public sector banks’ operations, so that
advice to banks on things such as raising
they can compete with the private sector
capital, mergers and acquisitions, and
banks. (Note: There is another mission
so on. BBB will have three ex-officio
of the government with the same name.
members and three expert members in
Mission Indradhanush (MI) of the Ministry
addition to the chairman.
of Health and Family Welfare, was launched
o Capitalisation: Capitalisation of banks
in 2014 and aims at increasing the full
by inducing Rs. 70,000 crores in the
immunisation coverage to children to 90%.)
next four years due to rising NPAs, and
• The seven components include:
the necessity to meet the provisions of
o Appointments: Separation of the the Basel III norms.
essential positions of Chief Executive o De-stressing: Solving problems arising
Officer (CEO), and Managing Director in the infrastructure sector in order to
(MD) to minimise power concentration check the stressed assets in the banks.

o Empowerment: Providing better • Lenders will need to work on personalising

flexibility, and autonomy to PSBs in loan terms for consumers who take out
hiring manpower. digital loans based on their previous
o A framework of accountability: New behaviour and data from third-party
performance indicators would be used sources.
to assess the performance of banks. • Banks can examine MSMEs’ transactional
Quantitative indicators such as growth, data, GST data, and other data to make
NPA management, diversification, return analytics-based credit choices.
on capital, and financial inclusion. Banking with Resilient Technology
Qualitative parameters, such as asset • PSBs will be required to move their IT
quality improvements, human resource systems to secure cloud-based solutions in
efforts, and so on. accordance with the regulatory framework,
o Governance reforms: Gyan sangam as well as execute time-bound audits and
testing in accordance with board-approved
meetings between government officials,
regulations.
and bankers to resolve banking sector
challenges and set a course of action • PSBs will have to strengthen cyber-
resilience by implementing advanced cyber-
for the future.
security measures such as the adoption
EASE 4.0
of AI- and ML-based threat detection, API
• EASE 4.0 is a reform in PSBs, and it is a security etc.
continuation of the reforms carried out Agricultural Financing
under EASE 3.0.
• Dial-a-Loan feature will also be used for
• PSBs will focus on four key initiatives under agricultural lending.
EASE 4.0, namely, Smart lending backed • There are plans to automate the processing
by analytics; 24x7 banking with resilient and sanctioning of agricultural loans based
technology, and cloud-based IT systems; on field visits, borrower interaction, and
data-enabled agriculture financing; and risk assessment in states with digitised
collaborating with the financial ecosystem. land records.
• EASE 4.0 will have an index, and it will Financial Ecosystem Collaboration:
measure the PSB’s performance on nearly • PSBs will need to work with NBFCs to
135 + objective metrics. develop data-driven co-lending models.
Smart Lending • To support co-lending with NBFCs, PSBs
• PSBs will have to simplify their loan will need to design and improve the
commencement processes in order to performance of lead management systems,
develop, and improve their performance. loan management systems, loan monitoring
systems, and other systems.
How to Reduce NPA

Before giving loans:
• Credit information of the borrowers: A third party agency such as CIBIL should help. The
banks have the information about the financial health of the borrower to aid the banks intake
correct decisions about the loan, and they com charge the bank for it.
• Cautioned treatment of defaulters: Government should set up a Central Vigilance Commission
for the collection of information on individual defaulters, and identifying the willful defaulters,
and informing concerned banks so that no more funds are allotted to the individual or firm.

• Proper structuring of loans: Loan structuring is simply designing the loan in such a manner
that it fulfils the needs of the borrower, and also protects the lender from the loss occurring
when the borrower, is unable to pay the loan. Loan structuring involves components, purpose,
amount, collateral, type of loan, risks, etc, pricing. All these components must work for both
to reduce the NPA before giving a loan etc.
After declaring an asset as an NPA:
• A comprehensive framework by RBI: RBI has released a comprehensive framework for
Revitalising Distressed Assets in the Economy. It includes:
o Early recognition of the problem: RBI has recommended setting up an early alert system
and indicators so that problem can be identified before it occurs.
o Identifying borrowers with genuine intent: To identify borrowers who want to revive from
those not serious about commitment.
o Timeliness and adequacy of response: Longer delay in response is a problem
in the revival of assets. So, a quick and export solution should be brought up.
o Focus on cash flow: Focus on the funds allotted to the company and its flow and use
o Management effectiveness: The banks assume that lack of finances leads to NPA’s, but
effective management is required to tackle the business condition, and it decides its
fortune.
o Legal and related issues: Lenders should start a legal action only when they are convinced
that they have reached a conclusion.
• Government relief: Government should also provide relief such as tax waivers so that firms
can revive.
• Revival of Viable entities: There should be a committee set up by the lending bank to explore
various options to resolve the stress account for the revival of the entities. The options may
include:
o Rectification: Initially allowing the borrower to identify the problem, and providing him
with extra funds for a specific time. If he is unable to resolve it the bank may provide
expert help to him to resolve the problem.
o Restructuring: This option is taken only for borrowers who have been identified as not
being a willful defaulters. In this process, the agreement between the lender and borrower
is revisited, and the loan is restructured, and both have to agree to a final resolution.
o Recovery: If the first two solutions are not viable, the recovery process may be used. With a
view to optimising the efforts and results, the committee may choose the optimal path for
recovery from among the numerous legal and other recovery possibilities available.
• Debt Recovery Tribunals: The Debt Recovery Tribunals (DRTs), and Debt Recovery Appellate
Tribunals (DRATs) were established under the Recovery of Debts Due to Banks and Financial
Institutions Act, 1996 (RDDBFI Act), to assist banks in receiving prompt redress for NPAs.
o The DRTs also have the authority to decide on an application filed by a borrower or
mortgagor against a secured creditor for action taken under the Securitisation Act.
o The government has established 39 DRTs and 5 DRATs (single Member Tribunals) as of
today.
o The difficulty with DRTS is that they are sluggish in solving pending disputes because the
process is lengthy, resulting in a large number of pending cases.

• Invoking legal provisions: Many legal provisions can be used to reduce NPAs such as the-
o Insolvency and Bankruptcy Code of 2016,
o Securitisation and Reconstruction of Financial Assets and Security Enforcement,
o Interest Act of 2002,
o Act of 1993 for the recovery of debts owed to banks and financial Institutions,
o Legal Services Authorities Act, 1987.
• Selling the NPA to SCs/RCs: Selling NPA to SCs/RCs is to sell NPA at a discounted price by
banks to any registered RCs/SCs so as to clear the books of the bank. Due to this, there
is a loss to the bank, but a fair amount is recovered by the bank by doing so. To date,
28 reconstruction companies are registered under RBI. RBI has also provided guidelines for
transparent sales of NPAs
• JLF (Joint lenders forum): It is a form created by RBI in 2014 by grouping lender banks to
take decisions when an asset of more than Rs 100 crore turns out to be a stressed asset. It will help
to stop practices like giving loans to the same defaulter individual from different banks, paying the
loan ofone bank bytaking a loan from another bank etc. It has not been effective because, while there
is a great deal of ambiguity about how it works, banks are also wary of taking a long-term approach.
• Lok Adalats: Lok Adalat is an alternative dispute redressal mechanism. It was formed under
the Legal Services Authorities Act 1987. It takes disputes pending in the court of law or at the
pre-litigation stage.
o The salient feature of Lok Adalats:
■ No fee is nvolved.
■ It can settle bank disputes involving amounts up to Rs 20 lakh.
■ It can hear of any existing suit pending in Civil Court/DRTs, and if no settlement is
arrived, parties can continue with Court proceedings.
■ Decisions passed by it have legal status and are binding on both parties.
■ Settlement in it is cost-effective and less time-consuming. Banks can quickly recover
their NPAs.
Indian Banking System prejudicial to the interests of its depositors.

The Indian banking sector has transformed from Scheduled banks are further classified into
a slow commercial entity to one that is highly commercial and cooperative banks.
proactive and dynamic. It is highly fragmented, • Non-scheduled banks are those which are
with just 30 banks accounting for more than not included in the second schedule of the
half of all deposits and 60% of all advances. RBI Act, 1934.
The Indian banking system consists mostly of Commercial Banks
“scheduled” and “non-scheduled” banks. • Commercial banks may be defined as,
• A scheduled bank is a bank that is listed any banking organisation that deals
under the second schedule of the RBI Act, with the deposits and loans of business
1934. In order to be included under this organisations.
schedule of the RBI Act, banks have to fulfil • Commercial banks issue bank checks and
certain conditions such as having a paid-up drafts, as well as accept money on term
capital and reserves of at least 0.5 million deposits. Commercial banks also act as
and satisfying the Reserve Bank that its moneylenders, by way of instalment loans
affairs are not being conducted in a manner and overdrafts.

Fig. 6.1 Indian Banking System
• Commercial banks also allow for a variety of • Private sector banks include the old
deposit accounts, such as checking, savings, private sector banks and the new
and time deposits. These institutions are generation private sector banks, which
run to make a profit, and are owned by a were incorporated according to the
group of individuals. revised guidelines issued by the RBI
Scheduled Commercial Banks (SCBs) regarding the entry of private sector banks
• Scheduled commercial banks (SCBs) in 1993.
account for a major proportion of the • Foreign banks are present branch/
business of the scheduled banks. SCBs in subsidiary route presence or through their
India are categorised into five groups based representative offices.
on their ownership and/or their nature of Regional Rural Banks (RRB)
operations. State Bank of India and its • RRBs (Regional Rural Banks) are financial
associates are recognised as a separate institutions that offer loans to farmers, and
category of SCBs, because of the distinct other small enterprises in Rural Areas.
statutes (SBI Act, 1955 and SBI Subsidiary • The Regional Rural Banks Act and the
Banks Act, 1959) that govern them. suggestions of the Narasimham Working
• Nationalised banks and SBI and associates Group (1975) led to the establishment of
together form the public sector banks Regional Rural Banks in 1976. On October 2,
group IDBI ltd. has been included in the 1975, the Prathama Grameen Bank became
nationalised banks group since December the first Regional rural bank.
2004.

• According to the Department of Financial

• Tenure: The Act stipulates the term
Services, there are 43 RRBs functioning in
of office of a director (excluding the
the country currently.
Chairman) to be three years.
• RRBs’ main objectives are to provide credit
• Board of directors: The Act raises the
and other services to agricultural labourers,
occupancy of directors to three years
artisans, small and marginal farmers, and
from the present two years. The bill also
small entrepreneurs in rural areas, with
states that no director can hold office for
the purpose of eliminating the rural credit
a total period exceeding six years.
gap, minimising regional imbalances, and
• Government limit: According to the Act, the
improving rural job creation.
central government, state governments,
• Priority sector lending has been made and sponsoring banks can increase or
available to RRBs in the same way that it has lower their shareholding limits in the RRB
been made available to commercial banks. by notification after discussing with the
• The three sponsoring institutions, the state governments and sponsoring banks.
central government, sponsoring bank,
and state government, have a 50:35:15 Cooperative Banks
shareholding arrangement in RRBs. • A cooperative bank is a financial institution
• In 2010, a committee chaired by K.C. that is owned and operated by its
Chakrabarty reviewed the financial status shareholders, who are also its customers. It
of all RRBs and recommended that 40 of offers a full range of traditional banking and
the 82 RRBs be recapitalised. financial services. The States Cooperative
• The remaining RRBs, according to the Societies Act governs cooperative banks in
committee, are capable of achieving the India. They are also under the authority of
required amount of CRAR on their own. the Reserve Bank of India (RBI), according
• Accepting the committee’s suggestions, the to two laws: the Banking Regulations Act,
central government and other shareholders 1949, and the Banking Laws (Co-operative
began pouring funds into the RRBs to Societies) Act, 1955.
recapitalise them. The amalgamation • India’s co-operative movement began in
process proceeded in the same way. 1904 with the passage of the Co-operative
Societies Act, which addressed the issue of
RRB Amendment Act, 2015 rural finance.
The Regional Rural Banks (Amendment) Act • The goal of this law was to establish
of 2015 took effect on 4th February 2016. cooperative credit societies to support
• Authorised capital: The Act raises the saving, self-help, and cooperation between
amount of authorised capital to Rs. 2,000 the farmers, artisans etc.
crore and states that it cannot be reduced Features of Cooperative Banks
below Rs. 1 crore. • All the co-operative banks share common
• Shareholding: RRBs can raise funds from features:
sources other than the federal and state • Customer owned entities: Members of a
governments, as well as sponsor banks, cooperative bank are both customers and
as long as the central government and bank owners.
the sponsor bank own at least 51 per cent
• Democratic member control: Cooperative
of the company. Furthermore, if a state
banks are owned and governed by their
government’s ownership in the RRB falls
members, who elect the board of directors
below 15%, the federal government must
through a democratic process. According
meet with the affected state government
to the cooperative concept of “one person,
to resolve the situation.

one vote,” members typically have equal • The primary land development banks in
voting rights. the state’s districts and tehsil areas are
• Profit allocation: A large portion of a overseen by the state land development
company’s annual profit, benefits, or surplus banks, which are all registered under the
is normally set aside as reserves. In some Co-operative Societies Act.
circumstances, a portion of this benefit • LBDs get their working capital from
may be granted to co-operative members, share capital, loans, and debentures, as
subject to legal and legislative constraints. well as borrowings from the State Bank
Advantages of Cooperative Banking of India, commercial banks, and State
• Cooperative banking provides an cooperative banks. NABARD oversees
effective alternative to the traditional land development banks.
credit system. • These institutions do not take deposits
• Cooperative Banking encourages saving and from the general public.
investment.
• It provides cheap and easy credit to people National Bank for Agriculture and Rural
in rural areas. Development (NABARD)
• Cooperative societies have helped in the • The NABARD Act was passed in 1981, but
introduction of better agricultural methods it was not established until 1982. It was
like improved seeds, chemical fertilisers, set up as a development bank under the
modern implements, etc. Sivaraman Committee’s recommendation.
It was set up as a 50-50 joint venture by
Disadvantages of Cooperative Banking
RBI and the Government of India. The total
• Primary credit societies’ organisational and
capital investment was rupees 100 crore.
financial constraints severely restrict their
• However, the RBI brought down its holding
ability to offer sufficient credit to the rural
in NABARD in 2018. Now the Government
population.
of India holds a 100% stake in NABARD. It
• Cooperative Banks are losing their lustre due
acts as a refinance agency. It means that
to the expansion of Scheduled Commercial
the government of India infuses money
banks and the adoption of technology.
in NABARD, and NABARD makes loans to
• Political interference to raise their vote bank banks that give loans for agricultural and
and, in most cases, have their members rural development.
elected to the board of directors to achieve
• However, NABARD can also do direct
unfair advantages.
lending to state governments, corporates,
• Regional disparities the cooperatives in cooperative societies etc. for setting up
northeast states and in states like West food processing units, food parks etc. and
Bengal, Bihar, and Odisha are not as developed also for developmental activities.
as the ones in Maharashtra and Gujarat.
• NABARD has its headquarters located in
Land Development Bank Mumbai, and it mainly has its branches in
• These are cooperative banks, which state capitals.
provide medium and long term credit to • The minute details of even Kisan Credit Cards
the agricultural sector. have also been prepared by NABARD only.
• The Land development banks are • It is responsible for supervising State
structured in three levels namely. Cooperative Banks (SCBs), District
o State, Cooperative Central Banks (DCCBs), and
o Central Regional Rural Banks (RRBs), as well
as conducting required inspections. By
o Primary level

providing credit facilities, NABARD has businesses, unorganised sectors, low-income

played a vital role in rural development. households, farmers and migrant workforce.
• It gives financial institutions credit for a Important Aspects of Small Finance Banks
variety of operations, including farm and • Small finance banks are allowed to take
non-farm activities, with terms ranging deposits from customers, and unlike
from 18 months to more than 5 years. payments banks, small finance banks will
• The Rural Infrastructure Development also be allowed to lend money to people.
Fund (RIDF) is managed, and controlled by • Small finance banks are another step to
NABARD. bring those with no access to banking
• Warehouse Infrastructure Fund (WIF), Food under the ambit of the banking system and
Processing Fund, Producer Organisation achieve financial inclusion.
Development Fund (PODF) for Producer • Small financing banks will offer low-
Organisations and Primary Agriculture Credit cost banking products to the country’s
Society (PACS) etc. also come under NABARD. underserved and unserved segments, such
• To encourage Indian banks to lend to self- as small and marginal farmers, micro and
help groups, NABARD launched the SHG- small companies, and other organised
Bank Linkage Program. sector entities at a reasonable cost.
• Through KCC, Rupay Kisan Card etc, it has Payment Banks
made the availability of institutional credit
• A payments bank is comparable to a
easier. Promoting incubation centres, skill
traditional bank, with the exception that it
development, climate resilient agriculture
operates on a smaller scale and does not
etc. it supports innovation in the agriculture
take on any credit risk. To put it another
sector.
way, it can handle the majority of banking
• Through NABARD (Amendment) Act 2017, activities, but not loans or credit cards. It
the Central government has increased the accepts remittances, mobile payments/
capital for NABARD to 30,000 crore rupees transfers/purchases, and other banking
from earlier 5000 crore rupees. By this act, services like ATM/debit cards, net banking,
the shares of NABARD were transferred and third-party fund transfers, as well as
from RBI to the Government of India. The demand deposits up to Rs 1 lakh.
amended act has given the responsibility
• The Reserve Bank of India set up a committee
of providing loans and support regarding
led by Dr Nachiket Mor in September 2013 to
machinery and instruments to the
investigate ‘Comprehensive financial services
manufacturing sector with up to 10 crore
for small firms and low-income persons.’ The
investment and the service sector with up
purpose of the committee was to come up
to 5 crore investment.
with ways to improve financial inclusion and
Small Finance Banks access to financial services. In January 2014,
Small Finance Banks are a special segment the RBI received the committee’s report. One
of banking created by RBI under the guidance of the committee’s main recommendations
of the Government of India with an objective was to establish specialised banks or
of furthering financial inclusion primarily by “payments banks” to serve lower-income
taking basic banking activities and benefits to people and small enterprises, with the goal
the unserved and underserved, including small of having a global bank account for every
Indian resident by January 1, 2016.

Payments bank India Post Payments Bank (IPPB)

• A payments bank is like any other bank but • The Prime Minister launched India Post
operates on a smaller or restricted scale. Payments Bank (IPPB) on September 1, 2018.
The minimum paid-up capital for payments • It is an initiative of the government aimed
bank is Rs 100 crore. at making banking services available at
• The minimum initial contribution to the people’s doorstep.
paid-up equity capital shall at least be • PPB is a wholly-owned subsidiary of the
40% for the first five years from the Department of Post, with 100 per cent
commencement of its business. Government of India equity.
• They cannot advance loans or issue credit • It is a payments bank of the Indian postal
cards. They can issue an ATM/Debit Card. department which will work through a
• It can accept demand deposits only, i.e., savings network of post offices and nearly 3 lakh
and current accounts, not time deposits. postmen.
• It can make deposits up to ₹1 lakh per account • It will be governed by the Reserve Bank of
• The Payment banks cannot set up India (RBI).
subsidiaries to undertake non-banking • It will accept deposits, offer remittance
financial services activities. services, mobile banking and third-party
• Payments and remittance services through fund transfers.
various channels. • It offers three types of saving accounts:
• Distribution of non-risk sharing simple • Regular Account – Safal,
financial products like mutual fund units • Basic Savings Bank Deposit Account
and insurance products, etc. (BSBDA) – Sugam and
• They are only allowed to invest the money • BSBDA Small – Saral
received from customers’ deposits into • The maximum limit on deposits for current
government securities. and savings accounts is Rs 1 lakh.
• They cannot accept NRI deposits. • The bank offers a 5.50 per cent interest
• They need to maintain a Cash Reserve Ratio rate.
(CRR). • They can issue debit cards and ATM cards,
• Need to hold a maximum of 25% in but they cannot issue credit cards and
current and time/fixed deposits with other cannot loan money.
scheduled commercial banks for operational • It will provide social security payments like
purposes and liquidity management. MNREGA wages, and direct benefit transfer
• A committee headed by Dr Nachiket Mor and give access to third-party services,
recommended setting up of ‘Payments insurance and mutual funds.
Bank’ to cater to the lower-income groups • IPPB account holders will be issued a QR Code
and small businesses. based biometric card with a unique QR code.
As of now, only six banks are working namely;

1. Airtel Payments Bank Limited (First)
2. India Post Payments Bank Limited
3. Fino Payments Bank Limited
4. Paytm Payments Bank Limited
5. NSDL Payments Bank Limited
6. Jio Payments Bank Limited

The problem of commercial banks in India

• Competition from non-banking financial institutions: Non-banking financial intermediaries
such as mutual funds, housing finance corporations, leasing and investment organisations
have posed significant challenges to commercial banks in terms of deposit mobilisation. All
of these institutions compete with commercial banks for public deposits, and they all pay
greater interest rates than commercial banks.
• Competition with foreign banks: Deposits have increased at a faster rate at foreign banks, and
smaller private sector banks. One reason is that non-nationalised banks appear to provide
superior customer service. This gives the impression that deposits have been diverted from
nationalised banks to non-nationalised banks.
• Political pressures: Growing political demands from the Centre and States have also impeded
the smooth operation of nationalised banks. Due to diverse political demands, nationalised
banks frequently encounter several obstacles. Such pressures are established in staff selection
and the granting of loans to specific parties without regard for their creditworthiness.
• NPA: Commercial banks currently lack the necessary infrastructure to ensure that their loans,
and advances are put to constructive use in the greater public interest. Banks are suffering large
losses as a result of a high number of non-performing assets or outstanding debts owed to them
by borrowers. They are also unable to sustain a capital adequacy ratio in the majority of cases.
Difference between Commercial Banks and Cooperative Banks

Parameter Commercial Banks Cooperative Banks
Registration Under Companies Act Under the co-operative societies act of state
1956 government
Objective Profit Making Financial Inclusion, provide credit at concessional
rate rural sector, weaker section etc.
Services Provide value-added Provide only basic banking service
service
Source of fund Public deposits Government, NABARD/RBI, and very less public
deposits
Regulator RBI State Government, RBI, NABARD
Structure Unified Structure Three-tier structure
Loan Short, medium and Short term
long term
Priority Sector Applies Not Applies
Lending
Coverage of Area Large Small
Borrowers are Account-holders Member shareholders
Types of ATM • Brown label ATM: These ATMs are owned

• Bank’s own ATM: These types of ATMs and maintained by the service provider, but
are owned, and operated by the bank and the bank manages the cash and connectivity
carry the bank logo. to the bank network. They carry the logo
of the bank which outsources their services.

• White label ATM: A third party owns, and

to these types of accounts are in compliance
operates these (non-banking firm). To aid
with the Reserve Bank of India directives.
financial inclusion and ATM penetration in the
• Non-Resident Ordinary Rupee Account
country, the RBI has permitted the launch of
(NRO account): These kinds of accounts
White Labeled ATMs. These white label ATMs
can be opened by any individual resident
will not display the logo of any particular
outside India with an authorised bank, or an
bank. TATA launched the first white label ATM
authorised dealer for collecting their funds
in India under the brand name Indicash.
from local bonafide transactions in Indian
National Financial Switch rupees. When a resident becomes an NRI,
• NFS is the largest domestic ATM his existing rupee accounts are designated
network in India. as NRO. These types of accounts can be
• The Institute for Development and in the form of savings, current, savings,
Research (IDRBT) in banking technology recurring or fixed deposit accounts.
created, developed, and deployed NFS. Priority Sector Lending (PSL)
• Through interconnection across the • The Reserve Bank of India (RBI) mandates
Bank’s switches, NFS supports ATM banks to lend a specified amount of their funds
transaction routing, allowing transactions to designated sectors known as the “priority
conducted at any ATM to be forwarded to sectors” by the RBI. Example: Agriculture,
the connected banks. MSMEs, export credit, education, housing, etc.
Non-Resident Indian Deposit: • The goal of priority sector lending is to
Foreign Exchange Management (Deposit) ensure that appropriate institutional credit
Regulations, 2000 allows NRIs (Non- reaches economically vulnerable areas.
Resident Indians) to have deposit accounts • Priority sector comprises the following
with authorised dealers, and with banks categories:
sanctioned by the Reserve Bank of India.
o Agriculture
These accounts include:
o Export credit
• Non-Resident External Account (NRE
o Micro, small and medium enterprises
Account): NRE accounts can be opened
by Overseas Corporate Bodies (OCBs) and o Education (Loans to individuals for
NRIs with authorised dealers and with educational purposes, including
banks approved by RBI. These can be in vocational courses, not exceeding
the form of a current account, a savings ₹ 20 lakh)
account, a recurring account, or a fixed o Housing (Loans to individuals up to ₹35
deposit account. Deposits are permitted in lakh in metropolitan centres (with a
any permitted currency. The rate of interest population of ten lakh and above), and up
valid to these accounts is in accordance to ₹25 lakh in other centres for purchase/
with the directives issued by RBI. construction of a dwelling unit per family
• FCNR (B) [Foreign Currency Non-Resident provided the overall cost of the dwelling
(Bank)] account: These kinds of accounts unit in the metropolitan centre, and
can be opened by Overseas Corporate at other centres does not exceed ₹45
Bodies (OCBs) and NRIs with an authorised lakh and ₹30 lakh, respectively. Existing
dealer. The type of accounts can be opened individual housing loans of UCBs presently
in the form of term deposits. Deposits classified under PSL will continue as PSL
of funds are accepted in the following till maturity or repayment.)
currencies: Pound Sterling, Euro, and o Social infrastructure (Bank loans up
Japanese Yen. The interest rates applicable to a limit of ₹5 crores per borrower
for setting up schools, drinking water

facilities, and sanitation facilities purpose of purchase, and supply of

including construction/ refurbishment inputs and/or the marketing of the
of household toilets and water outputs of the beneficiaries of these
improvements at the household level, organisations.
etc. and loans up to a limit of ₹10 crores ■ Loans up to ₹50 crores to Startups,
per borrower for building health care as per the definition of the Ministry
facilities including under ‘Ayushman of Commerce and Industry, Govt. of
Bharat’ in Tier II to Tier VI centres.) India that are engaged in activities
o Renewable energy (Bank loans up to a limit other than Agriculture or MSME.
of ₹30 crores to borrowers for purposes • PSL does not apply to Regional Rural Banks
like solar-based power generators, (RRB) and Small Finance Banks (SFB)
biomass-based power generators, because these banks are already working in
windmills, micro-hydel plants and for the sector, which is defined in PSL norms.
non-conventional energy based public • The RBI will determine the interest rate for
utilities, viz., street lighting systems, and bank loans in the priority sector.
remote village electrification etc., will be
• If the Banks fail to meet their PSL target,
eligible for priority sector classification.
then banks may be required to invest in
For individual households, the loan limit
the Rural Infrastructure Development Fund
will be ₹10 lakh per borrower.)
(RIDF).
o Others
• Banks can purchase Priority Sector
■ Loans not exceeding ₹1.00 lakh Lending Certificates (PSLCs) in the event
per borrower provided directly by of a shortfall, allowing them to satisfy the
banks to individuals and individual priority sector lending target and sub-
members of SHG/JLG, provided the targets. This encourages surplus banks to
individual borrower’s household sell excess achievement beyond targets,
annual income in rural areas does resulting in more lending to the priority
not exceed ₹1.00 lakh and for non- sector. The PSLC method allows the seller
rural areas, it does not exceed ₹1.60 to sell the fulfilment of a priority sector
lakh, and loans not exceeding ₹2.00 obligation to the buyer without transferring
lakh provided directly by banks to any risk or loan assets.
SHG/JLG for activities other than
Digital Initiative
agriculture or MSME, viz., loans for
National Payments Corporation of India (NPCI)
meeting social needs, construction
or repair of house, construction of • Under the requirements of the Payment and
toilets or any viable common activity Settlement Systems Act, 2007, the Reserve
started by the SHGs. Bank of India (RBI) and the Indian Banks’
Association (IBA) founded the National
■ Loans to distressed persons [other
Payments Corporation of India (NPCI) as the
than distressed farmers indebted
umbrella organisation for all retail payment
to non-institutional lenders] not
systems in India.
exceeding ₹1.00 lakh per borrower to
prepay their debt to non-institutional • Founded in 2008, the NPCI is a not-for-
lenders. profit organisation registered under the
Companies Act 2013.
■ Loans sanctioned to State sponsored
organisations for Scheduled Castes/ • The products of NPCI are as follows:
Scheduled Tribes for the specific

RuPay Unified Payment Interface (UPI)

• RuPay is India’s first domestic Debit and • UPI is an interbank payment system that
Credit Card payment network, and it carries allows you to send, and receive money in
out the RBI’s vision of a “less-cash” economy. real-time.
• Singapore will be the first nation to issue • To enable seamless account settlement, it
RuPay cards in the country. relies on existing technologies, such as the
• RuPay card has been introduced in the Immediate Payment Service (IMPS), and the
following countries Bhutan, Maldives, UAE, Aadhaar Enabled Payment System (AEPS).
Bahrain, and Saudi Arabia. • UPI 2.0 was released in 2018, allowing users
to link their Overdraft accounts to a UPI.
BHIM Bharat Bill Payment System (BBPS)
• Bharat Interface for Money (BHIM) is a • BBPS is an interoperable platform that
mobile payment app that allows users to allows a customer to pay bills like water,
make quick transactions using the Unified telephone, gas, direct-to-home (DTH) and
Payments Interface (UPI). electricity at a single location: electronic or
• Maximum Fund transfer limit: A user can physical.
send up to Rs 100,000 per transaction and
a maximum of Rs 100,000 per day for one
bank account. This limit is available per
bank account linked on BHIM.
Aadhaar Enabled Payment System (AePS)
• It allows people to carry out financial transactions on a Micro-ATM using the Aadhaar
authentication.
• The only inputs essential for a customer to do a transaction are:
o Aadhaar number.
o Issuer identification number (finding the Bank with which the customer is associated).
o Fingerprints were captured during their enrollment.


7 Inflation
Inflation in no way dangerous to the economy. This

Inflation is defined as a long-term rise in the is also known as mild inflation or moderate
general price level of goods and services in inflation.
a given economy. It takes into account the • Walking inflation: When prices rise
pricing of most everyday or common products moderately and the annual inflation rate is
and services, such as food, clothing, housing, a single digit ( 3% - 9%), it is called walking
recreation, transportation, consumer staples, or trolling inflation.
and so on.
• Running inflation: When prices rise rapidly
• Inflation is the change in the average price
like the running of a horse at a rate of speed
of a basket of goods and services over time.
of 10% - 20% per annum, it is called running
• The inflation rate is defined as the rate of
inflation
change in the overall price level, which is
calculated as follows: • Galloping inflation: Galloping inflation or
hyperinflation points out unmanageably
high inflation rates that run into two or three
• As the general price level rises, fewer digits. With high inflation, the percentage of
products and services can be purchased the same is almost 20% to 100% from an
with each unit of currency; this diminishes overall perspective.
the currency’s purchasing power, the Based on the causes
currency loses its real value as a medium
• Demand-pull inflation: It takes place in any
of exchange, and a unit of account within
economy because of an increase in demand.
the economy.
If, in case the flow of money in the economy,
o Suppose one ₹100 note buys 10 litres i.e., the liquidity is high either because of
of petrol in 1980. In the year 2020, the an increase in our income or employment
same ₹100 buys 2 litres of petrol. This opportunities or because of a decline in the
shows that although the ₹100 note did interest rate on borrowing or an increase
not lose its value over time, it has lost in the expenditure of the government, the
its purchasing power over this time of 30 consumer is left with surplus money. Due
years. This example explains how money to this, the consumption or the demand
loses its value over time when prices rise. increases.
• It is measured on a year-on-year basis (or o If this increase in demand is not
month/week basis). The rate of change in adequately matched with supply, then
the price level in a given month vis a vis the the price will increase, leading to
corresponding month of last year is known demand to pull inflation.
as point-to-point inflation.
o That is the reason why every
Types of Inflation economy tries to create more and
On the basis of speed, the four types of inflation more employment opportunities, but
are indicated. employment opportunities have to be
• Creeping inflation: Creeping inflation is created only to the extent that they do
slow-moving and very mild. The rise in not accelerate inflation beyond control.
prices will not be perceptible but will spread This is referred to as NAIRU.
over a long period. This type of inflation is
Inflation 93
NAIRU (Non-Accelerating Inflation Rate of o Cost-push inflation is not directly

Unemployment) associated with demand, but it may be
indirectly associated with demand.
Demand-pull inflation is always associated
o Causes of Cost-Push Inflation are
with economic growth. As the demand
■ Increase in cost of production
increases, the companies try to produce
more and more, which leads to economic ■ Decrease in output
growth. However, the gap between the ■ Hoarding and speculation
demand and supply should not be very high ■ Increase in indirect taxes
otherwise, demand-pull inflation will not be ■ Defective supply chain
beneficial. The goods and services will go ■ Increase in price of imported
beyond the reach of common people. That is commodity (like oil)
the reason why employment opportunities
should be created in a productive manner. It Structural Inflation
means that along with an increase in income • It takes place in any economy because of
of an individual, he should also contribute structural deficiencies. In other words, if
to supply. In a developing economy like the storage and transportation facilities
India, demand-pull inflation is a common are not adequate, and even if the goods
phenomenon. More and more employment are produced in sufficient quantity,
opportunities are being created, leading to a they will fail to reach the market in
continuous increase in demand which is the adequate quantity. Structural inflation
cause behind demand-pull inflation. can also happen because of hoarding,
cartelisation or black marketing. Hence,
o Causes of Demand-Pull Inflation are:
it can be said that structural inflation is
■ Increase in money supply. that inflation which takes place because
■ Decrease in direct taxes. of supply-side problems.
■ Increase in population o When a middleman or a dealer
■ Increase in government expenditure/ procures a commodity in huge
public expenditure quantity and, instead of supplying it
■ Increase in exports in the market, stores that commodity
■ Decrease in imports for a long period of time, creating an
• Cost-Push Inflation Cost-push inflation artificial shortage of product in the
does not take place because of an increase market, then it is termed Hoarding.
in demand. It takes place in an economy o When the producers of a commodity
mainly because of an increase in the cost or providers of a service mutually
of production. In other words, if the price of decide to increase the price, setting
raw material or any other input increases, aside competition, then it is termed
the price of the final product or service Cartelisation.
will increase even without an increase in o The process through which goods or
demand. products are sold at the wrong place
o For example, crude oil is the source or in the wrong way is called Black
of production of diesel, and diesel is marketing. All hoarding, cartelisation
the most important source of fuel in and black marketing are illegal.
production and transportation activities.
Hence, if diesel becomes more costly, Measures to Control Inflation
the cost of production will increase, The government adopts various measures
leading to cost-push inflation. to control the increase in the price of goods
and services. In India, the RBI is responsible
94 Inflation
for controlling inflation. Inflation targeting process is as follows: Increased taxes

and keeping inflation within the set target is (keeping government spending constant)
the responsibility of the RBI. However, the RBI, → disposable personal income decreases
through its monetary policies, can only control → consumption decreases → aggregate
demand and pull inflation to a limited extent. demand decreases → prices decline → rate
The RBI can only control credit flow in the of inflation is lowered
economy by taking away surplus money from • A similar process follows if the government
the banking system. However, in this process, cuts down on its expenditures without
economic growth is affected. The RBI cannot raising taxes (or reduces its deficit/
control that part of inflation which is driven by increases surplus).
black money. In case the public expenditure • Some of the fiscal policy measures are as
(expenditure of the government) remains high, follows:
and the monetary policies become ineffective.
o Reducing import duties
At the same time, in controlling cost-push
o Banning exports or imposing minimum
inflation and structural inflation, the role of
export prices.
government and state government is more
important as compared to the RBI. Hence, o Suspending the futures trading of
inflation can be controlled only through commodities.
the combined efforts of the RBI, the central o Raising the stock limit for the
government as well as state governments. commodities
Monetary Policy Supply Management Measures:
• There is a close link between the money • Supply management measures aim to
supply and inflation. Therefore, controlling increase the competitiveness, and efficiency
the money supply with the help of monetary of the supply chain, putting downward
policy can be controlled. pressure on long-term costs.
• Using contractionary monetary policy, • Some of the supply management measures
the money supply in the economy can taken are as follows:
be decreased. This leads to a decrease o Restricting exports of commodities
in aggregate demand in the market, and in short supply and increasing their
thereby reduces inflation. imports.
Decrease in the supply of money → rate o Effective implementation of the
of interest increases → Investment Essential Commodities Act, 1952 to
decreases → Aggregate demand prevent hoarding, and speculation.
decreases → prices decline → rate of o Incentivising the increase in production
inflation is lowered of commodities through tax concessions,
A similar process follows when CRR, subsidies, institutional support etc.
SLR, and Repo rates are increased, and o Higher MSP has been announced to
decreased. incentivise production and thereby
• Rates like CRR, SLR, Repo rate and Reverse enhance the availability of food items,
repo rate are increased to impact the which may help moderate prices.
money supply in the economy by the RBI to o Fixing the ceiling prices of the
control inflation. commodities, and taking measures to
Fiscal Policy control the black marketing of those
goods.
• Fiscal policy refers to the revenue and
expenditure policy of the government. o Reforming the supply chain through
infrastructure development, foreign
• Contractionary fiscal policy can be
investments etc.
useful to tackle high inflation rates. The
Inflation 95
Previous Year Question (PYQ) (2018, Mains)
Q. Examine the role of supermarkets in the supply chain management of fruits, vegetables, and
food items. How do they eliminate the number of intermediaries? (150 Words, 10 Marks)
• In the intro, try to define horticulture and discuss horticultural production in India.
• In the body,
o Define the concept of a Supermarket.
o Scrutinise the role of supermarkets in supply chain markets in horticulture and food
items.
o And discuss how they eliminate the number of intermediaries.
• Tyr to conclude by writing the significance of supermarkets in many areas.
Answer:
Horticulture is the cultivation, production and sale of vegetables, fruits, flowers, herbs, and
ornamental or exotic plants. Horticulture crops are characterised by high-value crops, higher
productivity per unit of area and lower requirement for irrigation and input cost.
Indian Scenario - Need for Supermarkets:
Horticulture production in India has more than doubled approximately from 146 million tonnes
in 2001-02 to 314 million tonnes in 2018-19 whereas the production of food grain increased from
213 million tonnes to 285 million tonnes during the same period.
• In 2012-13, total horticulture production at 269 million tonnes surpassed total food grain
production at 257 million tonnes.
• The area under horticulture crops increased to 25.5 million hectares in 2018-19, which is 20%
of the total area under food grain.
• India’s foodgrain production is estimated to rise by 2% in the 2020-21 crop year and it is at
an all-time high at 303.34 million tonnes.
Thus, total food grain and fruit and vegetable production have constantly been increasing, which
shows the need to have a better supply chain and management. Supermarkets are an answer to
this challenge.
o A Supermarket is a large retail store operated on a self-service basis, selling groceries,
fresh produce, meat, bakery and dairy products, and sometimes an assortment of non-
food goods. Therefore, it acts as a crucial link in the supply chain of food products.
The role of supermarkets in supply chain management and reducing interference of middlemen:
• Transportation: The perishability of fruits, vegetables and other food items requires faster
transportation. Especially mobile cold vans, and trucks to keep the freshness of fruits and
vegetables. Supermarkets are equipped with all this faster transportation.
• Storage facility: Supermarkets have good facilities for storage, especially cold storage and
mobility of products will increase efficiency.
• Price discovery: Supermarkets can give better prices to farmers because direct dealing with
farmers by eliminating middlemen will give the best price to farmers. Without middlemen,
farmers can negotiate with supermarkets in a better manner leading to expected price
discovery.
• Direct contract: Big supermarket chains such as Walmart, Reliance etc. can directly contract
with farmers or farmers’ producer organisations on predetermined conditions. If this can be
implemented properly, it will substantially increase farmers’ income and reduce transportation
costs, mandi tax, middlemen exploitation etc.
96 Inflation
Thus, it can be said that though supermarkets are concentrated in urban areas, their products
come from villages which mean supermarkets can reduce urban-rural connectivity, reduce
gaps between both, and improve conditions of rural and urban areas by benefiting farmers and
consumers, respectively.
Constraints Faced by the Government in and economic events in the international

Controlling Inflation arena.
• According to Petroleum Planning and • Long overdue supply-side reforms.
Analysis Cell, in the pandemic year 2020- • Inefficiencies in the monetary policy
21, over 84 per cent of India’s petroleum transmission.
product demand (crude oil and petroleum • Limited control of Government, and RBI in
products) was met with imports. In 2019- controlling rupee depreciation.
20, over 85 percent of petroleum product • Political compulsion in reducing expenditure
demand was met with imports. Oil prices and fiscal deficit.
are volatile owing to the various political • Populist measures of the government.
Impact of Inflation
Positive Impact Negative Impact

• A moderate level of inflation • It deteriorates the standard of living of people as it reduces
stimulates economic growth income at their disposable.
because it increases the • It is regressive, i.e., it affects the poor relatively more because
profit margins of firms in the the marginal utility of money for them is relatively high.
short run, which encourages • High inflation may cause shortages of goods if consumers
them to increase production start hoarding out of concern that prices will increase in the
and supply. future.
• It indicates that there is no • High inflation retards economic growth, as it induces the
deficiency of demand in the government to adopt contractionary fiscal and monetary
economy which improves policies.
profitability expectations,
• It deteriorates the balance of payments situation of the
which encourages firms
country. It discourages export and encourages imports which
to invest and increases
widen, creates a deficit, and tend to reduce FOREX reserves.
production capacity.
Effects of Inflation
Person/ Effect Reason
Entity
On Creditor Loss The interest rate charged by the bank is the nominal interest rate
On Debtor Profit (NIR), which is not the same as the real interest rate(RIR) paid by the
borrower.
RIR = NIR - Inflation
The real interest rate is always lower than the nominal interest rate if
inflation is taking place.
On-Demand Increases Since the money supply increases, it increases the demand for
commodities.
Inflation 97
Person/ Effect Reason

Entity
On Increases Inflation in the short-run boosts investment since it indicates higher
Investment demand, and industries increase production to match demand.
On Saving Reduces Inflation reflects a reduction in the purchasing power per unit of
money, i.e., each unit of currency buys fewer goods and services.
That is why people try to keep the least money with themselves and
hold the maximum in the bank.
On Indirect Increases As indirect tax is imposed on the value of products, with an increase in
Tax the price of the product, people pay more. Hence, indirect tax increases.
On Direct Increases Due to Inflation, tax-payer income increases, due to which, taxpayers
Tax are moved into a higher income tax slab. Hence, the direct tax burden
increases.
On Exchange Depreciate Due to inflation, the currency of the economy loses its value.
Rate For example, $1 = Rs50
after inflation $1 = Rs. 60
On Export Increases The export will increase in volume but will decrease in value.
On Import Decrease Because of the increase in the costs of imported products, hence, the
volume of imports decreases.
On Increases Inflation increases employment in the short run. But in the long term,
Employment as costs rise, it may substitute labour with other factors, such as new
technology.
On Salary Increases Inflation increases the nominal value of the wages while their real
wages (adjusted for inflation) fall.
On Economy If inflation is in the specified range, then it is healthy for the economy, otherwise
not good.
Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian
economy in good shape? Give reasons in support of your arguments. (150 Words, 10 Marks)
• In the introduction, try to highlight India’s steady GDP growth and Inflation with stats.
• In the body,
o Discuss how steady GDP growth and low inflation has a positive impact on the economy.
o Also, justify the shortcomings of steady but low inflation.
• Try to conclude with the need for balance between both growth and inflation.
Answer:
Since 2014-15, overcoming the effect of the subprime crisis, the Indian economy is witnessing
more stable inflation (4-6%) along with steady GDP (6-8%) growth till 2019-20. As per Economic
Survey 2018-19, low inflation contributed to stable economic growth which enhanced savings,
investments, and economic growth, and helped maintain international competitiveness.
98 Inflation
The positive impact of a steady growth rate and lower inflation

• Increased output: Low inflation has always been good for an economy, especially in India,
which needs steady and sustainable growth, higher investment in the economy, increased
confidence among investors etc. for achieving higher economic growth targets.
• Increase disposable income: High inflation erodes the purchasing power of the poor, and
marginalised section of the people. Lower inflation automatically improves the purchasing
power of the poor and increases disposable income in their hands.
• Macroeconomic stability: Low inflation rate improves macroeconomic stability by keeping
the exchange rate stable, and improving export and import. Stable interest rates will improve
investment, which further leads to multiplier effects.
• Reforms facilitator: Steady economic growth helps the government to push for economic
reforms like goods and service Tax.
• Improve tax collection: Steady economic growth and low inflation improve tax collection
(both direct and indirect), which further improves the spending of the government on
infrastructure development and social infrastructure etc. Improved revenue prospects for
the government will also help in improved contribution to various social sector schemes.
Insufficient Economic Parameters:
• Hamper investment: Constant lower level of inflation will deter private investment in an
economy.
• Unemployment: When companies see lower or negative inflation, and there is no expected
profit gaining in the business, then corporates cut the further expansion and investment,
which hampers employment generation.
• Jobless growth: When steady economic growth has not transformed into enough employment
generation.
• Farmer’s loss: Lower inflation has resulted in poor earnings for farmers. This has negatively
impacted the rural economy and resulted in agrarian distress.
Thus, it is imperative to have a healthy rate of inflation which should boost higher economic
growth. Higher economic growth is very much needed to improve various socio-economic
indicators. The balance between both economic growth and inflation is needed for overall
economic development.
Measurement of Inflation
The following are the two primary inflation indices used in India to track price changes:
• Wholesale Price Index (WPI)
• Consumer Price Index (CPI)
Consumer Price Index (CPI) Wholesale Price Index (WPI)

• It measures price changes from • It is the most widely used inflation indicator
the perspective of a retail buyer. in India.
• It measures changes over time in the level of • All transactions at the first point of bulk
retail prices of selected goods and services sale in the domestic market are included.
on which consumers of a defined group • The major criticism of this index is that the
spend their incomes. general public does not buy products at
wholesale prices.
Inflation 99
• Four types of CPI are as follows: • Published by the Office of Economic Adviser,
o CPI for Industrial Workers (IW). Ministry of Commerce and Industry.
o CPI for Agricultural Labourer (AL). • The base year of All-India WPI has been
o CPI for Rural Labourer (RL). revised from 2004-05 to 2011-12 in 2017.
o CPI (Rural/Urban/Combined).
Note: Of these, the first three (IW+ AL+RL) are
compiled by the Labour Bureau in the Ministry
of Labour and Employment. The fourth is
compiled by the Central Statistical Organisation
(CSO) in the Ministry of Statistics and Programme
Implementation.
• The base Year for CPI is 2012.
• CPI captures changes in prices levels at the • WPI tracks inflation at the producer level
consumer level
• Both baskets measure inflationary trends • WPI does not capture changes in the prices
(the movement of price signals) within the of services.
broader economy, the two indices differ in •
which weights are assigned to food, fuel and
manufactured items.
• CPI captures changes in prices of goods and
services in both.
• In April 2014, the RBI adopted the CPI as its The WPI is used for the following purposes:
key measure of inflation. • To provide estimates of inflation for the
• According to MOSPI data, the Provisional economy as a whole at wholesale transaction
combined CPI (General) of January 2022 was levels. It enables monetary authorities
at 6.01%. to intervene quickly to control inflation,
particularly in critical commodities, before
price increases affect retail prices.
• WPI is also one of the important macro
indicators used by global investors to make
investment decisions.
• According to government data, WPI inflation
in India rose to 13.11% in February 2022.
100 Inflation
Four Types of CPI:

• CPI for Industrial workers CPI(IW): This is the oldest index among the CPI indices, as it
started as early as 1946. Consumer Price Index for Industrial Workers (IW) measures a change
in prices of a fixed basket of goods and services consumed by industrial workers over a fixed
period of time.
o The target group is an average working-class family belonging to any of the seven sectors of
the economy: mines, factories, plantations, motor transport, port, electricity generation
and distribution and railways.
o The Labour and Employment Ministry revised the CPI (IW) base year from 2001 to 2016
to reflect shifting consumption patterns, giving more weight to spending on health,
education, leisure, and other miscellaneous expenses while decreasing the weight of food
and beverages.
o It is used to decide wages and to fix the dearness allowance for government employees.
o The retail prices used in the calculation of CPI(IW) are collected by the Labour Bureau,
Ministry of Labour.
• CPI for Urban Non-Manual Employees (UNME): This index depicts the changes in the level of
average retail prices of goods and services consumed by the urban section of the population.
The target group of this index was urban families who derived a major portion of their income
from non-manual employment in the non-agricultural sector.
o The index was being released by CSO with a time lag of nearly two weeks
o Some public and private sector undertakings, State governments, foreign embassies, etc.
are using this index for purposes of regulating the Dearness allowance.
o The release of all-India linked CPI(UNME) has been discontinued since January 2011.
• CPI for Agricultural Labourers CPI (AL): CPI for Agricultural labourers (AL) measures the extent
of change in the retail prices of goods and services consumed by the agricultural labourers.
CPI (AL) is basically used for revising minimum wages for agricultural labour in different
States. CPI (AL) is compiled by the Labour Bureau in the Ministry of Labour.
• CPI for Rural Labourers CPI (RL): CPI for Rural labourers (RL) measures the extent of change in
the retail prices of goods and services consumed by the Rural labourers. CPI (RL) is compiled
by the Labour Bureau in the Ministry of Labour.
Service Price Index (SPI)
• The business services price index is meant to be used in conjunction with the wholesale price
commodity index (WPI). The index is intended to reflect price changes in banking, insurance,
transportation (air, inland waters, trains, and sea for freight and people), postal services, and
communications.
• The services sector accounts for more than half of the country’s GDP (GDP). While the WPI
currently in use mainly captures price changes in manufactured products, which account
for around 17% of GDP, government economists have suggested the services price index as a
more realistic measure of inflation.
• The index is also required because the services sector is developing faster than the
manufacturing sector. As a result, service rates are expected to rise at a quicker rate as well.
To that extent, the current measure of inflation, the WPI, is erroneous (depressed). The index
would be similar to the developed world’s corporate services price index.
Inflation Targeting in India • When deciding on various monetary

• Inflation targeting is a monetary policy tool policy rates, inflation targeting adds more
used by Central Bank (RBI) to keep prices at transparency and predictability. Companies
a set level or within a given range. and households can plan ahead of time
Inflation 101
if the RBI can maintain price stability, is also in charge of keeping consumer price
negotiating pay based on inflation targets. inflation within a 4% band (+/- 2%).
• In 2015, the Indian government and the • If retail inflation is greater than 6% for three
Reserve Bank of India inked a Monetary consecutive quarters, and less than 2% for
Policy Framework Agreement. According three consecutive quarters, the RBI will be
to the principles of this agreement, the required to explain why it failed to attain the
monetary policy framework’s primary goal target, and provide a timeframe for achieving it.
will be to maintain price stability while also • Every six months, the RBI would be compelled
pursuing growth goals. to publish a document explaining the
• The Reserve Bank of India (RBI) is in charge sources of inflation and forecasting inflation
of the monetary policy framework. The (RBI) for the following six to eight months.
Food Prices Indices
WPI Food Index Consumer Food Price Index
• As a part of the revised • The Consumer Food Price Index (CFPI) is a measure of changes
WPI series, the WPI food in retail prices of food products consumed by a specific set of
index was launched in people in a certain location over time, with the base year being
2017 with the base year the year before.
2011-12. • Beginning in May 2014, the Ministry of Statistics and Programme
• WPI food index measures Implementation (MOSPI)’s Statistics Office (CSO) began
the fluctuations in producing Consumer Food Price Indices (CFPI) under three
prices of food items at headings: rural, urban, and combined, on an all-India basis.
the producer’s level. • Like Consumer Price Index (CPI), the CFPI is also calculated on
• The WPI Food index a monthly basis, and the methodology remains the same as CPI.
is calculated using a • The base year presently used is 2012.
weighted arithmetic Note: The United Nations’ Food and Agriculture Organization (FAO)
mean of the WPI for releases a global food price index. On a monthly basis, the FAO Food
“Food Products” under Price Index measures the change in international prices of a basket
“Manufacture Products” of food goods. From 2002 to 2004, it was made up of the average
and “Food Articles” of five commodity group price indices (Vegetable Oil, Cereal, Sugar
under “Primary Article.” Meat, and Dairy), weighted by their average export proportions.
Producer Price Index (PPI) PPI WPI

• Producer Price Index calculates the price of PPI includes WPI does not cover
goods as they are sold to the wholesalers services. services.
by the producers. PPI weights are The weight of an item in
• Producer Price Index calculates price change derived from the WPI is based on net traded
from the perspective of the producers. supply use table. value.
• The Government of India has established
NHB RESIDEX
a committee under the chairmanship of
B.N Goldar to advise methodology for • NHB RESIDEX, India’s first official housing
introducing PPI in the country. price index, an initiative of the National
PPI vs WPI Housing Bank (NHB), was launched in 2007.
PPI WPI • NHB RESIDEX is designed in such a way
PPI measures the WPI captures the price that it tracks changes in housing prices at
average change changes at the point of neighbourhood, city and national levels.
in prices received bulk transactions, and may Price changes will be measured over a
by the producer include some taxes levied period and across different cities and
and excludes and distribution costs up
various locations within cities.
indirect taxes. to the stage of wholesale
transactions.
102 Inflation
Important Terminology
• Stagflation: The term stagflation is a combination of two terms stag+flation. Here stag stands
for stagnant, and inflation stands for inflation. Here, stagnant refers to the economy of a
country remaining stagnant without any growth. It may even fall down. Hence, stagflation is
a contradictory situation in which inflation does not demand-pull, but is mainly due to cost-
push and structural factors. Since the growth is not there, the unemployment rate is high.
Therefore, stagflation further becomes contradictory because it is a situation of high inflation
with high unemployment. It is the worst condition witnessed in any economy.
• Recession: A recession is a period of economic activity that has slowed or stopped completely. A
recession is usually preceded by a major drop in consumer expenditure. Such a slowdown in economic
activity might endure for several quarters, thereby halting an economy’s expansion. Economic metrics
such as GDP, business earnings, employment, and so on collapse under this situation.
• Reflation: It is a situation in which price level increases along with an increase in output,
employment etc, when an economy moves from recession/depression. Reflation refers to the
combination of monetary and fiscal policy initiatives aimed at combating lower economic growth
and is usually done by increasing the money supply, lowering interest rates and tax rate cuts.
• Skewflation: It refers to the price rise of one or a small group of commodities over a sustained
period of time. In India, food prices went up steadily during the last few months of 2009 and
the early months of 2010, though the prices of non-food items continued to be relatively
stable. As it was an unusual phenomenon, Skewflation appeared in the Economic Survey
2009-10, Government of India, Ministry of Finance.
• Misery Index: It is the summation of the inflation rate and unemployment rate.
o Inflationary gap: The situation in which aggregate demand is more than the productive
capacity of the economy. The inflation gap leads to excess demand, which leads to inflation.
Aggregate Demand >Aggregate Supply Full employment
• Deflationary gap: The situation in which aggregate demand is less than the productive capacity
of the economy. Deflation gap leads to deflation and recession
Aggregate Demand <Aggregate Supply Full employment
• Agriflation: Increase in the price of agricultural products.
• Disinflation: Reduction in the rate of inflation. It is a situation where the rate of increase in
price level decreases without any adverse impact on output, national income, employment etc.
• Deflation: A persistent decrease in price level, i.e. negative inflation. It is the situation in
which the price level reduces along with the reduction in the output. It leads to recession
(which is never desirable), unemployment etc. Central banks try to keep the overall price
levels stable by avoiding situations of severe inflation/Deflation. They may ease the money
supply in the economy to counterbalance the deflationary impact. Deflation is different from
disinflation as disinflation implies a decrease in the level of inflation, while on the other hand
deflation implies negative inflation.
• Depression: There is a commensurate rise in unemployment. The growth in the economy
continues to decline, and as this falls below the steady growth line, the stage is called
depression.
• Inflation spiral: The inflation spiral or wage-price spiral refers to the cyclic relationship between
the increase in wages and an increase in inflation. As the wages or the income of employees
is increased, the demand increases, leading to inflation. As the price increases, there will be
further demand for increased wages, and as the wages increase, cost-push and demand-pull,
the inflation will increase. This is an inflation spiral which is a continuous process.
Inflation 103
• Headline inflation reflects the rate of change in prices of all goods and services in an economy
over a period of time. It includes price rises in food, fuel, and all other commodities. In India,
the CPI is used as the headline inflation as it reflects the prices of essential consumer goods.
The headline CPI inflation in India tends to increase whenever there is a surge in food and fuel
prices.
• Core inflation is also called underlying inflation. Core inflation is calculated by excluding
items that are vulnerable to volatile price movement, specifically food and energy items.
Thus, Core inflation is nothing but headline inflation minus inflation caused by food and
energy articles. The Reserve Bank of India and Central banks across the World always monitor
the core inflation. Whenever core inflation increases, Central Banks increase their key policy
rates to reduce excessive liquidity from the market and vice versa. It is, thus, a preferred tool
for framing long-term policy.
• Open inflation: It is the situation in which the price level increases without any price
suppressive measure by the government. The government does not suppress inflation with
subsidies and monetary policy.
• Suppressed/Repressed inflation: The situation in which aggregate demand is greater than
aggregate supply in the economy, but the government prevents the price level from rising
through direct price control measures like ceiling price etc. Repressed inflation is the state
in which there is persistent excess demand for goods and services. Governments in India are
not effective in suppressing inflation because the supply chain is highly unorganised.
Phillips Curve inflation, and unemployment are alarmingly

• It is a graphic curve which depicts high. This concept was given by A.W. Philips.
the relationship between inflation and
unemployment in an economy. Phillips Curve
depicts that there is an inverse relationship
between inflation and unemployment.
• That is when inflation is high, unemployment INFLATION
is less in the short term, and higher inflation

lowers the unemployment.
• However, the implications of the Phillips
curve have been found to be true only in
UNEMPLOYMENT RATE
the short term. The Phillips curve fails to
justify the situation of stagflation when both Fig 7.1 Philips Curve
GDP Deflator
• GDP deflator measures the impact of inflation on the gross domestic product (GDP) i.e. how
much a change in GDP relies on changes in the price level. It is calculated by dividing nominal
GDP by real GDP and then multiply by 100.
Table 7.1 GDP Deflator vs WPI
104 Inflation
Base Effect • In India, during the period 2008 to 2013,

when real interest rates were constantly
• The base effect is the impact of the
negative, inflation was one of the
previous year’s price increase (i.e., last
primary macroeconomic problems of the
year’s inflation) on the current year’s price
country.
increase (i.e., current inflation).
• As a result, households invest heavily in the
• If the inflation rate was too low in the
alternative instrument (gold), necessitating
previous year’s corresponding period,
substantial gold imports. The Government
even a little increase in the Price Index
of India introduced inflation-indexed bonds
will arithmetically result in a high current
(IIB) in 2013 to lessen the attractiveness
inflation rate.
of gold as an investment and to lower
• The index, for example, has risen by 20 the CAD.
points in each of the last three years:
• The Reserve Bank of India auctioned its first
2008, 2009, and 2010. However, the
tranche, which was linked to WPI headline
inflation rate (measured on a year-over-
inflation, which was then utilised by RBI as
year basis) has been declining over the
the major gauge of inflation.
last three years, falling from 20% in
• As inflation has moderated significantly
2008 to 14.29% in 2010. This is because
since 2014-15, IIB bonds have lost their
a 20-point increase in the price index
appeal over time.
each year raises the base year price index
• In April 2014, the RBI changed its monetary
by the same amount, although the price
policy stance to use the Consumer Price
index’s absolute increase remains the
Index (CPI combined) as the primary
same.
measure of inflation.
Inflation-Indexed Bond (IIB) • If RBI issues new IIB bonds in the near
• An inflation-indexed bond (IIB) is a bond future, they will be based on CPI, which
issued by the Reserve Bank of India that the RBI has been recognised as the key
guarantees a fixed yield regardless of the measure of inflation for its monetary policy
level of inflation in the economy. stance since 2014.
• Inflation-indexed bonds are designed to
provide a hedge and protect investors from
macroeconomic risks in a country.
Inflation 105

8 Financial Market
Financial Market Money Market Capital Market

• Financial Market is the system consisting It is the source of It finances capital
of the financial institution (banks working capital equipment to firms
etc.), instruments (bonds and shares), finance for firms. i.e. it promotes
organisations (stock exchange) and capital formation.
regulatory bodies (RBI, SEBI etc.), which It deals with bonds. It deals with both
facilitate the flow of equity and debt capital. Example: commercial bonds and equities.
• The financial market gives a platform to papers, commercial
the buyers and sellers for trading assets at bills, certificates of
deposit, treasury bills
the prices determined by the demand and
etc.
supply forces.
Usually, it deals It deals with both
Functions of Financial Market
with high volume low and high volume
• It facilitates the mobilisation of savings, transactions. transactions.
where an investor can invest his saving
In India, the People’s participation
according to risk and choice assessment.
participation of the is significant.
• It helps in determining the price of financial general public is limited.
commodities, based on demand and supply. Participation is All types of
• It provides liquidity to the financial confined to banks. Financial instrument
commodities, i.e., investors can sell their participates actively.
financial commodities, and convert them RBI is the prime SEBI is the prime
into cash in a very short period. regulator. regulator.
• It saves the time, money, and effort of It consists of both It is mainly confined
investors. The financial market gives a organised and to the organised
platform where both the buyers and sellers unorganised sectors. sector.
can find each other easily.
Types of Financial Market Money Market Instruments
There are two types of Financial Markets
• Money market: It is the market that fulfils
the requirements of funds for the period
ranging from overnight to one year.
• Capital market: Capital market is the
market that fulfils the requirements of
funds for the period above one year.
Money Market vs Capital Market
Money Market Capital Market Fig.8.1: Money Market in India
It deals with short It deals with medium

term financial and long term Commercial Paper
transactions. financial transactions. • Commercial Paper (CP) is a short-term
unsecured money market instrument
Financial Market 107

issued in the form of a promissory note • Certificates of deposit are similar to fixed
(legal instrument). deposits but are negotiable and tradable in
• In India, it was introduced in 1990 to enable the money market.
highly rated corporate borrowers to diversify • These can be issued by:
their short-term sources of borrowing, and o Scheduled commercial banks (except
to provide an additional instrument to Regional rural banks and local area banks).
investors. o Selected All-India Financial Institutions
• Commercial Paper can be issued by (FIs) which are permitted by RBI.
o Corporates (whose tangible net worth is • These can also be issued to Non-Resident
not less than Rs. 4 crores) Indians (NRI).
o Primary Dealers (PDs) and Call Money Market
o All-India Financial Institutions (FIs): • It deals with the day-to-day lending and
• These can be issued for maturities between borrowing transactions of banks amongst
a minimum of seven days and a maximum themselves.
of up to one year from the date of issue. • It deals in very short loans that have
• These can be issued in denominations of maturity ranging between 2 - 14 days.
Rs.5 lakh or multiples thereof. • Its objective is to provide liquidity to banks.
Commercial Bill • The interest rate charged on such
• It is unsecured security issued by one transactions is called the ‘call money
merchant firm to another against a credit rate’ and is based on market demand.
transaction. • It is a very competitive market that reflects
• These are issued at a discount (investors the liquidity position of banks.
pay the price lower than the face value).
Banks Average Daily Withdrawal Cash Available
• Its maturity ranges between 14 days to 1
ICICI 50 Lakh 1 Crore
year.
• It is a source of working capital finance for SBI 1 Crore 2 Crore
small corporations. Table. 8.1 Bank Liquidity
• For example: Suppose there are two firms For example, If a person comes and withdraws
A and B. Firm B needs to buy raw material 90 Lakh from ICICI, it cannot give withdrawal
from A worth Rs. 1 Lakh. But firm B does to other customers on that day. So ICICI will
not have the money to buy raw materials. borrow some amounts from SBI and may
So firm B will issue a commercial bill to return in 2- 3 days (should not take more than
Firm A as per the guideline of RBI. Firm A 14 days). The interest may vary from bank to
will give the raw material of less than Rs. 1 bank.
Lakh. Firm B is liable to pay Firm A.
Government Security (G-Sec)
Certificate of Deposit • Government Security (G-Sec) is a tradable
• It is the bond/security issued by a bank to instrument issued by the Government of
the depositor of the fund. India or the State governments.
• It is an agreement to deposit money for a • It acknowledges the debt obligation of the
fixed period of time with a bank that will government.
pay interest. • Such government securities are either short
• Certificates of deposit are issued in multiples term (generally called treasury bills, with
of Rs. 1 lakh subject to a minimum value of maturities of less than 1 year) or long
Rs. 25 lakhs. term (generally called Government bonds
• These are issued at a discount. or dated securities with an original maturity
of one year or more).
108 Financial Market

• G-Secs have practically no risk of default • DFHI participates in transactions in all the
and, therefore, are called risk-free gilt- market segments like treasury bills, call
edged instruments. money market, etc.
• Short-term government securities are: • In 2004, RBI transferred its total holding to
o Treasury Bills (T-bills) SBI Gilts Limited. Its new name is SBI DFHI.
■ Treasury bills or T-bills are short- LIBOR (London Interbank Offered Rate)
term debt instruments issued by the • It is the interest rate at which major
Government of India, and are presently global banks lend to one another in the
issued in three maturity periods of international interbank market for short-
91 days, 182 days, and 364 days. term loans.
■ Treasury bills are zero-coupon • LIBOR is administered by the Intercontinental
securities as they do not carry Exchange or ICE.
any interest. Rather, these are • It is computed for five currencies Swiss
issued at a discounted value and franc, euro, pound sterling, Japanese yen,
redeemed at face value at the and US dollar.
time of maturity. MIBOR and MIBID
■ For example, a 182 day treasury bill • Mumbai Interbank Offer Rate (MIBOR), and
of ₹1000/- (face value) may be issued Mumbai Interbank Bid Rate (MIBID) are the
at say ₹ 998.20, that is, at a discount benchmark rates at which Indian banks
of say, ₹1.80 and would be redeemed lend to each other.
at face value of ₹1000/-.
• These rates reflect the short-term funding
Cash Management Bills (CMBs) costs of major banks.
• In 2010, the Government of India, in • Mumbai Interbank Offer Rate (MIBOR) is the
consultation with the RBI introduced a new interest rate at which banks are willing to
short-term instrument Cash Management offer loans to other banks, and MIBID is the
Bills (CMBs), to fulfil the temporary cash flow rate at which banks would like to borrow
mismatches of the Government of India. from other banks.
• The cash management bills have the Hundi
generic character of T-bills but are issued
• Hundi is an unconditional writing order
for maturities less than 91 days.
made by a person, which directs another
Repo (Ready Forward Contract) person to pay a certain amount of money to
• Repo allows the bank, and other financial the person mentioned in the order.
institutions to borrow money from the RBI • Hundis, being a part of the informal
for the short term. system, have no legal status and are not
• The interest rate at which the Reserve Bank covered under the Negotiable Instruments
of India (RBI) gives short-term loans to Act, 1881.
commercial banks is called the repo rate. Capital Market
Discount and Finance House of India (DFHI) • Capital market refers to the market
• DFHI was set up by RBI in 1998 to strengthen where long-term capital is raised via both
the money market, and provide liquidity to debt and equity instruments such as equity
money market instruments. share, preference share, debenture, etc.
• It was established based on the • The demand for long-term capital comes from
recommendation of the Vaghul Committee. both the government, and the private sector.
• The main objective of DFHI is to develop • Every capital market has two complementary
an active secondary market for the money markets:
market instruments.

o Primary market: • It is also called the secondary offering.

■ Deals with the issuance and sale of Right Issue
the instrument of capital market to • A listed company offers its new securities only
investors directly by the issuer. to the existing shareholders in proportion
■ When a company or corporate entity to their existing shareholding.
issues stock or bonds for the first • In the right issue, shares are issued at a
time and sells those securities discount.
directly to the investors, that Referential Issue
transaction occurs on the primary
• Under this, a listed company offers its
market.
new securities only to a selected class of
o Secondary market: shareholders.
■ The market where instruments of
Bonus Issue
the capital market are being traded
• Bonus shares or issues are additional shares
among the primary instrument
given to the existing shareholders without
holders.
any additional cost, in the proportion of
■ In the secondary market, all the
their shareholding in lieu of distribution of
transactions occur between various
dividend.
investors, and the proceeds of each
Private Placement
sale go to the selling investor, not to
the company that issued the stock. • Raising capital by selling the share to a
It means the company is not directly select group of investors, or individuals.
involved in the transactions of the • The advantage of the private placement is
secondary market. saving on marketing expenses.
■ Such transactions need a platform • Under this, the number of investors who
for their trading, the stock exchange are issued shares cannot be more than 50.
provides the platform for the Sweat Equity
secondary market. • Under this, the share is allotted to top
Means of Raising Funds in the Primary Market management like directors of a company at
• Following are the different ways through a highly discounted price in recognition of
which a company can raise the capital from their outstanding contribution.
the primary market: The secondary market as a trading instrument
Initial Public Offer (IPO) The secondary market is used as a trading
• An initial public offer is a process of instrument in the following ways:
offering new securities to the public/ Stock Exchange
investor for the first time through the issue • A physical institutional set-up where capital
of a prospectus. market instruments (shares, debenture,
• It is issued only by the unlisted company (a etc.) are traded.
company whose shares are not traded on a • It performs the following major functions:
stock exchange).
o Efficient price discovery: A stock
Follow on Public Offer (FPO) exchange determines the process of
• Follow on Public Offer (FPO) refers to the price discovery via constant valuation of
process where an already listed company all the securities.
offers its securities to the public/investor o Liquidity: Stock market ensures
as an offer for sale. high liquidity. The securities can be sold
• A follow-on offering is the issuance of at a short notice, and be converted to
additional shares made by a company after cash.
an initial public offering (IPO).

o Investor protection: The government o BSE 200: This is the 200-stock share
regulates stock exchanges. This provides index of the BSE.
the investor with assurances to transact National Stock Exchange (NSE)
in securities. • NSE was established in 1992 and started
Over the Counter Exchange (OTC) trading in 1994.
• The counter, exchange refers to the process • NSE was established on the basis of
in which securities are traded by companies the recommendation of the “Phirwani
that are not listed on a formal exchange Committee” as the most modern stock
market like NSE, BSE, etc. exchange in the country.
• Securities that are traded over the counter • National Stock Exchange is ranked as
are traded via a broker-dealer network as the largest stock exchange in India in terms
opposed to on a centralised exchange market. of total, and average daily turnover for
• These securities are qualified for listing on equity shares.
a standard market exchange. • Presently, there are two Indices connected
• Over the Counter Exchange of India Limited with NSE:
was established in 1999. It facilitates trade- • S&P CNX 50 (Nifty Fifty)
in companies having paid-up capital of Rs. • S&P CNX 500
30 Lakh or more.
Stock Exchange and Indices
Stock Exchanges in India
Major stock exchanges in India are: Stock Exchange Indices
Bombay Stock Exchange (BSE) New York Stock Exchange Dow Jones
• Bombay Stock Exchange (BSE) was NASDAQ NASDAQ Index
established in 1875, and is the oldest stock National Stock Exchange
exchange in Asia. NIFTY
(NSE)
• On August 31, 1957, the Bombay Stock Korean Stock Exchange Kospi
Exchange became the first stock exchange
Shanghai Stock Exchange Composite Index
to be recognised by the Indian government
under the Securities Contracts Regulation Bombay Stock Exchange
Sensex
Act. (BSE)
• Around 5500 companies are listed on BSE, London Stock Exchange FTSE-100
the largest number of companies listed Hongkong Stock Exchange Hang Seng Index
in the world (but not the largest stock Straits Times
exchange in the world). Singapore Stock Exchange
Index
• It introduced BOLT (BSE online trading
Tokyo Stock Exchange Nikkei
system) in 1995 to promote transparency
and eliminate any errors. Important Terms of Stock Exchange
• Presently, there are four Indices connected Bear and Bull
with BSE: • A bull market is a market that is on an
o Sensex: Sensex is the stock market index upward trend. It is a sustained increase
of 30 well established, and financially in market share prices, and subsequent
sound companies listed on the Bombay returns on each share. In such times,
Stock Exchange. investors often believe that the uptrend will
o BSE 100: An index of 100 stocks. continue over the long term, and investors
o BSE 500: This index represents major infuse more money for better returns.
industries, and many sub-sectors of the • A bear market is a market that is on the
economy. decline. Share prices are continuously

falling, resulting in a downward trend. In • It is a criminal offence.

such scenarios, investors tend to withdraw Algorithm Trading
their money to reduce their losses. This • Under this, securities are traded on the basis
causes a fall in share market trends. of inference from advanced mathematical
Speculation models.
• Speculation refers to buying a commodity/ • Algorithmic trading makes use of complex
currency/security with the intention of formulae, combined with mathematical
selling it in the near future at a higher price models and human oversight. Such algorithm
to make a profit. trading is used to make decisions to buy or
• Here, the sole intention is just to sell when sell financial securities on an exchange.
the price goes up and not to purchase. • It can be used in a wide range of situations
• Moderate speculation is good as it checks like order execution, arbitrage etc.
prices from going up. • Concerns: Algo trades have been criticised
Arbitrage for exaggerating market patterns and
• It refers to buying a commodity/security causing flash crashes. A programming flaw
from a cheaper market, and selling it or a trader’s mistake may cause stock prices
immediately in another market at higher to fluctuate wildly, potentially collapsing
prices. the economy.
• Arbitrage is a trade that generates profits by • SEBI approves algo programmes before they
exploiting the price differences of identical can be used on any of the Indian exchanges,
or similar financial instruments available on and stock exchanges must assign each
different markets or in different forms. approved algorithm a unique identifier, and
ensure that each order is marked with it.
• Arbitrage exists because of market
inefficiencies, and would therefore not • Recently, SEBI has put in place a new
exist if all markets were perfectly efficient. framework for the order-to-trade ratio
(OTR) of algo orders issued by stockbrokers.
Stag
Under the scheme, stock exchanges may be
• It refers to a speculator who purchases a
allowed to introduce additional slabs up to
security from the primary market like an IPO
an OTR of 2,000 (from the current OTR of
for selling them in the secondary market.
500), and for OTR more than 2,000, such
Buyback of Share slabs can be announced with a deterrent
• Under buyback, a company purchases its incremental penalty, which stock exchanges
own shares from the investor. may decide jointly. It has also suggested
• It reduces the number of outstanding tighter oversight of these trades to ensure
shares of the company. the market’s smooth operation.
• It increases the dividend per share. Stock Exchange Regulator
Short Selling SEBI (Security Exchange Board of India):
• Under this, an investor sells a security • Initially, SEBI was constituted in 1988 as
that is not possessed by him/her, but such a non-statutory body to deal with all the
an investor has to purchase that security matters relating to the regulation, and
within a specified period of time. development of the capital market.
• Short sellers gain with a fall in the price of • It was granted statutory status under
a security. the SEBI Act 1992.
Insider Trading • Functions of SEBI are:
• It refers to buying or selling shares of a o Regulation of capital market (both in
company on the basis of unpublished price the primary and secondary markets).
sensitive information.

o To register, and regulate intermediaries • Under rolling settlement, a spot market

in the capital market like brokers, sub- transaction in the stock market must
brokers, trustees, underwriters, and be completed within a specified period, i.e.,
mutual funds. the settlement period cannot be shifted.
o To check malpractices in the securities • It is on the basis of the T+2 system (T=
market, particularly in the Stock transaction day; T+2= transaction day + 2
exchange. working days).
o To promote investor education, and Corporatisation
awareness. • Historically, the stock exchange was formed
o To protect the interest of the investor. as a mutual organisation, i.e., formed by
Capital Market Reforms trading members themselves for their
The stock exchange scam of 1992 (Harshad common benefits.
Mehta), and the Ketan Parekh scam in 2000 led • They mainly focus on the interest of members
to various measures to protect the interest of instead of investors. The Government of
the investor. India introduced corporatisation of the
Circuit Breakers stock exchange, by which ownership,
• It is a mechanism under which trading in management and trading member of the
a stock exchange is halted for a specified stock exchange would be separated from
period of time, in case of deviation in the each other.
index of the Stock exchange (or share price) • Objectives of the corporatisation of stock
beyond a certain limit. exchange:
Dematerialisation/Demat Trading o To reduce the scope of manipulation by
• Under this, computer records of a Stock brokers.
Exchange are maintained instead of issuing o To enable the stock exchange to raise
shares/security certificates in the physical funds from the public through IPO
form. modernisation.
• At present, two public sector depositories Demutualization
are functioning in India: • It refers to the separation of ownership,
• NSDL (National Securities Depositories management, and brokerage rights in the
Limited) stock exchange.
• CDSL (Central Depositories Services • The first stock exchange to be
Limited) corporatised and demutualised in India
Depository Participants (DP) was BSE in 2005.
• These are agents of depositories that • Ownership = Shareholder

provide demand service/online security • Management = Directors (Board of Directors)
trading services to the investors. • Brokerage = Open to all
• Example: India Infoline, ICICI direct, Axis Investor Protection and Education Fund
direct etc. (IPEF)
Rolling Settlement • It was established in 2001 by SEBI and the
• Badla system: Under this, a spot market central government for promoting investor
transaction in a stock exchange could be awareness, and to protect the interest of
postponed by the buyers. It leads to over investors, especially small investors.
speculation, and defaults in the stock Introduction of forwarding/Derivative Trading
exchange transaction. So, it was replaced To enable investors to hedge (using financial
by a rolling settlement. instruments to offset the risk of any adverse

price movements) market risks derivative • The benefits of forwarding are:

trading was introduced. o It tends to stabilise the prevailing spot
Derivative Trading market prices, as it provides a future
• Derivative trading refers to contracts/ reference price.
transactions of a forward contract. o It enables farmers, producers, and
exporters to hedge marketing risk.
Derivative
Future
• It is a financial instrument whose value
• These are exchange-traded contracts
is derived from the value of one or more
to sell or buy financial instruments or
underlying assets, which can be precious
physical commodities in the future at a
metals, commodities, currency, bonds,
predetermined price.
stocks indices, stocks etc.
• In future contracts, there is an agreement to
• Following are the four most common
buy or sell a specified quantity of financial
examples of derivative instruments:
instruments commodity in a designated
Futures, forwards, options and swaps.
future month at a price agreed upon by the
Forward Market
buyer and seller.
• In this market, contracts are made to buy/sell
Difference between forwarding vs Future
a financial instrument at a predetermined
price and date (i.e., in future). Basis Futures Forward
Nature Traded on an Over the
organised exchange Counter
Contract Standardised Customised
Terms
Liquidity More liquid Less liquid
Settlement Follows daily At the end of
settlement the period.
Margin Requires margin Not required
Payments payments
Options
• These are standardised exchange-traded
Fig.8.2: Derivative Trading contracts that provide options/rights (not
Forward the obligation) to an investor to sell and
• A forward is a mutual/bilateral contract buy a commodity at a predetermined date,
between two parties, where settlement and rate in the future against the payment
takes place on a specific date in the future of options premium.
at a price agreed upon today. • There are two types of options: A call option
• Following are the key features of forwarding provides the holder with the right to buy a
contracts: stock, and a put option provides the holder
with the right to sell a particular stock.
o These are bilateral contracts, and thus
exposed to counterparty risk. • Call Option: option to buy
o Each contract is custom designed, and • Put Option: option to sell
thus is unique in terms of contract Swaps
size, expiration date, and asset quality • These are bilateral contracts to exchange
and type. a commodity/security with another at a
o The contract is settled by delivering the predetermined date and rate.
asset on the expiration date.

• These instruments can be anything, but o NCDEX Spot Exchange Limited

most of the swaps include cash, based on o Reliance Spot Exchange Limited
a notional principal amount. o Indian Bullion Spot Exchange Limited
• Swaps are primarily over-the-counter • Advantages of Spot Exchange
contracts between companies or financial o Creates a National market
institutions. o Shows overall demand-supply of
Commodity Exchanges in India commodity
• Commodity exchange provides a platform o Eliminates middleman
for trading commodities. Depository Receipt
• It determines, and enforces rules and • It is a financial instrument representing
procedures for trading standardised certain securities (e.g., shares, bonds,
commodity contracts, and related etc.) issued by a company/entity in a foreign
investment products. jurisdiction.
• Commodity exchange was first regulated by • These constitute an important mechanism
the Forward Market Commission (FMC), but through which issuers can raise funds
with the merger of FMC with SEBI in 2015 it outside their home jurisdiction.
is now regulated by SEBI. • DR is issued for tapping foreign investors
• Commodity exchange in India are as follow: who otherwise may not be able to
o MCX (Multi Commodity Exchange): participate directly in the domestic market.
Largest exchange in India • Securities of a company are deposited with
o NCDEX (National Commodities and a domestic custodian in the company’s
Derivative Exchange) domestic jurisdiction, and a corresponding
“depository receipt” is issued in foreign,
o NMCE (National Multi-Commodity
which can be purchased by foreign
Exchange)
investors.
o ICE (Indian Commodity Exchange
• For investors, DRs are the method to diversify
Limited)
the risks by getting exposure to a foreign
o UCX (Universal Commodity Exchange) market, but without the exchange rate risk
o ACE Derivatives & Commodity Exchange as they are foreign currency denominated.
Ltd. (ACE) Further, they feel safer investing from their
Spot Market home location.
In this market, trading is done at the prevailing • Depending on the location where these
price and transactions are done on the spot. receipts are issued, the Depository Receipt
Spot Exchanges in India (DR) are classified as:
• Spot exchanges refer to electronic trading American Depository Receipts (ADRs)/Global
platforms, which facilitate the purchase and Depository Receipt (GDR)
sale of specified commodities, including • If the Depository receipts are issued outside
agricultural commodities, metals, and India on the basis of the shares/securities of
bullion by providing spot delivery contracts the domestic (say Indian) company, it is ADR.
(provides for the delivery of goods and the • Hence, ADR or GDR are issued outside
payment of the price) in these commodities. India by a foreign depository on the back of
• There are four-spot exchanges currently Indian security deposited with a domestic
operating in the country. These exchanges Indian custodian (SEBI) in India.
are: • In India, any company, whether public
o National Spot Exchange Ltd (NSEL): limited or private limited or listed or
Largest spot exchange in India unlisted, can issue DR.

Indian Depository Receipts (IDR) can be easily transferred to other entities,

• If depository receipts are issued in India on which creates multiple layers, which makes
the basis of the securities/shares of the the process complex to identify the real
foreign company. owner. Because of these, concerns about
• Standard Chartered issued the first IDR in the identity of the ultimate beneficial owner
India. and the source of funds arise.
Participatory Note (PN, P-note) • As these are issued outside of India, SEBI
does not have full control over them.
• P-Notes are instruments used by foreign
investors not registered with the SEBI to • It is also alleged that most of the money
invest in the Indian securities market. invested through P-Notes is unaccounted
money or black money. P-Notes are also
• These unregistered foreign investors may
used for money laundering purposes, which
invest in equity, debt, derivatives or may
convert black money into white money.
even be an index.
• SEBI has been successful in taking action
• As foreign investors are not required to
against FIIs who are non-compliant, and
register with SEBI, the P-notes gained
those who have misreported offshore
popularity like FIIs. This allows the investors
derivatives.
to remain anonymous and speculate on
Indian stock markets. • SEBI has made it mandatory since January
2011 that all FIIs have had to follow KYC
• P-notes are also called Equity Linked
norms and submit details of transactions
Notes, Overseas Derivative Instruments,
including P-notes.
Participating Return Notes and Capped
Return Notes, etc. • In 2014, SEBI made it mandatory for those
FPIs issuing P-Notes to submit a monthly
• The investor in P-notes does not own the
report disclosing their portfolios.
underlying Indian security, which is held by
the FII (Foreign Institutional Investor) who Financial Sector Legislative Reforms
issues the PN. Commission
• Thus, the investors in P-notes gain • Financial Sector Legislative Reforms
economic benefits by investing in the Commission (FSLRC) was established
securities without actually holding them. by the Government of India as per the
The benefit is due to fluctuations in the announcement made in the Union Budget
price of the underlying security as the value 2010-11, to help to rewrite and to harmonise
of the P-notes is linked with the value of the financial sector legislation, rules, and
the underlying Indian security. regulations to address the contemporary
requirements of the sector.
• The P-Notes holders also do not have any
voting rights in relation to security/shares. • The Commission was chaired by
retired Supreme Court Judge B. N.
• One of the key reasons for the emergence of an
Srikrishna, and included ten members with
Off-shore derivative market is the restrictions
expertise from the fields of economics,
on foreign investments like capital account
finance, law, and other relevant fields.
convertibility, entry barrier etc.
• The recommendations of the Commission
• Advantages of PN are
can be divided into two parts:
o Reduces transactions cost
o Legislative aspects
o Lower financing costs
o Non-legislative aspects.
o Enhance portfolio yields
• The legislative aspects deal with revamping
Concerns Raised Related to Participatory Notes
the legislative framework of the financial
• Participatory notes are derivative instruments sector regulatory system by a non-
and are also freely tradable, and these

sectoral, principle-based approach, and by Present Proposed Functions

restructuring existing regulatory bodies and
Financial Statutory
setting up new bodies wherever needed.
Stability agency for
• For this, the Commission has recommended
Development FSDC systemic
a seven-agency regulatory architecture,
Council risk and
namely, Reserve Bank of India, Financial
(FSDC) development.
Sector Appellate Tribunal, Unified Financial
Agency, Resolution Corporation, Financial An independent
Debt
Redress Agency, Financial Stability and debt
Management
Development Council, and Public Debt management
Agency
Management Agency in the draft law- agency.
New entities
Indian Financial Code to replace a number Financial
of existing laws. Redressal Consumer
• The non-legislative aspects of the FSLRC Agency complaints.
recommendations are broadly in the nature (FRA)
of governance enhancing principles for
enhanced consumer protection, and greater Financial Stability and Development Council
transparency in the functioning of financial (FSDC)
sector regulators. • FSDC was established on the
FSLRC’s Regulatory Architecture recommendation of the G-20 in 2010.
Present Proposed Functions • The mandate of FSDC Council:
o To monitor macro-prudential
Monetary
supervision of the economy, along
policy;
with the functioning of large financial
regulation and
conglomerates.
supervision
o It will also address inter-regulatory
RBI RBI of banks;
coordination issues and hence, spur
regulation and
the financial sector development.
supervision
o It will also focus on financial inclusion
of payments
and financial literacy.
systems.
• The Chairman of the FSDC is the Finance
Regulation and Minister of India.
supervision of • Members include
United
SEBI, FMC, all non-bank o Heads of the financial sector regulatory
Financial
IRDA, PFRDA and payments bodies (i.e., SEBI, IRDA, RBI, PFRDA and
Agency (UFA)
related IBBI)
markets. o Finance Secretary
Securities o Secretary, (Department of Financial
Hear appeals
Appellate Services, Ministry of Finance)
FSAT against RBI, the
Tribunal o Secretary, Department of Economic
UFA and FRA.
(SAT) Affairs (Ministry of Finance)
Deposit o Chief Economic Adviser
Insurance Resolutions • A sub-committee of FSDC has also been
and Credit Resolution work across the constituted under the chairmanship of
Guarantee Corporation entire financial Governor RBI.
Corporation system.
(DICGC)

• The Sub-Committee discusses and An argument against PDMA

decides on a range of issues relating to • The scope of conflict of interest has
financial sector development, and stability significantly reduced as FRBM 2003 has
including substantive issues relating to prohibited RBI from involving in the primary
inter-regulatory coordination. auctions of the government securities (as it
would lead to printing money).
Public Debt Management Agency (PDMA)
• The RBI has been handling multiple tasks
• The public Debt Management Agency
very efficiently. It has ensured transparency
(PDMA) is a specialised autonomous,
in managing public debt in a cost-effective
independent body that manages both the
manner (low cost of raising funds for the
internal and external liabilities of the Indian
government).
Government in a holistic manner, and
advises on such matters in return for a fee. • The function of debt management lies
at the crossroad of fiscal and monetary
• The agency was proposed to be established
policies, so it requires some coordinated
in India through the Finance Bill of 2015.
approach.
• But PDMA was not established due to the
• Some countries like Denmark, and Iceland
differences of opinion on the matter, and
have reverted the debt management
the relevant clauses were dropped from
function back to the central bank.
the Finance Bill, 2015.
RBI Autonomy
The argument in favour of PDMA
• Constitutionally, RBI is not autonomous, but
• Fragmented jurisdiction in public debt
practically the government has given
management: RBI manages the market
it significantly autonomy/conventional
borrowing programs of Central and State
autonomy.
governments. But the external debt was
managed directly by the Central Government. • An aspect of autonomy:
A centralised debt management agency o Objective Autonomy
would consolidate all debt management ■ To fix goals of inflation/GDP growth.
functions in a unified body which will make ■ The inflation target is set by
holistic management of the internal and the government, and RBI has to
external liabilities. maintain inflation within the target.
• Most advanced economies have dedicated Ex: Recently, the government has
debt management agencies and thus, decided to retain the inflation target
it is an internationally accepted best of 4%, with a tolerance band of +/- 2
practice. Hence, debt management should percentage points for the Monetary
be disaggregated from monetary policy, and Policy Committee of the RBI for the
taken out of the realm of the central bank. coming five years.
• It was recommended by various committees o Instrument autonomy
like the Percy Mistry committee, Raghurajan ■ Use of instruments of monetary
committee and FSLRC. policy. For example, Repo Rate etc.
• There is a conflict of interest between ■ In general, this is the autonomy of
setting the short-term interest rates using the RBI. Due to political factors, the
various tools of monetary policy and selling government cannot do this work.
government bonds. If the RBI tries to be an The argument in favour of RBI Autonomy
effective debt manager, it will sell bonds
• Expertise, and professionalism in decision
at very high prices, which will lower the
making would reduce political interference.
interest rate. This leads to an inflationary
• Monetary stability is essential for the
bias in monetary policy.
efficient functioning of the economic system

which can be achieved if a professional capital fund under Category I- Alternative

central bank with a long-term perspective Investment Fund (AIF) that raises funds
is given charge. from angel investors.
The argument against RBI Autonomy • Angel funds can make investments only in
• The RBI lacks political legitimacy. investee companies that:
• It may lead to political friction between o Are incorporated in India, and should
the government, and the central bank not be more than 3 years old.
affecting the coordination between fiscal o Have a turnover not exceeding Rs. 25
and monetary policies. crores.
• Full autonomy of RBI is not desirable as o Are unlisted.
accountability would be compromised. o Has no family connection with the
Venture Capital investors who are going to invest in the
• These are investment funds that manage company.
the money of investors who seek private External Commercial Borrowing (ECB)
equity stakes in startups and small- to • In India, external commercial borrowing
medium-sized enterprises which have (ECB) is an instrument used to facilitate
strong growth potential in the future. These Indian companies or big corporates to
investments are usually characterised as raise money outside the country in foreign
high-risk/high-return opportunities. currency.
• It is a type of equity financing that gives • External commercial borrowing is
entrepreneurial or other small companies fundamentally a loan availed by an Indian
the ability to raise funds. company from a non-resident foreign
• Venture capital seeks to invest in firms that lender.
have high-risk/high-return profiles, based • Most of the ECBs are raised by companies
on a company’s size, assets, and stage of through foreign commercial banks and
product development. other institutions.
• The money provided by VCF is termed • Indian corporations can raise money via
Venture capital. ECB for expansion of existing capacity as
• In India, the VCF is regulated by the SEBI. well as for fresh investments.
Angel funds • ECB can be availed either by automatic
• An Angel fund is a money pool created by route or by approval route.
high-net-worth individuals or companies o Automatic route: If a company passes
(generally called angel investors), for all the prescribed norms specified by
investing in business start-ups. the government, it can raise money
• They are a subcategory of venture capital without any prior approval.
funds with a special focus on startups, o Approval route: For specific sectors, the
whereas venture capitalists generally invest borrowers have to take the permission
at a later stage of the development of the of the government before borrowing
company. through ECB.
• Angel funds can raise funds only by issuing • Advantage of the ECB are as follows:
units to angel investors, which should have a
o ECB provides an opportunity to borrow
corpus of at least a hundred million rupees.
a large volume of funds for the long
• In India, Angel Funds are defined under term.
SEBI (Alternative Investment Funds)
o The cost of funds is usually cheaper if
(Amendment) Regulations, 2013.
borrowed from economies with a lower
• Under this regulation, the Angel fund is rate of interest.
defined as a sub-category of venture

o ECB allows the borrower to diversify the • Under this, a company that can issue shares
investor base. for the first time (IPO) is allowed to sell
Terms some additional shares to the public.
Mutual Fund • Greenshoe option gets its name from
the USA Green shoe company which was
• It is a professionally managed trust that
allowed such an option.
collects money from a number of investors to
invest in securities like bonds, stocks, money Employee Stock Ownership Plan (ESOP)
market instruments, and other assets. • It is an employee benefit plan which provides
• A mutual fund is operated by a group of workers ownership interest in the company.
qualified persons who form a company, • Under this, the employer gives certain
called an asset management company stocks of the company to the employee for
(AMC) and the operations of the AMC are negligible or fewer costs.
under the guidance of another group of • These plans are aimed at improving the
people, called trustees. company’s performance, and increasing
• In India, mutual funds are regulated by the the value of the shares by involving
Securities and Exchange Board of India stockholders, who are also employees.
(SEBI). Debenture
Exchange-Traded Fund (ETF) • Debentures are debt instruments used by
• An exchange-traded fund (ETF) is a type companies, and the government to issue
of security that involves a collection of the loan.
securities (stocks, commodities, etc.), and • Debentures are issued to raise capital
often tracks an underlying index such as a to meet the expenses of an upcoming
stock index or bond index. project or to pay for a planned expansion in
• Exchange-Traded Funds are in many ways business.
similar to mutual funds; however, they • The important features of debentures are
are listed on stock exchanges and ETF as follows:
shares trade throughout the day just like an o A debenture is redeemed after a fixed
ordinary share. period of time.
Greenshoe Option o Debentures may be either secured or
• A greenshoe option is an over-allotment unsecured.
option. o Debenture holders do not have any
voting rights.

9 Taxation
A tax is a mandatory financial contribution Indirect Tax

imposed by the government on a taxpayer (an • The indirect tax is a tax that has incidence
individual or legal entity) in order to support and influence in multiple places. As,
certain government expenses. Most governments’ for instance, sales tax, excise duty etc.,
principal source of revenue taxes, which also are imposed on either the traders or the
serve as a tool for income distribution. producers. However, it is the general
• For Example, Suppose a government consumers who bear the burden of the tax.
imposes a rate of income tax, i.e., 20%. GST, Customs duty, service tax, and value-
If a person earns more in comparison to added tax are some other examples.
another person. • It is usually levied on a manufacturer or a
• Then the difference between their income supplier, who subsequently passes the tax
before tax is much higher. But after-tax is on to the customer.
imposed at 20% income difference between • For example, Suppose you buy a shirt from
them is reduced. an online website priced at Rs. 500. At
• Hence, the imposition of income tax reduces the time of the payment additional tax is
income disparity between both A and B. imposed on the price of the Shirt.
The purposes that taxation serves are: Direct Tax vs Indirect Tax
• When certain industries are subjected to Direct Tax Indirect Tax
high taxes, resources from the high-taxed A liable person or Indirect tax is a type
industries are diverted to the low-taxed entity must pay a of tax that is paid to
ones. direct tax to the the government in a
• Income distribution: It is meant to lessen government. non-direct manner.
inequalities in the distribution of income
Income or profit taxes Taxes are levied on
and wealth to enhance the objective of
are imposed. both commodities
social equity.
and services.
• Stabilisation: Taking on issues such as
Individuals bear the The manufacturer
inflation, slowing down, and so forth
burden of paying the or service provider
(through appropriate fiscal policy). It
tax directly. shifts the burden to
contributes to the preservation of high
the customer.
employment and price stability.
Individuals are taxed Indirect tax does not
directly based on their take into account a
Types of Tax
ability to pay. customer’s ability to
Direct Tax
pay, and is applied
• A direct tax is one that is paid to the to everyone who
government directly by an organisation or purchases products
an individual. or services.
• It is the type of tax that has incidence and
If there is a lack of Because indirect
impact both at a similar point—the individual
proper collection taxes are levied
who is hit, the same individual bleeds.
administration, direct automatically on
• Income tax, poll tax, land tax, and personal taxes can be evaded. products, and
property tax are all examples of direct services, they cannot
taxes. be avoided.
Taxation 121
Direct Tax Indirect Tax that everyone should contribute a fair

amount to taxes.
Progressive taxation Regressive taxation
o Taxpayers in identical financial situations
is demonstrated by methods include
should pay the same amount of taxes,
direct taxes. indirect taxes.
according to horizontal equity.
Direct taxes include Indirect taxes include
o Vertical equity means that higher-
things like income tax, the GST (Goods and
income taxpayers should pay at least
wealth tax, corporate Services Tax), Sales
the same proportion of their income
tax, and so on. Tax, and others.
in taxes as lower-income taxpayers. It
What are the Characteristics of a Good Taxation involves categorising taxes as regressive,
System? proportional, or progressive.
• A good taxation system is one that has o Regressive taxation indicates that
predominantly good taxes and fulfils most persons with lower incomes pay a higher
of the canons of taxation; it must yield percentage of their income in taxes than
sufficient revenue but causes the minimum those with higher incomes.
aggregate sacrifice to the people, and o A proportionate tax is one in which all
minimum obstruction to the incentive for taxpayers pay the same share of their
production. income in taxes. Example, property tax
• In good taxation system taxes are universally and corporate tax.
applicable in the sense that people with o Progressive tax means that the tax is
the same ability to pay are treated in the levied by the government according to
same way without any discrimination so far. their income, such as a large amount of
• A good taxation system should be tax is paid by a person who is earning
convenient to pay, flexible, economical, a higher amount in a year. Example:
productive, and simple as possible. Income tax and its slab rate is as follows:
We will see a good taxation system as an ■ (0 to 5 Lakh) Nil Tax
example. ■ (2.5 to 5 Lakh) 5% Tax
• Before 01 July 2017 when GST (Goods and ■ (5 to 7.5 Lakh) 10% Tax
Services Tax) was not implemented in India ■ (7.5 to 10 Lakh) 15% Tax
there are different tax rates, and slabs on ■ (10 to 12.50 Lakh) 20% Tax
different goods and services as the tax on
So, we will see that higher-income earning
shoes is 10 per cent and the tax on stationary
persons are given higher taxes as compared to
is 13 per cent, but after GST is implemented
lower-earning persons.
a fixed tax slab is made by government like
5, 12, 18, 28 per cent slab. So, before GST is • Adequacy:
not implemented there are many problems It means being enough or satisfactory for a
for taxpayers because each, and every purpose. Adequacy is now being employed in
product had different tax slabs but after GST the taxation system, as taxes must generate
is implemented a fixed slab is made, and it enough money to support a society’s basic
makes the tax system very good and simple. necessities. If a tax system generates enough
Characteristics of a Good Tax System are as revenue to cover the demand for public
Follows: services, it passes the sufficiency test. The
government should get an adequate amount
• Equity (horizontal and vertical)
of tax so that in the next year there will be
o Equity means that each and everybody
no need to increase the slabs of tax rate and
should get equally distributed or each
when the government is getting enough tax
and everybody will pay equally. Now we
then the government should spend a good
will see it in the tax system. It means
122 Taxation
amount of money on public services like

health, environment, education, transport
etc. So, we will say that adequacy is a must
in a good taxation system.
• Simplicity:
It means that the tax system must be TAX RATE
simple so that it can avoid a maze of taxes,

forms and filing requirements. A simplified
tax system makes it easier for taxpayers to
grasp the system and lowers the cost of
compliance.
• Transparency: TAXABLE INCOME
It implies that taxpayers and leaders can Fig. 9.1: Progressive Taxation Graph
quickly learn about the tax system, including
how money is spent and where tax revenue • Progressive taxation discourages more
is received. With a transparent system, we earning by the individual/organisation i.e,
can quickly determine who pays taxes, how the poor are rewarded, while the rich are
much they pay, and whether or not the tax punished.
they pay is correct. We can easily find those • The progressive tax system is used with an
who are exempted from tax-paying, and aim to help reduce inequality. For example,
who are not exempted. taxing low-wage earners at a lower rate
• Administrative ease: while taxing higher-wage earners at a
It indicates that the tax system should be greater rate.
simpler, and less expensive for taxpayers. • The most prevalent taxation method in the
Rules for tax-paying are clearly simple and world is progressive taxes.
fair. The government must know that when Regressive Taxation
they are auditing the tax received and if • People with low income pay higher tax
they find that if a person or businessman rates in a regressive taxation system. On
did not pay the right taxes, then what are the other hand, people with higher income
the sections implemented on him for not attract low tax rates.
paying right taxes. These sections should
be very simple and clear. So we can say that
administration must be good and simple
for taxpayers and the government.
Method of Taxation
In most economies, there are three types of TAX RATE
taxation:
Progressive Taxation
• People with greater incomes pay a higher
proportion of tax under a progressive tax.
• It simply indicates that the bigger a person’s TAXABLE INCOME
income, the higher his tax rate.

Fig 9.2: Regressive Taxation Graph
• Income tax, for example, rises in tandem
with personal income. A person earning • Regressive taxation can be used to boost
below Rs. 5 Lakh is charged 5% income tax certain industries, such as production.
and the person earning above Rs. 5 Lakh is • There are not any permanent or specific
charged 20% Income tax. divisions for such a category of taxes. As a
Taxation 123
provision of promotion, some specific sectors • A regressive tax is one that lowers the tax
might be imposed with regressive taxes. rate as the amount subject to taxes rises.
• For instance, to promote the growth and Important points for degressive tax:
development of small-scale businesses, • Degressive tax is a combination of
once India had regressive excise duty on progressive and proportional tax.
their productions with growing slabs of • Degressive tax is often used in the case of
volume they produced, the burden of tax income tax.
used to go down.
We will see the regressive taxation system with
Proportional Taxation the help of a diagram.
• A proportionate tax is one in which all
taxpayers pay the same rate of tax,
regardless of their income.
• Low, middle, and high-income people all
pay the same tax rate under a proportional
TAX RATE
DEGRESSIVE TAXATION
tax.
• Proportional taxation is rarely utilised as
a stand-alone type of taxation. It can be
used in conjunction with either progressive
or regressive taxation regimes.
TAX BASE INCOME
Fig 9.4: Degressive Taxation Graph
In this diagram, it is clearly seen that the tax

TAX R ATE rate is progressive seen up to a certain limit
and after that, it is fixed at a certain rate.
Value Added Tax (VAT)
• VAT (Value Added Tax) is a tax-collecting
mechanism (as well as the name of the
tax) that is levied on each stage of value
TAXABLE INCOME
addition in each stage of economic activity.
Fig 9.3: Proportional Taxation Graph
• Every commodity goes through different
• It is used as a complementary method stages of production and distribution before
because if progressive tax is not converted reaching the consumers. Some value additions
into proportional tax it will go on increasing are done at each stage of the production and
and similarly regressive tax will decrease to distribution chain, for example, a metal tool
zero. is more valuable than metal.
• The table shows the change in the tax rate • Since the VAT method of tax, the collection
in different taxation systems. is imposed and collected at different stages
Degressive tax of value addition that is why it is a multi-
point tax collection.
• Degressive tax means the rate of tax that
increases up to a certain limit after which • It is called a consumption tax because
a uniform rate is charged. This system the tax is ultimately paid by the final
combines proportional and progressive consumers. The dealer or producer or
taxation. The absolute amount of tax manufacturer acts as a link between the
collection falls with an increase in income. government and people for paying the tax
to the government, but they ultimately pass
• Degressive tax redistributes wealth from
this tax to the consumers. VAT is based on
the bottom to the top.
124 Taxation
a taxpayer’s consumption rather than their • VAT is calculated by deducting input tax
income. (charged to the customer by a dealer)
• It’s a destination-based tax because the from output tax (tax paid by the dealer for
tax rate is determined by the consumer’s purchases).
location where the products and services VAT = Output Tax - Input Tax
are consumed.
Table 9.1 Stages of value addition from farmer to retailer
The above table shows the stages of • The process of estimation of VAT is quite
value addition from farmer to retailer, i.e., complex.
Wheat → Flour → Cake → Sale. Cascading effect of taxation: MODVAT and
Hence, VAT does not have the ‘cascading effect’ CENVAT
on the price of goods. It does not increase MODVAT:
inflation and is, therefore, more suitable for • MODVAT means modified value-added tax
developing economies like India. or slightly modified form of tax.
Cost Tax Market Price • In 1986, it was a landmark in the history
of excise taxation in India when the
Andhra
9 4 13 government introduced the MODVAT.
Pradesh
• MODVAT is different from the VAT system
Tamil Nadu 10 1 11
as it takes into account the duty paid while
Limitation of VAT calculating the taxes to be paid by the
• It is highly resource-intensive in that it producers.
requires computerisation to maintain records • The MODVAT system allows the producers
of firms in a specified format, a centralised to get back their complete reimbursement
record of indirect tax, trained officials etc. of excise duty which is already paid
Taxation 125
by them on the components and raw numerous Central and State tax levies
materials purchased by them used in the already in use in India.
manufacturing of the products. • The majority of domestic indirect taxes,
• Cascading effect of taxation means a tax such as excise tax, service tax, and
on tax. Now MODVAT is introduced by the entertainment tax, would be consolidated
government to avoid repeated payment of into one.
duties from the raw material stage to the • It will be assessed at several levels,
final product stage. including as:
The objective of MODVAT is to avoid duplication o Central GST will be imposed, and
of payment of tax at different stages of excise collected by the Central Government
duties. It was introduced to simplify and (CGST).
rationalise the tax procedure in India. After some o On intra-state supply of goods and
time, the Government introduced CENVAT. services, the State Government would
CENVAT: tax and collect State GST (SGST).
India’s central excise system includes the o On interstate supply of goods and
Central Value Added Tax (CENVAT). It lowers services, the Central Government would
the tax burden on customers who buy any tax and collect Integrated GST (IGST).
product, and it provides a clear picture of tax • In September 2016, the 101st Constitution
obligations at every stage of production. Amendment Act introduced a sub-clause
• It was developed in 2004 with the goal of 12A to Article 366 of the Indian Constitution,
reducing the tax burden that a consumer which defined GST.
faces when purchasing a product, and • Since then, the GST Council has existed
providing a clear picture of tax liability at as a constitutional body to decide on GST-
various stages of production. related issues.
• The CENVAT notification of 2004 explicitly • Firms must pay taxes based on the value of
outlines credit obligations for both their output under GST. However, the input
manufacturers and service providers, ensuring taxes would be offset (reimbursed) in the
that all parties are aware of their responsibilities. form of an Input Tax Credit (ITC).
• In 2004, the government adopted “The Salient Features of GST
CENVAT Credit Rules,” which aid in the
Following are the salient features of Goods and
implementation of CENVAT in the country
Services Tax:
and provide the final product maker with
• GST stands for Goods and Services Tax,
certain tax credits on the excise charge that
and it is a value-added tax that allows for
he or she must pay.
input tax credits and levies taxes only on
• With a number of procedures involved
the value-added during the production of
in each stage of manufacturing, a
goods and services.
manufacturer or service provider is obliged
• GST would be imposed on the supply of
to pay specific government-imposed duties
products and services, as opposed to the old
in the execution of their task.
system of taxing the sale or manufacturing
• It provides a smooth flow of duties, with no
of items or the provision of services.
additional burden placed on anyone’s part,
• GST is a destination-based tax, meaning
whether it’s a manufacturer or a customer,
it will be imposed at the place where
avoiding double taxation and keeping the
goods and services are provided, as
entire chain simple and tidy.
opposed to the old system of origin-based
Goods and Service Tax (GST)
taxation, which imposed tax at the point of
• The Goods and Services Tax (GST) is a single consumption.
unified tax system formed by combining
126 Taxation
• As a result of the new tax laws, the SGST

collected will typically go to the state where
the consumer of various goods or services
offered lives, rather than the state where
the commodities are manufactured.
• The Centre and the States would agree on
rates for the central and state GSTs.
• GST has already been imposed on all
products and services, with the exception of
alcoholic beverages for human consumption
(to bring alcoholic liquor under GST which
is a major source of revenue for the states,
another constitutional amendment would
be necessary).
• Crude oil and several petroleum products
are already subject to GST under the
Constitution.
• Exports would be exempt from taxation.
The exporter can either pay the tax on the
output and claim a refund or export without
paying the tax, and claiming an Input Tax
Credit return.
• Imports of goods and services are
considered inter-State trade, and as such,
they will be subject to the IGST as well as
any applicable customs taxes.
• The GST Council would be a shared platform
with representation from both the federal
government and the states.
• Surcharges on goods covered by the GST
scheme cannot be imposed by the Union
Government.
• The Indian government would reimburse
states for revenue losses experienced as
a result of the GST’s adoption on July 1,
2017, for a period of up to five years. The
compensation will be given in the following
manner:
o First three years: 100%`
o Fourth-year: 75%
o Fifth-year: 50%
Taxes Amalgamated in GST
The following taxes, which are now levied by
the Centre and States, will be subsumed under
GST.
Fig 9.5: Timeline of GST in India
Taxation 127
• Harmonization of acts, procedures, and tax

Central Taxes State Taxes
rates between the federal government and
Subsumed Subsumed the states, as well as between states.
Central Excise duty State VAT/Sales Tax • Improved tax compliance, as all returns and
input credits, will be filed online, creating a
Additional Excise Luxury Tax
paper record of transactions at each level
Duties (Textiles and Central Sales Tax of the supply chain.
Textile Products) (levied by the Centre • Increased usage of information technology
Taxes on the sale and collected by the will lessen the human interface between
or purchase of States) taxpayers and the government, reducing
newspapers and Entry Tax i.e, taxes the likelihood of corruption.
on advertisements on the entry of goods • Taxpayer registration procedures, tax
published into a local area refunds, a common tax base, uniform tax
Excise Duty for consumption, return formats, and the classification of
products and services under a common
levied under the use or sale. (other
framework will provide the taxation system
Medicinal and Toilet than those in lieu of
with more confidence.
Preparations (Excise octroi)
Duties) Act 1955 Octroi
Additional Excise Entertainment Tax
Duties (Goods of not levied by the local
Special Importance) bodies
Special Additional Purchase Tax
Duty of Customs (SAD) Taxes on lotteries,
Additional Customs betting, and gambling
Duty (called Taxes on general
Countervailing duties advertisements
or CVD)
State cess and Fig 9.6: Revenue Collection in ₹ CR
Cess and surcharges surcharges insofar
on the supply of as they relate to the Note:
goods and services supply of goods or • The gross GST revenue collected in the
Service Tax services month of March 2022 is ₹ 1,42,095 crore
of which CGST is ₹ 25,830 crore, SGST
is ₹ 32,378 crore, IGST is ₹ 74,470 crore
Advantages of GST
(including ₹ 39,131 crores collected on
Advantages for the government: import of goods) and cess is ₹ 9,417 crore
• GST will unite India’s national markets, (including ₹ 981 crores collected on import
attracting foreign investment and supporting of goods). The gross GST collection in
the “Make in India” programme. March 2022 is an all-time high breaching
the earlier record of ₹ 1,40,986 crore
collected in the Month of January 2022.
128 Taxation
Q. Discuss the rationale for introducing the Goods and services tax in India. Bring out critically
the reasons for the delay in roll out for its regime. (200 Words, 10 Marks)
Decoding the question:
• In the introduction, you need to write about GST.
• In the body,
o Discuss the rationale behind GST’s introduction.
o In the second part, discuss the reasons behind its delayed rollout.
• Try to conclude by highlighting the need for reforms in GST.
Answer:
The goods and services tax (GST) is a value-added tax levied on most goods and services sold
for domestic consumption. The GST is paid by consumers, but it is remitted to the government
by the businesses selling the goods and services.
Rationale Behind GST introduction:

• The Complex Tax Structure: The main reason behind the introduction of GST is to simplify
the tax structure. As there were many taxes imposed by States and Central governments
which had a burden on taxpayers.
• Improving compliances: Too many taxes discourage people and mainly industries to pay
taxes. One nation’s one tax has decreased pressure on compliance with tax laws and made
easier tax filing process and compliance with tax laws.
• Increase Tax Revenue: Increased tax revenue has become possible after the introduction
of GST as the number of taxpayers increases. The government, both state and centre, are
looking forward to making needed amendments to improve tax revenue.
• Decrease Cascading Effects: The ultimate burden of paying taxes goes on citizens hence It
was speculated that cascading effects or cascading burden of paying taxes on citizens. This
reduced burden again helps increase taxpayers’ base.
• Improve Fiscal Federalism: As per GST law centre will pay compensation in case states
would fail to get the expected amount of tax. This principle underlines fiscal federalism and
also cooperative federalism for national development.
• Destination- Based Tax: GST is destination-based hence this destination-based tax reduces
paying multiple taxes on a single product has ended.
Though GST was introduced in 2017 it has seen multiple delays to introduce it. The delay in GST
introduction can be understood by the following timeline.
Reasons Behind its Delayed Rollout: The idea of a Goods and Services Tax (GST) for India was
first mooted sixteen years back, by the then Prime Minister. The Empowered Committee (EC) of
State Finance Ministers, which had formulated the design of State VAT was requested to come
up with a roadmap and structure for the GST.
• Difficulties of consensus building and charting out of technical difficulties took time:-
• Based on discussions, the EC released its First Discussion Paper (FDP) on GST in November
2009. The FDP spelt out the features of the proposed GST and has formed the basis for the
present GST laws and rules.
Taxation 129
• In 2011, Constitution (115th Amendment) Bill, 2011 was introduced in the Lok Sabha to
enable the levy of GST. However, due to a lack of political consensus, the Bill lapsed after
the dissolution of the 15th Lok Sabha3.
• In December 2014, the Constitution (122nd Amendment) Bill 2014 was introduced in the Lok
Sabha and was passed by Lok Sabha in 2015.
• Thereafter, the Constitutional Amendment Bill was moved on in 2016 based on political
consensus. Finally, the Constitutional Amendment paved the way for the introduction of the
Goods and Services Tax in India.
• Following this, State Legislatures of different States have passed respective State Goods
and Services Tax Bills.
However, Goods and Services Tax has been proven how it is significant, but certain challenges
need to be addressed. As recently the controversy created on GST compensation is an example
of its implementation challenges, also their revenue shortages have been experienced as many
times as possible a revenue collection is not steady, issues in tax filing, fake billing of GST,
E-billing, etc. need to be addressed to improve tax revenue, seamless and very easy way of
tax compliance, etc. If India wants to make One Nation One Tax a true game changer and
amilestone in India’s tax administration, the implementation of GST at the ground level needs
to improve.
Q. Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax
(GST) in India. Also, comment on the revenue implications of the GST introduced in India in
July 2017. (150 Words, 10 Marks)
• In an introduction, try to write about Goods and Services Tax (GST) in brief.
• In the body,
o F
irst, enlist the indirect taxes (both under the Centre and State) which have been
subsumed under GST.
o Second, discuss the revenue implications of the GST in India since 2017.
• Try to conclude with suggestions to improve the impact of GST on the economy.
Answer:
Originally our constitution provided for separate taxation powers to unions and states of indirect
taxes but the 101st Constitutional Amendment Act,2016 merged the majority of these taxes into
Goods and Services Tax (GST). GST is an indirect tax used on the supply of goods and services
sold for domestic consumption. It was introduced in 2017 by subsuming almost all the indirect
taxes of both Centre and State leading to realise the idea of revenue integration of India through
One Nation, One Tax.
Central Taxes Subsumed under GST:

• Central excise duty.
• Additional excise duty.
• Service tax.
130 Taxation
• Additional customs duty (Countervailing duty).

• Special additional duty of customs.
At the State level, the following taxes are being subsumed:
• State value added tax/sales tax.
• Entertainment tax (other than the tax levied by the local bodies).
• Central sales tax (levied by the Centre and collected by the states).
• Octroi and entry tax.
• Purchase tax.
• Luxury tax.
• Taxes on lottery, betting, and gambling.
Still, some of the taxes are not under GST which includes Central Custom Duty on import
and export, Central Excise on five Hydrocarbons and Excise on liquor production by the State.
Ever since GST became effective, it has registered a significant impact on the Indian financial
system.
Positive Implications on Revenue:
• Tax to GDP ratio: In the first year of implementation of GST, the tax buoyancy increased to
1.2% and revenue increased to 11.9% compared to the pre-GST period.
• Increased Tax eturn Filing: People filing tax returns has been increased from 5.43 crore in
2016-17 to 6.84 crore in 2017-18.
• Formalisation of economy: With increased Employees Provident Fund Organisation
subscriber base along with increased registration for GST, it provides evidence for greater
formalisation.
• Monthly collection: It has crossed Rs 1 lakh crore many times, signalling increased overall
indirect collection of taxes of both centre and state.
• Ease of Doing Business: Subsuming almost all the indirect taxes of both centre and state
improved the ease of doing business and integrated the whole economy.
o This destination-based tax reduced the double incidence of tax and increased the
confidence of investors in the Indian economy.
Negative Implications on Revenue:
• State’s control over revenue: The Constitution has given the power to states to impose
taxes on their respective domain. While GST resolved the issue of cascading taxes, it has
an adverse impact on the revenue of states.
o PRS Legislative Research shows that states have control over only 35 per cent of tax
revenues.
o Some states have witnessed a revenue decline in SGST compared to VAT - Punjab,
Himachal Pradesh, Chhattisgarh, Uttarakhand, Jammu, and Kashmir, Odisha, Goa,
Bihar, Gujarat and others.
• Reduced collection: In 2018-19, indirect taxes fell by 0.4 percentage points of GDP mainly
due to a shortfall in GST collections.
• GST compensation: The GST Compensation Act, 2017 guaranteed states compensation for
any loss of revenue in the first five years of GST implementation, until 2022, through a cess,
levied on sin and luxury goods.
Taxation 131
o Due to the pandemic, the revenue collection has fallen, and there is an estimated
compensation shortfall of Rs 2.35 lakh crore.
• Inconsistent Tax Buoyancy: Against a target of Rs 1.12 lakh crore a month set for 2018-19,
average GST revenues fell short of Rs 1 lakh crore a month. A similar inconsistency was
registered in 2020-21 also.
• Fake Invoice generation to claim false ITC Claims are increasing.
Though Goods and Service Tax has been one of the biggest economic reforms after the
new economic policy, especially in tax administration, it has some inherent problems like
exceptions and multiple rate slabs etc, which need to be addressed in a time-bound manner.
This will make the indirect tax structure better and strengthen fiscal federalism.
Q. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act
of 2017. How has COVID-19 impacted the GST compensation fund and created new federal
tensions? (250 Words, 15 Marks)
• In the introduction, start with writing about GST compensation.
• In the body
o Explain the rationale behind the GST compensation act 2017
o D
iscuss how Covid-19 impacted the GST compensation fund and gave rise to new
federal tensions.
• Try to conclude with suggestions and how to strengthen fiscal federalism.
Answer:
The Constitution (One Hundred and First Amendment) Act, 2016, created the mechanism for
levying a nationwide GST. As per this law, there was a provision to compensate the States for
loss of revenue arising out of the GST implementation. It was agreed that revenue shortfalls
arising from the transition to the new indirect tax regime would be made good from a pooled
GST Compensation Fund for five years that is set to end in 2022.
The rationale behind GST Compensation Act 2017:
• To meet Revenue Shortfall of States: GST was introduced as one nation one tax by
integrating the indirect taxation system of the country. This compensation fund was
created by imposing concession cess on demerit goods.
• Meeting the Actual Revenue Targets of the state: The total compensation payable in any
financial year shall be the difference between the projected revenue for any financial year
and the actual revenue collected by a state. This is done through the GST compensation
corpus fund created for it.
• Fixed Revenue Growth: The Centre had assured 14% year on year GST revenue growth for
5 years. If such an amount is not available then the Centre will compensate the State for
such deficiency.
• Increasing New Revenue Sources: State Government has given up their revenue-raising
power from alternative indirect means of taxes after the introduction of GST. The deficiency
which may arise in future will be fulfilled by the centre through the GST compensation fund.
132 Taxation
• Creating Constitutional Liability: The GST act created a constitutionally binding agreement
between Centre and State regarding GST compensation. It balanced fiscal federalism by
fulfilling States’ financial needs, and the same obligation guaranteed under the act.
How Covid-19 impacted GST compensation fund and gave rise to new federal tension:
For the 2020-21 fiscal year, the revenue shortfall has been anticipated at ₹3 lakh crore, with the
Compensation Fund expected to have only about ₹65,000 crores through cess accruals and the
balance to pay the compensation to the States.
• Decrease in Economic Activity: Nationwide lockdown and almost no economic activities
led to a drastic fall in revenue shortfall, especially in the GST compensation fund. This
has created an adverse situation as States simply do not have the funds to fulfil the
obligations. This revenue shortfall is around 1.75 lakh crore.
• Bypassing of council: The GST Council would have been expected to provide a forum to
discuss and debate solutions to the compensation crisis. Instead, what was seen was that
the Union tried to bypass the council.
• States Demand for full Compensation: The States are demanding full compensation from
the Centre, but the Union government is asking the States to bridge the gap through
market borrowing.
• States rejected Market Borrowing Mechanism: Many states like W. Bengal, Kerala, Punjab,
etc, are against market borrowings and asking the Centre to fulfil the constitutional
obligation. As the GST act and Compensation Act made it clear that the revenue shortfall
of states will have to be compensated by the Centre under the agreement.
• Supreme Court’s Intervention: Opposition party ruled states moved to the Supreme Court
against the Centre’s move to break down constitutional/federal agreement.
The Centre should focus on its constitutional obligation and give States their due share of revenue
by borrowing from the market. Therefore, Covid-19 has created federal-economic issues, and
these issues should be handled with the prudence of constitutional wisdom, and the Centre
should allow States to raise money by imposing cess in their respective domain.
Advantages to Trade and Industry trucks are covering around 10-15% more
• Reduction in the multiplicity of taxes that distance as compared to the previous
existed earlier will lead to simplification regime. In the previous regime, heavy
and uniformity in the indirect tax regime. transport vehicles were hovering close to
• Elimination of double taxation in some around 300-350 km per day, but after the
areas, such as contracts, software, and the implementation of GST, this distance has
hospitality industry. improved to 400-410 km per day.
• Simplified and automated procedures for Advantages to Consumer
numerous tasks, such as registration, returns, • Prices of commodities and goods will
refunds, and tax payments, among others. fall in the long run as the cascade
• Reduced compliance costs: Because there effect of taxation is reduced. The year-
are fewer records to keep for different types on-year Consumer price index (CPI) was
of taxes, there is a lower investment of more than 6% in July 2016, which now
resources and people in preserving records. has decreased to a little over 2 percent in
January 2019.
• A leading logistics corporation recently said
that after the implementation of the e-way • Because of the smooth movement of input
Bill and GST, heavy transport vehicles, i.e., tax credits among producers, merchants,
Taxation 133
and service providers, the final prices of • It will be more effective for tax neutralisation,
items are supposed to be transparent. particularly for exports.
• GST will generate more employment and • It will lead to the development of national
more financial resources which will help in markets.
poverty eradication. For consumers:
Fig 9.7: GST Structure in India
Advantages to States • Cascading will be eliminated, resulting in

• GST backed up by strong IT infrastructure lower prices for products and services.
will bring the entire supply chain from • It will make a uniform price in the whole
manufacturing to retail under the ambit of country.
the indirect tax system. This will help states • It will create transparency in the taxation
to expand their tax base. More and more system.
suppliers will opt for GST as non-registered There will be several taxes in the country prior
suppliers would not be able to claim benefits to the implementation of GST.
under the input tax credit system. Centre Levies these taxes: Customs Duty,
• Earlier, only the central government was Excise Duty, Central Sales Tax, Cess Service
empowered to tax services, but under the Tax etc.
GST system states will also levy taxes on State Levies these taxes: VAT, Luxury Tax,
services. This will also increase revenue Entertainment Tax, Octroi, Entry Tax etc.
and provide States with access to the
• So, once GST is implemented, there will be a
economy’s fastest-growing industry.
uniform tax structure with CGST, SGST, and
• Improve the investment climate in India, IGST, as well as concurrent jurisdiction for
which will, in turn, help our development. the levy and collection of GST by the Centre
• Taxpayer compliance will make a (CGST) and the States (SGST), as well as
significant difference in the states’ revenue the Centre’s levy and collection of IGST on
collection. supplies made in the course of inter-State
GST will bring the Informal Sector into Formal trade or commerce, including imports.
Sector Now we will see some improvement after GST
Benefits of GST or we can say how it will bring is implemented, and we will say that GST is
the informal sector into formal one: transforming the informal sector into a formal
For trade: one. The data given below is after one year of
• It will lower the number of different taxes. implementation of GST.
134 Taxation
• India has completed a year since • Due to CST and state entrance taxes,
implementing one of the world’s largest many big corporations kept their multiple
and most significant tax reforms. warehouses in the country in different states
• The immediate gains and losses are as before the advent of GST. The majority of
follows: The tax net has widened (45-50 these warehouses are underutilised, which
lakh new taxpayers) and tax revenues have adds to their operational inefficiencies.
increased by an estimated 13 per cent when • We had witnessed a long line or chain of
compared to the pre-GST period. trucks on the borders of states because
• The unorganised sector, on the other hand, before GST states will levy octroi or chungi
has faced transitory transition hurdles such taxes at different places, and it is a lot of
as higher compliance costs and supply time taking process, and it will lead to too
chain delays, resulting in reduced business much maintaining of different papers.
growth for a few quarters. • This will also lead to an increase in the
• Over the medium to long term, the actual delivery time of products and many times
benefits of GST will be in the areas of some deliveries will cost a lot to a consumer
increased productivity, formal jobs, and or a small businessman or for big industries
improved economic competitiveness. After because of different taxes slabs.
a year, several factors that will have a long- • But after GST is implemented in India there
term socioeconomic influence are slowly will be a uniform tax structure and the
emerging. e-way Bill will ease movement across the
• In the past, some state governments have states, and it will lead to a decrease in the
struggled to come up with precise data time of delivery of products and a decrease
on the number of exports that leave their in document formalities.
borders. • However, once GST is fully implemented in
• The GST mechanism is generating a lot the country, most of the industry’s current
of extremely valuable and high-quality issues would be a thing of the past, as
data that will benefit the formal-informal India will become a unified market where
economy, state-specific production and commodities can flow freely between
exports, point of origin of goods and states without incurring any fees.
services, and other economic data that will • This would further consolidate warehouses
help policymakers and government officials around the country, and we may see major
make better decisions. logistic centres and large infrastructure
So, we can say that GST is bringing the informal projects, where 100 per cent FDI (Foreign
sector into the formal one. Direct Investment) is already permitted.
Impact of GST on Logistics: So we can say that GST has a good impact on
Now we see how the GST will be beneficial logistics and made it more effective.
for logistics. As logistics is the backbone of
GST and Revenue Neutral Rate (RNR)
manufacturing and trading activities in the
• Revenue Neutral Rate (RNR) refers to that
economy of a country. It will play a critical
single rate, which preserves revenue at
role in developing countries like India wherein
desired (current) levels.
consumption is in high demand. In other ways,
we can say that logistics can be considered the • Revenue Neutral Rate is the rate of GST
movements of goods from the point of origin at which the amount of taxes currently
to the point of consumption. A well-planned collected by the government and the
logistics chain supply can assure timely delivery amount collected by the government in the
of products at the right time at the right place pre-GST regime remains the same, i.e., it
for the customer. does not lead to revenue loss or gain.
Taxation 135
• The Government of India constituted a • Decisions are only made with a 3/4th
committee under Arvind Subramanian majority, and such decisions are exempt
which suggested the RNR be from 15% from flaws in the Council’s establishment
to 15.50%. or appointment of its members, as well as
o The RNR is kept slightly high to ensure any procedural irregularities.
no loss in revenue generation. • The GST Council’s functions are as follows:
GST and Fiscal Autonomy of State According to Article 279A (4), the Council
• States majorly depend on two sources for will make recommendations to the Union
their revenue; their own revenue raised and State governments on critical GST
through taxation powers given under the issues such as:
State List of Seventh Schedule of the o Taxes, surcharges, and cess to be
Constitution and various central transfers subsumed under the GST
including revenue share recommended by
o Including or excluding goods and
the Finance Commission. services from the GST
• Many state-level indirect taxes have o The maximum amount of revenue that
been subsumed under GST since its can be taxed
implementation. o GST rates
• Previously, states had the authority to set their o Model GST laws, principles related to
own tax rates; now, under the GST framework, the place of supply, principles of levy,
tax rates are set by the GST Council. apportionment of IGST, and principles
• This means that states have a limited related to the place of supply.
amount of leeway when it comes to deciding o Special provisions with regard to the
on tax rates for products and services. eight northeastern states, Uttarakhand,
• As a result, a greater reliance on GST Jammu and Kashmir and Himachal
revenues for revenue lowers state autonomy Pradesh.
because these receipts are determined by o Other related matters
the GST Council’s tax rates. GSTN
GST Council • The Goods and Services Tax Network
• The GST Council is a constitutional body (GSTN) is a private limited corporation that
is non-profit and non-government. It was
that makes GST-related recommendations
incorporated in 2013.
to the Union and State governments.
• The government (Central and State)
• The GST Council will be a combined forum
holds 49% equity in GSTN while private
of the Centre and the States, according to
players hold the remaining 51% equity in
Article 279A of the Constitution, and will the GSTN.
comprise the following members:
• It was created primarily to provide IT
o Chairman: Union Finance Minister infrastructure and services to the federal
o Members: Finance/Revenue Ministers and state governments, as well as
or Ministers nominated by each of the taxpayers and other stakeholders, in order
States and UTs with legislatures. to ensure that the Goods and Services Tax
• The voting authority is split between the is implemented smoothly.
federal government and the states, with the GST Tax Slab
federal government holding 1/3 of the vote • GST is currently levied on every product
and the states holding the remaining 2/3. in five slabs of 0,5, 12, 18 and 28 per cent.
136 Taxation
• GST Tax System

Essential goods
o Imagine a t-shirt manufacturer. He buys
(For example, cereals, fresh fruits, and
0% raw materials worth Rs. 5,000, for which
vegetables, salt, natural honey, milk,
he pays a tax of 10%, i.e., Rs.500.
human blood etc.)
o He manufactures shirts by adding the
Commonly used goods and services 5%
value of Rs.1000 including profit.
Standard goods and services fall under For the total cost, the manufacturer will
12% o
1st slab (computer and processed food) include 5,000 + 1,000 and fix the price
Standard goods and services fall as 6,000.
under the 2nd Slab (capital goods and Manufacturer leaves out 500 paid as a
18% o
industrial intermediaries are covered in tax because it will be reimbursed by the
this slab) government as an input tax credit.
Special category of goods and services o The customer buying will pay the final
including luxury (Luxury items such as cost of 6,600 (6,000 + 10% tax, i.e., 600).
28%
small cars, premium cars, cigarettes o So, the total tax liability to the
and aerated drinks) government is 600.
Further, a cess will be levied on certain goods Challenges Associated with the
like aerated drinks, luxury cars, tobacco Implementation of GST
products, and pan masala, over and above the • Because of the enormous shortfalls in the
rate of 28% for payment of compensation to tax collection under GST (exacerbated by the
the States. Covid-19 lockdowns), the Union government
• 97.5 percent of articles are covered by an 18 and State Governments have come at
percent or lower GST slab. loggerheads as the Centre has revealed its
• Some of the products are not covered incapability to compensate the states as
under GST. These are: promised under the provision of the GST Act.
o Alcohol for human consumption • The Comptroller and Auditor General of
India (CAG) found that an anti-evasion tool
o Tobacco
envisioned under the indirect tax regime,
o Electricity
matching invoices of purchasers and sellers
o Petroleum product were still missing.
GST Tax System vs Non-GST Tax System • According to the CAG Report (2018-2019),
• Non-GST Tax System one major area where GST’s (Goods and
o Imagine a t-shirt manufacturer. He Services Tax) full potential has not been
buys raw materials worth Rs. 5,000, for realised is the implementation of the
which he pays a sales tax of 10%, i.e., streamlined tax compliance regime.
Rs. 500. • Due to the sophistication and complexity
o He manufactures shirts by adding the of the return method, as well as technical
value of Rs. 1000 including profit. difficulties, invoice-matching was rolled
o For the total cost, the manufacturer will back, making the system vulnerable to
include 5,000 + 1000 + 500 and fix the different ITC frauds. The GST Network (GSTN)
price as 6,500. still faces numerous technical glitches. This
o The customer buying will pay the final cost is very problematic as it is required by the
of 7,150 (6,500 + 10% sales tax, i.e., 650). businesses to register, file GST returns, etc.,
with the help of this portal.
o So, the total tax liability to the
government is 500 + 650 = 1,150. • Aviation Turbine Fuel (ATF) prices have
increased almost every fortnight since the
Taxation 137
start of 2022. In several hikes beginning Remission of duties and taxes on exported
January 1, 2022, ATF prices have been products:
increased by almost Rs 38,902.92 kg or It is a new system that took effect on January
almost 50 per cent till March 2022. Apart 1, 2021. It was created to take the place of
from the charges that the Union government the current MEIS (Merchandise Export From
levies the governments of states charge India Scheme). This method will ensure that
sales tax on the same at different rates. exporters obtain refunds on hitherto non-
India is one of the fastest-growing aviation recoverable embedded taxes and levies. This
markets in the world. However, the aviation technique was implemented to enhance
exports that were low in volume and did not
businesses are burdened by growing debt
comply with WTO requirements (World Trade
and bankruptcy because of high fuel costs Organisation).
and depreciation of the rupee. The scheme aims to reimburse tax and
Way forward: duties such as vat, and excise on fuel, which
• It is very important to give clarity on the are levied by the centre, state and local
various procedures to be followed while levels and not refunded under any other
mechanism. Merchant exporters (traders)
filing GST, and also to repair the present
and manufacturer exporters are both able to
problems and prevent future ones from participate in this scheme.
arising for an effective tax regime. By adopting the RoDTEP scheme, the
• Though currently, the GST may face exporters of our country will be able to meet
certain glitches and weaknesses, it is very the standards fixed by international countries
flexible in nature as the implementations for exports as affordable costs for testing
and decisions are based on transparent and certification will be made available to
our exporters within the country instead
conversation within the GST Council. This
of relying on international organisations.
permits for flexible resolution and response Tax assessment for exporters will also be
to the issues related to GST. totally automated under it. Businesses will
• The Central Government must also be be able to access their GST refunds using
required to lead the country out of its GST an automated refund system. This would
standstill by borrowing more from different boost the country’s economy as well as the
company’s working capital.
financial markets or directly from the
Central Bank. The Union Government must Condition to get benefit from this scheme
has some basic rules, which are as follows:
appreciate that it is their legal obligation, and
1. Exports products are not eligible under
they cannot abrogate it. State Governments
this scheme.
should respond by settling for a more
2. It is also applicable for goods that are
realistic compensation for the time being exported under e-commerce platforms.
while exploring the options recommended 3. There is no turnover threshold to claim
by the Central Government. RoDTEP.
• The government also should think about So finally, we will say that this scheme
the rationalisation of the GST slabs. will have some salient features like an
• The GST base can be increased by including automated system of credit like refunds
will be done through an electronic system
fuel, alcohol and real estate in GST and by
and transactions should be maintained and
preventing ITC fraud.
tracked through an electronic ledger. The
• GST is a positive step toward shifting the verification for refund will be done through
economy of India from an informal to a digitisation like an IT-based risk management
formal economy. It is very crucial to utilise system to ensure speed and accuracy of
experiences from international economies transaction processing.
that have implemented GST before us, to We will state that after implementing this
overcome the impending challenges. system, India will have an international
138 Taxation
standard for exporting because testing, paying income taxes despite having the
and certification will be available in India “ability to pay.”
rather than relying on the standards of other • All corporate entities, whether public or
countries. private, are subject to MAT.
Direct Tax • The MAT does not apply to:
The following are examples of direct taxes: o Any income a corporation receives
Personal Income Tax or generates from the life insurance
• An income tax is a type of tax levied on business.
income by governments on persons who o Tonnage taxation applies to shipping
live within their jurisdiction. earnings.
Corporate Tax Alternative Minimum Tax (AMT)
• A corporate tax is a tax placed on a • It is a viable alternative to traditional taxation.
company’s net profits. • AMT is a tax on ‘adjusted total income’
• Companies that are registered in India in a fiscal year (FY) in which the tax on
under the Companies Act 1956, both private regular income is lower than the AMT
and public, are subject to pay corporate on adjusted total income. As a result,
tax. AMT must be paid by taxpayers who are
Dividend Distribution Tax subject to AMT rules, regardless of their
• The Dividend Distribution Tax is imposed regular tax obligations.
on dividends paid to shareholders from a Capital Gain Tax
company’s profits. • Any profit earned from the sale of a capital
Minimum Alternate Tax asset is referred to as capital gain (Land,
• The Finance Act of 1987 effectively created building, house property etc.)
the Minimum Alternate Tax (MAT) in India. • Capital gains tax is the tax that is paid on
It was enacted to tax the so-called “zero- the earnings.
tax corporations.” Corporations that show • Long-term capital gains tax (when an
zero or minimal income to avoid tax nets individual owns an asset for more than 36
are known as zero-tax companies. months) or short-term capital gains tax
• Under MAT, a fixed amount of a company’s (when an individual owns an item for less
book profit is taxed as taxable income. than 36 months) (In case assets are held
• MAT was implemented to curb tax avoidance for a duration of 36 months or less).
methods used by some businesses to avoid
Q. Comment on the important changes introduced in respect of the Long-term Capital Gains
Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.
(150 Words, 10 Marks)
• n the introduction, write the definitions of Long-term Capital Gains Tax (LCGT) and Dividend
A
Distribution Tax (DDT).
• In the body,
o Discuss changes introduced in LCGT and DDT in the Union Budget 2018-19.
o Further, the rationale or merit expected with the move can be discussed.
• Concluding our answer by giving the final comment over the step.
Taxation 139
Answer:
Under the Seventh Schedule of the Constitution, the Union Government is empowered to
levy taxes on income other than that from agriculture such as Corporation Tax, Income Tax,
Fringe Benefits Tax, Capital Gains Tax (CGT) and Dividend Distribution Tax (DDT).
Long-term Capital Gains Tax: A capital gains tax is a tax on the growth in value of investments
incurred when individuals and corporations sell those investments. A profit from the sale of a
capital asset is known as capital gains.
• The tax does not apply to unsold investments.
• When an asset is held for 36 months or more, it is treated as a “Long-Term” Capital Gain
(LCGT).
• Shares and equity mutual funds alone enjoy a special dispensation which is, holding a
period of 12 months or more qualifies as long-term in this case.
Dividend Distribution Tax: It is a tax levied on dividends that a company pays to its shareholders
out of its profits. The Dividend Distribution Tax is taxable at the source and is deducted at the
time of the company distributing dividends.
Changes made in LCGT in Budget: its shareholders out of its profits. Two major
• The government has introduced a levy of 10 changes were introduced in DDT in the 2018-19
% LCGT on profit exceeding the amount of budget. These changes include:
1 lakh during the sales of shares and equity • Before 2018-19 equity mutual funds
mutual funds. distributing income to investors were not
• Until 2018 if an investor sold his shares / subjected to DDT. Now, they are subjected
equity Mutual Fund units after holding them to 10% of DDT.
for a period longer than 12 months, then his Merits of changes in DDT: Multinational
profits were not subjected to long-term companies and local unscrupulous companies
capital gains tax. But excessive taxation would do or announce mergers or amalgamation
could discourage retail and small investors of their profit-making subsidiary companies and
from participating in the share market and loss-making subsidiary company, to reduce their
mutual fund. DDT liabilities to promoters. Such loopholes in
• In India, profits from capital gains were law were used to avoid tax. To fill this gap the
about 3.60 lakh crore and the majority of government introduced technical changes in
this profit was earned by large corporations calculating dividend distribution tax.
and high net worth individuals. Thus, the changes in LCGT and DDT are made
Merits of changes in LCGT: By taxing such large by the government to augment its revenue
amounts through LCGT the government would resources. Another important aim behind this
augment its financial resources to balance is to reduce the tax avoidance of unscrupulous
rising income inequality and earn money companies.
through tax. Securities Transaction Tax (STT)
Changes made in DDT in Budget: • Securities Transaction Tax (STT) is a
At the same time, the government also financial transaction tax applied in India on
introduced changes in dividend distribution domestic stock exchange transactions.
tax. The Dividend Distribution Tax is a tax • The STT rates are set by the Central/Union
levied on dividends that a company pays to Government in its Budgets from time to time.
140 Taxation
• It falls under the category of direct tax. Equalization levy on the supply of services via
Commodity Transaction Tax (CTT) e-commerce:
• Commodities transaction tax (CTT) is a • It will be imposed on everyone who lives in
tax on domestic commodities derivatives India or who is not a resident but lives in India
exchange transactions that is analogous under certain conditions, as well as anyone
to the Securities Transaction Tax (STT) in who uses services or purchases items through
India. an internet protocol address in India.
• The notion of CTT was initially presented in • The equalisation levy shall not be charged
the 2008-09 Union Budget. under these conditions:
• Excessive speculation, which is harmful to o If the e-commerce operator making
the market, is discouraged by CTT. or enabling the e-commerce supply
Equalisation levy or service has a permanent operation
• The Equalisation Levy is a direct tax in India, or if the e-commerce supply
withheld by the service recipient at the is effectively connected to such a
time of payment. The following are the two permanent establishment.
conditions that must be met in order to be o If the e-commerce company’s sales or
subject to the equalisation levy: turnover from e-commerce supplies or
o The payment should be paid to a service services was less than 2 crore rupees,
provider who is not based in India. the previous year.
• We can also say the equalisation levy is a o After that, there is the sale of data
digital tax. It is applicable to the online sale collected from a person residing in
of goods or online sale of services by the India or a person who uses an internet
non-resident e-commerce operator. protocol address located in India, as
well as the sale of advertisements
• An equalisation levy is needed because
that target a customer residing in India
many big companies earn crores of
or a customer who will access their
rupees and when the time comes for their
advertisement through an internet
taxpaying, they transfer their big amount
protocol address located in India.
to their subsidiary companies and inform
us that their expenses are more than their Merits of Direct Taxes
income. Direct taxes are those that are paid directly
• We will see it with an example: to the entity that levies them by an individual
or an organisation. E.g., income tax, property
o According to the Economic Times,
tax.
Google India sent a total of Rs 16,119.6
crore-50 to 60% of its earnings to Merits of Direct Taxes
its parent company companies in • Equity and reduce inequalities: Direct
Singapore and Ireland for “acquisition taxes are based on the principle of ability
of advertising space” in November 2018. to pay so that the burden of taxation
As a result, the corporation recorded it is distributed to different people and
as a miscellaneous expense, lowering institutions in a just or equitable manner.
their earnings. As a result, they were They are usually levied in a progressive
able to earn a large sum of money while manner. Progressive direct tax reduces
avoiding paying taxes. income inequalities in society and brings
• So, India levied digital taxes, which are as social and economic justice.
follows: • Certainty: In the case of direct taxes, the
o Section - 165A, Equalisation Levy of taxpayer has certainty about the time of
Income Tax Department Sections payment, manner of payment, and amount
Taxation 141
to be paid. Similarly, the government is

applied to a variety of tax situations, such
certain about the amount that will be as the tax on imported goods, which is
collected in the way of tax from the people, referred to as import duty.
institutions and companies. • In 2018 government has increased the ad
• Elastic: They are elastic in the sense that as valorem tax on imports from 10 to 20 per
people’s income and wealth rise, the direct cent on textile products, such as jackets,
tax yield rises with it. Elasticity also means suits, etc., because this step is done in
the government revenue can be increased line with the Make In India initiative. And
simply by raising the rates of taxation. that will help domestic manufacturing
• Civic consciousness: They have educational it will lead to increased income for
value, in the case of direct taxes, the domestic traders and it will also boost
our economy.
taxpayers are made to feel directly the
burden of taxes and hence may take a keen Specific taxes:
interest in knowing how public funds are • A per unit tax, also known as a specific tax,
spent by the government. The taxpayers are is a tax imposed on each unit of an item or
likely to be more aware of their rights and service sold, for as cents per kilogramme.
It is proportional to the specific quantity
responsibilities as citizens of the state.
of a product sold, regardless of the price.
• They are often inexpensive in the sense that
Excise taxes, for example, are an example
the expense of gathering them is minimal. In
of this type of tax.
the case of salaried people, a direct tax, such
• It is based on specific qualities of goods.
as income tax is collected at the source.
This tax is imposed on the commodity
In such a case, it is both convenient and according to its weight, size, and volume.
economical to collect and this is however E.g. The tax on cloth is based on their
not true in the case of other taxes. length, whereas the tax on sugar will be
• Simplicity means avoiding the complexity based on their weight.
of taxes, papers, and filing obligations for • For example, excise duty is charged as
taxpayers. A simple tax helps taxpayers per the length of the cigarette.
better understand the system and reduce
Direct Tax Code (DTC)
the cost of compliance. The need for
simplicity is that the tax system is not • The Direct Taxes Reform Act (DTC) is a
too complicated for payers and the proposed legislative reform of the direct
government. taxation system.
• It aims to simplify and combine all of the
Specific and ad valorem taxes: federal government’s direct taxes, such as
• Ad valorem taxation is a type of tax that is income tax, gift tax, and wealth tax. It aims
based on the assessed worth of something to extend the tax base in order to enhance
like real estate or personal property. All tax revenue.
ad valorem taxes are imposed on the • DTC has the following features:
basis of the item’s determined worth. o To lessen the risk of misinterpretation,
Property tax, which is collected on real tax regulations will be recast in plain,
estate, is the most common ad valorem unambiguous language.
tax. However, ad valorem taxes can be
142 Taxation
o Reduce the argument over exemptions • It gives tax officers the authority to disregard
and deductions to limit their potential certain rules of domestic tax law and the
for abuse. Double Taxation Avoidance Agreement
o Changes in tax provisions can be made (DTAA) (a bilateral agreement).
without amending the tax code thanks • The goal of GAAR is to formalise the idea
to a flexible tax system. of ‘substance over form,’ in which the true
• In 2017, the government-appointed Akhilesh intention of the parties and the purpose
Ranjan to head an expert committee tasked of an arrangement are considered in
with drafting a new Direct Taxes Code. In assessing the tax consequences, regardless
2019, the task force presented a report that of the legal structure of the transaction or
has yet to be made public. arrangement in question.
To honour the nation’s honest taxpayers, the • India’s general anti-avoidance rule
Union Government created the ‘Transparent (GAAR) came into effect on 1 April 2017 for
Taxation: Honoring the Honest’ programme in the assessment year 2018-19.
2020. Why GAAR?
• Faceless assessment, taxpayer’s charter, • GAAR was brought in to address the
and faceless appeal are all significant tax avoidance issues and ensure that
innovations in this platform. those in different tax brackets are taxed
• The goal of faceless assessment is to correctly.
eliminate human interaction between • In many cases of tax avoidance,
the taxpayer and the income tax arrangements could take place for gaining
department. a tax advantage while complying with the
• The Taxpayer Charter defines both law.
taxpayers’ and tax authorities’ • Advantage of GAAR
responsibilities and rights. o To check tax avoidance.
• Faceless Appeal: Appeals will be allocated o It would plug loopholes in the taxation
to any officer in the country at random system.
under this structure. The identity of the o It would also check misuse of DTAA.
officer who will decide the appeal will be • Disadvantage of GAAR
kept secret. o It may increase the scope of corruption
General Anti-Avoidance Rule (GAAR) as it provides discretionary power to
• It is a provision under direct tax law that tax officials.
seeks to check tax avoidance, i.e., misuse of o It may adversely affect domestic
exemption, ambiguous language, loopholes and foreign investment as it creates
in tax laws etc. uncertainty regarding the interpretation
• It is a provision of indirect tax legislation of tax provisions.
that aims to prevent tax evasions, such as Parthasarathi Shome Panel
the misuse of exemptions, unclear language, The Parthasarathi Shome Panel was established
and tax law loopholes. in 2012 to draught the final GAAR guidelines.
• A transaction that disguises the value, Recommendations of the committee are:
location, source, ownership or control • GAAR should be deferred for three years
of funds would also be deemed to lack to 1st April 2016 for safeguarding and
commercial substance. consultation with investors and for training
tax officials.
Taxation 143
• It should be invoked by the approving panel will have the option to accept the tax
with 5 members. return or modify it.
o Head: High Court Judge • Structure and governance:
o Two Member: Income Tax Department o Central Board of Direct Taxes (CBDT) and
o Two Member: Non- government Central Board of Excise and Customs
Members (CBEC) should be fully integrated in
• The focus of GAAR should be to check the next ten years. Within the next five
the misuse of tax provisions rather than years, they should evolve into a unified
increase tax revenue. authority as the Central Board of Direct
• It should be imposed only if the sole objective and Indirect Taxes.
of an arrangement is tax avoidance. o The post of Revenue Secretary should
• The application of GAAR should be clarified be discontinued, and its functions
through an appropriate illustration. should be assigned to the two
Boards.
• Firms should be permitted to clarify
the applicability of GAAR before making • Human Resource Development:
investments/transactions i.e., advanced o There should be a focus on specialisation
ruling. by bringing expertise, including lateral
• The bar for GAAR application should be set entry of specialists into the Boards.
at least Rs. 3 crores in tax avoidance. Indian Revenue Service (IRS) officers
should specialise in particular tax
• It should not be used to assess the
administration areas.
genuineness of a tax residency certificate
issued under DTAA even by tax havens. o The Central Vigilance Commission
should have a Member who has been an
• It should not be applied in the case where
IRS officer.
Special Anti-Avoidance Rules (SAAR) are
applicable. • Dispute Resolution and Management:
Tax Administration Reform Commission o Avoid retrospective laws.
(TARC) o Currently, tax litigations are clogging the
The Tax Administration Reforms Commission system. Thus, both Boards should start
(TARC) under the Chairmanship of a special drive for review and liquidation
Dr Parthasarathi Shome was appointed in of such cases by setting up dedicated
2013 by the Government of India for giving task forces.
recommendations for reviewing the public tax • Internal processes:
administration system of India. TARC made the o The Permanent Account Number (PAN)
following recommendations: should be made as a Common Business
• Consumer focus: Identification Number (CBIN), to be used
o A minimum of 10 percent of the tax by other departments such as excise,
administration’s budget must be used customs, etc.
for taxpayer services. Tax Reform Committee
o The decision of the Ombudsman • In 1991, the Indian government established
with respect to grievance redressal a tax reform commission led by Raja J.
of taxpayers should be binding on tax Chelliah, Director of the National Institute
authorities. of Public Finance and Policy (NIPFP).
o Pre-filled tax returns should be made • The major recommendations of the
available to all taxpayers. The taxpayers committee are as follows:
144 Taxation
o Reducing tax rates to reform the • Increase the rate of depreciation for plants
personal taxation system. and machinery.
o Corporate tax rates should be reduced. • Abolish Minimum Alternate Tax.
o Importing inputs at a lower cost through Wealth Tax
lowering customs taxes. • After being eliminated in the Union Budget
o Excise duties are combined with a of 2015, India no longer has a wealth tax.
Value-Added Tax (VAT) system. • Individuals, Hindu Undivided Families,
o Incorporation of the services sector into businesses, and other entities were subject
the VAT system. to the tax when it was in effect.
o The tax base is being widened. • Instead of a wealth tax, the tax authorities
o Improving the tax administration’s apply a surcharge to persons with higher
quality. income under the present direct tax
structure, and this surcharge was doubled
Task Force on Tax Reform
in the Union Budget 2019.
The Indian government established a task
• Individuals with an annual income over Rs.
force on tax reform, led by Vijay Kelkar, with
50 lakhs are subject to a 10% surcharge on
the goal of simplifying the country’s complex
income tax, while those with total income
tax structure in order to reverse the downward
surpassing Rs. 1 crore but less than 2 crores
trend in public finances, improve the tax-
are subject to a 15% surcharge on income
to-GDP ratio by making tax administration
tax.
simple and meaningful, and expand the tax
base with low rates. It gave the following Double Taxation Avoidance Agreement (DTAA)
recommendations: • The imposition of tax by two or more
Administration of Direct Tax countries on the same stated income,
asset, or financial transaction is known as
• The taxpayer services should be expanded
double taxation.
both in quantity, and quality and taxpayers
should get easy access through the internet • When such income is taxed in two nations,
and emails. the overall tax liability will account for a
significant portion of total income.
• Expanding PAN (Permanent Account
Number) to cover all citizens. • This double responsibility can be avoided in
a variety of ways, one of which is through a
• A Tax Information Network should be
tax treaty between the two countries.
established to modernise, simplify, and
rationalise tax collection, particularly TDS • A Double Taxation Avoidance Agreement
and TCS. (DTAA) is a tax treaty signed by two or more
nations with the goal of assisting taxpayers
• Give CBDT the administrative and financial
in avoiding double taxation on the same
authority it needs.
income.
Personal income tax
• It means that there are agreed tax rates and
• Rationalise income tax slabs and eliminate
jurisdiction on specified types of income
surcharge on personal income tax.
arising in a country.
• Exemption for senior citizens and widows.
• In circumstances where a taxpayer is a
• Increase the deduction for contributions to resident of one country but generates
pension funds under Section 80C. income in another, a Double Taxation
Corporate Tax Avoidance Agreement is used.
• Dividend and capital gain taxes should be • For example, suppose an NRI earns income
waived for publicly traded corporations. both in India and let us say Singapore, the
Taxation 145
income earned in India would be taxed both • The tax to GDP ratio has risen consistently
in India and Singapore. If India has a DTAA in in the past 10 years, which can be seen in
place with Singapore, NRIs can either avoid the above graph.
paying tax twice or pay a lower rate of tax.
Note:
The objective of DTAA is?
• India’s gross tax revenues surged 34% in
• To prevent tax avoidance, evasion, and grant 2021-22 to exceed ₹27 lakh crore, lifting
relief. the tax-to-GDP ratio to an at least 23-year
• To improve the cooperation between two high of 11.7%, from 10.3% in the previous
countries’ tax authorities. year 2020-21.
• To attract foreign investments by providing Reasons for the low tax to GDP ratio in India:
relief from double taxation.
• The tax GDP ratio is lower because of the
• To prevent discrimination between narrow tax base. Ex: top 5% of individual
taxpayers. taxpayers contribute nearly two-thirds of
India and DTAA all the taxes collected.
• India presently has DTAA with 80+ • There are large, scale tax evasion and tax
countries. Thus, there are agreed tax rates avoidance. Ex: Just the top 5% of tax-
and jurisdiction on specific types of income paying firms contribute about 95% of the
arising in a country to a tax resident of total corporate tax collections.
another country. • Numerous exceptions and poor tax-paying
• Some of the countries with which it culture.
has comprehensive agreements include
• Weaknesses in tax administration.
Australia, Canada, the United Arab Emirates,
• A complex taxation structure gives
Germany, Mauritius, Singapore, the United
loopholes for tax avoidance.
Kingdom, and the United States of America.
Feature of Indian Taxation System
Tax to GDP Ratio
• The Indian taxation system follows a
• The tax-to-GDP ratio depicts a country’s
progressive method of taxation.
tax revenue in terms of GDP.
• For example, if India’s tax to GDP ratio is • The Indian taxation system is complex and
15%, it means that the government earns prone to tax evasion.
15% of its GDP as tax revenue from the • It includes multiple exemptions, deductions,
public. and rebates.
In general, taxes and GDP are linked; the bigger • Moderately high tax rate (despite a
a country’s GDP, the more taxes it collects. significant reduction in tax rate).
Countries with lower taxes, on the other hand, • Narrow tax base and low tax to GDP ratio.
have lower GDP. Taxation System in Developing Countries and
11.9
major problems
11.2
11.2
10.9 In developing countries, there are two types of
10.4 10.6
10.2
10.1 10
taxation systems; direct and indirect taxes.
• Direct taxes are collected on individuals
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
or businesses and paid directly to the
government, whereas indirect taxes are
Fig 9.8: Total Tax to GDP%
paid indirectly to the government.
146 Taxation
• Direct taxes are levied based on a person’s statistics data due to the informal nature
income or ability to pay, whereas indirect of the economy in many developing nations,
taxes are levied regardless of a person’s as well as financial constraints.
income or ability to pay; they are the • Policymakers are unable to analyse the
same for everyone who buys products and possible impact of large changes to the tax
services. system due to a lack of data. As a result,
• The progressive method of taxation is little structural adjustments are frequently
used for direct taxes, while the regressive favoured over substantial ones, even though
technique is used for indirect taxes. the latter is clearly superior. Inefficient tax
Major problems in Taxation in Developing structures will result as a result of this.
Countries • Fourth, income in developing countries is
Developing countries are facing challenges that often unequally allocated. Although, in this
are coming their way when they are trying to case, increasing large tax collections causes
establish efficient tax systems. the wealthy to pay a higher tax rate than the
• To begin with, the majority of workers in poor. Rich taxpayers’ economic and political
these nations engage in agriculture or tiny clout often allows them to block budgetary
informal businesses. Because they are rarely reforms that would increase their tax loads.
paid a consistent, fixed pay, their earnings • This helps to explain why many developing
will fluctuate with the seasons, and many countries have not fully tapped the potential
of the labourers are paid in cash without a of personal income and property taxes, and
record, calculating income tax is difficult. why their tax systems are rarely progressive
• The working class in these countries will enough (in other words, where the rich pay
not spend their money in major stores that proportionately more taxes).
keep reliable sales and inventory records. Retrospective Taxation
As a result, new ways of obtaining money, The Taxation Laws (Amendment) Bill, 2021, was
such as income taxes and consumption recently introduced in the Lok Sabha by the
taxes, play a role in these economies, and Indian government. The bill aims to get rid of
the government will not be able to generate tax claims made under a 2012 law that taxed
a large amount of revenue from taxes. the indirect transfer of Indian assets.
• Second, without a well-educated and well- Meaning of Retrospective Tax
trained staff, it is difficult for a country • A retrospective tax is imposed on a
to create an efficient tax administration, transaction that occurred before the law
especially when money is scarce to pay good was enacted.
salaries to tax officials and to computerise
• It could be a new charge or a charge on
the operation (or even to provide efficient
previous purchases.
telephone and mail services), and when
• This type of taxation is used by countries
taxpayers have limited ability to keep
to correct any inconsistencies in their tax
accounts.
policy.
• As a result, rather than establishing
• Companies that had deliberately or
rational, modern, and effective tax systems,
unknowingly exploited the tax regulations
governments frequently pursue the path of
in a different way are affected by the
least resistance and construct good tax
retrospective tax.
systems that allow them to use whatever
alternatives are available. Proposed Changes in Bill
• Third, statistical and tax administrations • Amendments to the Income Tax Act and the
will struggle to generate trustworthy Finance Act of 2012 effectively say that no
tax demand would be issued for any indirect
Taxation 147
transfer of Indian assets made before May o This is an endeavour, rather than
28, 2012. arbitration, to achieve a settlement
through the sovereign mechanisms of
• Taxes levied on indirect transfers of Indian
Indian law.
assets prior to May 2012 would be “nullified”
provided certain conditions were met, such Impacts of Retrospective Tax ban on Sovereign
as the dismissal of current litigation and a Right to Taxation
promise that no damages claims would be • India’s sovereign power to tax will not be
lodged. diluted as a result of the revision to the
• It also proposes that in certain instances, retrospective income-tax law, according to
the sum paid by corporations facing a the administration.
lawsuit be refunded without interest. • The change was made after the Supreme
Importance of Curbing Retrospective taxation Court ruled in 2012 that earnings deriving
laws: from the indirect transfer of Indian assets
were not taxable under the existing Income
• While the “sovereign right to taxation”
Tax Act provisions.
is preserved, the amendment also gives
businesses a reasonable opportunity to • The concept behind the limitation on
remedy the matter. retrospective taxation is that a sovereign
government has the authority to tax but
• It is a positive step for international
doing so in retrospect has caused a lot of
investors, and it will lead to an increase in
controversies.
foreign investment.
Limitation to States Sovereignty
• The need of the hour is for the economy to
recover quickly. Foreign investment would • The two most used Bilateral Investment
play a vital role in encouraging quicker Treaties (BIT) provisions to challenge a state’s
economic growth and employment in this taxation measures are expropriation and
approach. the fair and equitable treatment provision.
• This might help restore India’s reputation and • The tax should not be discriminatory, and it
make doing business in the country easier. should not be confiscatory.
• It is consistent with the government’s Way forward:
objective to create a tax climate that is not • To avoid having to go to foreign courts and
confrontational. save money and time, India has to develop
• It’s a great chance for the impacted significant and unambiguous dispute
taxpayers to settle all of their previous resolution processes in cross-border
disagreements and prevent the costs of transactions.
future litigation. • The ease of doing business will benefit by
• Apart from resolving criticism about improving the arbitration ecosystem.
ambiguity, the action is anticipated to Terms
resolve lawsuits with 17 businesses, Surcharge:
including Vodafone and Cairn. • The surcharge is an additional charge and
• The amendment also balances two different not an additional tax.
objectives. • A surcharge of 10% on a tax rate of 30%
o One is the government’s policy of having effectively raises the combined tax burden
a predictable tax framework. to 33%.
o Two, India is concerned about the The objective of surcharge:
adjudication of Indian tax law by foreign • To increase the tax revenue temporarily
tribunals. (additional fund mobilisation).
148 Taxation
• To make the tax system more progressive. Tax Rebate

Cess • A tax rebate is a refund to the taxpayers if
• It is a tax on tax (Tax on Tax) that is levied the taxpayers pay more tax than they are
to fund a certain activity. supposed to.
• Cess is not a long-term source of revenue • Tax rebate helps to lower the tax burden on
for the government, and it is phased out the low-income bracket individuals.
once its function has been met. • Income tax rebates are supposed to be
• It can be imposed on direct and indirect claimed from the total tax payable.
taxes alike. Incidence of Tax
• For example, Education Cess, Swachh • It refers to the point at which a tax is levied,
Bharat Cess, Clean Energy Cess etc. i.e, the person or business on whom the tax
• The government can impose any one of the is levied.
surcharges or cess or both. • A tax’s effect is felt first by the person or
Deduction entity who is subjected to it.
• Tax Deduction is the reduction in tax Impact of Tax
obligation. Under this, the amount of • The incidence of a tax means the extent to
deduction is subtracted from the total which an individual or organisation suffers
income to estimate taxable income. It from the imposition of a tax.
reduces taxable income. • The tax incidence depicts the allocation of
• For example, Under Section 80C, up to Rs. tax liabilities that must be met by both the
1.5 Lakh can be saved. If a person’s income buyer and the supplier.
is Rs. 7 Lakh and he invests Rs. 1.5 Lakh • Impact relates to the tax’s initial burden,
under Section 80C now his taxable income whereas incidence refers to the tax’s
reduces to Rs. 5.5 Lakh (7 Lakh - 1.5 Lakh). ultimate burden.
Exemption • In the case of direct taxes, the impact and
• Tax Exemption refers to expenditure, income, incidence are both present at the same time.
or investment on which no tax is levied. • For Indirect tax, impact and incidence are
• Thus, if a particular income is exempted at a different points.
from tax, it is excluded from the Tax Expenditure
total revenue of the government. This
• Tax expenditures are special provisions
reduces the total taxable income of the
such as exclusions, deductions, deferrals,
taxpayers.
credits etc, given to the taxpayers.
• Examples, are House Rent Allowance (HRA),
• Tax expenditure indicates how much more
Leave Travel Allowance (LTA) etc.
revenue could have been collected by the
• Income tax exemptions are provided on Government if not for such measures.
particular sources of income and not on the
• It shows the extent of indirect subsidies
total income.
given to the taxpayers in the country.
Taxation 149
Q. What is the meaning of the term tax-expenditure? Taking the housing sector as an example,
discuss how it influences the budgetary policies of the government. (200 Words, 10 Marks)
• In the intro, try to define tax expenditure
• In the body,
o In first part discuss various tax expenditure or tax exemptions given in budgets
o In the second part, discuss how tax expenditure influences budgetary policies.
• Try to conclude, and answer with contextual conclusive remarks.
Answer:
A tax expenditure is not related to government expenditure or expenditure incurred by the
government while collecting taxes. But it includes opportunity tax at concessional rates or
as an opportunity cost of giving exemptions, rebates, deductions, credits, and any other
concessions given on the actual rate of taxes. The tax expenditure measures how many
collections of taxes would have been taken if concessions are not given. In 2006-07, for the
first time, the Government laid before Parliament a detailed report on tax forgone or tax
expenditure.
Tax expenditures affect: The budget balance, budget prioritisation in allocation, the effectiveness
and efficiency of fiscal resources, and the scope for abuse by taxpayers, government officials and
legislators
Impact of Tax Expenditure on Budgetary Policies in the Housing Sector:
• Exemption on Principal Amount: Exemption allowed on principal repayments and
exemptions given on interest rates on housing loans.
• Extensions on Tax Incentives by a Year up to the End of Fiscal 2021-22. This includes tax
deductions up to Rs 1.5 lakh on interest on housing loans and tax holidays for affordable
housing projects.
• Housing for all: In order to spur investment in the housing sector, the government is
considering providing tax incentives for certain projects to ensure ‘Housing for All by 2022.
• New Rent House Policy: The draft National Urban Rental Housing Policy has suggested a
host of fiscal incentives to encourage rental housing with a view to achieving the goal of
housing for all by 2022.
• Economic survey: As per Economic Survey 2019-20 Central government has slashed interest
rates on house buildings in advance for government employees. The interest rates have
reduced to 7.9% from 8.3% and would now be linked with 10-year G-sec yields.
• Relaxation of ECBs: The external commercial borrowings guidelines will be relaxed to
provide easy financing for homebuyers who are eligible under Pradhan Mantri Awas Yojana.
Due to reduced tax exemption from the government, a number of people owned their own
houses. The tax expenditure budget comprises estimated revenue losses attributable to
various exemptions, deductions, non-refundable credits etc. These provisions reduce liabilities
of certain types of businesses, individuals etc.
150 Taxation
Laffer Curve • Pollution is an externality that has a

• The Laffer Curve depicts the relationship detrimental impact. For example, the driver
between tax rates and government revenue of a non-compliant car may not suffer
levels. immediately from the exhaust generated by
the vehicle, but everyone behind the vehicle
may suffer as the vehicle travels down the
road. Their exhaust might pollute the air for
everyone in the neighbourhood.
• The government levies a Pigouvian tax on
non-compliant automobiles in order to
TAX REVENUE make the driver bear a greater share of the
expense of any misery they may cause.
Tax Haven
• A tax haven is a country or location with
extremely low “effective” tax rates for
overseas investors.
• Tax havens also share only a limited amount
TAX RATE
of financial data with foreign tax authorities,
Fig 9.9: Laffer Curve if any at all.
• Tax havens do not typically require residency
• The curvature of the Laffer curve indicates
or business presence for individuals and
that as tax rates rise, so will tax revenue.
businesses to benefit from their tax policies.
However, these higher tax revenues will
• A list of some of the popular tax haven
only continue until they reach a peak, after
countries includes the Bahamas, Bermuda,
which they will start to drop.
the British Virgin Islands, the Cayman
• The curve was developed in 1979 by
Islands, Hong Kong, Mauritius, Lichtenstein,
economist Arthur Laffer.
Monaco, Panama, St. Kitts, and Nevis.
• The curve begins at 0% taxation, with
Round Tripping
zero revenue, and then rises to maximum
• It refers to the transfer of illegitimate money
revenue at an intermediate rate of taxation,
through a foreign company (through a tax
often known as the optimum tax rate, with
haven) to invest back in the home country.
maximum revenue, before falling to zero
revenue at a 100% tax rate. • The objective of round-tripping in the
conversion of black/illegal money to white/
• The shape of the Laffer curve is uncertain.
legitimate money.
Tobin Tax
Ad Valorem Tax
• A Tobin tax is levied on the international
• Ad valorem tax (Latin word meaning
flow of short-term capital or hot money
“according to value”) is a tax in which a
which are very speculative.
tax amount is levied on the value of a
• The aim of a Tobin tax was to commodity or transaction.
generate stability in currency markets.
• As with a value-added tax (VAT), it is
• The Tobin tax was proposed by James Tobin in imposed at the time of the transaction.
1972 in the form of a currency transaction tax.
• Property taxes are the most prevalent ad
Pigouvian Tax valorem taxes imposed on real estate.
• A Pigouvian tax is a government levy Specific Tax
imposed on activities that have negative
• Specific tax is a fixed amount for each unit
societal consequences.
of a good or service sold.
Taxation 151
Tax Buoyancy India and BEPS

• The responsiveness of tax revenue growth • India has been heavily involved in the BEPS
to changes in GDP is referred to as this. effort. India has participated actively in
• It’s the relationship between the growth the development of action plans and is
of the government’s tax revenue and the a member of a number of committees,
growth of the economy. working groups, and task-forces tasked
• It’s computed by dividing the increase in with assessing various parts of these plans.
tax revenue by the increase in GDP. • Union Budget 2016 announced an
‘equalisation levy’ of 6 per cent on payments
exceeding over Rs. 1 lakh to online ad
services from non-resident entities.
• A tax is buoyant when revenues increase • This affected multinational companies
for example by more than 5 per cent for a 5 with Indian subsidiaries, like Google and
per cent increase in GDP. Facebook.
Tax Elasticity • India is the first country to levy such tax,
• Tax elasticity refers to changes in tax post the OECD action plan.
revenue in response to changes in the tax • A tax panel has also recommended
rate. expanding the ambit of this levy to cover a
Base Erosion and Profit Shifting (BEPS) wide range of transactions including cloud
• BEPS stands for Base Erosion and Profit computing, online marketing, website
Shifting, which refers to tax planning tactics designing, hosting and maintenance,
employed by multinational corporations to platforms for the sale of goods and services,
avoid taxes by exploiting loopholes and and online use of or download of software
mismatches in tax rules. and applications.
• It is crucial for developing countries since Advance Pricing Agreement (APA)
they rely heavily on corporate income tax, • An APA is an agreement, usually for
especially from multinational corporations. multiple years, between a taxpayer and
• In recent times, MNCs are developing CBDT specifying the transfer pricing
sophisticated tax planning practices to methodology to forecast the pricing of
avoid tax by shifting their incomes/profits future international transactions of the
across the borders by exploiting loopholes taxpayer well in advance.
and mismatches in tax regulations, to take • Transfer price means the price at which
advantage of lower tax rates and, thus, transactions are done between companies
avoid tax payments in the country where part of the same group.
the profit is actually made. • The main goal of an Advance Pricing
• Under the BEPS initiative, the OECD has Agreement is to give assurance to taxpayers
studied methods to amend tax treaties, so that transfer pricing practices may be
tighten standards, and exchange more expected to be predictable and foreseeable.
government tax information, and has • India has framed a legal framework that
developed action plans under the authority gives a legally binding agreement between
of the G20 countries. the taxpayers and the Central Board of
• The BEPS Package includes 15 Action Direct Taxes.
Points that give governments domestic • The Finance Act, 2012, introduced sections
and international tools to combat tax 92CC and 92 CD in the IT Act to provide
evasion. the legal status for the Advance Pricing
Agreement in India.
152 Taxation
• These statutory provisions made effective Central Board of Indirect Taxes and Customs
from 1st July 2012, empowered the CBDT (CBIC)
to enter into an agreement with any • The board is part of the Ministry of Finance’s
person, with the approval of the Central Department of Revenue. It accomplishes
Government, determining or specifying the the following tasks:
manner of determination of transfer pricing o Policy development for Central Excise,
in relation to an international transaction. Customs, Central Goods and Services
Tax Regulation Authority in India Tax, and Integrated GST levy and
Central Board of Direct Taxes (CBDT) collection.
• The Central Board of Revenue Act of 1963 o Smuggling prevention and administration
established the CBDT as a statutory body. in the areas of Customs, Central Excise,
• The CBDT is part of the Ministry of Finance’s Central Goods and Services Tax, IGST,
Department of Revenue. and Narcotics, to the extent that they
• At the same time as providing substantial fall under CBIC’s jurisdiction.
contributions for direct tax policy and The Central Revenues Control Laboratory,
planning, the CBDT is also responsible Central Excise and Central GST
for the implementation of direct tax laws Commissionerate, and Custom Houses are all
through the Income Tax Department. part of the CBIC’s administrative structure.
Taxation 153

10 Government Budgeting
Budget month so that standing committees can

• It is a quantitative expression of a plan of examine the demand for grants.
action for a specific time span, as well as a • Voting on demand for grants in Lok Sabha
tool for planning, execution, and evaluation (LS).
of the plan of action. It is also a method • Passing of appropriation bills.
for determining the most efficient use of a
• Passing of Finance bills.
country’s total resources. A budget can be
Receipt and Expenditure
made for an individual, a group of people,
a business, a government, or just about • The budget’s two most significant
anything else that generates and spends components are expenditures and receipts.
money. • A receipt is the accrual/receiving of money
• Government budgeting is an essential to the government by revenue and non-
element in the planning and control of the revenue sources.
financial affairs of a nation and is made • Expenditure is spending that is made by
necessary because income and expenditure the government for the development of the
do not occur simultaneously. economy of a country.
• The Union Budget is referred to as the • In a balanced budget, total expenditure and
Annual Financial Statement in Article 112 total receipt are equal.
of the Indian Constitution. It’s a forecast of
the government’s revenue and spending for
the coming fiscal year.
Objectives of Budget
• To stimulate economic growth
• Redistribution of Income (Reducing
inequalities) Fig. 10.1: Budget Receipts
• Optimal allocation of resources
Revenue Budget
• Employment generation and poverty
reduction • Revenue expenditures and revenue inflows
are included in the revenue budget. These
Rationale of Budget
receipts and expenditures are related
• To ensure transparency in public finance
to the day to day functioning of the
• To ensure accountability of the government government.
• To ensure advance planning Revenue Receipt
• To ensure financial control of the legislation • These are government revenues, which do
over the executive not create assets, lower liabilities, or cause
Stages of Budget a reduction in the government’s assets.
The budget in India is divided into five steps • They are natural occurrences that occur on
by the Indian parliament: a regular basis.
• Presentation of the budget with Finance • Essentially, these represent the
Minister’s speech. government’s current income receipts from
• In the budget debate in general, after this, all sources.
there is an adjournment of houses for a • Revenue Receipts are further divided into
the following categories:
Government Budgeting 155

Fig. 10.2: Government Budget
o Tax revenue o Non-tax revenue

■ Tax Revenue includes receipts from ■ Non-tax Revenue includes
direct and indirect taxes. receipts from the government’s
■ The direct tax includes income tax, disinvestment proceeds from the
corporate tax etc while indirect tax stake sale in various public sector
includes GST (Goods and Services undertakings.
Tax), Cess, Custom duty etc. ■ Non-tax Revenue will also include the
dividend income which the government

receives as a shareholder of the • Revenue expenditures include expenses for

various public sector undertakings. the day-to-day operations of government
departments and services, debt interest
Non-Tax Revenue payments, and subsidies, among other
The government earns interest on things. It is recurring in nature.
loans it makes, whether they are • Revenue expenditure is defined as any
internal (to state governments, expenditure that does not result in
union territories, and so on) or the production of assets for the Indian
Interest external (to other countries) government.
(outside the country). • Revenue expenditure does not create
Interest income from these loans an asset for the government nor does it
is a significant source of non-tax decrease any liability.
revenue.
Revenue Expenditure
Profits from the selling of public-
sector items are used by the Interest The government pays
government. interest on the debts
Profits and it has taken out both
The government also reaps the
Dividends internally and outside.
benefits of its investments in
other businesses in the form of Salaries, Pension These are paid by
dividends. and Provident the government to
Fund employees working in the
It refers to fees levied by the
government and private
government to cover the expense
sector.
of recurring government services.
Fees Such services include both fiscal Subsidies Subsidies are government
services (cost incurred on printing provided incentives for
of currency etc.) and general certain sectors.
services (community service etc.). Defence Defence expenditures
They refer to payments that are are incurred by the
imposed on people for breaking government on the
the law. purchase of defence
Fines and equipment.
For example, a fee for failing to
Penalties
obey a traffic signal or a penalty Law & order Expenditure incurred
for failing to pay taxes such as expenditures on maintaining law and
income tax or customs charges. order i.e., on police &
Grants from foreign governments paramilitary forces.
and international organisations Social services & Expenditures on
are received by the government. General services social services include
Grants Such grants are not a consistent education, health, and
source of income and are typically other social sectors, as
given in response to a disaster well as tax collection and
such as a war or a flood. other general services.
Table 10.1: Components of Non-tax Revenue Grants The government awards
grants to Indian states
Revenue Expenditure and international
• The government’s expenditures are either countries.
current or obligatory in nature. Table 10.2: Components of Revenue Expenditure

Fig. 10.3: Budget Revenue and Budget Expenditure
Revenue Deficit • For both domestic and international studies,

• It is the difference between the government’s the revenue shortfall is typically expressed
revenue expenditure (consumption as a percentage of GDP.
spending) and its revenue receipts (union • Elimination of the revenue deficit has
or state governments) (current revenues). always been a priority for Union and State
Revenue Deficit = Revenue Expenditure - Governments, as revenue deficit may divert
Revenue Receipt the resources that otherwise would be
• It depicts the extent to which the available for capital investments.
government’s assets and/or liabilities have Effective Revenue Deficit
been reduced in order to meet current • Even if the funds are used for asset creation,
consumption expenditures. the revenue budget includes all grants from
the Central Government to the states/

union territories/other bodies as revenue Capital Receipt

expenditure.
State governments and union
• According to the Ministry of Finance, such
territories, as well as other
tax expenditures contribute to economic
countries, receive loans from
growth through creating assets, and hence
Recovery the federal government. The
should not be regarded as wasteful.
of Loans repayment of such loans is
• A new term, ‘Effective Revenue Deficit,’ counted as a capital receipt
was introduced in the Union Budget 2011- because it diminishes the
12. It excludes revenue expenditures (or government’s assets.
transfers) for the creation of capital assets
The phrase “borrowing” refers
in the form of grants.
to all long-term loans taken
• In 2012, the FRBM Act was revised to
out by the government, both
include the notion of Grants for Capital Borrowings
internally (inside the country)
Asset Creation.
and outside (outside the
• The FRBM Act defines grants for the country).
formation of capital assets as help
These include long term
provided by the Central Government to
capital accruals like National
state governments, local governments,
Saving Certificates, Post Office
autonomous organisations, and other
Other Deposits, Kisan Vikas Patras etc.
scheme implementing agencies for the
Receipts Because they are considered
development of capital assets held by these
agencies or governments. a government responsibility,
they are referred to as capital
• As a result, the Effective Revenue Deficit is
revenues.
the difference between the revenue deficit
Table 10.3: Components of Capital Receipt
and grants for capital asset building.
Effective Revenue Deficit = Revenue Deficit - Capital Expenditure
Grants for creation of capital assets (GoCA) • Capital expenditure is an expense that
• The effective revenue deficit is the either generates an asset or eliminates a
number of capital receipts used for actual liability.
government consumption expenditures. • Capital expenditure is defined by the
Implications of Revenue Deficit Union government as money spent on the
acquisition of assets such as buildings,
• It refers to the government’s failure to meet
land, machinery, and equipment, as well as
its recurring and regular responsibilities.
stock investments.
• It implies that the government is dissaving
or borrowing money from other parts of the Capital Expenditure
economy to meet its spending demands. Government grants loans
Capital Budget to state governments or
Loan Disbursals
• The capital budget includes both capital union territories and also
by the
receipts and capital expenditures. externally (i.e., foreign
Government
Capital Receipt countries, IMF, World Bank,
etc.).
• Capital receipts are those that lead the
government to incur a liability or a loss in Because interest payments
Loan
its assets. They are non-recurring in nature. on loans are included in
Repayments
revenue expenditure, it only
• Capital receipts are utilised for investment by the
includes the capital portion
and are expected to be used by the Government
of the loan repayment.
government to develop plans.

Any expenditure that is done • According to the Constitution, all expenses

on programmes that are incurred during a fiscal year must be paid
mentioned in the current from the Consolidated Fund of India, which
(Five Year) Plan of the centre includes the President’s allowances and
Plan emoluments, as well as expenses linked to
or centre’s advances to state
Expenditure his office. Salary and allowances are paid
for their plans is called plan
expenditure. (The plan and to the Chairman and Deputy Chairman
non-plan classification was of the Council of States, as well as the
removed from 2017-18). Speaker and Deputy Speaker of the House
of Individuals.
This consists of
• Judges of the Supreme Court will have
Capital capital expenses for
their salaries and allowances deducted
Expenditures equipment purchase, and
from the Consolidated Fund of India. Other
on Defence modernization of defence
expenditures that Parliament may declare will
forces.
be charged to the Consolidated Fund of India.
Government spending on
• Special provisions on financial bills (Article
General providing public services
117). — (1) a bill or amendment making
Services like railways, education,
provision for any of the matters of article
health, etc.
110 may be introduced or moved only on the
This includes government President’s advice, and such a bill may not
Other Liabilities
repayments under Other be introduced within the Council of States.
of the
Receipts, such as capital If an amendment is submitted under this
Government •
receipts. article that provides for the reduction or
Table 10.4: Components of Capital Expenditure repeal of any tax, there will be no need for
Capital Deficit a recommendation.
• When capital disbursements of the • If a bill is adopted and put into effect, and
government exceed capital receipts, it spending from the Consolidated Fund of
leads to a Capital deficit. India is incurred as a result of the bill, it will
• Capital deficit term is not used in public not be approved by any of the chambers of
finance or in economics. Parliament unless and until the President
Article 112 Annual plan recommends the bill for consideration.
• The Annual financial plan could be a • Article 114: Appropriation Bills: The
document presented to Parliament every appropriation bill shall be introduced in
twelve months as a part of the Budget Parliament after all the expenses and
process, under Article 112 of the Constitution grants shall take place in the form of grants
of India. The yearly financial plan includes or assets in parliament under article 113.
the government’s receipts and expenditures • In the appropriation bill, no amendment
for the current year, the previous year, and shall be taken place if the amount granted
hence the Budget year. by the Parliament, or the destination of
• The Consolidated Fund of India, the the grant shall be different which will be
Contingency Fund of India, and the Public charged on consolidated funds of India than
Account of India each have their own set of in that condition the person presiding as to
receipts and expenditures. Because of the whether the amendment is inadmissible
“annual financial statement,” the President under this clause.
shall cause to be put before both Houses • Except for appropriations authorised
of Parliament an announcement of the by Parliament, no withdrawals from the
estimated receipts and expenditures of the consolidated fund of India are permitted
government of India for that year. under this Article.

Fig.10.4: Types of Budget and Measures of Government Deficit
• Article 265: Taxes shall not be levied or Six Stages of Passing the Budget in Parliament
collected unless authorised by law. This • Presentation of Budget: The budget will be
indicates that no tax shall be charged or presented on the first day of February in Lok
collected unless authorised by law. It means Sabha by the Finance Minister of our country.
that no tax can be imposed by resolution • General Discussion: The general discussion
or orders. Their law must be passed, and on the budget will start after a few days of its
it must be a legislature of competence presentation in Parliament. The discussion
and covered under the list in the seventh will take place in both the houses of the
schedule. Parliament, and it will last for 3 to 4 days.

Fig 10.5: Type of Deficit
After the discussion, there will be voting for • It means when the government needs
grants in Lok Sabha only. money at its disposal to keep running the
• Scrutiny by Departmental Committee: After administration till the appropriation act is
the discussion is over in houses than there passed.
will be a gap of about 4 weeks, or we say the • It is to withdraw funds from India’s
houses are adjourned for 3 to 4 weeks and consolidated fund.
during this time there are 24 departmental • It is limited to the expenditure side.
committees that will discuss the details of • It is normally granted for 2 months but
grants and schemes with their ministers cannot be extended for more than 6 months
and prepare a report. Then these reports (the maximum gap between 2 sessions).
are submitted to the house of people.
• A vote on the account cannot alter the
• Voting on Demand for Grants: The budget direct taxes because direct taxes are
will now go to Lok Sabha and voting for altered through a finance bill.
demands will be done with different
• It should not be related to taxation and
reports like Rs 25000 crore for defence and
revenue.
Rs 35000 crore for the health ministry in
• Vote on account need has been decreased
this way, different ministry’s reports will be
because the government has shifted its
presented and then voting will be done like
budget presentation from the last day of
yes or no.
February to the first day of February so tax
• Passing of Appropriation Bill: In this, an
planning and implementation by companies
appropriation bill will be presented in the
and the government can be done in advance
Lok Sabha. In this bill, a form of permission
and the government will get more time to
will be taken to withdraw money from the
effectively spend the sanctioned money in
consolidated fund of India, and this money
the budget.
is used to make expenses for grants which
Deficit Measurement in India
are permitted in the budget.
• Deficit measures, in general, the
• Passing of Finance Bill: It is introduced to
government of India reports transactions
give effect to the financial proposal of the
that can be categorised either by the
government of India for the following year.
‘type of transactions’ or by the ‘means of
Vote on account
financing.’
• It is a type of grant which is taken in advance
• The graph below depicts the many types of
from the Central Government to meet their
deficits that India has used and continues
short term expenses.
to use.

Budget Deficit • Deducting net domestic lending from the

• A budget deficit occurs when a government gross fiscal deficit yields the net fiscal deficit.
spends more than it receives in revenue. • The implementation of the FRBM (Financial
• It’s the gap between total spending Responsibility and Budget Management) Act
(including revenue and capital spending) has aided the Union and State governments
and total receipts (revenue receipts and in significantly reducing their budgetary
capital receipts). deficits.
Budget Deficit = Total Expenditure - Adverse Impact of Fiscal Deficit
Total Receipt • It increases public debt which increases
• The practice of showing a budget deficit in future interest liabilities.
India has been stopped since the 1997-98 • It deteriorates the fiscal situation of
budget. the government which adversely affects
Fiscal Deficit developmental expenditure.
• The fiscal deficit is calculated as the • It causes inflation by increasing the
difference between revenue + non- economy’s aggregate demand.
debt producing capital receipts and • It leads to crowding out which refers to
total spending, including loans, and net a reduction in private investment due to
repayments. the increase in interest rate as a result of
Fiscal deficit = Total Expenditure - excessive government borrowing.
(Revenue Receipt + Non • It increases the vulnerability of the domestic
debt creating capital economy to economic shocks because
receipt) it reduces the government’s capacity to
Fiscal deficit = Total Expenditure - Total intervene in the economy to overcome
Receipt except borrowing economic shocks.
(Net borrowing at home • It adversely affects the creditworthiness
+ Borrowing from RBI + of the domestic government which may
Borrowing from abroad) destabilize the macroeconomic situation of
• It calculates the difference between the the country.
government’s consumption expenditure Measures to Reduce Fiscal Deficit
including repayment of loans and the • Reducing Subsidies.
expected income from tax and non-tax • Reducing Expenditure on General
revenues. Administration: The government took
• It also depicts the government’s borrowing some austerity measures to reduce this
requirements from a variety of sources. expenditure like:
• As a result, if the budget deficit grows, the o Reducing five-star hotels meeting.
government will need to borrow more money o Appointed Expenditure Management
from the market or print more money. Commission.
• Its impact on economic development o Better use of technology like video
depends on the use of borrowed funds. conferencing.
• It is the most comprehensive concept of the o The tax base should be broadened and
budgetary deficit, as it takes into account exemptions and rebates in taxes should
the total resource gap of the government. be reduced.
• The Fiscal Deficit is calculated both in o Tax evasion and avoidance must be
absolute terms and also as a percentage rigorously monitored.
of the Gross Domestic Product (GDP) of the
o Restructuring and disinvestment of the
country.
public sector enterprise.

Primary Deficit = Fiscal Deficit -

Does the economy really need a fiscal
deficit? Interest Payment
The difference between the government’s • This value ideally should be negative.
total expenditure and total revenue, excluding • A reduced primary deficit shows that the
borrowing, is known as the fiscal deficit. economy is improving.
Fiscal deficit = Total expenditure – • The fiscal deficit equals the interest
(Revenue receipts + payment if the primary deficit is zero. As a
Non-debt creating capital result, zero primary deficits imply that the
receipts) government only borrows to pay interest.
Non-debt creating capital revenues are • The primary deficit as a percentage of GDP
government receipts that reduce the is mentioned in the Budget paper.
government’s assets while not increasing its Monetized Deficit
liabilities, and hence do not result in debt.
• The government’s borrowing from the
Recovery of loans and earnings from the
central bank (RBI) during the financial year
sale of PSUs are two examples. Borrowing
is measured by the monetary deficit.
will be required to cover the fiscal shortfall.
As a result, it shows the government’s total Monetized Deficit:
borrowing needs from all sources. From a In India, it is a new term adopted since 1997–
financial standpoint Net borrowing at home 98. The Monetized Deficit measures how
+ borrowing from the RBI + borrowing from much the Reserve Bank of India (RBI) assists
abroad = gross fiscal deficit Direct borrowing the government in its borrowing programme.
from the public through debt instruments is In other words, monetary deficit refers to
included in net borrowing at home. a growth in net RBI credit to the central
• Yes, a fiscal deficit is required because government, allowing the government’s
it occurs when a government spends monetary requirements to be easily met.
more money than it receives in taxes and
other sources, excluding debt, during a In other terms, it refers to the central bank’s
given period of time. Raising the fiscal purchase of government bonds to fund the
deficit might theoretically help a sluggish government’s expenditure demands.
economy by providing more money to
• Because RBI borrowings can be both short
individuals, allowing them to spend
and long-term, the monetized deficit is
and invest more. It will decrease the
calculated by adding the net issuance of
slowdown of the economy and decrease
short-term Treasury bills (T-Bills), dated
its negative effect in comparison with
securities (long-term RBI borrowings), and
other countries.
rupee coins held exclusively by the RBI, less
the government’s deposits with the RBI.
Primary Deficit
• Monetized Deficit leads to the printing of
• The primary deficit is calculated by
currency (i.e., an increase in M0) which
subtracting the current year’s fiscal deficit
increases the money supply by multiple
from the government’s interest payments
magnitudes. So, it is highly inflationary.
made throughout the financial year.
• Unlike the Indian rupee is not regarded
• It shows the fiscal situation of the
as a safe-haven currency. As a result, if
government during the current financial
year ignoring the impact of the debt the currency is oversupplied, the rupee’s
burden of the past (borrowing by previous value may fall, resulting in a loss of foreign
governments). investment.

Term of Type of Financing Type of Deficits

Financing
Long term a) Long term
financing financing other
(a+b) than RBI
b) Long term Monetized deficit
financing from RBI (b+c)
Short term c) Short term Gross Fiscal deficit
financing financing from RBI (a+b+c+d+e)
(c+d+e) d) Long term
Taditional budget
financing other
deficit (c+d+e)
than RBI
e) Draw down of
cash
Table 10.5: Financing and Deficits
Deficit
Significance
Measure
Fiscal It is frequently used as a summary gauge of the budget’s macroeconomic impact in
Deficit various developed countries.
In their programmes, the IMF has made this measure the key policy goal.
The Indian government did not start reporting the fiscal deficit until 1991.
Because the difference between receipts and expenditures must be covered by
borrowing, the Gross Fiscal Deficit is a measure of the government’s total borrowing
needs for a given fiscal year.
As a result, it shows the net increase in government debt over the course of a fiscal
year.
Monetized Monetization of deficits, which raises the money supply, is inflationary if the rate of
Deficit increase in the money supply exceeds the rate of increase in the demand for cash
balances resulting from the economy’s growth.
As a result, monetized deficits are a major indicator of the government’s growing
fiscal deficits’ inflationary impact.
Primary It depicts the net increase in the government’s indebtedness due to fiscal activity in
Deficit the current fiscal year, excluding the weight of past debt.
A decrease in the primary deficit reflects the government’s attempts to close the
fiscal gap throughout the course of a fiscal year.
Revenue A positive revenue shortfall indicates that the government is borrowing to cover
Deficit current expenditures.
Table 10.6: Deficits Measure and Significance

Significance of different measures of deficit • Deficit financing has a negative impact on

investment. During high inflation, employees
demand higher wages. If the wages are
increased, it raises the cost of production
which demotivates the investors.
Fiscal Policy
• The use of government income collection
(taxes or non-tax) and expenditure
(spending) to influence a country’s economy
is known as fiscal policy.
Fig. 10.6: Deficit Trends in India • Fiscal policy is the guiding force that
assists the government in determining how
much money it should spend to stimulate
economic growth and how much revenue it
needs to raise to keep the economy running
smoothly.
• Along with the monetary policy, fiscal policy
is critical in governing a country’s economy.
Main objectives of Fiscal Policy
• Fiscal policy aids in maintaining the
Fig. 10.7: Sources of Deficit Financing economy’s growth rate so that the
government may meet its economic
Effect of Deficit Financing
objectives.
The government’s deficit financing has the
• Price stability: It regulates the price level in
following consequences:
the economy so that prices can be managed
Advantages of Deficit Financing when inflation becomes too high.
• Deficit financing does not remove money • There are two types of fiscal policy:
from taxpayers’ pockets while providing the
o Expansionary Fiscal Policy:
government with tremendous resources.
■ It stimulates economic growth
• Borrowing from the Reserve Bank of India
because the government either
is used to fund deficits in India. Interest
spends more, cuts tax rates or both.
payments to the RBI on this debt are
■ It puts more money into the
returned to the Indian government in the
consumers’ hands, so they spend
shape of a dividend.
more which increases the demand
• The government’s financial resources that it
for the goods and services in the
needs to mobilise through deficit financing
economy.
are certain and known ahead of time.
o Contractionary Fiscal Policy:
The disadvantage of Deficit Financing
■ The contractionary fiscal policy goal
• Inflation is caused by an increase in the
is to slow economic growth and
amount of money available in the economy.
stamp out inflation.
• Decrease in average consumption level due
■ Government increases the tax and
to higher inflation.
cuts its spending.
• Increased income disparities, as well as
Fiscal Policy can be Either Expansionary or
deficit financing-driven inflation, aid the
Contractionary
flourishing of the producing classes and
• Contractionary fiscal policy works towards
merchants. Fixed-income earners, on the
contracting the economy like low level or
other hand, suffer from inflation.

decrease in fiscal deficit or decrease in period the government will decrease their
purchasing power of people (it will lead to expenditure and increase the tax rates.
lower consumption of goods and services). • Now the outcome of this policy is it will
• Expansionary fiscal policy works towards soften the recession and moderate the
expanding the economy by increasing the expansion, thereby decreasing fluctuations
fiscal deficit and increasing the purchasing in the business cycle.
power of people (more consumption of • So, a counter-cyclical fiscal policy is
goods and services) and more consumption desirable for the economy.
will give more revenue to the government. Importance of Fiscal Policy in India
Variables that change in a way that is positively • Fiscal policy, in a country like India, aids
and negatively connected with business cycle economic growth by increasing investment
fluctuations in GDP are referred to be pro- rates in both the public and private sectors.
cyclical and counter-cyclical. If fiscal policy
• Fiscal policy aids in the mobilisation
is expansionary during economic booms and
of resources (through taxation) for the
contractionary during recessions, it is said
financing of economic activity.
to be pro-cyclical. Counter-cyclical fiscal
• The fiscal policy encourages investment into
policy, on the other hand, is expansionary
those productive sectors which are
during recessions and contractionary during
considered socially and economically
booms.
desirable.
Procyclical Fiscal Policy
Fiscal Council and Issues with the Present
• We will observe procyclical fiscal policy
System
during the recessionary time when the
• Fiscal councils are independent
government will implement contractionary
governmental institutions tasked
fiscal policy, in which they will raise taxes
with reinforcing public pledges to
and reduce their own spending (government
fiscal sustainability through a variety
expenditure).
of responsibilities, including public
• Now in the expansion period/ or boom
assessments of fiscal plans and
period, the government will use an
performance, as well as the appraisal
expansionary fiscal policy and in this
or production of macroeconomic and
period the government will increase their
budgetary projections.
expenditure and decrease taxes giving relief
• A fiscal council is an independent
to the people of the country.
organisation established by a government
• Now the outcome of this policy is it
to assess the government’s spending and
will deepen the recession and amplify
tax policies. Economists and statisticians
expansion thereby increasing fluctuation in
serve the councils, which do not make
the business cycle.
policy but advise governments and the
• So, the procyclical fiscal policy is undesirable public on the economic implications
for the economy. of government budget and policy
Counter-cyclical Fiscal Policy recommendations. Economic forecasting
• In counter-cyclical fiscal policy we will see is also provided by several fiscal councils.
both the period of recession and boom Fiscal councils assess the government’s
period. In recession periods, the government fiscal policies, plans, and performance
will use expansionary fiscal policy and in against macroeconomic objectives such
this period the government will increase as long-term fiscal sustainability, short-
their expenditure and decrease taxes. to-medium-term macroeconomic stability,
• In the boom period, the government will and other official goals in a public and
use a contractionary fiscal policy and in this independent manner.

Challenges with Fiscal Council will be shifted to the Finance Ministry, which
Fiscal irresponsibility, over-ambitious revenue will be represented by a council.
targets, off-budget financing. • No in-depth discussion in Parliament on
Diluting Finance Ministry Authority: the government’s fiscal stance. Thus, there
Forcing the Finance Ministry to use someone is a lack of demand for accountability.
else’s estimates on purpose will absolve it of Fiscal Consolidation
responsibility for the economy. If the estimates • Fiscal consolidation refers to government
go away, it will simply shift the blame to the initiatives (at both the national and sub-
fiscal council. national levels) aimed at reducing deficits
Executive Control of elected Government: and debt accumulation.
Executive Control of Elected Government: • Fiscal consolidation is a process by which
It is also believed that it will prevent the the government’s financial health improves,
government from moulding or shaping fiscal as evidenced by a reduction in the fiscal
rules depending upon the situation and need. deficit.
It may create rigid rules for fiscal prudence. • In India, fiscal consolidation or the fiscal
roadmap for the government is defined in
Arguments in Favour of the Fiscal Council
terms of the budgetary targets i.e., fiscal
It will improve coordination between the
deficit targets and revenue deficit targets.
centre and states and in policymaking. It will
• Measures to achieve fiscal consolidation:
act as a watchdog by reviewing fiscal policies
based on rules and increasing awareness and o Improves tax revenue and minimizes tax
debate both inside and outside of Parliament. avoidance.
It improves coordination and ensures fiscal o Broadening the tax base and minimizing
stabilisation and debt sustainability. tax concessions and exemptions.
Arguments against Fiscal Council o Better targeting of government
• Fiscal council forecasts are any more credible subsidies and increasing use of Direct
than others. Why not let the Finance Ministry Benefit Transfer (DBT). This will reduce
do its study and defend its figures rather leakages.
than forcing it to rely on a single agency’s o Reduction of excessive/unnecessary
estimate? If the estimates fail, the blame expenditure.
Q. In what way could the replacement of price subsidy with direct benefit Transfer (DBT)
change the scenario of subsidies in India? Discuss. (200 Words, 12.5 Marks)
• In the Introduction, Introduce your answer with a general explanation about direct benefit
Transfer (DBT).
• In Body,
o Discuss how DBT can change price subsidies on a large scale.
• Try to conclude the answer with the increasing scope of DBT and its need.
Answer:
The Direct Benefit Transfer (DBT) Mission was created by the Planning Commission to act
as the nodal point for the implementation of the DBT programmes. To give more impetus,
DBT Mission and matters have been placed in Cabinet Secretariat.

Aim of DBT: DBT is a kind of economic security method where the government transfers a
certain amount of money to the bank accounts of beneficiaries directly to provide an individual’s
product or services subsidy. The DBT initiative was launched in 2013. This method has
proved successful in pilot mode hence the government decided to launch it in a full-scale
manner.
Benefits of Direct Benefit Transfer (DBT)
• Savings on Transportation and Storing Charges: Additional charges on transportation and
storing take place while carrying out PDS. Through DBT, the government does not have
to worry about storing or transportation as people directly buy from the market using the
transferred amount.
• Reduction in Leakages: Fraud beneficiaries add extra pressure on already resources
crunching government welfare programmes. PDS is a good example, after the implementation
of DBT thousands of ghost beneficiaries were removed. By opting for DBT, the leakages
through fake enrolment can be stopped as the amount directly gets credited to a bank
account.
• Enhancement of quality: The PDS system is plagued with low-quality products due to
black marketing by people involved. If DBT is carried out, people can buy products of their
choice and quality without relying on inferior quality under PDS. This will enhance the
quality of product life too.
• Reducing corruption: Corruption is the biggest issue in the implementation of welfare
schemes for poor and marginal sections of the people. DBT will not only help reduce
corruption but also in making governance pro-poor and welfare centric to achieve
constitutional objectives.
• Better targeting: Better targeting of welfare schemes is very essential for achieving desired
objectives of welfare schemes. For example, there are many welfare schemes made for
the poor section but still, India is having a significant poor population. It justifies the poor
targeting of schemes meant for the poor.
• Resource savings: Every year about 2 lakh crore is spent on various subsidy schemes and
huge corruption and leakages in these schemes lead to wastages of thousands of crore
and corruption leads to loss of this money. DBT will help in tackling all these problems and
make schemes efficient and better implemented.
Methods to realise these benefits:
BAPU (biometrically authenticated physical uptake): The Economic Survey 2015-16 pitches for
BAPU for delivering food and kerosene subsidy and partly for fertiliser subsidy. It is mandatory
for cardholders to physically go to ration shops and authenticate their identity through the
biometrics-based point of sale (POS) machines. JAM (Jan Dhan Yojana, Aadhar and mobile)
Trinity may have made significant progress but still faces significant challenges of inclusion
and exclusion along with connectivity.
DBT will definitely help poor sections of society to get their due rights and fruits of development
and welfare schemes meant for them only. Therefore, the significance of DBT and its need for
a time makes the situation imperative to apply DBT on a large scale yet a constant effort to
make it more inclusive and easier is essential

Fiscal Responsibility and Budget Management o Macroeconomic Framework Policy

(FRBM) Act 2003 Statement
In 2003, the Fiscal Responsibility and Budget It includes an estimate of the predicted rate
Management Act (FRBM) was passed. It of GDP growth, the Central Government’s fiscal
establishes the legal and administrative situation, and the economy’s external sector
foundation for budgetary consolidation. The balance.
objectives of the Act are: • The 12th Finance Commission provided
• Ascertain that fiscal management is done incentives to states for enacting Fiscal
in an equal and fair manner. Responsibility Legislations, including
conditional debt restructuring and interest
• Macroeconomic stability is ensured.
rate relief, in order to establish fiscal
• Assuring stronger fiscal and monetary
discipline at the state level (FRLs). Every
policy cooperation.
state has its own FRLs in place.
• Increasing transparency in the government’s
Target by FRBM Act 2003
fiscal operations.
• By 2008-09, the budget deficit must be
• Only in the event of a natural disaster,
reduced to 3% of GDP, according to the
national security, or other extraordinary
FRBM regulation.
circumstances as defined by the Central
• The central government has set a goal of
Government, can the government bypass
reducing the fiscal deficit by 0.3 per cent of
the fiscal consolidation targets.
GDP per year.
• In the event of a breach, the Finance Minister
• By 2008-09, the revenue deficit will be
must examine the reasons for missing the
totally eliminated.
targets and propose corrective measures.
• The revenue shortfall must be decreased by
• In addition, the Act forbids the government
0.5 per cent of GDP each year.
from borrowing from the Reserve Bank of
• Total debt will be decreased to 9% of GDP
India, thereby separating monetary and
over time, with an annual reduction of 1% of
fiscal policy.
GDP.
• The Act also requires the government
• After 2006, the RBI is prohibited from
to present three policy statements to
purchasing the initial issuance of Central
parliament each fiscal year, notably
Government securities.
o Medium Term Fiscal Policy Statement
Amendments to FRBM Act 2012
It sets out three-year rolling targets for five
• The Fiscal Responsibility and Budget
specific fiscal indicators in relation to GDP at
Management Act of 2003 was updated by
Market Prices, namely,
the Finance Act of 2012. It stipulated that, in
o Revenue Deficit addition to the three existing publications,
o Effective revenue deficit, the Central Government will present a fourth
o Fiscal Deficit, document, the Medium-Term Expenditure
o Tax to GDP ratio Framework Statement (MTEF).
o Total outstanding Debt as a • Amendments to the FRBM Act were made in
percentage of GDP response to the 13th Finance Commission’s
o Fiscal Policy Strategy Statement recommendations.
• The change to the FRBM Act in the direction
It outlines the government’s fiscal strategic
of expenditure reforms has two key features:
priorities for the fiscal year, including taxation,
loans, spending, and investments, as well o Effective Revenue Deficit
as administered pricing, borrowings, and o Medium Term Expenditure Framework:
guarantees. It will set a 3-year rolling target for
expenditure indicators.

• As per the 2012 Amendment, the Central

• In addition, the government has been seen
Government has to take appropriate
manipulating revenue and expenditure
measures to reduce them:
accounts to meet deficit targets, such
o Fiscal deficit to 3% of GDP by 2015. as lowering capital expenditure and
o Revenue deficit to less than 2% of GDP demanding interim dividends from Public
by 2015. Sector Undertakings (PSUs) ahead of
o Effective revenue deficit to be eliminated schedule, among other things.
by 31st of March 2015. • In addition, the FRBM Act ignores the
Significance of FRBM Act: possibility of a negative link between bank
lending (monetary expansion) and fiscal
• It creates the legal and administrative
imbalance (fiscal expansion). To put it
foundation for budgetary consolidation. It
another way, if credit growth slows, the
calls on the federal government to reduce
fiscal deficit may need to rise, whereas
the budget deficit, erase the revenue
if credit growth accelerates, the fiscal
deficit, and achieve revenue surpluses in
deficit should drop — all of this is done
the next years.
to guarantee that the economy has an
• The Act makes budgetary consolidation
adequate money supply.
necessary not just for the current
administration but also for future • Both money supply growth and credit
administrations. expansion have decreased in relation to
GDP growth, according to data on bank
• As a result of the FRBM Act, both the
credit, money supply growth, and GDP.
federal government and the states have
The budget deficit has been reduced as a
improved their fiscal efficiency.
result of the FRBM Act, but the emerging
• Prior to the subprime crisis, the act aided
economy has been denied much-needed
in strict adherence to the path of fiscal
investment.
contraction, allowing adequate fiscal
space to undertake countercyclical fiscal N K Singh Committee Review of FRBM
policy (strategy by the government to
Under the chairmanship of N. K. Singh,
counter boom or recession through fiscal
the Government of India established
measures). In 2007-08, the government
the Committee in 2016 to assess the
was able to reduce the budget deficit to 2.7
implementation of the FRBM Act (Nand
percent of GDP and the revenue shortfall
Kishore was the former Revenue and
to 1.1 percent of GDP thanks to this policy.
Expenditure Secretary.) Recommendation of
Limitations of the FRBM act the committee:
• Although deficits have decreased • Public debt to GDP ratio
significantly, this is mostly owing to cuts
o It should be seen as a fiscal policy
in critical areas of the economy such as
anchor for the medium term.
education and health care. The Union
o By 2023, the overall debt-to-GDP ratio
government’s share of GDP spent on
of the federal government and states
development has dropped over time.
should be reduced to 60%. (comprising
• According to an examination of the
of 40 per cent for the Centre and 20 per
state revenue account for development
cent for States).
expenditures, virtually all development
• Fiscal deficit
sectors have been reduced throughout
the FRBM era. o The Committee agreed to use the fiscal
deficit as the operating aim for reducing
the national debt.

o The centre should lower its fiscal deficit • Fiscal consolidation responsibility for
from 3.5 per cent in 2017 to 2.5 per states
cent by 2023 in order to achieve fiscal o The Committee points out that the
consolidation. state government’s financial situation
• Revenue deficit is critical following increased resource
o The Committee also recommended transfers to them (Fourteenth finance
that the central government reduce Commission award).
its revenue shortfall by 0.25 percent of o The state government should reduce
GDP every year, from a projected value its debt objective to 20% of GDP, down
of 2.3 percent in 2017 to 0.8 percent by from the current 21%.
2023. • Congruence of Fiscal and Monetary Policy
o Both monetary and fiscal policies must
• Independent Fiscal Council
support growth and macroeconomic
o It was suggested that an independent
stability, according to the FRBM Review
Fiscal Council be established.
Committee.
o The Council will advise the government • Annual targets as recommended by the
in a variety of ways. committee are as follows:
o Key macro indicators such as real and
Year Debt/ Fiscal Revenue
nominal GDP growth, tax buoyancy, and
GDP Deficit Deficit
commodity prices will be forecasted.
• Escape Clause 2017-18 47.3 3.0 2.1
o In the form of escape clauses, the 2018-19 45.5 3.0 1.8
committee recommends fiscal flexibility 2019-20 43.7 3.0 1.6
to go over or below the fiscal deficit 2020-21 42.0 2.8 1.3
targets.
2021-22 40.3 2.6 1.1
o The Committee established a 0.5 per
cent budget deficit target as an escape 2022-23 38.7 2.5 0.80
clause. Table 10.7: Annual Targets recommended by NK Singh
Committee
Q. What are the reasons for the introduction of the Fiscal responsibility and Budget Management
(FRBM) act, 2003? Discuss critically its salient features and their effectiveness.
• In the Intro try to write in brief about the FRBM act.
• In Body,
o Discuss the purpose and objectives of the FRBM act 2003.
o Discuss the utility and failure of the Act
• Try to conclude your answer by mentioning the NK Singh committee.
Answer:
The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which
set targets for the government to reduce fiscal deficits. In 2016, the government set up a
committee under NK Singh to review the FRBM Act. The government believed the targets were

too rigid. The committee recommended that the government should target a fiscal deficit of 3
percent of the GDP in the years up to March 31, 2020, cut it to 2.8 percent in 2020-21 and to
2.5 percent by 2023.
The purpose and objectives of the acts can be understood in the following manner.
It seeks to foster fiscal discipline in the Central Government and achieve a balanced budget
with effective revenue management. The objective of the FRBM Act was to inculcate the habit
of fiscal discipline in the governance. It fixes targets and suggests means of reducing fiscal and
revenue deficits.
Objectives Under The Act:
• Reduction and Elimination of revenue deficit by 2008-09. Thereafter, build up an adequate
revenue surplus.
• Reduction of fiscal deficit to no more than 3 percent of GDP at the end of 2008-09.
• Reduce the Gross Fiscal Deficit (GFD) by March 31, 2008.
• Institutionalise India’s financial discipline.
• Improving macroeconomic management.
• Bring transparency to the fiscal management of the country.
• To introduce more equitable and manageable debt over the years.
• The act aims to bring fiscal stability to India over the long run and additionally gives
necessary flexibility to RBI to control inflation.
The Central Government shall lay in each financial year before both houses of Parliament the
following statements of fiscal policy along with the annual financial statement and demands
for grants:
• The Medium-term Fiscal Policy Statement.
• The Fiscal Policy Strategy Statement.
• The Macro-Economic Framework Statement.
The utility of the Act can be understood as it has given a framework within which the government
has to outline and manage its fiscal deficit. Keeping fiscal deficit within a given target will
improve confidence within the Indian economy and increase investment, which further boosts
economic growth. Fiscal deficit is one of the very important economic tools which decides
countries’ credit sovereignty in the global economy.
• Unstable Targets: However, the targets set under the original act have been periodically
changed or amendments made within the act due to unforeseen conditions. For example,
during the 2008-09 subprime crisis government revised targets under the act and successive
governments have failed to achieve the targets of the fiscal deficit underact.
• Debate on the feasibility of the Act: After 17 years of enactment of the Act there is debate
about whether the Government of India should continue with the target or not.
o One group is against setting Fiscal Deficit targets, as India is a developing nation
and it needs to spend a lot of money on creating social and capital assets which are
prerequisites for growth and development. The upper ceiling on the expenditure of the
government will force the Government to reduce spending.
o The opposite group which is in favour of the FRBM Act argued that missing the targets
will lead to higher unnecessary targets, inflation, increased burden of debt and facing
several other microeconomic problems.

• Infrastructure and SDGs: Spending on social infrastructure to create productive assets is

necessary to form India’s target to achieve Sustainable Development Goals and improve its
ranking on Human Development Index. But criticism is that the act prohibits the Government
from higher spending.
• Agriculture and Monsoon: The vagaries of monsoon and one of the largest dependent
populations on agriculture and over-optimistic suggestions of the task force, which is in
charge of the development of the target, highlighted some of the potential failures of the act.
Hence, following fiscal targets and increasing social spending is the need of the hour. As NK
Singh committee underlines that there are problems in setting up fiscal deficit targets in
external situations or pandemic like situations. For example, in the 2020-21 financial year, the
government has to borrow more for social sector spending under various programmes of ATMA
NIRBHAR BHARAT Abhiyaan.
Types of Budget Performance Budget

Zero Based Budgeting • The technique of generating budgets based
• Under Zero Based Budgeting, Ministries have on the link between input cost and projected
to justify expenditure on every project on returns is known as performance-based
the basis of its merit (cost-benefit analysis) budgeting.
annually afresh. • The major aim of performance budgeting is to
• Unlike a standard budget, which is based improve the efficiency of public expenditure
on past budgets, zero-based budgeting since financial resources are allocated
starts from scratch. according to objectives and purposes.
• Zero Base Budgeting was developed by • From 2007-08 onwards, the Performance
Peter Pyhrr in the 1970s. India adopted this Budget was merged with the Outcome
in practice in 1997-99. Budget.
• The main benefit of Zero-base budgeting are: Outcome Budget
o Efficient resource allocation, as is based • The Outcome Budget is a report on how
on cost and benefits. various Ministries and Departments used
o Prioritising the allocation of resources is the money from the previous year’s budget.
another feature of ZBB. • It assesses the developmental outcomes
o ZBB allows close examination and of all government programmes and
scrutiny of each programme and public determines if funds were spent for the
spending. intended purpose.
o ZBB helps policymakers to achieve more • In 2005-06 Outcome Budget was first
cost-effective delivery of public services. introduced in India. Since then, the
Government has continued to release annual
• Limitations of Zero-base budgeting are:
Outcome Budget Reports with incremental
o There is a certain expenditure that
changes and without any reference to the
violates cost-benefit analysis i.e.,
previous year’s performance.
Defence, foreign relations etc.
• All Ministries have to prepare outcome
o Zero base budgeting is too complex and
budgets to make the budgeting target
needs detailed attention and analysis.
oriented.
o There is certain expenditure upon which
Balanced Budget
the government/parliament does not
• A balanced budget is one in which the
have the power of scrutiny (charged
predicted government expenditures in a
expenditure in India).

given fiscal year are equal to the expected • It entails assessing the effects of a budget
government receipts. on men and women and allocating resources
• In this, there is no budget deficit but could accordingly.
have a budget surplus. • The motivation for gender budgeting
Surplus Budget stems from the awareness that resource
• In a given fiscal year, a surplus budget is one in allocation in national budgets affects men
which expected government income exceeds and women differently.
estimated government expenditures. • Women constitute 48% of India’s population,
• Because of the desire for the government but they fall behind men on many socio-
to spend more money and decrease taxes, economic indicators like education, health,
surplus budgets are uncommon in modern economic opportunities, skills etc.
economies. • Thus, they require special attention due
Deficit Budget to their vulnerability and lack of access to
• A deficit budget is one in which the predicted resources.
government expenditures in a given fiscal • Since 2005-06, the Expenditure Division of
year exceed the expected government the Ministry of Finance has been issuing a
receipts. note on Gender Budgeting every year.
• It is best suited for developing countries like Golden Rules of Budgeting
India. • The golden rule of budgeting argues
• Deficit budgets help create more demand that a government can borrow only for
and boost economic growth. capital expenditures and not for revenue
• Here, the government incurs excessive expenditures.
expenditure to improve the demand for • To put it another way, the government
goods and services which helps in reviving should only borrow to fund initiatives that
the economy. benefit the entire economy, and current
Gender Budget spending should be covered and supported
by existing taxes.
• Gender budgeting is a strategy for
governments to use fiscal policy to promote • The golden rule of budgeting is that the
equality. government’s budget should have no
revenue deficit.
Q. Women empowerment in India needs gender budgeting. What are the requirements and
status of gender budgeting in the Indian context? (200 Words, 12.5 Marks)
• In the Intro, try to Start your answer by defining Gender Budgeting or Women empowerment.
• In Body, Explain the requirements and status of gender budgeting.
• Try to conclude the answer as per the context.
Answer:
Gender Budgeting is a powerful tool for achieving gender mainstreaming so as to ensure that
benefits of development reach women as much as men. It is not an accounting exercise but
an ongoing process of keeping a gender perspective in policy/ programme formulation, its
implementation and review. Gender budgeting entails the dissection of the Government budgets

in order to establish its gender differential impacts and ensure that gender commitments are
translated into budgetary commitments.
Current status of gender budgeting in India:
• Gender Budget Statement (GBS) was first introduced by the Union government in 2005-06.
Various ministries and departments provide information to the Finance Ministry based on
which gender budgeting is prepared.
• Ministry and Government Departments have been instructed to open Gender Budgeting
Cells (GBC). Presently, 57 Ministries and Departments have established GBC.
• Over the years budgetary allocations for women have remained constant at 5.5 per cent of
the GDP.
• Only one-third of all the demands for the grant presented to the Union government is
reported in the gender budgeting statement.
• Of the total budgetary allocation of the Ministry of Women and Child Development, only 15%
of the amount is actually spent on Women and Women related schemes.
Requirements of Gender budgeting for women empowerment in India:
• There are certain women issues which can be attended to on priority through gender
budgeting. For example, regarding women’s security, the specific budgetary allocation has
been done under the Nirbhaya fund.
• Gender budgeting aims at making society more gender-equal by allocating resources to
programmes and schemes that will reduce and eliminate prejudice existing against a
particular gender.
• With a literacy rate of just about 65%, and making up 48% of India’s population, women
lag behind inequitable participation in the economy (Labour force participation is just
33%). Financial allocation through gender budgeting serves as a potent tool to ensure the
economic empowerment of women (e.g. differential rates for men and women in property
tax rates etc.).
• Gender budgeting helps in the assessment of the extent to which the sector’s policy
addresses gender issues and gaps. This keeps women’s empowerment a priority agenda of
the government.
Hence Gender Budgeting is a very important tool for ensuring women’s empowerment and
achieving certain Constitutional provisions made under DPSP and Fundamental Rights. There
are certainly encouraging trends over the past couple of years.
Ways and Means Advances (WMA) • The WMA is only valid for 90 days.
• The Reserve Bank of India (RBI) provides • The Repo Rate is now being applied to WMA
the central and state governments with a loans.
temporary loan facility. Ways and Means • An overdraft occurs when a WMA loan is
Advances is the name of this type of loan maintained for over 90 days (such overdraft
(WMA). is charged at 2 percent more than the Repo
• It was created in 1997 to address Rate).
discrepancies between government • There are two kinds of Ways and Means
receipts and payments. Advances:
• WMA limitations are set by the government o Special WMA or Special Drawing Facility
in agreement with the RBI at the beginning ■ It is secured by the state’s holdings of
of each fiscal year. government securities as collateral.

■ SDF has an interest rate that is 1% Foreign governments, and international

■
lower than the Repo Rate. financial institutions, such as the IMF,
o Normal WMA are examples of foreign creditors.
■ These are unsecured advances ■ The major instruments covered
extended at the bank rate. under External Debt are as follows:
■ The Government is given a 1. Commercial Borrowing
conventional WMA after the special 2. NRI Deposit
WMA limit has been reached.
3. Multilateral debt refers to debt
Public Debt or Sovereign Debt owed to multilateral institutions
• Public debt is nothing, but the total amount such as the Asian Development
borrowed by the government. Bank (ADB), the International
• According to Article 292 of the Indian Bank for Reconstruction and
Constitution, the government of India has Development (IBRD), and others.
the authority to borrow amounts set by 4. Long and Short-Term Debt
Parliament from time to time. ■ Commercial Borrowing has the
• Since the Union government depends heavily highest share of total external debt,
on market borrowing to meet its operational followed by NRI deposit and short-
and developmental expenditure, the study of term debt.
public debt becomes key to understanding ■ The share of US dollar-denominated
the financial health of the government. debt has the highest share in
• The debt to GDP ratio is used by investors external debt followed by the Indian
to measure a country’s ability to make future rupee, SDR, Japanese Yen and Euro.
payments on its debt. • Debt to GDP of the central government has
• The following two groups make up India’s been consistently reduced, especially after
total Central Government Liabilities. the enactment of the FRBM Act (2003).
o Internal Debt • This is an outcome of each fiscal
■ Internal debt, also known as consolidation attempt as well as relatively
domestic debt, refers to the portion strong GDP growth.
of the total government debt that is 60
owing to domestic lenders.
Percent of GDP
■ It is the money borrowed by the 50
government from its own citizenry.

■ Internal debt constitutes more than 40
93 percent of the overall public

debt. 30 P)
6
20 3
20 5
20 -18
2
9
0
7
20 4
20 6
20 7
5
1
-0
-1
-1
-1
-1
-0
-0
-1
9(
-1
-1
-1
-0
-0
■ The major instruments covered

17
12
14
11
13
16
15
10
05
09
-1
08
06
07
04
20
20
18
20
20
20
20
20
20
20
under Internal Debt are as follows:

1. Dated Securities Fig. 10.8: Trend in Centre’s Debt-GDP Ratio
2. Treasury-Bills Public Debt Management of the Union
3. Securities issued against Small Government in India
Saving
• The ultimate goal of the Central
4. Market Stabilization Scheme Government’s debt management policy, as
(MSS) Bonds stated in the Central Government’s status
o External Debt paper (November 2010), is to “meet Central
■ Foreign creditors are owing to the Government’s financing needs at the lowest
external debt. possible long-term borrowing rates while

also keeping total debt within sustainable o External debt, Ministry of Finance,
levels.” Office of Aid and Accounts Division
• The government’s public debt management o Other liabilities, such as deposits, minor
policy, according to the Fiscal Policy Strategy savings, reserve money, and so on, are
Statement for 2012-13, centres around a handled by the Ministry of Finance,
steady reduction of the public debt-to-GDP Budget Division, and Reserve Bank of
ratio. India.
• This is in keeping with the goal of lowering Findings from the Economic Survey 2020-2021:
the debt servicing risk and freeing up fiscal Interest Rate Growth rate Differential (IRGD)
space for development operations. The difference between the interest rate and
• The government’s funding policy is based the growth rate in an economy is known as
on the following principles: the interest rate growth rate disparity. “If the
o More reliance on domestic borrowings interest rate paid by the government is less
over external borrowing. than the growth rate, then the intertemporal
o Market borrowings should be preferred budget facing constraint no longer binds the
over instruments that carry administered government.” This phenomenon shows that
interest rates. debt sustainability depends on the “interest
o Debt portfolios are being consolidated. rate growth rate differential” (IRGD).
o To boost liquidity in the secondary • Extremely low-interest rates, which have
market, a broad and deep market resulted in negative IRGD and, on the one
for government securities should be hand, have limited monetary policy, have
developed. prompted a rethinking of fiscal policy’s role
Institutions Responsible for the Management in advanced economies.
of Public Debt • The same phenomenon of a negative IRGD
• The Indian Constitution allows the in India is not due to lower interest rates
government’s executive branch to borrow but due to much higher growth rates –
money using the Consolidated Fund of India which must prompt a debate on the good
as collateral. features of fiscal policy, especially during
slow growth of the economy and economic
• The borrowing programme is implemented
crises.
by RBI as a representative of the government
(both the Union and the States). • In the special context of growth and debt
sustainability, this confusion also comes
• The Reserve Bank of India Act, 1934, grants
from the fact that the academic and policy
RBI the necessary statutory authority for
literature primarily focuses on economies
debt management.
of the advanced level where causality is
• While the Reserve Bank is required to
endangered by lower potential growth when
manage the Union Government’s public
compared to India.
debt, it controls the public debt of the
• Because the COVID-19 pandemic has caused
individual state governments through an
a demand shock, active fiscal policy –
arrangement.
which recognises that fiscal multipliers are
• The following are the jurisdictions of the
disproportionately higher during economic
several authorities in charge of public debt
crises than during booms – can ensure
management:
that the full benefit of seminal economic
o Domestic Marketable Debt, which reforms is realised by limiting potential
includes cash management bills, capacity loss. Because the IRGD is likely to
treasury bills, and dated securities, is remain negative in the future, fiscal policy
defined by the Reserve Bank of India that stimulates growth will result in lower
(RBI). debt-to-GDP ratios.

• Indeed, given India’s economic potential, • In India, federal payments to the states are
even in the worst-case scenarios of the made in three ways:
economy, debt sustainability is unlikely to o Share of central taxes devolved to states
be a worry, as proven by samples collected o Grants from the federal government
till 2030. to the states are further divided into
• While admitting critics’ counter-argument statutory and non-statutory grants, as
that governments have a natural inclination well as plan and non-plan grants.
to spend, the Survey aims to give the ■ Statutory grants:
conceptual foundation for the government
1. The Finance Commission has
to be more relaxed about debt and fiscal
recommended statutory grants
spending amid a slowing economy or a
to fill the revenue shortfall.
recession. Instead of fiscal recklessness,
2. Assisting in humanitarian efforts
the Survey will advocate for more
following natural disasters.
aggressive fiscal policy. It’s a plea to end
the asymmetric prejudice against the fiscal ■ Non-Statutory grants, comprising:
policy that has developed as a result of Plan grants
intellectual anchoring. 1. State plan schemes
Fiscal Federalism 2. Central plan schemes
• The separation of governmental duties and 3. Centrally sponsored schemes
financial relationships among different 4. Special schemes for North
levels of government is referred to as fiscal Eastern council etc.
federalism. ■ Loans from Centre
• The goal of fiscal federalism is to enable 1. Plan loans
national and subnational governments to 2. Non-Plan loans including Ways
operate in a way that maximises resource and Means Advance
efficiency and creates an environment in
• In recent years, the fiscal relationship
which all economic variables make effective
between the federal government and state
use of resources.
governments has shifted dramatically.
• Fiscal federalism has a long history
• Since 2015-16, three significant
in modern India, dating back to the
modifications in union-state budgetary
Government of India Acts of 1919 and 1935.
relations have been implemented:
• The 1935 Act provided for the sharing
o The Planning Commission was abolished
of Center income and the distribution
by the Union Government in January
of grants-in-aid to provinces, whereas
2015, and the NITI Aayog was constituted
the 1919 Act provided for a separation of
in its place.
revenue heads between the Center and the
o Fundamental changes have been
provinces.
introduced in the system of revenue
Division of Functions and Resource
transfers from the centre to the
• Article 246 and the Seventh Schedule of the states. The Centre has devolved higher
Indian Constitution allocated authority and taxes (from 32% to 42%) to the states
topics between the Union and the states. from the 2015-16 fiscal year onwards
• The Indian Constitution establishes as recommended by the Fourteenth
a particular division of taxing powers Finance Commission.
between the Union and the states, as well o The Goods and Services Tax (GST), and
as a portion of the resources available to the formation of the GST Council, allow
the Centre. the federal, and state governments to
collaborate, and make decisions.

• In terms of absolute amount, and as a Fifteenth Finance Commission

percentage of GDP, total transfers to States Recommendations
have risen between 2014-15 and 2019- 20. Vertical Devolution (Devolution of Taxes of the
Union to States)
• It has advocated keeping vertical devolution
at 41%, as it was in its interim report for
2020-21. It is at the same level as the 14th
Finance Commission’s recommendation of
42 percent of the divisible pool.
• Due to the change of the erstwhile state
of Jammu and Kashmir into the new Union
Territories of Ladakh and Jammu and
Kashmir, it has requested a 1% adjustment.
Horizontal Devolution
Fig 10.9: Total Transfers to States & UTs
The overall devolution formula is as follows,
Finance Commission based on the principles of equality, need, and
Under Article 280 of the Constitution, the performance.
President of India appoints the Finance 14th FC 15th FC
Commission every five years. It makes Criteria
2015-20 2020-21
recommendations on the financial ties
between the centre and the states. Its primary Income Distance 50 45
responsibilities are as follows: Population (1971) 17.5 -
• To assess the state of the Union’s and state Population (2011) 10 15
government’s finances. Area 15 15
• Recommend that they split the tax burden.
Forest Cover 7.5 -
• Establish the principles that will determine
Forest and Ecology - 10
how these taxes are distributed across the
states. Demographic
- 12.5
Performance
• The first Finance Commission was
established in 1951, and there has been a Tax Effort - 2.5
total of fifteen since then. Total 100 100
• According to the recommendations of the Table 10.8: Devolution Formula of 14th and 15th
State Finance Commission, the Finance Finance Commission
Commission is also expected to recommend Performance-Based Grants and Incentives to
ways to improve the Consolidated Fund the States:
of the State in order to supplement
These grants and incentives revolve around
the resources of the municipalities and
four major themes.
panchayats in the State.
• The 1st is the social sector, which has
• The Finance Commission’s recommendations
concentrated on education and health.
are advisory in nature and hence do not
• The second is related to the rural economy,
obligate the government.
which has emphasised the agriculture
• In 2017, the 15th Finance Commission
sector and the maintenance of rural roads.
was set up under the chairmanship of
• The economy of rural areas plays a vital role
N.K. Singh.
in the country as it encompasses 2/3rd of

the country’s population, around 70% of Consolidated Fund of India

the total workforce and approximately 46% • All revenues (both tax and non-tax revenue)
of national income. received by the Union government, as well
• Third, administrative and governance as all loans raised through the issuance of
reforms under, which it has suggested T-bills, external and internal loans, and all
grants for the judiciary, statistics and money received by the Union Government
aspirational districts and blocks. in repayment of loans, form a consolidated
fund known as the “Consolidated Fund of
• Fourth, it has created a performance-based
India,” according to Article 266 (1) of the
incentive mechanism for the power sector
Indian Constitution.
that is not linked to grants and provides
• The government cannot withdraw the
States with a substantial additional money from the Consolidated Fund unless
borrowing window. such withdrawal is voted in the Lok Sabha.
Fiscal Space for Centre • The CAG (Comptroller and Auditor General)
• The total 15th Finance Commission of India audits these Funds and reports to
payments (devolution + grants) account for the Union and State legislatures when proper
about 34% of anticipated Gross Revenue accounting procedures are not followed.
Receipts to the Centre, allowing the Charged Expenditure
government to satisfy its resource needs • According to Article 112 (3) and Article
and invest in national development goals. 202 (3) of the Constitution, the following
expenditure does not require to be
Grants to Local Governments
voted and such expenditure is charged to
• Along with grants and incentives for municipal
the Consolidated Fund of India. They include:
public services and local government
o Salary, allowances and pension for the
bodies, it incorporates performance-based
President and Governors of States,
grants for the incubation of new cities and Speaker and Deputy Speaker of the Lok
health grants to local government bodies. Sabha, the Comptroller General of India
• Only cities/towns with populations of less and Judges of the Supreme and High
than a million people are recommended for Courts.
basic funds for urban local bodies. With the o Interest and other debt-related costs
support of the Million-Plus Communities owed by the government, as well as any
Challenge Fund, all awards for million-plus monies necessary to satisfy any court
cities are performance-based (MCF). judgement owed by the government.
• The sum of MCF is related to how well these Fiscal Neutrality
cities perform in terms of improving air • Fiscal neutrality means that the
quality and meeting service level standards government’s overall fiscal policy has
no effect on the economy’s aggregate
for urban drinking water supply, sanitation,
demand.
and solid waste management.
• Fiscal neutrality is a situation where demand
Disaster Risk Management
is neither stimulated nor diminished by
Mitigation funds should be established at both fiscal policy.
the national and state levels, in compliance with • Fiscal neutrality is demonstrated by a
the Disaster Management Act. Community- balanced budget, in which government
based and local-level efforts that decrease spending is virtually entirely funded by tax
hazards and promote ecologically sustainable receipts. In other words, tax revenue is
settlements and livelihood patterns should be equal to government expenditure.
supported by the Mitigation Fund.

Twin Deficit NABARD and has a corpus of Rs.5,000

• When a country has both a current account crore, would be quadrupled.
and a budget deficit, it is known as a twin • Reinvigorating Human Capital
deficit. o The Union Government stated that the
• It’s also known as a twofold deficit. recently announced National Education
• India is an example of a country with a twin Policy (NEP) has received a positive
deficit. response and that over 15,000 schools
The Budget 2021-22 will be qualitatively enhanced to
Proposals under Budget 2021-22 will further embrace all aspects of the NEP.
strengthen the Sankalp of Nation First, Strong o In addition, the budget promised the
Infrastructure, Healthy India, Good Governance, establishment of 100 additional Sainik
Doubling Farmer’s Income, Education for All, Institutions in conjunction with NGOs,
Women Empowerment, Opportunities for private schools, and states. A Higher
Youth, and Inclusive Development, among Education Commission of India, as an
others. This budget rests on six pillars. umbrella agency with four independent
• Health and wellbeing: There has been a vehicles for accreditation, regulation,
significant rise in investment in health standard-setting, and funding, was also
infrastructure, with the Budget allocation for proposed in the budget.
Health and Wellbeing in BE 2021-22 being Rs. o The government planned to create a Central
2,23,846 crores, up from Rs. 94,452 crores in University in Leh to provide accessible
BE 2020-21, a 137 percent increase. higher education in the Ladakh region.
• Physical & Financial Capital, and • Innovation and R&D
Infrastructure
o Our manufacturing sector, according
to the Finance Minister, must grow in
double digits on a continual basis for a
USD 5 trillion economy.
o To achieve this goal the government has
committed nearly Rs. 1.97 lakh crore in
the next 5 years starting FY 2021-22.
• Inclusive Development for Aspirational
India:
o Agriculture and allied industries,
farmers’ welfare and rural India, migrant
Fig. 10.10: Innovation and R&D Components
workers and labour, and financial
of Budget 2021-22
inclusion would all be included under
this pillar, according to the Finance • Minimum Government and Maximum
Minister. Governance
o The Indian government has increased o In recent years, the Union government
the agricultural credit target to Rs. 16.5 has suggested a number of modifications
lakh crore in FY22 in order to provide to Tribunals in order to speed up the
appropriate credit to our cultivators. delivery of justice, and it intends to
Similarly, the Rural Infrastructure take other efforts to improve Tribunal
Development Fund’s budget was performance.
increased from Rs. 30,000 crores to o The National Commission for Allied
Rs. 40,000 crores. The Micro Irrigation Healthcare Professionals Bill was
Fund, which was established under also introduced in Parliament by the

government, with the goal of ensuring • The government emphasised that this
effective and transparent regulation of Budget continues to provide the impetus
the 56 allied healthcare professions. for growth. It lays a parallel track of
o The government also declared that the o A blueprint for the Amrit Kaal, which
forthcoming Census might be India’s is futuristic and inclusive, will directly
first digital census, with Rs. 3,768 crores benefit our youth, women, farmers, the
were set out for the mission in the years Scheduled Castes and the Scheduled
2021-2022. Tribes.
The Budget 2022-23 o Big public investment for modern
• India’s economic growth in the current year infrastructure, readying for India at 100
is estimated to be 9.2 percent, the highest and this shall be guided by PM GatiShakti
among all large economies. The overall, and be benefited by the synergy of a
sharp rebound and recovery of the economy multi-modal approach.
from the adverse effects of the pandemic is • Moving forward, on this parallel track, there
reflective of the country’s strong resilience, are four priorities:
as per the government statement. o PM GatiShakti
• The Finance Minister observed that India is o Inclusive development
celebrating Azadi ka Amrit Mahotsav and it o Productivity enhancement & investment,
has entered into Amrit Kaal, the 25-year- sunrise opportunities, energy transition,
long leadup to India@100, the government and climate action
aims to attain: o Financing of investments
o Complementing the macro-economic • Some of the key features of the Budget:
level growth focus with a microeconomic
level all-inclusive welfare focus.
o Promoting digital economy & fintech,
technology-enabled development, energy
transition, and climate action, and
o Relying on a virtuous cycle starting from
private investment with public capital
investment helps to crowd-in private
investment.
• The Finance Minister informed that the
Fig. 10.11: Receipts and Expenditure of
Productivity Linked Incentive in 14 sectors
Budget 2022-23
for achieving the vision of AtmaNirbhar
Bharat has received an excellent response,
with the potential to create 60 lakh new
jobs, and an additional production of Rs 30
lakh crore during the next 5 years. Dwelling
on the issue of implementation of the
new Public Sector Enterprise policy, the
strategic transfer of ownership of Air India
has been completed, the strategic partner
for NINL (Neelanchal Ispat Nigam Limited)
has been selected, the public issue of the
LIC is expected shortly and others to are in
the process for 2022-23. Fig. 10.12: PM-DevINE

Fig. 10.16: Central Bank Digital Currency
Fig. 10.13: Agriculture and Food Processing
Fig. 10.17: Education related Initiatives in

Budget 2022-23
Fig. 10.14: Transition to Carbon Neutral Economy
Fig. 10.18: Health related Initiatives in Budget 2022-23

Fig. 10.15: Trends in Deficit

Fig. 10.21: Indirect Tax Proposals in Budget

Fig. 10.19: MSME Related Initiatives in Budget 2022-23 2022-23
o Direct Tax Proposals Deficit Financing

• Deficit financing is the process of raising
funds to cover a deficit caused by an excess
of spending over receipts.
• As a result, anytime the government’s
spending exceeds its revenue, the
government considers deficit financing.
• It is a temporary arrangement of the funds
through various methods like the sale of
bonds to borrow the money from the public
or printing new currency.
• Two important characteristics of deficit
financing are:
o Financing of the budget deficit.
o This financing is done by the increase in
the money supply.
Need for Deficit Financing
• Higher economic growth is a priority for
emerging countries like India. Greater
expenditure is required for increased
economic growth. Because the private
sector will not be able to afford such a large
Fig. 10.20: Direct Tax Proposals in Budget 2022-23 investment. As a result, the government
bears exclusive responsibility for raising
o Indirect Tax Proposals
financial resources to finance economic
development.
• Deficit financing allows the government to
obtain the resources it needs to carry out
its development ambitions.
Means of Deficit Financing
The deficit financing by the government is done
in the following ways:

Borrowing from External Sources Borrowing from Internal Sources

• Borrowing from external sources includes • Borrowing from Internal Sources includes
borrowing from developed countries and borrowing from RBI, General Public, Ad-hoc
international institutions like the World Treasury Bills & government bonds etc.
Bank, IMF, etc. • It stifles private-sector and corporate-
• Advantages of external borrowing are: sector investment opportunities. It tends
o External borrowing brings in foreign to reduce private spending and leads to a
currency and gives the government “crowding out” effect.
additional capacity to fulfil its Printing New Currency
developmental requirements both • The government’s last option for dealing
inside and outside the country. with its fiscal deficit is to print money.
o Because there is no ‘crowding out • The most significant disadvantage of
effect,’ external borrowing is preferred printing currency is that it prevents the
over internal borrowing. This reduces government from incurring foreign-currency
private investment due to the increase expenditures and increases the money
in interest rate as a result of excessive supply, resulting in inflation.
government borrowing.
Q. One of the intended objectives of Union Budget 2017-18 is to ‘transform, energise and clean
India’. Analyse the measures proposed in the Budget 2017-18 to achieve the objective. (250
Words, 15 Marks)
• In the intro, try to write about ‘transform, energise and clean India’(TEC).
• In body, discuss measures taken to achieve TEC India.
• Try to conclude the answer by highlighting the need for implementation of the objectives.
Answer:
The budget in India is an important national-level exercise. The ideas, schemes and
initiatives announced in the budget have a great impact on the country. One of such is the
‘transform, energise and clean India’(TEC) agenda as a theme in the Union Budget 2017-18
that wants to:
• Transform the quality of governance and quality of life of people,
• Energise various sections of society, especially the youth and the vulnerable, and enable
them to unleash their true potential; and
• Clean the country from the evils of corruption, black money, and non-transparent political
funding.
To achieve these targets there are various measures proposed in the budget. They are:
Emphasis on Traditional Sectors
• In order to achieve TEC, the government has allocated the highest ever 48,000 crore fund
to MGNREGA.
• To save farmers from natural calamities, the government target has increased to
cover 40% of the cropped area under Pradhan Mantri Fasal Bima Yojana (PMFBY)
and also corpus under the long term irrigation fund has been increased to
Rs. 40, 000 crores.

• Increased agriculture credit allocation target to Rs. 10 lakh crore.

Emphasis on Rural Development
• The increased pace of construction of rural roads, which are the lifelines of rural areas, to
133 km per day under Pradhan Mantri Gram Sadak Yojana.
• Under this budget target of 100%, village electrification by 1 January 2018 has been set by
the government.
• Mission ANTYODAYA proposed a target to pull out 1 crore people and 50000-gram panchayats
from poverty.
Emphasis on Education and Youth
• To improve distance learning and online education, the government has launched the
SWAYAM portal with over 300 online courses and an allocation of 4000 crores to train
youths for developing market-oriented skills. Under the SANKALP scheme, the government
is aiming to make India a skilled capital of the world.
Emphasis on Infrastructure:
• The highest allocation for railways of rupees is 1.3 lakh crore which is again increased
allocation for national carriers with improving passenger safety, improved journey
experience, cleanliness and development work being the focussed areas.
• The overall infrastructure sector has got the highest ever allocation, which is over 3.96
lakh crore.
• To give a boost to the real estate sector, the government has given ‘Infrastructure’ status
to the housing sector.
Emphasis on Improving Investment:
• Abolishment of Foreign investment Promotion Board.
• To promote small entrepreneurs, the rate of corporate income tax has been reduced to
25% of companies with a turnover less than Rs 50 Crore.
Clean India:
• In order to curb the use of black money and increase transparency in political funding.
Under it, a maximum limit of 20000 is set for an individual cash donation to a political
party.
• Contributions above the suggested limit can be made only in the form of digital payment,
cheques, or electoral bonds.
• Piped water supply on a priority basis to open defecation free declared villages.
So, it can be said that the budget 2017-18 reiterates the government’s intentions to bring
about greater and faster economic growth, and transparency in political funding to reduce
corruption and give boost inclusive growth for everyone to smile. But all of the above objectives
are meaningless if they are not implemented in the desired spirit.


11
2 National Income
External Sector
The external sector of a country’s economy o Foreign Currency Assets (FCAs): The
includes all international economic transactions largest component of the FOREX
between residents of the country (both public Reserves
and private sector) and the rest of the world. o Gold
All economic activities that take place in foreign
o Special Drawing Rights (SDRs)
currency fall in the external sector like import,
export, capital account, foreign investment, o Reserve position of RBI with the
the Balance of Payment, etc. International Monetary Fund (IMF)
Importance of External Sector - Why Imports • FOREX reserves are used to back liabilities
and Exports Matter (meet their foreign obligations) and
Imports and exports matter because they influence monetary policy.
influence various aspects of the economy of a • India’s foreign exchange reserves touched a
country as: record high of US$ 603.694 billion, in April
GDP (Gross Domestic Product): 2022, according to the RBI data.
• GDP is a broad measure of the economy’s • The rise in FOREX reserves was mainly on
overall activity. When the GDP is estimated account of an increase in foreign currency
using the spending method, The GDP assets (dominated by the dollar), which
formula is as follows: rose to $536.768 billion, gold reserves rose
GDP=C+I+G+ (X-M) to $43.145 billion, the country’s reserve
Here position with the IMF increased to $5.086
C= Consumer spending on goods and services. billion, Special Drawing Rights (SDR) were
I = Investment spending on business capital up to $18.694 billion.
goods.
G= Government spending on public goods and
services.
X= Exports
M = Imports
• In this equation, (X-M) is net exports. When
exports exceed imports; it has a positive
effect on GDP, and when exports are less
than imports, the net export has a negative
effect.
Exchange rates
In a country where exports are higher than
imports, their forex supply is high in the country,
so it reduces the exchange rates and vice versa.
FOREX reserve
• The foreign currency assets held by a
country’s central bank are known as Foreign
Exchange Reserves (RBI).
• In the context of India, foreign exchange Fig. 11.1: FOREX Reserves in India in Previous years
reserves include:
External Sector 189

• Hence, FCA > Gold > SDR > Reserve Position • The goal of a fixed exchange rate system
with IMF. is to keep the value of a currency within a
Exchange Rate certain range.
• The value of one currency expressed in • After decades of having a fixed exchange
terms of another currency is referred to as rate, most countries converted to a floating
an exchange rate. exchange rate in the early 1970s.
• For example, at present, approximately • A fixed exchange rate system may minimise
Rs. 74.68 is exchanged for US $1. Hence, instabilities in real economic activities by
the value of one US Dollar is equal to 74.68 reducing volatility and fluctuations in the
Indian rupees. (approximately, the exchange currency.
rate is in February 2022). Managed Exchange Rate System
Exchange Rate System • A managed exchange rate is a cross between
• An exchange rate system establishes fixed and floating exchange rate systems.
the way in which the exchange rate is • The native currency is governed by demand
determined, i.e., the value of the domestic and supply, subject to central bank
currency with respect to other currencies. intervention in the FOREX market, under
• There are many ways in which the country’s this exchange rate.
exchange rate is determined. • The central bank cannot fix the exchange rate,
Floating Exchange Rate System but it can affect the currency exchange rate
• The exchange rate of currencies is both directly (by buying and selling currencies)
established in the Floating or Flexible or indirectly (through monetary policy).
Exchange Rate System based on demand- • But in case of extreme fluctuations, the central
supply in the FOREX market relative to bank under managed floating exchange rate
other currencies. system intervenes in the FOREX market with
• As a result, if there is a large demand for the objective to minimise the fluctuation in
money and a low supply, the value will rise. the exchange rate of the currency.
If demand is low and supply is plentiful, the • India adopted this form in 1993.
currency price will fall. • Today, the majority of economies use
• A currency that uses a floating exchange a controlled exchange rate system to
rate is known as a floating currency. determine currency exchange rates.
• Most of the world’s currencies are floating Wider Band Exchange Rate System
and include the most widely traded • Under this, the central bank (RBI) fixes
currencies: The United States dollar, the exchange rate bands (lower and upper limit)
swiss franc, the euro, the Japanese Yen, for the domestic currency within, which it
the pound sterling, and the Australian is permitted to fluctuate.
dollar. Crawling Peg Exchange Rate System
• Even in the case of floating currencies, • Under this central bank (RBI) fixes the
central banks frequently intervene in the exchange rate band which is periodically
markets to try to affect the value of the revised, and it is like a type of fixed exchange
currency. rate system.
Fixed Exchange Rate System • This type of fixed exchange rate system is
• The central bank of a country determines followed in China.
the exchange rate of currencies in a fixed Devaluation
or pegged exchange rate regime (RBI for • It refers to the reduction in the value of
India). the domestic currency in terms of foreign
currency.
190 External Sector

Fig. 11.2: Foreign Exchange Rates
• This monetary policy instrument is used by • The Foreign Exchange Market determines
countries with a fixed exchange rate. foreign exchange rates for every
• RBI devalued Indian rupee three times in currency.
1949, 1966 and 1991. • Central banks, commercial banks, brokers,
Revaluation exporters and importers, immigrants,
• It refers to an increase in the exchange rate investors, and tourists all participate in
of domestic currency by the central bank. foreign exchange markets.
Foreign Exchange Market • The floating exchange rate system and
Managed exchange rate system used this
• The Foreign Exchange Market (commonly
institutional framework for determining the
known as FOREX) is a market for buying
exchange rate of the currency.
and selling different currencies.
External Sector 191

Fig. 11.3: Functions of Foreign Exchange Market
Depreciation • It discourages imports by raising the cost

• It refers to a reduction in the exchange rate of imports, making domestic customers
of a currency due to a change in its demand less likely to buy them, bolstering domestic
and supply in the FOREX market. firms even more.
• A flexible exchange rate system or a • It helps in reducing the trade deficit and
managed floating exchange rate system current account deficit (CAD).
both experience depreciation. • It promotes inward foreign remittances and
• For example, if in the previous month 1$ = foreign tourism.
Rs. 40 now 1$ = Rs. 50, hence the rupee Negative impact
loses its value in front of a dollar. • It creates inflation as it increases FOREX
Impact of Depreciation/Devaluation reserve, which increases the money supply
Positive impact: and aggregate demand.
• It may adversely affect economic growth
• It promotes export as it reduces the cost of
as it creates cost-push inflation due to an
a country’s exports, rendering them more
increase in the prices of inflated commodities
competitive in the global market.
in terms of domestic currencies.
192 External Sector

• It increases the burden of external debt in Exchange Rate in India

terms of domestic currencies. • Because of the opening of the economy as
• It deteriorates terms of trade (it measures part of broader macroeconomic reforms
the purchasing power of export of a country and liberalisation from the early 1990s,
in terms of quantity of imports). India’s exchange rate policy has changed
Reasons for Rupee Depreciation in Recent Years significantly over time.
• Supply of the Rupee increased, and demand
for the Rupee decreased, leading to a
demand-supply mismatch.
• An increase in crude oil prices increased
total import cost. India is the third-largest
crude oil importing country in the world.
• High Trade Deficit and High Current Account
Deficit (CAD).
• The protectionist policy was adopted by the
major economies.
Fig. 11.4: Exchange Rate $ to Rs
• A hike in the FED rates (as was observed
twice in 2018), strengthens the US Dollar, • Exchange rate policy has changed from
which in turn leads to a depreciation of the a par value system to a basket-peg and
Indian currency. then to a controlled floating exchange rate
Government/RBI Measures to Check regime in the post-independence period.
Depreciation of Rupee? • Due to the dollar crisis of the 1960s, the
• Restriction of Imports. Bretton Woods System came to an end in
• Contractionary monetary policy. 1971, and the rupee was linked to the pound
sterling.
• Liberalisation of Foreign Investment Policy.
• It was required to address the drawbacks
• Sale of the dollar in the FOREX market by RBI.
of a single currency peg while still ensuring
• The interest rate on NRI deposits increased exchange rate stability. Thus, in September
by RBI. 1975, the rupee was pegged to a basket of
Roles of RBI in Maintaining the Stability of the currencies which continued till the early
Rupee 1990s.
• RBI acts as a regulator of foreign exchange i.e. • With the initiation of economic reforms, India
o It manages the forex reserves of India moved to a floating currency regime that
o It maintains the value of rupees outside involved the dual exchange rate system (one
the country official and the other market-determined).
o It aids foreign trade payments • The dual exchange rate system was replaced
Appreciation: by a unified exchange rate system in March
• It refers to the increase in the value of a 1993.
currency due to a change in its demand and Effective Exchange Rate
supply in the FOREX market. • The weighted value of a basket of foreign
• Appreciation occurs in a managed floating currencies is used to calculate the effective
exchange rate system or in a flexible exchange rate, which compares the value
exchange rate system. of the domestic currency to the weighted
• For example, if in the previous month 1$ = value of a basket of foreign currencies. The
Rs. 65 now 1$ = Rs. 50, hence rupee gains weights reflect the foreign countries’ share
its value in front of a dollar. in the domestic country’s trade.
External Sector 193

• It measures the strength of domestic • The current account is a key indicator of a

currency with respect to currencies of country’s economic health.
major trading partners. • A positive current account balance (current
o These are of two types: Nominal account surplus) shows that a country is a
Effective Exchange Rate (NEER) net lender to the rest of the world, resulting
o Real Effective Exchange Rate (REER) in an increase in the country’s net foreign
• Nominal Effective Exchange Rate (NEER) assets.
and Real Effective Exchange Rate • A negative current account balance (deficit)
(REER) are utilised to gauge the external shows that a country is a net borrower
competitiveness of an economy. from the rest of the world, lowering its net
Nominal Effective Exchange Rate (NEER) foreign assets.
• The weighted average of bilateral nominal • The current account represents the net
exchange rates of the home currency in income of the country.
terms of foreign currencies is known as the • The current account deficit is shown either
nominal effective exchange rate (NEER). numerically by showing the total monetary
• It is the domestic currency’s exchange amount of the deficit, or in the percentage of
rate in relation to the basket currencies the GDP of the economy for the concerned
(36 currencies), weighted by the basket year.
country’s share of the domestic country’s • The main components of the current
trade. account are:
• The nominal exchange rate determines o Trade-in goods (visible balance)
how much domestic money is required to o Trade-in services (invisible balance)
purchase foreign currency. o Investment incomes: It includes
Real Effective Exchange Rate (REER) dividends, interest, and remittances.
• The purchasing power parity (PPP) theory o Net transfers: It includes International
states that the real effective exchange rate aid etc.
(REER) is a weighted average of nominal Current Account Deficit (CAD)
exchange rates adjusted for relative price • The difference between the inbound and
differentials (inflation rate) between home outward flow of money as a result of the
and foreign countries. trade of goods and services, as well as
• The REER considers the relative inflation the transfer of money from domestically
levels in two economies and thus incorporates owned factors of production overseas, is
the concept of purchasing power parity. calculated as the current account deficit.
• An increase in REER shows that exports are • CAD includes the trade deficit along with
becoming more expensive while imports some other important factors like net
are becoming cheaper, indicating a loss in income and transfer payments.
trade competitiveness. • Lowering the Current Account Deficit (CAD)
Current Account implies a reduction in the country’s external
• The current account measures the overall debt, making the domestic economic policy
inflow and outflow of products, services, more independent of external influences.
transfer payments, and investment incomes • Foreign Direct Investment (FDI) provides a
of a country’s transactions with the rest of more stable source of financing for the CAD
the world. as compared to external borrowings.
• Because goods and services are typically • Crude oil and gold imports are the key
consumed in the present period, it is called causes of India’s high CAD.
a current account.
194 External Sector

• The Current Account Deficit can be reduced • It summarises both private and public
by increasing exports and decreasing non- investment flows into a given economy.
essential imports like gold, mobile phones, Capital Account = Foreign Direct investment
and electronics. + Foreign Portfolio Investment + External
• India’s Current Account Deficit (CAD) Lending and Borrowing + Other Investments.
increased to $23 billion (2.7 per cent of GDP) • A capital account deficit indicates that
in the third quarter (Q3) of 2021-22 from more money is moving out of the economy,
$9.9 billion (1.3 per cent of GDP) in Q2 of accompanied by a growth in the economy’s
2021-22 and $2.2 billion (0.3 per cent of ownership of foreign assets, whereas a
GDP) in Q3 of 2020-21, according to RBI data. surplus indicates the opposite.
Balance of Payment (BoP)
• It is the systematic record of the entire
economic transactions of a country/
resident of a country with the rest of the
world throughout a financial year.
• The components of the balance of payment
are:
o Current account: It includes all kinds
Fig. 11.5: Current Account Deficit as a percentage of current financial transactions of the
of GDP economy.
o Capital account: It includes all kinds
Impact of BREXIT on India’s External Debt
of capital financial transactions of the
It seems that there will be a change in the
economy.
short-term loan due to changes in exchange
o Official reserve transactions: It is
rates and loss of confidence of investors, but
conducted by the central bank in case
on long-term loans, there will not be much
of the BoP deficit or BoP surplus.
effect. (BREXIT’s name is given to the United
Kingdom’s departure from the European o Errors and omissions: It refers to the
Union. It is a combination of Britain and exit.) balancing items reflecting the inability
to record all the international financial
Capital Account transactions
• The capital account tracks all transactions • The Balance of Payments of a country
between the country’s citizens and the indicates whether or not it saves enough to
rest of the world that result in changes in cover its imports.
the residents’ or government’s assets or • The Balance of the Payment account is kept
liabilities. in accordance with the requirements of the
• Capital account includes the following: double-entry accounting system. Under this,
o Foreign Direct Investment (FDI), every entry shown either as a credit (inflow)
or debit (outflow) is made in the account for
o Foreign Portfolio Investment (FPI),
every transaction is always equal.
o External Lending and Borrowing,
• If the country’s Balance of Payments is
o Foreign Currency Deposits of banks,
positive at the conclusion of the fiscal year,
o External Bonds Issued by the Central the excess is immediately transferred to
Government. the country’s FOREX reserves.
• The capital account depicts changes in • If the outcome is negative, an equal
asset ownership both within and outside amount of foreign exchange is taken from
the country. the country’s FOREX reserves. A BoP crisis
External Sector 195

occurs when FOREX reserves are insufficient • Financial account:

to cover the negative BoP balance. o When a country’s ownership of foreign
assets matches the ownership of
domestic assets by other countries, the
financial account is in balance.
o A deficit can occur if a country’s
foreign ownership grows faster than its
domestic ownership.
o When a country’s Balance of Payments
Fig. 11.6: Balance of Payment accounts for a deficit, it signifies the
country sells more assets than it gains.
Components of Balance of Payments
Balance of Payment Disequilibrium
There are three components of Balance of
The Balance of Payment deficit or surplus
Payment, namely:
shows an imbalance in the Balance of
• Current account: Payment. This imbalance is termed Balance
o The current account covers a country’s of Payment disequilibrium. When a country’s
net goods and services trade with other receipts do not equal its payments, the
countries, as well as its net revenues country’s Balance of Payments is said to be
from overseas investments and net in disequilibrium.
transfer payments. Types of Disequilibrium
o It is used to track the flow of • Cyclical disequilibrium:
commodities and services into and out
o Trade cycles have created a state of
of the country.
disequilibrium.
o It comprises all revenues and payments
o As a result of trade cycles, terms of
related to raw materials and finished
trade fluctuate. It has an impact on the
commodities.
payment balance.
• Capital Accounts
o It can be fixed by adjusting the import-
o It entails the purchase and sale of export ratio.
assets such as land and buildings.
• Secular disequilibrium:
o This covers the flow of taxes, the
When an economy experiences significant
acquisition and sale of fixed assets, and
changes, the Balance of Payments suffers
other financial transactions involving
from secular or long-term disequilibrium.
migrants who are relocating to another
• Structural disequilibrium:
country.
When structural changes occur in certain
o A capital account has three major
areas of the economy, they have an impact
components:
on the country’s import-export trade,
■ Loans and borrowings: This category
resulting in structural disequilibrium.
encompasses all forms of loans
• Fundamental disequilibrium:
made in other countries by both the
private and state sectors. A deep-rooted, chronic deficit or surplus in
a country’s Balance of Payments is referred
■ Non-residents’ investments: These are
to as fundamental disequilibrium.
funds invested in corporate equities.
• Temporary disequilibrium:
■ The capital account is influenced by
foreign exchange reserves, which are The Balance of Payments of a country is of
held by a country’s central bank to a transient nature, lasting just a brief time
monitor and control exchange rates. and occurring only once in a while.
196 External Sector

Causes of Disequilibrium in Balance of Payment Measures to correct the Disequilibrium in the

• Unfavourable Balance of Trade Balance of payment
When a country imports more items than it • Export encouragement:
exports, there is an overall outflow of dollars, Manufacturers and exporters should be
resulting in a Balance of Payment imbalance. given numerous concessions to encourage
• Development programmes: them to export. Imports should be
Projects in developing countries require discouraged at the same time by attempting
the importation of finances, capital, to replace them with local alternatives and
skilled labour, and technology from setting acceptable tariffs.
wealthy countries. These development • Import reduction:
programmes are very consuming, and the Restricting imports and promoting the
import procedure might take a long period, use of local alternatives to imports like
resulting in a state of disequilibrium. increasing use of their own made country
• High Population Growth products for correcting disequilibrium.
As the country’s population grows, it • Reducing inflation:
imports more, causing an imbalance in the Exports are discouraged by inflation, while
Balance of Payments. imports are encouraged. As a result, the
• Demonstration effect: government should keep an eye on inflation
It refers to developing or underdeveloped and cut prices throughout the country.
countries imitating the consumption • Exchange control:
patterns of affluent countries. Importing Foreign exchange should be controlled by
more items becomes necessary when the government by requiring all exporters
people seek to increase the level of a to submit their foreign money to the central
consumption pattern. bank, which would then be distributed
• Natural factors: among approved importers.
Natural calamities like floods, drought • Depreciation of domain currency:
and earthquakes destroy agricultural land It refers to a decrease in the exchange
production and industrial production which value of a home currency in terms of a
adversely affects exports and increases foreign exchange unit, lowering the price of
imports. relevant goods on the international market.
• Inflation: When a country needs to adjust to a new
exchange rate system, the government
As the price of goods in the country increases
issues a depreciation order. It is important
the export price also increases and this
to ensure that depreciation does not lead
would lead to a decline in export and lead
to an increase in local costs.
disequilibrium in the Balance of Payment.
• Depreciations:
• Huge External Borrowing
Depreciation reduces the purchasing
When a country borrows heavily from other
power of the local currency in international
countries, its Balance of Payments displays
markets. Depreciation takes place in a free
increased debt.
market system wherein demand for foreign
• Political conditions: currency passes the supply of foreign
Due to political uncertainty, countries currency in the market of a country.
may value their foreign exchange and gold Indian Balance of Payments Crisis (1991)
reserves. Foreign investors may relocate
During the year 1991, India faced a huge
their capital to protect themselves from
economic problem in the way of the
political instability, producing an outflow of
“Balance of Payment Crisis”. This is also
funds and causing disequilibrium.
called the currency crisis.
External Sector 197

Causes of Balance of payment crisis in 1991 • India was on the verge of defaulting on its debt
• In 1990-91, the fiscal deficit increased obligations to the international community.
from 9% of GDP in 1980-81 to 12% percent • Investors withdrew their funds.
of GDP. • Exporters were concerned that they would not
• Internal debt increased from 35% of GDP in be paid, therefore short-term funding dried up.
1985-36 to 53% of GDP in 1990-91. • Inflation rates have soared dramatically.
• The current account deficit was substantial. Effects of Balance of payment Crisis 1991
• The increase in crude oil prices as a result • Restriction on imports.
of the Gulf War triggered the current • Hike in the price of fuels.
account imbalance. India’s foreign exchange
• Bank rates were to rise.
reserves were severely drained as a result
• The government had to cut its spending on
of this. Despite taking out large loans from
various schemes and projects.
the International Monetary Fund (IMF)
earlier this year. • By promising 67 tonnes of gold as collateral
security, India was able to get a $2.2-billion
• By June 1991, India had less than $1 billion
emergency loan from the IMF.
in foreign exchange reserves, barely enough
to cover import needs for three weeks. • India delivered 20 tonnes of gold to Union
Bank & Switzerland in Zurich in May 1991,
• India lacked sufficient foreign exchange
and 47 tonnes of gold to the Bank of England
reserves to conduct international trade.
in July 1991, to raise a total of $600 million.
Q. Craze for gold in India has led to a surge in the import of gold in recent years and put
pressure on the Balance of Payments and the external value of the rupee. In view of this,
examine the merits of the Gold Monetization Scheme. (200 Words, 12.5 Marks)
• In the introduction, try to show the status of the surge in gold imports.
• In the body,
⚪ Impact on BoP and the value of rupee.
⚪ Examine the merits of the Gold Monetisation Scheme (GMS).
• In conclusion, conclude your answer with RBI’s new norms.
Answer:
India is the largest importer of gold, which mainly caters to the demand of the jewellery industry.
In volume terms, the country imports 800-900 tonnes of gold annually. Gold is a very significant
part of Indian cultural life as it is seen as a powerful tool to increase presence in society and
impress others. This high craze for gold every year increases imports and consequent increase
in the import bill of the country and puts pressure on the balance of payment and external
value of the rupee. As gold imports increase the Current Account Deficit (CAD) and this CAD
led to the devaluation of the rupee in comparison to the dollar.
The Government of India announced the Gold Monetisation Scheme in 2015. The objective of the
scheme is to mobilise gold held by households and institutions of the country and facilitate its use
for productive purposes, and in the long run, reduce the country’s reliance on the import of gold.
Merits of gold monetisation can be seen in the following manner:
Consumers:
• Fall in prices of the gold.
198 External Sector

• Gold will be securely maintained by the bank.

• Consumers earn interest on the gold otherwise lying idle in the households.
• It will ascertain the purity of gold held by people.
• The carrying cost for gold is saved.
• Earnings are exempt from the capital gains tax, wealth tax and income tax. There will be no
capital gains tax on the appreciation in the value of gold deposited.
Banks:
• Banks may sell the gold to generate foreign currency. The foreign currency thus generated
can then be used for onward lending to exporters/importers.
• Banks to buy and sell on domestic commodity exchanges, where mobilised gold can be
delivered.
• Lending to jewellers and earning extra cash.
• Banks may convert mobilised gold into coins for onward sale to their customers.
Government:
• The import bill of India can go down by 10 to 20 per cent even if 1% of the gold lying with
people is deposited into banks under the scheme.
• The Gold Monetisation scheme may lead to greater investment and accelerate growth.
Other Benefits:
• Reduce Black Money: The gold owned most of the time is through the use of black money.
This gold through GMS will be used for the general well-being of the people and the economy
at large.
• Income addition: Ideal gold at homes can be used to earn interest, and this will give additional
income sources for individuals. Through the earning of interest, a person can augment his/her
income. Even this will improve earnings in rural areas as well.
• Reduce Current Account Deficit: Most of the gold in India is imported from abroad with
high duty. This import of gold and paying off high duty is resulting in pressure on the forex
reserve of the country. By supplying gold through banks, the demand for import of gold will
be reduced.
• Boost Jewellery Sector: With easy and cheaper availability of gold, the domestic jewellery
industry will become more competitive and boost its production. In addition, the local
industry can borrow gold on loans from banks, which can provide stability to prices.
The Reserve Bank of India (RBI), in consultation with the government, has issued new norms. New
norms include making the scheme more accessible for potential gold depositors and allowing
premature redemptions after three years and five years for medium-term and long-term deposits,
respectively. These suggestions, if implemented, can go a long way in ensuring that GMS does not
go the same way as the GDS, at least as far as the consumer side of the equation is concerned.
Opening of Indian Economy- Neo-Liberal • It desired economic stability and the

Economic Reforms 1991 transformation of the Indian economy into
Main objectives of Neo-Liberal Economic a market economy by reducing needless
Reforms (1991): barriers.
• Globalising the Indian Economy gave a new • It intended to foster the free movement of
boost to market orientation. products, services, capital, human resources,
and technology across international borders.
• The rate of inflation was reduced.
• It aimed to enhance the private sector
• It was intended to accelerate its economic
engagement in practically every sector of
growth and accumulate sufficient foreign
the Indian economy.
currency reserves.
External Sector 199

Steps Under Economic Reforms of 1991 • Freedom to import capital goods: To achieve
The branches of the Neo-liberal Economic holistic development, industries were free
Reform 1991 policy are threefold: to purchase machines and raw materials
from other countries.
• Liberalisation
• Freedom for expansion and production
• Privatisation
to Industries: Limits on the production of
• Globalisation industries were removed.
Steps were taken under liberalisation: • Removal of Industrial Licensing and Registration:
• Free determination of interest rate & by Except for the following, the private sector
the commercial Banks: Commercial banks has been exempted from licencing and other
were allowed by the RBI to determine their restrictions under this policy:
own interest rates. o Liquor
• Increase the investment limit in small o Cigarette
scale industries: Small-scale industry
o Defence equipment
investment limits have been lifted to one
o Industrial explosive
crore rupees, allowing these businesses to
modernise their equipment and improve o Drugs
their efficiency. o Hazardous chemicals
Q. Examine the impact of liberalisation on companies owned by Indians. Is it competing with

the MNCs satisfactorily? (200 Words, 10 Marks)
• In the introduction try to define the meaning of liberalisation:
• In the body,
o D
o scrutiny of impacts of liberalisation (Write both positive and negative impacts but
keep more focus on positive outcomes).
o In the second part, you need to discuss whether they are competing with MNCs
satisfactorily.
• ry to conclude the answer by underlining the need for improvement in corporate
T
governance, especially in Indian corporates.
Answer:
In Economic terms, Liberalization means minimizing government restrictions and all types of
regulations. This deregularization of the economy and opening of all the sectors, except a few
national significance sectors like nuclear energy and railways, are opened up for the private
sector. This brings many advantages for the country in general and the corporate sector in
particular, both private and public sector companies.
Positive impacts on Indian companies:
• Impact on Small Industries: Indian manufacturing industries are dominated by Micro, Small,
and Medium enterprises. After following up on liberalization policy this sector has seen
some technological advancement and become a supplementary industry for big industries.
• Unrestrictive Capital Flow: This unrestricted flow of capital in the country brought much-
needed capital for expansion and technology adoption. Newer technology adoptions and
capital investment improved manufacturing sector output.
200 External Sector

• Growth of Service Industry: New Economic policies brought the biggest thrust to the growth
of the service industry. Many private firms from abroad and India got opportunities and
incentives to start a business in the service sector like Information technology, software
companies, etc.
• Tourism industry: Liberalisation policy allowed and attracted foreign tourists to visit India.
This visit and the popularity of India among foreign tourists have increased manifold. This
growth gives a boost to the tourism sector.
• Impact on Agriculture Sector: In the agricultural sector, modern equipment-making
companies were established in India, which brought down the cost of this equipment and
decreased the input cost of agriculture.
• Outsourcing: In Knowledge Processing Organisations (KPOs), Business Processing Outsourcing
(BPOs), and other cheap and effective service industries, human resources are now outsourced
by foreign companies.
• Improved Ease of Doing Business: NEP has drastically reduced bureaucratic hurdles in the
form of license raj, permit system, over bureaucratic control, etc. This has been a major
reason behind the growth of companies in India in the first generation of economic reforms.
Removing the Restrictive Trade Practices Act is an example of removing control of the
government.
Although various sectors of the Indian economy have witnessed positive impacts, certain
negative impacts have also been witnessed in Indian Industries, such as:
• Sudden competition: The sudden opening of the Indian economy and liberalised policy had
negatively impacted Indian companies as they are facing tough competition from MNCs.
• Impact on MSMEs: The impact on SMEs can be widely discussed as this is the sector
that received relatively fewer advantages but got higher disadvantages. As most of the
investment and capital come from big corporates and sectors, but are not given much
focus on the modernisation of MSME.
• Agriculture sector: Agriculture sector sees monopolisation in seeds, fertilisers, chemicals,
and even duplicate seeds and costly inputs like HYV seeds, herbicides, fungicides, etc. This
resulted in the exposure of Indian farmers to increased input costs and a higher level of
investment for agricultural operations.
• Unequal competition: Some companies are not able to compete with foreign companies
or MNCs which further leads to a monopoly in the market in which consumers and other
companies suffer.
• Commercialisation of some sectors: sectors like education, health, and higher education
have seen trends of commercialisation which are again becoming costly for the general
public, and only wealthy people can afford quality education, health care, etc.
Although all the Indian companies have seen some negative and positive outcomes, Indian
companies are more or less competing with global giants:
• IT sector: Many IT sector companies are successfully competing with global giants. Now,
India is considered the Silicon Valley of the east. Companies like TCS, Infosys, etc, are
known for their global presence and competence.
• Automobile: The automobile sector is another sector where Indian brands are considered
the best options for foreign car brands. TATA Motors, Maruti Suzuki, Mahindra, etc. are
Indian giants in the automobile sector. Even, Tata Motors has acquired British carmaker
External Sector 201

Jaguar Land Rover company and become one of the biggest companies in the world in the
automobile industry.
• Oil and Gas Exploration: Indian giants like ONGC, Reliance Petroleum, and Gas Authority of
India Limited (GAIL) are now global giants in oil and gas exploration and even in the supply
and processing sector. They are one of the major competitors in oil and gas exploration.
However, Indian corporates and companies are suffering from poor corporate governance, as
corporate governance is widely discussed in India and abroad concerning Indian companies.
Indian companies need to improve corporate governance and try to invest more in R&D so
that technological advancement can make Indian companies in every field a competitor.
Steps were taken under Privatisation Criticism of Neo-Liberal Economic Reforms

• Sale of shares of PSUs: The Indian • Even though there was an increase in GDP,
government has begun selling PSU shares indicating economic growth, employment
to public and private organisations. did not increase.
• Disinvestment in PSUs: The government • The industrial and service sector was given
has started disinvestment in PSUs, which priority, and the agriculture sector was
was running into the loss which means that neglected.
the government was selling out shares of • Low level of industrial growth competition
these industries to the private sector. with cheap imports.
• Minimisation of Public Sectors: The • Ineffective disinvestment policy as the
public sector was given priority in order earnings were used to meet the insufficient
to aid in industrialisation and poverty revenue and not for the development of the
alleviation. However, PSUs were unable to Indian economy.
fulfil this goal, and under new economic • Ineffective fiscal Policy due to the reduction
reforms, a strategy of PSU downsizing was of direct and indirect taxes and other
implemented. duties, the revenue of the government was
Steps were taken for Globalisation. significantly reduced.
• Reduction in tariffs: Import and export Importance of BoP
customs charges and tariffs were imposed • It provides detailed information related
to entice international investors. to the demand and supply of a country’s
• Long-term trade policy: Its main feature currency. For example, if India imports more
were: than it exports, then this means that there
o Liberal policy. will be more outflow of foreign currency from
o All controls on foreign trade were the domestic market. Thus, rupee would be
removed. under pressure to depreciate against other
o Competition has been encouraged. currencies (other things being constant).
• Partial convertibility of Indian currency: It • It examines all the export and import
is described as the process of converting transactions of goods and services.
Indian rupees into the currencies of other • It can be used to evaluate the country’s
countries in order to facilitate the flow of performance in international economic
foreign investment. competition.
• Equity limit of foreign investment • It helps the government to analyse the
increased: In 47 high-priority industries, the export potential of a particular sector and
equity limit for foreign investment has been formulate policies to support its export
lifted from 40% to 100%. growth.
202 External Sector

Q. Normally, countries shift from agriculture to industry and then later to services, but India
shifted directly from agriculture to services. What are the reasons for the huge growth of
services vis-a-vis the industry in the country? Can India become a developed country without
a strong industrial base? (200 Words, 12.5 Marks)
• In the introduction, try to write a contextual introduction.
• In the body,
o Discuss the reasons behind this shift
o J
ustify the need for the manufacturing industry and why it needs to make India a
developed country.
• ry to conclude, answer by writing about the manufacturing sector and the $5trillion
T
dollar economy.
Answer:
The normal course of economic progress and development path takes from agriculture to
services via industrialisation or manufacturing or secondary sector. But India took a leap from the
agricultural sector to the Services sector without the presence of the manufacturing sector.
Gross Value Added (GVA) at current prices for the services sector accounts for 53.89% of India’s
GVA. The Industry sector contributes 25.92% to GVA. Agriculture and allied sectors’ share is
20.19%. The services sector accounted for 18.1 per cent of the total employment during 1965-66,
going up to 23.5 per cent in 1999-2000.
There was a certain reason behind this direct shift, which can be understood in the following
manner:
• Globalisation and LPG policy: In 1991, India started opening its economy in terms to achieve
greater integration of the world economy and rapid economic development. These policies
created were mainly inclined towards the service sector.
• External demand and skilled manpower: Once India became part of the global market,
the fluent English-speaking skills and technological know-how fulfilled the demand for
the services outsourcing such as KPO and BPO. The cost-effective and efficient service
delivery made India a preferred destination for the service sector investments.
• License raj: The permit system and license raj were great impediments even after New
Economic Policy. This bureaucratic process hindered the growth of the manufacturing or
secondary sector. But, on the other hand, service sectors did not face any such issues, and
available resources made fertile ground for their growth.
• Income Elasticity of Demand for Services: A rising share of services in GDP is regarded
as an outcome of higher income elasticity of demand for services. Income elasticity of
demand for services increases with rising income which favours the fulfilment of more
sophisticated desires. During the development process, the distribution of GDP and
employment register sectoral shifts. Such shifts may occur on account of the hierarchy of
needs, distinguished into basic needs for food and shelter and needs for other material
and non-material goods including services.
• Services, Employment and Productivity: While, agricultural and manufacturing activities
account for a major share of employment in developing countries, services activities account
for a major portion of employment in most developed countries. Lagging productivity
External Sector 203

in the services sector is considered the main reason behind the rising share of service
employment in total employment even though the share of services in real GDP remains
constant, i.e. Baumol’s cost disease.
Can India become a developed country without a strong industrial base?
• Many economists view industrialisation as the only route to rapid economic development
for developing countries. Its potential lies in mass employment generation-ability as well as
the ability to strengthen domestic consumption.
• However, the fourth Industrial Revolution and digital technological changes have changed
the growth drivers in developing and developed countries. Technology-enabled services
have lowered transaction costs and overcome problems of asymmetric information making
this sector more dynamic than in the past. The emergence of e-commerce platforms is an
example of how the digital revolution can lower transaction costs, increase productivity as
well as make it more inclusive.
• For many internet-based businesses or services, fixed up-front costs can be high initially, but
once the physical infrastructure is in place, each additional customer, user, or transaction
incurs very little extra cost.
• On the other hand, still, it is imperative to grow the manufacturing sector not just to provide
employment to the largest working population (to absorb the labour force from agriculture),
but also to boost self-reliance and reduce total dependence on imports.
• Apart from this, a solid and higher industrial base is much required for the growth of the
agriculture and services sectors, and all the three sectors are dependent on each other therefore
the growth of the manufacturing sector is imperative for the growth of the other sectors.
• Industry experts are also important to increasing forex reserve industries and integration
into the global supply chain.
Therefore, there is still a rationale for making India an Industrialised nation. In fact, it shall
provide a much-needed base for the sustained growth of India in the coming decades. Mere
reliance on the service sector as a driver of growth is neither pragmatic nor sustainable. To
make India a $ 5 trillion dollar economy, it is imperative to have a robust Industrial sector.
Convertibility ■ Example: FDI, loans, borrowing

• It is a situation in which domestic currency etc.
can be converted into a foreign currency Impact of Convertibility/Current Account
and vice versa at the prevailing exchange Convertibility
rate without government intervention. Positive impact:
• There are two types of convertibility: • It promotes foreign investment as it enables
o Current account convertibility: foreign investors to withdraw FOREX at will.
■ The freedom to convert domestic • It promotes inward remittances and non-
currency into a foreign currency residential deposits.
with respect to the current account • It supplements domestic capital formation
transaction of BoP. which increases output and employment in
■ Example: Import/export of goods the economy.
and services, remittances etc. • It enables domestic investors and
o Capital Account Convertibility companies to invest abroad.
■ The freedom to convert domestic • It enables domestic firms to borrow from
financial assets/liabilities and vice- abroad at a relatively lower rate of interest.
versa.
204 External Sector

• It reduces the scope of illegal trade and • It will instil greater confidence in the Indian
financial transactions like smuggling, economy among foreign investors.
hawala, etc. • Capital gains accruing from the conversion
Negative impact: of rupees into other currencies are tax-free.
• Flight of capital, i.e., withdrawal of huge • If the rupee gains in value by the time the
FOREX within a short period of time (South bond matures. It is advantageous to the
Asian crisis 1997). investor.
• It increases the vulnerability of the domestic The benefits for the borrowers are:
economy to external shocks. • The borrower gains since there is no
• It increases volatility in domestic financial currency risk. Borrowers are protected
markets. against currency volatility.
• It increases the scope of speculation in • Borrowers did not have to be concerned
domestic currencies and securities. about currency depreciation because the
bonds were issued in Indian rupees.
Introduction of Convertibility in India
• It aids the Indian organisation that issues
• The budget 1992-93 replaced the fixed
these bonds in diversifying its portfolio.
exchange rate system with the Liberalised
• It helps borrowers save money because it is
Exchange Rate Management System
issued outside of India at a rate of less than 7%.
(LERMS) i.e., a dual exchange rate system.
• It enables borrowers to reach out to a huge
• The budget 1993-94 replaced the LERMS
number of international investors.
with the managed exchanged floating rate
Committee on Capital Account Convertibility
system. It also introduced the convertibility
Tarapore Committee (1997)
of the Rupee for trade account transactions.
• In 1997, the Reserve Bank of India
• In August 1994, the government established the Committee on Capital
introduced current account convertibility Account Convertibility (CAC) or Tarapore
[it is mandatory as per Article 8 of IMF Committee to provide a roadmap for full
(International Monetary Fund), in case the rupee capital account convertibility.
BoP (Balance of Payment) situation of the • The key highlights of the report, including
member country is stable]. the preconditions to be achieved for the
• Since, 1994 government and RBI have full floating of money are as follows:
been gradually liberalising capital account o Gross Fiscal Deficit to GDP ratio to be
convertibility (CAC) norms, i.e.: reduced from a budgeted 4.5% in 1997-
o The External Commercial Borrowing 98 to 3.5% in 1999-2000.
(ECB) ceiling has gradually been raised. o For the three-year period between 1997
o NRI deposit has been made fully and 2000, the inflation rate should
convertible. maintain between 3-5 per cent.
o Outward remittance ceilings are o External sector policies should be
gradually being raised. designed in such a way that current
Masala Bonds receipts to GDP ratios are raised, and
debt servicing ratios are reduced from
Masala Bonds are bonds issued in other
25% to 20%.
countries in Indian rupees, rather than the
o A consolidated sinking fund should be
local currency. It was introduced in India by the
constituted to meet the debt repayment
International Finance Corporation (IFC) in 2014
needs of the government. The fund
for funding infrastructure projects.
should be financed by increasing RBI’s
Benefits of Masala Bonds
profit transfer to the government and
The benefits for the investors are: disinvestment proceeds of the public
• It has a high rate of interest. sector undertakings.
External Sector 205

o To assess the adequacy of foreign o Improvement of the financial system in

exchange reserves in the event of an the context of global competition
emergency, four indications should be Foreign Investment
considered. In addition, the RBI Act • The foreign investment includes capital
should establish a minimum net foreign flows from one country to another country.
asset to currency ratio of 40%.
• With globalisation, more and more
Second Tarapore Committee on Capital
companies have branches in countries
Account Convertibility (2006)
around the world because of the attractive
• Reserve Bank of India set up the second
opportunities of cheaper production due to
Tarapore committee to set out the
the availability of labour at lower costs and
framework for Fuller Capital Account
lower or fewer taxes.
Convertibility in relation to the progress
made in economic reforms, the stability in • Foreign investment in a country is a good
the external and country’s financial sectors, sign that often leads to an increase in jobs
accelerated growth and integration with and income.
the global economy. • As more foreign investment comes into a
• The following are some of the committee’s country, it can lead to greater investments
key recommendations: because individuals/companies see the
o The committee proposed three stages country as economically stable.
for implementing full rupee convertibility • Foreign investments can be divided into:
in capital accounts. o Foreign Direct Investment (FDI)
o First Phase in 2006-07 o Foreign Portfolio Investment (FPI)
o The second phase in 2007-09
Foreign Direct Investment (FDI)
o Third Phase by 2011.
o External Commercial Borrowings (ECB) • A Foreign Direct Investment (FDI) is a financial
should have a higher upper ceiling for investment made by a person or a company
automatic approval. from one country into a company in another.
o NRIs should be allowed to participate in • A foreign investor establishes/acquires a
capital markets. business entity in the host country, as well
o NRI deposits should be tax-favoured. as management rights, through FDI.
o Existing P-notes holders should be • Definition of FDI by the IMF (International
provided with a way out before the Monetary Fund): “An investment through
P-notes are totally phased out. which an investor acquires lasting and
o Acts governing banking regulation are substantial management control (at least
being improved. 10% equity or voting rights) in the foreign
o On the current account, the rupee affiliates”.
is fully convertible, but only partially • FDI is usually made in open economies
convertible on the capital account. which offer skilled labour and growth
• Tarapore Committee has given the following potential for the investors, as opposed to
benefits of capital account convertibility to strictly regulated economies.
India:
Gaps Between MoUs and FDI
o Availability of large funds to supplement
• It is the difference between the investment
domestic resources and thereby
committed by the foreign investors and the
promote economic growth.
actual foreign investment made. This may
o Improved access to international
be due to the following reasons:
financial credit markets and a reduction
o Unfavourable investment climate
in the cost of capital.
characterised by excessive paperwork
o The incentive for Indians to acquire and
and red tape.
hold international securities and assets
206 External Sector

o Inadequate infrastructure and a scarcity Advantage of FDI

of skilled labour.
• FDI helps the host country’s economy
o Labour and contract enforcement thrive by supplementing domestic capital
legislation are out of date. formation, which creates jobs and supports
o In the official machinery, there is economic growth.
corruption and kickbacks.
• They bring modern technologies, managerial
o The fiscal deficit is high. and entrepreneurial skills, marketing
o There is no proper market exit strategies, etc., along with foreign capital
mechanism. to the host country.
Measures to Reduce the Gap between MoUs • They promote competition by suppressing
and FDI domestic monopolies.
• Developing viable projects.
• They provide a wide variety of quality
• Single window clearances should be products to people at competitive prices. It
started. increases the standard of living of people.
• Government spending on physical
• They promote industrial diversification in
infrastructure, the industrial corridor, and
host countries.
ports should be increased.
• They promote the development of
• Reduced corporate taxes and rational tax
infrastructure by directly investing in
laws.
infrastructure projects as well as by creating
• Having a firm grip on finances and cash
demand for such services.
flow.
• They provide significant tax revenue to the
• Reducing the number of negative FDI
host government.
investments.
• They promote the globalisation of the host
• Faster dispute resolution and improved
economies.
contract enforcement mechanisms.
• They tend to reduce the factor price
Components of FDI
differential across nations, i.e., they tend to
• Foreign direct investment has the following
increase wage rates and decrease interest
component as mentioned by IMF:
rates in underdeveloped countries and
o Equity investment: Foreign direct
developing countries and vice-versa in
investor’s purchase of shares of an
developed countries.
enterprise.
Disadvantages of FDI
o Retained Earnings/Reinvested earnings:
Earnings are not distributed as dividends. • They adversely affect domestic companies
especially MSME (micro small and
o Intra Company Debt Transfer: Short/
medium). It may worsen unemployment
long-term borrowing and lending
in the host (developing) countries due to
between direct investors.
export substitution and reimports than
Methods of FDI
employment through additional exports to
• There are several ways for foreign direct
host countries.
investment to get voting power in a company
• It can be the new wave of imperialism
in a given economy:
reflected by the use of power and economic
o By acquiring shares in an enterprise
influence to dominate smaller countries.
o Mergers and acquisitions
• They may intervene in the domestic
o Establishing a subsidiary of a domestic economic policy of the host government.
company in a foreign country
• They aggravate income and regional
o Joint ventures with foreign corporations inequalities.
External Sector 207

• They induce dualism (the sharp difference Exchange Management Act (FEMA)
between traditional and modern sectors) in 1999.
in the host (developing) countries. o Press Note 18 was abolished in 2005:
• They repatriate huge FOREX reserves ■ Under PN18, the foreign investor
in various forms like high dividends, who has joint ventures in India
interest, royalties etc. In the long run, they needed a No Objection Certificate
deteriorate the Current Account Deficit (NOC) from their Indian joint
(CAD) of host (developing) countries. venture partner for investing in any
• They promote excessive consumerism by business in India.
indulging in excessive advertisement and o FDI in Multibrand Retail 2012:
superficial product differences.
■ Allowing 100% FDI ownership in
• It leads to an escalation in the prices of single-brand retail trading and up to
assets which may lead to local resentment 51% FDI in multi-brand retail.
(Asset Price Bubble).
Recent FDI Reform
India’s FDI Policy
• International firms will be attracted to
• India’s FDI policy comes under the Ministry the coal sector by 100 per cent FDI via
of Industry and Commerce [Department the automatic route for coal mining
for Promotion of Industry and Internal and activities linked with processing
Trade (DPIIT)]. infrastructure, resulting in a more efficient
• The 1991, Balance of Payment (BoP) crisis and competitive coal market.
led to major reform in FDI policy. Some of • Contract manufacturing has been
them are as follows: authorised to accept 100 per cent FDI
o New Industrial Policy, 1991: through the automated approach, boosting
o Industrial licensing was abolished domestic manufacturing significantly.
except for a few important sectors. • The concept of 30% local sourcing has been
o Many sectors are open to foreign altered in single-brand retail trade (SBRT),
participation. and online sales are now authorised without
o Major bodies set up to promote the need to construct physical locations.
and facilitate FDI inflows, such as • According to the revised guidelines, Foreign
the Foreign Investment Promotion Direct Investment Cap is 100% in the
Board (FIPB). defence sector.
o Liberalisation of Exchange Rate o Up to 49% is allowed through automatic
System (LERMS): route and above 49% under government
route; wherever it is likely to result in
o With the initiation of economic
access to modern technology or for
reforms, India moved to a floating
other reasons to be recorded.
currency regime, which involved the
dual exchange rate system (one official • 100 % FDI is permitted for insurance
and the other market-determined). intermediaries.
India and FDI
o In March 1993, the unified exchange
rate system was introduced by • FDI equity inflows into India totalled US$
replacing the dual exchange rate 446.11 billion from March 2000 to September
system. 2019, according to the Department for
Promotion of Industry and Internal Trade
o Introduction of partial Capital
(DPIIT), indicating that the government’s
Account Convertibility (CAC).
efforts and initiatives to improve the ease
o Foreign Exchange Regulation Act
of doing business climate and relax FDI
(FERA) was replaced by the Foreign
norms are paying off.
208 External Sector

• Data for Q2 2019-20 indicates that the • During, Q2 2019-20, India received
service sector attracted the highest the maximum FDI equity inflows from
FDI equity inflow, followed by the Singapore, followed by Mauritius,
telecommunications sector, and computer Netherlands, USA, and Japan.
software and hardware.
• An increase in net FDI inflow also gives
a more stable source of funding than
the Current Account Deficit, and in that
sense provides greater stability to the
improvement in BoP position as compared
to other capital inflows.
Note:
• India received a total foreign direct
investment of USD 60.3 billion from April
to December 2021, which is 10.6 per cent
lower compared to the USD 67.5 billion
of FDI received in the same period of
2020-21, according to the government’s
data.
Fig. 11.7: FDI Inflows in India
Q. Discuss the impact of FDI entry into the multi-trade retail sector on supply chain
management in commodity trade patterns of the economy. (100 Words, 5 Marks)
• In the introduction, try to write the definition of FDI.
• In the body,
⚪ Discuss the impact of FDI on supply-chain management in commodity trade patterns.
• Try to conclude the answer by highlighting the need for FDI in the multi-trade sector.
Answer:
A foreign direct investment (FDI) is an investment made by a firm or individual in one country
into business interests located in another country. Generally, FDI takes place when an investor
establishes foreign business operations or acquires foreign business assets in a foreign
company. Currently, 51% of FDI is allowed into the multi-trade retail sector.
Multi-brand retail trading is selling products of different brands under one roof. For example,
Big Bazar, Reliance, Shopper Stop, etc. These establishments sell products of different brands
at one establishment. With regards to multi-brand retail trading, the central government has
just framed an enabling policy specifying the maximum FDI which is allowed.
Impact on the multi-trade retail sector:
• Improved supply: Once, FDI is allowed in the multi-brand retail sector various suppliers
in different brands will synergise their supplies to various areas. This synergies supply will
improve the overall chain.
• Improve warehousing: Warehousing facilities may improve as huge investment will come
into this sector. This improves storage facilities and helps to augment various brands’ value
and improve their sales in the market.
External Sector 209

• Employment generation: FDI in the multi-brand retail sector will increase employment
as many logistics-related jobs, delivery boys, and sales girls/boys demand will increase.
Hence, this will give full employment to youths.
• Technologies: Cold storage facilities may be improved and bring newer technologies to
the cold storage system. India currently needs investment and technologies concerning
cold storage both static and mobile cold systems.
• Opportunities for everyone: Opening up the multi-brand retail trade sector has brought
opportunities for small traders, producers, and tribal people to participate in huge markets
and sell products all over the country as well as exporting these products help them to
earn more.
Though, there is a lot of controversy regarding allowing FDI in the retail sector, these
controversies regarding policies need to be resolved and promote FDI in various other sectors
as well. India needs FDI to generate employment and a value chain.
Q: Though India allowed foreign direct investment (FDI) in what is called multi-brand retail
through a joint venture route in September 2012, the FDI even after a year, has not picked up.
Discuss the reasons. (100 Words, 5 Marks)
• In the introduction, try to write the definition of joint- venture.
• In the body,
⚪ Discuss why FDI has still not picked up in the multi-brand retail sector.
• Try to conclude the answer with suggestions.
Answer:
When 2 or more parties come together in an arrangement for business purposes so as to pool
their resources and complete a particular task, then it’s called A joint venture (JV). In this
venture, each of the participants is responsible for profit, losses, and costs associated with it.
In 2012 the Government allowed 51% FDI in the multi-brand retail sector but it has not picked
up since then. Reasons include-
• Euro crisis: The Euro crisis, a current account deficit of over 4%, double-digit inflation,
corruption in governance and a failing political system. It would not be wrong to say that
the above factors are the reasons behind the unhappy growth story of India.
• Unclear Policy Framework: It has been said that unclear policies or an environment of
confusion lead to unattractive offers to foreign investors to invest In India in the multi-
brand trade sector.
• Politicisation: Many political parties are claiming that if FDI is allowed in the multi-brand
retail sector, it will lead to the economic colonisation of India. (Currently, FD in this sector
is allowed to 100%, with 51% MSME content compulsory).
• Bureaucratisation: Getting approval from various government departments, including
state-level approval, is another problem in not picking up FDI in this sector.
210 External Sector

Hence, to promote FDI in the multi-brand sector, first, we need to improve ease of doing and
its various sub-categories. This may lead to increased job creation, and consumer asking can
become true if this FDI takes place and achieves its intended objectives.
Q. Foreign Direct Investment (FDI) in the defence sector is now set to be liberalised: What
influence is this expected to have on Indian defence and economy in the short and long run?
• In the introduction, try to write about India’s FDI in the defence sector (recent policy
changes)
• In the body,
o T
he first part of the answer discusses the short and long-term impact of the new FDI
policy on the Indian defence sector.
• Try to conclude the answer as per the context of the question.
Answer:
In the recent policy change of the Government of India, the Ministry of Finance has allowed
or increased the FDI limit from 49% to 74% with automatic approval. This new policy shift is
in accordance with the Make in India policy. The Indian defence industry has been very vibrant
and can be very competitive if it gets some critical technologies. For making India a defence
manufacturing hub and making India “ATMA NIRBHAR BHARAT” or “SELF RELIANT INDIA” in defence
equipment.
Short-term impact:
• Revive economy: The Indian economy is facing a slowdown and fresh investment
opportunities will generate employment and revive India’s economic growth by increasing
production in Micro, Small and Medium Industries (MSMEs)
• Fulfil immediate requirement: As tension with China has increased, the immediate need for
some of the equipment can be fulfilled by foreign defence corporations. Most corporations
are keen to invest in the Indian defence industry.
• Positive sentiments: With an increased limit of FDI will give positive signs in the pandemic
affected world economy and enhance the confidence of investors to invest in various
segments of the defence sector. It will attract newer domestic investors.
• Increases jobs: Slowing economy and jobless growth need economic growth with jobs.
The defence industry has immense potential to generate a number of direct and indirect
jobs.
• Reduced import: It will have both short term and long-term impacts as increased
investment will increase indigenous production and in long term, it will reduce India’s
import dependency and forex reserves as well.
• Boost Morale of Armed Forces: Indigenous manufacturing will boost armed forces as
modernisation of Indian armed forces may be done in a timely and faster manner, with
indigenous systems.
External Sector 211

• Start-ups: Easing FDI norms will also lead to a thrust to set up newer start-ups in defence
manufacturing. This will also help in making the most innovative defence products for the
Indian armed forces and for exports.
Long-Term impacts:
• Create Defence Ecosystem: Increased FDI limit will make foreign investors build a proper
defence ecosystem In India. If a proper ecosystem is developed in the defence ecosystem
it will help in building the state of the technologies.
• Increasing defence export: In the long term, India will become a well-established defence
manufacturer, which will help in increasing defence export. India has set a target of export
of rupees 35 thousand Crore or $5 billion dollars by 2025.
• Strategy in Indian Ocean region: Exporting defence equipment to friendly countries,
especially south-east Asian countries. The Government of India has been in talks about the
export of the BRAHMOS missile system to the Philippines, and recently Malaysia showed
interest in Tejas LCA.
• Making India ATMA NIRBHAR: Government has announced last year a policy of making India
ATMA NIRBHAR in the defence sector. The Ministry of Defense has declared a list of import
bans on some of the defence products.
• Future programmes: India is still lacking in critical technology like jet engine technology.
After spending thousands of crore rupees, India’s Kaveri Jet engine programme is still
not fully developed. One’s foreign companies start coming to India. The Kaveri engine
programme will get much-needed thrust.
• Strengthen the Indian rupee: Every year huge amount of dollars is spent on defence items
imports but an increased FDI limit will help in save foreign currencies and help keep the
rupee value stable.
• Competitive atmosphere: By bringing new private players into the Indian defence industry
will create a competitive environment which will further improve quality, research, and
development and cheap but most advanced products can be produced within India.
Thus, recent initiatives in India’s defence sector will give expected results in upcoming
times. The Indian government has been looking forward to increasing exports and building
a sustainable and matured defence sector and the related ecosystem. The constant policy
support and political support will make India self-reliant in defence industries.
Q. Justify the need for FDI for the development of the Indian economy. Why there is a gap
between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing
actual FDIs in India. (200 Words, 12.5 Marks)
• In the introduction, try to start your answer by defining FDI.
• In the body,
o Discuss the need for FDI in the first part of the answer in brief.
o In the second part of the answer, you need to discuss the reasons behind the gap
between MOU signed and the actual FDI.
212 External Sector

o Suggest measures for the realising of MOU signed FDI.

• Try to conclude as per the context of the question.
Answer:
A foreign direct investment (FDI) is an investment made by a firm or individual of one country
into business interests located in another country. Generally, FDI takes place when an
investor establishes foreign business operations or acquires foreign business assets in a
foreign country. FDIs are distinguished from portfolio investments in which an investor merely
purchases equities of foreign-based companies.
Need for FDI for India’s development:
• Economic growth: The growth of FDI is needed to boost economic growth. Higher FDI will
release pressure from domestic savings constraints, and also it will help to overcome foreign
exchange barriers, thereby, providing risk-sharing capital infusion.
• Industries and employment: Higher inflow of FDI will help to improve higher economic
activities of industries. Higher investment in the manufacturing sector will result in greater
employment generation.
The reason behind the gap between MOU signed and actual FDI’s:
• Ease of Doing Business: Infrastructural and regulatory bottlenecks such as, dealing with
construction permits, registering properties, availability of electricity, paying taxes, trading
across borders, corruption, strict labour laws etc. delay project implementation, and sometimes
rolling back investment decisions. For example, POSCO signed a preliminary agreement of
investment of more than $5 billion dollars but on the issue of securing mining rights and
regulatory clearance/litigations, it decided to pull out.
• Land acquisition: Land acquisition is the biggest hurdle in achieving the desired level of
FDI inflow. As major infrastructure projects and industrial clusters need concessional land,
delay in land acquisition leads to increased cost of projects.
• Red tapism: Increasing corruption and maladministration in granting all the required
permissions for investments have been not addressed. This restrictive behaviour resulted in
the realisation of the signed MOU and the actual inflow of FDI.
• Vested interests: Several reports by GoI have pointed toward the role of some NGOs
obstructing the course of projects by playing with popular sentiments. Such tactics not only
delay implementation, but also create a negative image of India as a business destination to
attract FDI.
Suggestions for increasing actual FDIs in India:
• Need to pursue economic reforms and business-friendly legal frameworks such as insolvency
and bankruptcy code, and easy exit norms.
• Land acquisition related infrastructure needs, such as special economic zones etc, should
be given priority.
• Strong political will at the level of state governments is needed to allay apprehensions in
the mind of the local population and tide over negative sentiments fostered in the local
community by some vested interest. Government must engage people proactively to stop
the spread of misinformation.
FDI is the need of the hour for further development of the Indian economy. By making it more
competitive, it also holds the key to making India part of the global supply chain. GoI along with
respective state governments must engage the global community to attract more and more FDI
and prioritise their implementation.
External Sector 213

Foreign Portfolio Investment (FPI) o FII (Foreign Institutional Investor)

• Non-residents can invest in Indian financial o Sub Accounts
assets like shares, government bonds, o Qualified Foreign Investors (QFI)
corporate bonds, convertible securities, • Foreign Portfolio Investment (FPI) is more
infrastructure securities, and so on through liquid than foreign direct investment
Foreign Portfolio Investment (FPI). because FPIs can be sold off quickly and
• Foreign Portfolio Investors are a type of FPIs are seen as short-term attempts
investor who makes investments in these to make money, rather than a long-term
securities. investment in the economy.
• Foreign Portfolio Investor (FPI) was created • Portfolio Investment by any single investor
based on the recommendation of the K. M. or investor group cannot exceed 10% of the
Chandrasekhar Committee by merging the equity of an Indian company, beyond which
existing three investor classes: it will now be treated as FDI.
Fig. 11.8: FPI Net Investment Yearwise
• An increase in net FPI inflows improves

the BoP position and arises on account
of cross-border transactions involving
debt or equity securities, other than those
included in direct investment or reserve
assets.
• Portfolio investment is generally referred to as
“hot money” because of its tendency to flee
at the first signs of trouble in the economy
or improvement in investment attractiveness
elsewhere in the world.
Fig. 11.9: FDI & FPI Inflow
214 External Sector

Committee on Rationalisation of Roots of HR Khan Committee on Foreign Portfolio

Portfolio Investment Investment
• To rationalise/harmonise, and thereby, • In 2014, SEBI established the H R Khan
ease the entry routes for various foreign Committee to investigate FPI guidelines
portfolio investors into India, SEBI set up a and investor concerns.
committee in 2014 under the Chairmanship • The committee’s key recommendations are
of K.M. Chandrasekhar. as follows:
• The major recommendations of the o NRIs, Indians living abroad, and resident
committee are as follows: Indians should be allowed to own
o A new investor type, “Foreign Portfolio non-controlling holdings in FPIs and
Investor” (“FPI”), by replacing FIIs and should not be restricted from managing
QFIs. Existing FIIs, their sub-accounts non-investing FPIs or SEBI-registered
and QFIs are to be merged into FPIs. offshore funds.
o Portfolio investments are defined as o According to the panel, NRIs will be
investments made by a single investor or allowed to invest as FPIs if their single
a group of investors that do not exceed holding is less than 25%, and their group
10% of an Indian company’s or firm’s holding is less than 50% in a fund.
equity. FDI is defined as an investment o In the case of government-related FPIs,
that exceeds a 10% threshold. SEBI should eliminate the additional
o FPIs will be allowed to invest up to 24 Know Your Customer (KYC) requirements
per cent of their total assets (being the for the beneficial owner.
present default aggregate limit for FIIs, o The panel also suggested that the new
which can be increased by the company restrictions be implemented equally for
up to the sectoral cap). investors who use participatory notes
• Know Your Client (“KYC”) checks are based (P-notes).
on the risk categorisation of FPI. o The committee proposed that former
o Low Risk (Category I): Government and PIOs (Persons of Indian Origin) be
Government-related entities. exempt from any restrictions and that
o Medium Risk (Category II): Regulated well-regulated and publicly owned FPIs
entities such as banks, asset with common control be allowed to
management companies, broad-based pool their investment limits.
funds such as Mutual Funds etc. o After the new regulations are
o High Risk (Category III): All other FPIs implemented, the time for compliance
that do not meet the criteria for the first should be extended by six months, and
two categories are placed in Category III non-compliant investors should be
(High Risk). granted an additional 180 days to wind
■ FPIs under the Category III are not down their existing positions.
allowed to issue Offshore Derivative o Changes to the rules for identifying
Instruments (“ODI”)/Participatory senior managing officials of FPIs and
Notes (“PN”). beneficial owners of publicly traded
firms were also proposed by the panel.
External Sector 215

Difference Between FDI vs FPI

Basis for Comparison Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI)
Definition FDI is the investment made FPI refers to investing in a foreign
by foreign investors to gain a country’s financial assets, such as
substantial interest in a company bonds and stocks.
located in a different country.
Role of Investors Active Passive
Type Direct Investment Indirect Investment
Investment Invests in financial & non-financial Invests only in financial assets.
assets.
Term Long-term investment Short-term investment
Volatility Stable Highly volatile
Table 11.1: Difference Between FDI and FPI
Foreign Trade • It is always termed as an inward-oriented

• Foreign trade includes all imports and trade policy.
exports to and from India. • Trade barrier: Government policy to restrict
trade. It includes:
• At the level of the Central Government, it is
o Tariff barriers:
administered by the Ministry of Commerce
■ It is a custom, duty or a tax imposed
and Industry.
on products that move across
• The inflow of goods is called import trade
borders.
whereas the outflow of goods is called ■ It includes import duty, export duty,
export trade.
etc.
• One of the most important macroeconomic o Non-Tariffs barriers:
indicators is the trade balance, which is the ■ These are non-tariff restrictions
difference between the monetary value of such as government regulations
exports and imports in the economy. and policies with respect to overall
Foreign Trade Policy trade.
Free Trade Policy ■ It includes quotas, subsidies, sanitary
• It is a trade policy with the least restriction and Phytosanitary requirements, etc.
on trade, i.e., trade takes place without ■ A number of times Alphonso
barriers such as quotas, tariffs, and foreign mangoes from Maharashtra are
exchange controls. rejected by European countries on
• Thus, under free trade, goods and services grounds of not meeting the sanitary
flow freely between countries. and phytosanitary requirements.
• Free trade implies an absence of Export Promotion Schemes
governmental intervention in international
• Duty Drawback Schemes:
trade among different countries of the
o Under this scheme, custom/excise duty
world.
paid by exporters of selected products
• It is also termed an outward-oriented trade
is partially or wholly reimbursed.
policy.
Protectionist Trade Policy • Export Promotion Capital Goods (EPCG):
• It is a trade policy with a restriction on o Under this scheme, exporters can import
trade through various trade barriers. capital goods at zero or concessional
216 External Sector

custom duty subject to an export o The schemes which are replaced by the
obligation. MEIS scheme are:
• Focus Market Scheme: ■ Focus Product Scheme (FPS)
o Exporters are provided duty credit ■ Focus Market Scheme (FMS)
scripts equivalent to 3% of the Free ■ Market Linked Focus Product
on Board (FOB) value of exports if they Scheme (MLFPS)
are exporting to selected destinations/ ■ Agri. Infrastructure Incentive Scheme
countries. ■ Vishesh Krishi and Gram Udyog
• Focus Product Scheme: Yojna (VKGUY)
o Under this exporter of selected labour- o The system compensates the exporter
intensive products (e.g., handicrafts) are for his loss of duty payment by providing
provided duty credit scrip equivalent to incentives in the form of duty credit
2% of the FOB value of exports. scrip (which permits the bearer to
India’s Medium-Term Export Policy: Foreign receive something in return).
Trade Policy, FTP (2015-20) o For notified commodities sold in notified
• It was announced on 1st April 2015 by the markets, the incentive is provided as a
Ministry of Industry and Commerce. percentage of the realised FOB value (in
• It seeks to enhance the competitiveness free foreign exchange).
of export by adopting systemic reforms • Service Exports from India Scheme (SEIS):
rather than incentivising exports through o The government has also introduced
subsidies. the Service Exports from India Scheme
• It seeks to focus on higher-value addition (SEIS) under the Foreign Trade Policy
and technology in future with a focus on (FTP)- 2015-20. It replaced the earlier
quality and standard. scheme ‘Served from India Scheme’
• It seeks to rectify the inverted duty under Foreign Trade Policy, 2009-15.
structure. It is a situation in which higher o The key objective is to make our services
custom duties are imposed on imports of globally competitive in terms of price.
input/raw material vis-a-vis on import of o These SEIS scrips are transferable
finished or final goods. and can also be used for payment of a
• It is drafted in consonance with other number of central taxes/duties including
initiatives of the government like Make in the basic customs duty.
India, Ease of Doing Business, Digital India, • Export Promotion Capital Goods (EPCG):
Skill India, etc. o Under this scheme, the export obligation
Objective has been reduced to 75%.
• To increase India’s share in world export • Trade facilitation:
to 2% to 3.5% by 2020. o Online filling of documente/application
• To double the export of goods and services in a 24*7 environment.
by 2020. o CA/CS can file digitally signed
Features documents.
• Merchandise Exports Incentive Scheme o Exporter/importers profiles will
(MEIS) be created to eliminate multiple
o The Merchandise Exports Incentive submissions of the document.
Scheme (MEIS) was created by the o The FTP is to be reviewed after two and
Indian government to replace five a half years instead of annual reviews.
existing incentive schemes from the Critical Appraisal of FTP Policy (2015-20):
Foreign Trade Policy 2009-14. • Subsidies have been reduced.
External Sector 217

• Gave more flexibility to exporters and • According to the SEZ Act, India’s SEZs are
importers. divided into four categories based on their
• Aligned with Make in India. size:
Special Economic Zones (SEZ) o (1,000+ hectares) multi-sector.
• A Special Economic Zone is a part of a o Specific to the sector (100+ hectares).
country that has its own set of economic o (40+ hectares) Free Trade and
rules and regulations that differ from those Warehousing Zone (FTWZ).
in other parts of the country. o (10+ hectares): Technology, handicraft,
• High tariffs and taxes, as well as red tape and non-conventional energy, gems and
tight labour rules, have traditionally been jewellery.
the major barriers to foreign investment • Currently, 378 SEZs have been notified,
in India. Foreign Direct Investment was with 265 of them operational according to
encouraged by the SEZ regulations (FDI). the data of the Ministry of Commerce &
• Infrastructure has been established Industry.
in these locations, as well as a liberal Exclusive Economic Zone (EEZ)
economic policy and favourable tax rates • The Exclusive Economic Zone is a particular
for businesses. territory that extends outside and adjacent
• In the year 2000, India implemented the to a country’s territorial sea, and it should
Special Economic Zones policy. Prior to be subject to the rights and authority of the
the implementation of SEZs, India relied coastal state.
on Export Processing Zzones (EPZs), which • The coastal state’s exclusive economic
failed to attract global capital. zone rights, authority, and responsibilities
• Instilling investor confidence and are as follows:
emphasising the government’s commitment o Coastal governments have legal
to a stable SEZ policy system. The Special authority over discovering and
Economic Zones Act of 2005 was passed by exploiting, protecting, and managing
the parliament in May 2005. natural resources, whether alive or non-
• The following are the main goals of the SEZ living, in the seabed or near the seabed,
Act of 2005: as well as the seabed’s boundary soil.
o Additional economic activities are o The coastal states should have the right
created. to the economic exploration of zones
o Exporting goods and services is such as to produce energy from water,
encouraged. winds and currents.
o Increasing investment from both • There will be many permissions under the
domestic and international sources. exclusive economic zone, such as:
o Employment opportunities are created. o They can establish and use artificial
o Infrastructure facilities are being islands under the area limit of EEZ.
developed. o They can do scientific research like
• SEZs can be established by: marine scientific research in the EEZ.
o They have the power to protect and
o The federal or state government, or its
preserve the marine environment.
agencies
• Any country’s exclusive economic zone
o The private/joint sector is a combination
cannot be extended beyond 200 nautical
of the public and private sectors.
miles. This distance should be measured
o A foreign agency.
from the baselines (and baseline means
218 External Sector

from where the breadth of the territorial Importance of EEZ

sea is measured) and one nautical mile • In a country, the ocean is a major hub of
equal to 1.852km. economic activity as it serves as a source of food
• The exclusive economic zone of India is and good minerals such as salt, magnesium,
available under the Maritime Zones Act etc., and the ocean is a highway for commerce
of 1976 under section 7. In India, EEZ is because major of the international trade is
guarded by the Indian Coast Guard. The done through the ocean with the help of giant
EEZ does not permit a coastal state to ships. So, EEZ is a big source of revenue from
prohibit or limit freedom of navigation or trade to the government.
overflight.
Q. There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool for
industrial development, manufacturing, and exports. Recognising this potential, the whole
instrumentality of SEZs requires augmentation. Discuss the issue plaguing the success of SEZs
with respect to taxation, governing laws, and administration. (200 Words, 12.5 Marks)
• In the introduction, try to define SEZ.
• In the body,
o Discuss SEZ’s role in industrial development, manufacturing, and export.
o D
iscuss gaps which need to be filled in areas of taxation, governing laws, and
administration.
• Try to conclude with a way forward.
Answer:
To robust the economy there are some regions that are treated differently than the other
regions. These regions are having different sets of rules and regulations. These are called
Special economic zone (SEZ). SEZs are deliberately made attractive so as to attract potential
investors.
SEZ tool for Industrial Development, Manufacturing, and Export:
• Improved investment: SEZ has become an attractive investment destination for investors
from around the world. As fewer rules and regulations, quick approvals, less duty on
export etc. have benefits which resulted in an increased rate of industries. With increased
manufacturing and competitiveness, exports from SEZ have been increasing.
• Easy Availability of Resources: India already creates special economic zones where most
of the infrastructure facilities are available. These available resources and facilities made
industrialists invest in these economic enclaves. All these resources make manufacturing
and competitiveness of the overall industrial sector.
• Export competitiveness: Export competitiveness of the country will improve with improved
connectivity, giving opportunity for reduced cost of transportation of goods. SEZ provide
opportunities for other parts of the country to export their goods at cheaper rates and get
benefits from it.
This huge potential of SEZ can make it possible to achieve the target of Make in India, making
India a $5 trillion dollar economy. But its instrumentality needs complete overhauling to reap
potential benefits from it. Following gaps need to be plagued for the increasing development
of industries in India.
External Sector 219

Issues plaguing SEZ in terms of Taxes, Governing Laws, and Administration:

• Unutilised land: More than 25,000 hectares of land are unutilized in SEZs. Lack of flexibility
to utilise land in SEZs for different sectors. The need is the optimal utilisation of vacant
land in SEZ. Allowing flexibility of land use and removing sector-specific constraints.
• Denotification of SEZ: The reasons given (by developers) for these requests for de-
notification include economic slowdown, poor market response, lack of demand for SEZ
space and change in the fiscal incentive regime for SEZs, etc
• Existence of Multiple Models: There are various models of economic zones such as NIMZ,
SEZ, CEZ, Delhi-Mumbai Industrial Corridor, food park and textile park.
• Under-utilisation of Existing Capacity: Currently, SEZ units are not allowed to do “job work”
for domestic tariff area (DTA) units.
o DTA is an area that is located outside the purview of SEZ and a custom bonded zone.
• Domestic Sales and Tax: Domestic sales of SEZs face a disadvantage as “they have to pay
full customs duty”, as compared to the lower rates with the Association of Southeast Asian
Nations (ASEAN) countries due to a free-trade agreement (FTA).
• Taxation: Imposition of Minimum Alternate Tax (MAT) on SEZs from 2012, as well as the
imposition of income tax on new SEZs and new units, has been stated as another major
challenge being faced by SEZs.
One of the well-known Industries bodies, The Confederation of Indian Industry (CII) expressed
some major issues regarding the Special economic zones —Industrial Parks and issues with
giving infrastructure status to SEZs, Issues regarding approval of external commercial borrowing
(ECB) for the SEZs, allow a refinancing option through ECB; relax the “risk weightage norms”
for the real estate sector.
China has tremendously utilised the potential of Special Economic zones. If India succeeds in
removing the obstacles it can also benefit from SEZs.
Coastal Economic Zone (CEZ) CEZs in India was constituted under the
• Coastal Economic Zones are those guidelines and collaboration of NITI Aayog.
economic regions, which include groups of • The Sagarmala Program, aims to lower
coastal districts, and the districts will have logistical costs and shorten the time it
a strong linkage to ports in the region to tap takes for international and domestic freight
like an organisation with planned industrial to move. The aim was to develop ports in a
corridor projects. way that they are used in an efficient way,
• These zones are developed to provide a and they can provide more space for cargo
business-friendly ecosystem, and it will and transport vehicles at a lower cost. So,
include ease of doing business, ease of in viewing this, the concepts of Coastal
exporting and importing, fast decisions for Economic Zones have been introduced.
environmental clearances and connections • In view of reducing logistics costs and
of electricity and water will be given in a reducing the time for movement of national
speedy manner. and international cargo, the government has
• Coastal Economic Zones are developed started 30 potential port-linked industrial
by the government under the Sagarmala clusters across three sectors, which are
Programme by the Ministry of Ports, Shipping energy, materials and discrete manufacturing.
and Waterways. An Inter-Ministerial There are nine bulk clusters for fundamental
Committee (IMC) for the development of input industries, such as power, refineries
220 External Sector

and petrochemicals, and cement, as well as India leading to the adoption of the model
21 discrete manufacturing clusters in labour- BIT in 2016.
intensive industries such as electronics, • Now some examples of bilateral investment
apparel, leather products, furniture, and food treaties/ agreements in which treaty done
processing. A master plan for the maritime and terminated:
cluster in Gujarat and Tamil Nadu has already
SNo Country Date of Date of Date of
been established by the government. Agreement Enforcement Termination
Bilateral Investment Treaties (BIT) and Free 1 United 14 March 6 January 23 March
Trade Agreement (FTA) with Evaluation Kingdom 1994 1995 2017
Bilateral Investment Treaties (BIT) 2 Germany 10 13 July 1998 23 March

December 2017
• Bilateral Investment Treaties are those 1995
agreements which are done between two
3 Russian 23 5 August 11 April
countries to promote and protect their Federation December 1996 2017
investment. Investment in both countries 1994
can be done by companies or individuals of 4 Malaysia 3 August 12 April 1997 23 March
foreign nationals. 1995 2017
• In simple words, one can say it aims at 5 Italy 23 26 March 23 March

November 1998 2017
protecting the investment of investors in
1995
both countries.
Table 11.2: Bilateral Investment Treaties/ Agreements
• BIT encourages foreign nationals to invest
in states to overall develop the economy. India’s Experience with BITs
• India signed its first BIT with the UK in 1994
• The aim of BIT is as follows:
and subsequently with 83 countries. These
o It protects the investment of investors
BITs were negotiated based on the India BIT
who are investing in foreign countries
Model of 1993.
where already their rights are not
• These BITs have been one of the major
protected due to the prevailing rules
drivers of FDI inflows into India between
and regulations of trade, treaties, etc.
2001-2012.
o It also encourages the adoption of • Under the 1999 Indo-Australia BIT, an
market-oriented policies of domestic international tribunal ordered India to pay
nature, which will give benefit private 4.10 million Australian dollars to white
investment in an open and freeway and businesses in 2011.
non-discriminatory way. • Since then, India has signed BIT with 4 new
Important Features of BIT countries and terminated its older BIT with
• Investor-State Dispute Resolution. 77 countries.
• Repatriation of investment and trade. • After getting shocked by the award and
notices, India revised its BIT model in 2015.
• Most Favourable Nation Treatment.
• Simultaneously, India began getting many
• National treatment.
notices under its BITs as a result of the
• Full Protection and Security. Supreme Court’s rejection of the 2G licence
Reason for Termination of BITs and the retrospective taxation crisis.
• The BITs signed by India gave extensive FTA (Free Trade Agreement)
protection to foreign investment with scant • It is a fair set of rules for trade between the
regard for the state’s interest based on the agreeing countries. In FTAs, both countries
neoliberal model. will provide favourable treatment to each
• The Investment State Dispute Resolution other by reducing trade barriers. In FTA
Cases (ISDS) cases against India led to a countries will cut down on duties levied on
fundamental rethink and review of BITs in goods and services they are importing.
External Sector 221

• There are different types of the trade like free trade. It was established by a foreign
bilateral and multilateral trade agreements. government as an alternative for countries
A bilateral trade agreement means when that do not want to join the European Union
two countries are ready to lose some trade (EC). The Stockholm Convention established
barriers and decrease duty on trade and a the European Free Trade Association (EFTA)
multilateral trade agreement means when on 3 May 1960, with Austria, Denmark, the
more than two countries are ready to lose United Kingdom, Norway, Portugal, Sweden,
trade barriers or decrease duty on imports and Switzerland as founding members.
between them. o EFTA membership is now confined
Benefits of FTA to four nations: Switzerland, Norway,
• It will create jobs and increase trade in Iceland, and Liechtenstein. These four
member countries. countries are not members of the
• It will help to gain economic growth in European Union (EU). In May 2005,
member countries. during the President of India’s visit to
• It will also improve the international Iceland, Iceland recommended to the
relations between the member countries. President that they negotiate a Free
Some of the Free Trade Agreements signed by Trade Agreement (FTA) with India.
India o Following that, in January 2006, during
• India-Gulf Cooperation Council (GCC) Free his meeting with India’s Commerce and
Trade Agreement (FTA) and negotiations: Industry Minister (CIM) in New Delhi, the
India signed an agreement on Economic Swiss Federal Councillor, who is also
Cooperation with the Gulf Cooperation the Head of the Federal Department
Council on 25th August 2004. The structure of Economic Affairs, proposed to
of the inked agreement states that both India a possible Preferential Trading
parties will study measures to expand and Arrangement (PTA) between India and
liberalise trade relations between the two EFTA. This request was made once more
nations, as well as begin discussions on the in October of 2006.
viability of a free trade agreement between Reverse Special Economic Zones (R-SEZ)
them to boost commerce. As a result,
• Reverse SEZ is an import-oriented area,
negotiations with the GCC began.
located outside the country’s border in
o So far, two rounds of negotiations have
order to get cheap, import duty-free/
taken place between the two countries,
exempt raw materials.
in 2006 and 2008. Because the Gulf
• Under this, Indian chemical and
Cooperation Council has deferred its
petrochemical companies will set up plants
discussions with all countries and
in other countries which have abundant
economic organisations throughout
and cheap feedstock for importing back
the world and is currently revising its
their output.
negotiating procedures with all countries
and economic groups, the third round • The Ministry of Chemical and Fertilisers is
has not taken place. The government is exploring options to set up R-SEZ in Iran,
working on resuming the negotiations and Myanmar.
as soon as possible on various bilateral • The 1st R-SEZ is proposed to be established
and multilateral platforms. in the Chabahar Port area of Iran.
India-EFTA: Broad-based Trade and Investment • Objective: To ensure the supply of cheap
Agreement (BTIA) industrialchemicalsforthe domestic chemical,
• The European Free Trade Association (EFTA) is petrochemical, and fertiliser industry in order
a non-profit intergovernmental organisation to enhance its competitiveness and increase
dedicated to promoting and expanding its export potential.
222 External Sector

International Financial Service Centre (IFSC) regardless of whether they are residents
• International or Offshore Financial Centres or non-residents, as determined by the
(IFCs) are financial centres that serve regulatory authority.
clients from countries other than their own o Further, then specified limitations, no
(OFCs). other regulations apply to a unit located
• All of these centres are ‘international’ in the in the IFSC.
sense that they deal with the cross-border • Under the provisions of the SEZ Act, financial
flow of money and financial products and
regulators such as the Reserve Bank of India
services.
(RBI), the Securities and Exchange Board of
• An IFSC is thus a jurisdiction that delivers
India (SEBI), the Department of Financial
world-class financial services to non-
Services, and the Insurance Regulatory and
residents as well as residents in a currency
Development Authority of India (IRDAI) issued
other than the domestic currency of the
place where the IFSC is located, to the the following regulations and guidelines to
extent possible under current rules and operationalise IFSC-GIFT in India.
regulations. Cluster-Based Export Area
• The objective of IFSC are: • Clusters can be defined as a sectoral and
o To increase tax revenue. geographical concentration of businesses,
o To create a high-value job. particularly Small and Medium Businesses
o To create an avenue for financial (SMBs), who face similar opportunities and
globalisation. risks, such as the following:
GIFT City o External economies are created as a
• Under the terms of the SEZ Act 2005 result of these factors, such as special
(SEZ Act), SEZ Rules 2006, the Gujarat suppliers of raw materials, components,
International Finance Tec-City (GIFT City) and mechanical equipment, as well as
multi-services special economic zone sector-specific expertise.
(SEZ) has built the first International
▪ It will encourage the country to
Financial Service Centre in India (IFSC) in
focus on specialised technical,
Gandhinagar, Gujarat.
administrative, and financial
• The IFSC in GIFT City (IFSC-GIFT) will
services.
be established as a worldwide financial
and information technology services ▪ It will pave the way for inter-firm
hub, comparable to London, Hong Kong, collaboration and specialisation,
Singapore, and Dubai. as well as collaboration between
• An IFSC aims to introduce to India the types public and private local institutions
of financial services and transactions that to encourage local production,
are now provided outside of India by foreign new innovation techniques, and
financial institutions and their overseas collective learning.
branches/subsidiaries. Some Facts about Cluster Areas:
• For all practical reasons, the IFSC has been • According to government statistics, India has
defined as a ‘deemed foreign country,’ which
roughly 400 contemporary small businesses
has the same ecology as other offshore
and about 2000 rural and artisanal clusters.
locales but is physically on Indian land.
These are expected to account for up to
• The IFSC is home to any financial institution
60% of India’s manufacturing exports.
(or its branch).
In India, it is predicted that SSE clusters
o It is expected to do business in such
generate a significant amount of jobs
foreign currencies and with such entities,
External Sector 223

Cluster-Based Export Area with Agriculture: vegetables including vegetables like potato,
• The first policy for this was announced and cashew, medical herbs got from plants
by the government in December 2018. A in value-added form and will include herbal
number of clusters have been established medicines, food-based nutrients products,
across the country for the development spices like cumin, turmeric, pepper, organic
of exports in order to meet the policy’s food have been identified as potential
objectives. winning sectors. Most of the products/
o Grapes, mango, pomegranate, banana, clusters are already aligned with this
oranges, and onions are among the objective of the policy.
products that have been identified in • Special emphasis has been given by the
Maharashtra’s six clusters. FPOs and co- government on processing and value
operatives should be linked with farmers addition in the policy through workshops for
and exporters to ensure a successful efficient synergy amongst all stakeholders
implementation of the strategy. who are relevant to policy, and they are
o The government must provide the expected to provide the necessary boost in
necessary infrastructure for these achieving the objective of higher exports of
clusters, and the agriculture industry India’s high-quality agricultural products.
must employ cutting-edge technology. Globalisation
Many countries in the Middle East • It refers to the integration of an economy
region are ready to invest and they want with the world economy. It is achieved
to invest in cold chain and warehousing by removing the restriction on the flows
facilities in India for the import of agro of goods and services, foreign capital,
and processed food products by them. technology transfer and movement of a
• The role of the state government is a very natural person across the nations.
important role in the implementation of the • It is a multidimensional concept, i.e., it
agriculture export policy. The main aim of includes the integration of nations in terms
the policy is to reach farmers at the grass- of social, cultural and political, etc.
root level, and the government wants to
Advantages of Globalisation
double their income for achieving the
• It allows for resource distribution based on
overall objective of the policy.
various countries’ comparative advantages.
• In India, agriculture and horticulture produce
Each country specialises in the production
over 600 million tonnes per year, and about
of these commodities in which they are
30% of fresh horticultural output is wasted,
most efficient. It increases productivity and
thus there is a pressing need to tighten the
production at the global level.
supply chain to prevent these losses. India’s
Agri production should not be stopped • It enables economic entities to specialise
within our country’s boundaries, and it and achieve economies of scale (benefit of
should reach out to international markets. large-scale production).
• One will have to see agriculture as an • Globalisation provides corporations
industry and all the stakeholders must work with worldwide access to low-cost raw
together to bring success to the agriculture materials, labour, and technology, allowing
industry. Industrialists can also invest in them to compete in both domestic and
agriculture, which will aid farmers while international markets.
also increasing industrialists’ earnings. • Globalisation has resulted in increasing
• As part of the policy, meat, basmati and non- inward investment flows across countries,
basmati rice, grapes, bananas, pomegranate, which has benefited recipient countries.
224 External Sector

Disadvantages of Globalisation • Euro (€), Japanese Yen (¥) and pound

• Multinational corporations have grown sterling (£) are three of the best hard
currencies in the world today.
in power and influence as a result of
globalisation. Soft currency:
• The threat of employment loss in home • Soft currency is extremely volatile and
markets as a result of globalisation’s unfair, varies frequently. Such currencies are
free trade and structural changes. extremely sensitive to a country’s economic
• A typical critique of globalisation is the and political progress.
over-standardisation of items through • Because of its instability, it’s also known as
transnational branding chains. a “weak currency.”
• Globalisation has made the economies of • In any economy’s FOREX market, the soft
the world interdependent on each other. currency is readily available.
Failure of the economy of one country • In the Indian FOREX market, for example,
creates ripples in many countries. the rupee is a soft currency.
Other Important Terms and Their Meanings Hot currency:
J-Curve effect • The transfer of funds (or capital) from one
• It refers to a phenomenon wherein the trade country to another in order to make a quick
balance of a country worsens following profit is known as hot currency.
the depreciation of its currency before it • Hot currency is constantly shifting from
improves mainly because higher prices on countries with low-interest rates to those
imports will be greater than the reduced with higher interest rates.
volume of imports. • Such sudden withdrawal of foreign currency
• It has a short-run effect. from the market adversely impacts the
Free on Board (FOB) exchange rate and potentially impacts a
• Free on Board (FOB) takes into account country’s Balance of Payments
costs incurred on export/import till the • As international investors run behind
port of loading. profits, they substantially gain from higher
Cost Insurance Freight (CIF) interest rates in different markets.
• It takes into account costs incurred on Cheap currency:
export/import until the port of destination. • Cheap currency refers to money in which
Hard currency low-interest loans and advances are made
• Any globally traded currency that serves as available on simple terms.
a reliable and stable store of value is known • The money that comes into the economy
as hard currency or strong currency. when a government starts repurchasing its
• It’s a currency that everyone trusts because bonds before they mature (at full-maturity
they know it’ll keep its value and won’t be prices) is known as cheap currency.
subjected to frequent, large exchange rate Dear currency:
swings.
• Because of the high-interest rates, dear
• Hard currencies are widely accepted across money is difficult to come by.
the world since they are stable, convertible,
• Because it occurs when central banks
and enjoy the confidence of investors,
tighten monetary policy, it is commonly
traders, and tourists.
referred to as “tight money.”
• Essentially, an economy with big and diverse
• The money that flows from the people
exports that are mandatory imports for
to the government or the money in the
other countries would generate significant
economy, in general, is referred to as dear
demand for its currency around the world,
currency when a government issues bonds.
causing it to become a hard currency.
External Sector 225


12 Economic Planning
Planning • It is also known as soft planning, facilitator
planning or planning by inducement.
• Economic activities in any modern
civilisation are aimed at meeting human • This planning is usually followed in the
needs with limited/scarce resources, and capitalist economy.
economic planning aids in the allocation of • India by initiating Economic reform in 1991
scarce resources to meet human wants in started following indicative planning before
the most efficient way possible. the reform India was following imperative
• As a result, economic planning is defined planning.
as “doing with a goal, making a decision, Objectives of Planning
and a decision is the essence of economic • The long-term objectives of planning in
activity.” India has been more or less the same in
• Planning has appeared as an important most of the plans and these objectives are
function of the modern government and interconnected with one another:
involves its purposive intervention to affect • Economic Growth
socially desired changes in the structure o The most important objective of all the
and course of the economy. plans is to raise the level of national and
Types of Planning per capita income in real terms.
• Corresponding to the political ideologies • Self-Reliance
and institutional framework of the country, o It implies a reduction in the dependence
varied planning types are observed in the on foreign aid and concessional foreign
world. capital as the donor country can have
• Some of them are as follows: political influence on the decision-
Imperative Planning making process of the recipient
• Economic decisions are decided by a country.
central planning authority rather than a o The planners realise that self-reliance is
market system under imperative planning. a vital requirement for economic growth
This type of planning lays down an objective and accordingly have aimed at making
and policy framework for each sector of the India self-reliant.
economy which is followed rigidly. • Employment Generation
• Under this planning, it is the responsibility o One of the aims of planning has been
of the state to provide required supplies to provide jobs to the unemployed and
like raw materials, machines, manpower efficiently utilise India’s demographic
and entrepreneurs as all the resources are dividend.
owned by the state. • Promotion of Social Justice
• It is also known as Directive Planning or o It includes the removal of poverty and
Authoritative Planning. reduction in inequalities of income and
Indicative Planning wealth by redistribution measures.
• In indicative planning, the government sets Evolution of Economic Planning in India
time-bound targets for the economy and • Thinking about economic planning started
seeks to achieve them by providing incentives quite early in India, i.e., immediately after
and disincentives to economic entities. the Russian Revolution.
Economic Planning 227

• There were several plan proposals submitted for providing the people with the ‘basic
by Individuals as well as political parties necessities of life.
and economic groups for the development • Nationalisation of all agricultural production
of the national economy. and other production methods were the
The Visvesvaraya Plan main features of this plan.
• M. Visvesvaraya wrote a book called Sarvodaya Plan
“Planned Economy in India” in 1934, in • Jai Prakash Narayan designed the Sarvodaya
which he offered the first Indian planning Plan in 1950.
blueprint.
• The Sarvodaya plan was inspired by the
• In ten years, he outlined a strategy to move Gandhian Plan and the Sarvodaya Idea of
labour from farms to industries, doubling Vinoba Bhave.
the national GDP.
• The plan’s major themes, such as the
National Planning Committee emphasis on agriculture, agri-based small
• The National Planning Committee (NPC) was and cottage businesses, self-sufficiency
established in 1938 under the chairmanship and nearly no reliance on foreign money and
of Jawaharlal Nehru. technology, land reforms, and decentralised
o Its objective of planning for development participatory planning, were strikingly
“was to ensure an adequate standard similar to the Gandhian Plan.
of living for the masses, i.e., remove Development Planning
poverty. • Development planning is the effort of the
o It advocated industrialisation and government in the major socio-economic
setting up heavy industries that were variables like GDP, consumption, saving,
essential for setting up other industries investment, price, employment, etc., for a
and for making India self-reliant. specific period of time to achieve its desired
The Gandhian Plan goal.
• It was formulated by S. N. Agarwala in Nature and Objectives of Planning
1944, which aimed to create self-contained • Economic Growth: Economic growth is
villages. defined as an increase in a country’s capacity
• It emphasised economic decentralisation to create goods and services inside that
with more focus on rural development by country in a given year. A good indicator
developing the cottage industries. of economic growth in the language of
The Bombay Plan economics is the increase in the GDP (GDP is
• In 1944, Eight Industrialists of Bombay the market value of all the goods and services
working together prepared “A Brief produced in a country during a year). The GDP
Memorandum Outlining a Plan of Economic of a country is derived from different sectors
Development for India”. of a country namely the agricultural sector,
industrial sector, and service sector, and the
• This strategy planned to double per capita
contribution of all the sectors make up the
income in fifteen years while tripling
structural composition of the economy.
national GDP in the same time frame.
• Modernisation: It means the updating of
• Although the Bombay Plan was not officially
technology to get more output, so each
recognised, many of its principles were
producer will have to adopt new technologies
incorporated into subsequent designs.
to get more revenue and give more output
People’s Plan
of products to the country. For example, a
• People’s plan was drafted by M. N. Roy. farmer can use HYV (high-yielding seeds)
• The plan was inspired by the ideals of seeds to get more agricultural products
Marxist socialism and advocated the need as compared to using normal varieties of

seeds. And in this way when we adopt new outlay for the construction of heavy basic
technologies, we call it modernisation. industries.
o Modernisation, on the other hand, is • Mahalanobis’ development strategy, which
not confined to the adoption of new emphasised basic heavy industries and was
technologies, but also to changes approved in the second plan, remained in
in societal attitudes, such as the place in Indian planning until the fifth plan,
acknowledgement that women have which ended in 1978.
the same rights as men. In traditional • In the early 1950s, the professor had
society, women live at home and work developed many sectors like single sector,
at home while men work. But in modern two-sector and four-sector models. The
society women will work equivalent last model had influenced the form of the
to men in the workplace like bankers, second plan.
accountants, etc. • Single Sector Model: It was the earliest
• Self-sufficiency: India’s first seven five- model at plan model building in India.
year plans prioritised self-sufficiency. It The model was built in 1951-52, and it
means that it will refrain from importing very closely resembles the Harrod-Domar
items that could be produced in our growth model.
own country. The approach was seen as • Two Sector Model: It has many assumptions
necessary in order to lessen our reliance on like it is a closed economy with no foreign
imported goods. It was feared that India’s trade. The division of the economy into
reliance on foreign products such as food, two sectors is complete so that no existing
technology, and capital would expose the capital can be transferred from one sector
country’s sovereignty to foreign influence in to another. Investment is determined
its policies. entirely by the supply of capital goods and
• Social Justice: It is critical that the benefits not by any consideration regarding return to
of economic prosperity reach the poor as investment.
well, rather than being enjoyed exclusively • This plan gives priority to the investment
by the wealthy. In addition to prosperity, book and explores the allocation of
modernisation, and self-sufficiency, social investment between different sectors of
justice or equity is critical. Every citizen of the economy of a country.
our country should be able to meet their
Agrarian Reconstruction
basic necessities, such as food, a good
• There are many points related to agriculture
education, a decent standard of life, and
reforms which are as follows:
adequate health care, and income disparity
should be eliminated. o Land Reforms: Prior to independence,
the agricultural land tenure system was
The Nehru-Mahalanobis Development Strategy
characterised by intermediaries (called
• The Mahalanobis model is a growth model
zamindars, jagirdars) who collected rent
with a substantial industry development
from the actual tillers of the soil without
stage.
contributing to farm improvements.
• Professor PC Mahalanobis, a friend and As a result of low productivity, food is
adviser of late Prime Minister Jawahar imported from the United States. As a
Lal Nehru and a member of the Planning result, land changes in land ownership
Commission at the time, prepared a growth were required for agricultural equity.
model in which he demonstrated that in So, following independence, the actual
order to achieve a rapid long-term rate of land tillers were given land ownership
growth, it would be necessary to devote so that they could invest in increasing
the majority of a country’s investment to their output.

o Green Revolution: At the time of o Agriculture Development: If the

independence India was totally agriculture development remains
dependent on agriculture but at that time backwards then the economy of a
the productivity was very low because of country cannot develop because
old machinery and low quality of seeds agriculture is the backbone of the
used and those farmers were dependent economy. So, the state government has
on monsoon and if monsoon did not to make necessary reforms in agriculture
come on time, then the agriculture will to get the productivity to a good level
be of bad quality. So, the importance is and decrease their dependency on food
given to HYV seeds (high-yielding seeds) products in other countries.
and their use will make the market o Industrial Development: The urgent
surplus after some time. need of the hour is that the state should
o Debate Over Subsidies: As the HVY come forward and state should take
seeds are of high cost and when farmers measures to formulate and implement
are not using the HYV then at that time an judicial industrial policy which will
the government was not providing any be beneficial for the development of
subsidies to farmers but to purchase the country. The policy should focus on
HYV seeds farmers need more money to the decentralisation of industries which
invest in HYV seeds so there will be a may spread all over the country.
debate on subsidies and subsidies will o Influencing the use of Resources: The
provide to farmers. state may properly use their available
Role of State in Development and Planning resources like which land is best for
• The state has an active role in the economic the township and which is best for
development and the ways are as follows: industrialisation, and which is best for
o Social and Economic Overheads: health care facilities.
The main problems in the economic o Removal of Inequalities: The
development of a country face many government must adopt the proper
problems such as communication, measures for equal distribution of
transportation and electricity etc, so it wealth. The government should impose
is the duty of the state to provide all the proper taxes so that the revenue will be
facilities to the industries. used in a proper way which will benefit
o Education: It plays an important role the poor through expenditure policy.
in development. To start a national Five Year Plans (FYP) in India
level development programme without • They are national economic development
giving education to society seems to programmes that are centralised and
fail on the ground level. The education integrated.
facility increases the geographic and • Following independence, the First FYP was
occupational mobility, raising their established in 1951, under the socialist
mobility, and productivity and facilitating influence of Pandit Nehru, the first Prime
their new innovations. The quality of Minister.
labour depends upon their education • The process began with the founding of
and how much they have studied. the Planning Commission in March 1950, in
o Public Health Services: The development order to achieve the government’s stated
and maintenance of public health services goals.
are provided by the state government • Encourage a quick rise in the living standard.
and a good healthy system of labour and
• Optimal usage of the country’s resources
society will increase their efficiency and
• Increasing output and efficiency
productivity in their working.

• Creating job chances for everyone. two Five Year Plans. As a result, the Third
• The Planning Commission was given the task Five-Year Plan’s primary goal was to make
of assessing all of the country’s resources, India a self-sufficient and self-generating
supplementing those that were inadequate, economy.
and establishing plans. • The goal of the strategy was to:
First Five-Year Plan (1951-56) o Achieve a national income growth rate
• The Harrod-Domar Model was used in the of higher than 5%.
First Plan. o Achieve self-sufficiency in food grain
• The influx of refugees from Western and production.
Eastern Pakistan, severe food shortages & o Expand basic industries like chemicals,
high inflation were some of the challenges steel, power and fuel etc.
in front of the country at the onset of the o Generate substantial employment
first five-year plan. opportunities in the country.
• Agriculture, price stability, power, and o Provide greater equity of opportunity.
transportation were all addressed in the
o Reduce economic disparities among the
Plan.
masses.
• An important feature of the first plan was
• Agriculture was given top priority to
the spread of community development
support exports and industry, based on the
projects throughout the country with the
lessons learned from the first two plans
objective of raising the level of living of
(agricultural production was considered a
the people through improved agricultural
limiting element in the country’s economic
efficiency.
development).
• The strategy was largely successful due to
• Due to unforeseeable developments such
good harvests in the plan’s final two years.
as the Chinese invasion in 1962, the Indo-
• The objectives of refugee rehabilitation, Pak war in 1965, and the severe drought
food self-sufficiency, and price control in 1965-66, the Plan failed to meet its
were mostly met. objectives completely.
Second Five-Year Plan (1956-61) • Due to conflicts with China and Pakistan,
• The Mahalanobis two-sector (consumer’s the resources meant for socio-economic
goods and producer’s goods) model, which development were diverted toward the
emphasises the physical components of defence sector. Thus, socio-economic
planning and investment, was used to sectors suffered due to shortfalls of
develop the Second Plan. resources.
• The Plan emphasised fast industrialisation Three Annual Plans (1966-69)
through the development of heavy and • Due to the failure of the third plan, the
basic industries. fourth plan was postponed. Due to the
• It advocated huge imports through foreign depreciation of the rupee (to stimulate
loans and accorded lower priority to exports) and an inflationary recession, the
agriculture. Third Plan failed. In place of five-year plans,
• Due to a severe lack of FOREX, development three annual plans were introduced.
targets were trimmed, prices were raised by • The Plan Holiday system covered these
nearly 30% compared to the previous Plan, three annual plans (1966–67, 1967–68, and
and the 2nd FYP was only partly successful. 1968–69).
Third Five-Year Plan (1961-66) • The government has to focus on agriculture
• The Indian economy was thought to have during the Annual Plans due to the current
entered the “take-off stage” after the first agricultural crisis and severe food deficit.

During the implementation of these runaway inflation induced by an increase

programmes, a completely new agricultural in oil prices and the collapse of the
method was applied. government’s takeover of the wholesale
• The Green Revolution experiment in India wheat trade.
started in 1966. • It proposed to achieve two main objectives:
• It comprised widespread distribution of o Poverty is eradicated (Garibi Hatao)
high-yielding seed varieties, substantial o Attainment of self-reliance
use of chemical fertilisers, and maximising • High growth rates, greater income
irrigation and soil conservation benefits. distribution, and considerable increases
• These Annual Plans assisted the economy in domestic savings were all viewed as
in absorbing the shocks caused by the Third important factors in economic progress.
Plan, paving the way for the anticipated • Due to significant inflation, the Plan’s outlay
growth in the coming years. proved to be utterly incorrect, necessitating
Fourth Five-Year Plan (1969-74) an increase in the original public sector
• During the Indo-Pak conflict, the allies’ outlay.
refusal to supply crucial equipment and • Following the declaration of a national
raw supplies resulted in two goals: emergency in 1975, the focus switched to
o Growth with stability. the Prime Minister’s 20-Point Plan.
o Progressive achievement of self- • When the Janata Party came to power
reliance for the Fourth Plan. in 1978, the FYP was consigned to the
• The basic strategy of the Fourth Plan has background, and the Plan was cancelled.
been called the Gadgil strategy. Rolling Plan (1978-80)
• The main focus was on agriculture’s • In contrast to the Nehru Model, which
development rate in order to allow other the government condemned for the
industries to advance. concentration of power and authority,
• One of the Plan’s main goals was to growing inequality, and intensifying poverty,
implement Family Planning Programs in the Janata Party administration shelved the
order to regulate the population. Fifth Five-Year Plan and created the Sixth
• The fourth five-year plan in India focused on Five-Year Plan (1978–1983), which focused
the “Weaker Sections” of society, although on employment. However, the government
there was still no comprehensive strategy barely lasted two years.
in place to meet fundamental necessities. • When Congress regained control in 1980,
• Agricultural production reached new highs it embarked on a new strategy aimed at
in the first two years of the programme. directly addressing the problem of poverty
However, because of the failure of the by establishing the conditions for a growing
monsoon in the last three years of the plan, economy.
productivity has decreased. Sixth Five-Year Plan (1980-85)
• The influx of Bangladeshi migrants before • The objective of “Improve the quality of
and after the 1971 Indo-Pak war was a major life of people”, i.e., with a special reference
issue, as was the price situation developing to the socially and economically deprived
to crisis proportions, and the strategy was section of the population through a
widely regarded as a failure. minimum-needs programme.
Fifth Five-Year Plan (1974-79) • In the Sixth Five Year Plan, the Minimum
• D. P. Dhar prepared and launched the Needs Programme had eight components,
final draught of the fifth plan against the namely:
backdrop of an economic crisis caused by o Elementary education

o Rural Health policies which the country had been

o Rural Water Supply pursuing for many decades.
o Rural Roads • Under the leadership of PM P V Narasimha
o Rural electrification Rao, the plan implemented strong policy
o Environmental improvement of urban measures to address the terrible economic
slums situation and achieve annual average growth
o Housing assistance to rural landless of 5.6 percent by implementing fiscal and
labourers economic reforms, including liberalisation.
o Nutrition (giving a healthy food fulfilled • The major suggestions which this plan
with nutrition) suggested are as follows:
• The Plan emphasised raising national o Re-definition of the state’s role in the
income, modernising technology, and economy,
ensuring a continuing reduction in poverty o Market-based economy with a greater
and unemployment through programmes role for the private sector,
such as TRYSEM, NREP, and IRDP, as well as o Increase investment in the infrastructure
managing population growth. sector,
• In general, the sixth Plan was a success o Subsidies need restructuring and
since most of the objectives were met, even refocusing,
though several regions of the country were o Decentralised planning,
hit by severe famine during the previous o Special emphasis on ‘co-operative
year (1984-85), and agricultural output federalism’,
was lower than the previous year’s record
o Greater focus on ‘agriculture’ and other
output.
‘rural activities’
Seventh Five-Year Plan (1985-90)
• The following are some of the important
• The Seventh Plan’s objectives are as follows: economic results achieved during the
• Increasing the rate of food production, eighth plan:
• Increasing job opportunities, as well as o Rapid economic expansion (highest
• Increasing productivity by concentrating on annual growth rate was 6.8 percent).
‘food, work, and productivity.’ o Agriculture and related industries, as
• In 1989, the Jawahar Rojgar Yojana (JRY) well as the manufacturing sector, have
was launched with the goal of providing pay experienced rapid expansion.
employment to the rural poor. o Export and import growth, trade
• The idea worked since the economy grew at development, and a reduction in the
a rate of 6% instead of the targeted 5%. current account deficits are all on the rise.
Eighth Five-Year Plan (1992-97) o Despite the fact that the public sector’s
• Because of political uncertainty in the portion of total investment had fallen
country’s capital, the proposal was to around 34%, a high growth rate was
postponed for two years. During the attained.
plan’s launch, the main obstacles were Ninth Five-Year Plan (1997-2002)
the balance of payments crisis, expanding • The Ninth Plan (1997–2002) was launched
budget deficits, mounting debt burden, when there was an all-around ‘slowdown’
inflation, and industrial slowdown. in the economy led by the South East Asian
• In a typical new economic climate, the Financial Crisis (1996–97).
Eighth Plan (1992–97) was established. • Growth with Social Justice and Equality
This was the first plan which went on was the centrepiece of the United Front
for introspection of the macroeconomic Government’s plan.

• The key objective of the Ninth Plan was to governance was regarded as a determinant
reduce historical inequalities and boost the of progress.
economic growth in the country. • The Tenth Five-Year Plan aimed to expand
• For economic growth and development, the the role of states in planning by involving
Ninth Plan primarily concentrated on the Panchayati Raj Institutions more directly.
private sector (both Indian and foreign). • The goal of breaking down growth and
• The state was to serve as a facilitator, social development targets by the state
involving itself in social areas such as was to create a balanced development for
health, education, law and order, and all states.
infrastructure development, where private Eleventh Five-Year Plan (2007-2012)
sector engagement was expected to be
• After the UPA formed the administration
limited owing to a lack of resources.
at the centre on the platform of assisting
• To provide appropriate productive jobs and Aam Aadmi, the Eleventh Plan was aimed
reduce poverty, it prioritised the agriculture “Towards Faster & More Inclusive Growth”
sector and rural development. (common man).
• Social sectors of the economy got strong • By the end of the Tenth Plan, India had
support which helped in the elimination of become one of the world’s fastest-growing
poverty. economies.
• The issue of fiscal consolidation became a • Savings and investment rates had risen,
top priority of the governments for the first industries had performed admirably in the
time, which resulted in: face of global competition, and international
• The sharp decline in the revenue deficit investors were eager to invest in India.
of the government, including the centre, • The broad vision for the 11th Plan involved
states, and the PSUs. several interrelated components like
• Cutting down subsidies, interest, wages, • Rapid growth for reducing poverty &
etc. creating employment opportunities for the
• More reliance on states and the PRI in masses.
decentralised planning (Panchayati Raj • Access to essential services in education &
Institution). health, especially for the poor people
Tenth Five-Year Plan (2002-2007) • Employment opportunities using the
• Recognising that economic growth cannot National Rural Employment Guarantee
be the main goal of a national plan, the Programme (NREGP).
Tenth Plan established ‘monitorable targets’ • Environmental sustainability.
for a few critical development indicators in
• Gender inequality must be reduced, among
addition to the 8% growth target.
other things.
• The goals included improving literacy,
• The Eleventh Plan got off to a good start,
closing gender gaps in literacy and wage
with a growth of 9.3% in the first year, but
rates, lowering maternity and infant death
after the global sub-prime crisis, growth
rates, cleaning key polluted rivers, and
slowed to 6.7 percent in 2008-09.
providing access to safe drinking water,
• However, the global slowdown in 2011
among others.
caused by the European sovereign debt
• To reduce regional inequities, the Tenth
crisis, as well as internal issues such as
Plan focused on a regional approach rather
tight monetary policy and supply-side
than a sectoral approach.
bottlenecks, caused GDP to decline to 6.2
• Agriculture was deemed the primary percent in 2011-12.
driving engine of the economy, and

• As a result, GDP increased at an annual rate certification by enhancing the skill

of 8% during the Eleventh Plan, which was sets of the workforce.
lower than the target but better than the o Education
achievements of the Tenth Plan.
▪ Increase Mean Years of Schooling to
• Since the two global crises of 2008 and 2011 7 years.
occurred during this time span, 8% growth
▪ Improve access to higher education
can be deemed satisfactory.
by creating 20 Lakh additional seats
Twelfth Five-Year Plan (2012-2017) for each age group to meet the skill
• The Twelfth Plan began at a time when the needs of the various sectors.
world economy was experiencing a second ▪ Reduce the social and gender
financial crisis, fuelled by the Eurozone’s disparities in school enrollment.
sovereign debt crisis in the Eleventh Plan’s
o Health
last year. All countries, including India, were
▪ Reduce the MMR to 1 per 1,000 live
affected by the crisis.
births and the IMR to 25 per 1,000
• The subtitle reflects the 12th Plan’s overall
live births, while raising the Child
goal and aspirations: ‘Faster, Sustainable,
Sex Ratio (0–6 years) to 950.
and More Inclusive Growth.’
▪ The Total Fertility Rate should be
• Poverty alleviation, promoting equality
reduced to 2.1.
and regional balance, empowering people,
▪ Reduce undernutrition among
and reducing inequality are some of the
children aged 0–3 years to half of
mechanisms through which inclusiveness
what it is in the NFHS-3.
is to be achieved.
o Environment and Sustainability
• Sustainability comprises ensuring
environmental sustainability, development ▪ Every year, add 1-million hectares to
of human capital with the help of the forest cover.
improved health, education, nutrition, ▪ The additional renewable energy
skill development, information technology capacity of 30,000 MW.
etc. and development of institutional ▪ Reduce GDP emission intensity by
capabilities, infrastructure such as power 20 percent to 25 per cent by 2020
telecommunication, roads, transport etc. compared to 2005 levels.
• The Plan’s monitorable targets are as o Infrastructure, Comprising Rural
follows: Infrastructure
o Economic Development ▪ Increase infrastructure investment
▪ A rate of 8.0 percent growth in real as a percentage of GDP to 9%.
GDP. ▪ All-weather roads connect all
▪ Agriculture has a growth rate of 4%. communities.
▪ A 10 percent growth rate in ▪ All national and state highways
manufacturing. should be upgraded to a minimum
o Poverty and Employment of two lanes.
▪ Reduce the head-count ratio of ▪ Increase rural teledensity to 70 per cent.
consumption poverty by 10% by the ▪ Ensure that at least 50% of the
end of the Twelfth Plan compared to rural population has access to 40
the previous targets. litres per capita per day (lpcd) of
▪ Create 5 crore new work piped drinking water and that 50%
opportunities in sectors other of grama panchayats achieve Nirmal
than agriculture and provide skill Gram Status.

• The Table below shows Every Five-year plan issues that affect people’s quality of life,
growth target set by a particular five-year plan particularly in rural areas.
and the growth achieved during that plan. • In 1982 and 1986, TPP was reformed. It was
Target Actual finally reformed in 2006 as new policies
Growth Growth and programmes were implemented, and it
is still operational today.
First Five-Year Plan 2.1% 3.6%
(1951-56) • The programmes/schemes covered under
TPP-2006 are as under:
Second Five-Year Plan 4.5% 4.3%
o Poverty Eradication
(1956-61)
o Power to People
Third Five-Year Plan 5.6% 2.8%
o Support to Farmers
(1961-66)
o Labour Welfare
Fourth Five-Year Plan 5.7% 3.3%
o Food Security
(1969-74)
o Housing for All
Fifth Five-Year Plan 4.4% 4.8%
o Clean Drinking Water
(1974-79)
o Health for All
Sixth Five-Year Plan 5.2% 5.7%
o Education for All
(1980-85)
o The welfare of Scheduled Castes,
Seventh Five-Year Plan 5.0% 6.0% Scheduled Tribes, Minorities and OBCs
(1985-90) o Women Welfare
Eight Five-Year Plan 5.6% 6.8% o Child Welfare
(1992-97) o Youth Development
Ninth Five-Year Plan 6.5% 5.4% o Improvement of Slums
(1997-2002) o Environment Protection and
Tenth Five Year Plan 8% 7.6% Afforestation
(2002-2007) o Social Security
Eleventh Five Year Plan 9% 8% o Rural Roads
(2007-12) o Energisation of Rural Area
Twelfth Five Year Plan 8% 6.8% o Development of Backward Areas
(2012-17) o IT Enabled e-Governance
Table 12.1: Five Year Plans and their Targeted and • TPP-2006 was initially composed of 20
Actual Growth Comparison points and 66 items that were each
Twenty Point Programme supervised by the respective Central Nodal
• The Indian government launched the Ministries.
Twenty-Point Programme (TPP) in 1975. • Since the merger of the Sampoorna
• The fundamental goal of the 20-Point Grameen Rojgar Yojana (SGRY) with the
Program was to alleviate poverty and National Rural Employment Guarantee Act
improve the living conditions of the poor on 1st April, 2008, SGRY has been removed
and oppressed. from the list of 66 items, leaving only 65
• The Program was designed to give a boost items to be monitored under the TPP-2006
to programmes that address poverty in 2008-09.
reduction, rural job creation, education, • For the purpose of ranking, the performance
housing, environmental protection, family of States on a monthly basis in respect of 20
welfare and health, and a variety of other identified parameters has been evaluated.

Planning Commission National Development Council (NDC)

• In March 1950, the Government of India • The National Development Council
passed a resolution establishing the (Rashtriya Vikas Parishad) was established
Planning Commission in order to achieve on 6th August, 1952, to strengthen and
the Government’s objectives of promoting mobilise the country’s overall effort
a rapid rise in the people’s standard of and resources in support of the plan, to
living through efficient use of the country’s encourage common economic policy in
resources, increased production, and all important spheres, and to ensure the
providing employment opportunities to all. balanced and rapid development of all
• The Planning Commission’s responsibilities sectors and regions of the country.
were as follows: • This Council, which was re-established
on 7th October, 1967, is India’s primary
o Assessment of all the resources of the
decision-making body in the domain of
country.
development.
o Developing plans for the most efficient
• The National Development Council (NDC) is
and balanced use of resources, as well
a body that includes representatives from
as determining priorities while allocating
both the Union and the States.
resources.
• All-Union Cabinet Ministers, State Chief
o Augmenting deficient resources. Ministers, and representatives from Union
• Planning Commission’s work was three Territories are members of this Council,
dimensional: which is led by the Prime Minister.
o Frame policy direction and suggest • The functions of NDC are:
required programmes/schemes. o To establish criteria for preparing the
o Influence the resource allocation through National Plan and assessing the Plan’s
the budget. resources.
o From time to time, monitor and o The National Plan, as produced by the
report performance on a consistent Planning Commission, will be considered.
framework for a comparison study of all o To consider major socio-economic policy
states. issues that affect national development.
• The Prime Minister served as the Planning o Review the Plan’s operation on a regular
Commission’s ex-officio chairman, which basis and make recommendations for
operates under the NDC’s overall direction measures to achieve the National Plan’s
(National Development Council). As Prime goals and objectives.
Minister, Pandit Nehru was the first o It is a place where not only plans and
Chairman of the Planning Commission. initiatives are discussed, but also
• The Commission’s Deputy Chairman and economic and social issues of national
full-time members advise and guide the importance are debited prior to policy
subject Divisions in the development of development.
Five-Year Plans, Annual Plans, State Plans, • The NDC meets twice a year on average.
Monitoring Plan Programs, Projects, and • It is a democratic platform for states to
Schemes. express their views and beliefs openly. The
• The National Development Council serves as Council does not pass any resolutions.
a liaison between the Planning Commission NITI (National Institution for Transforming
and the states. India) Aayog
• The Planning Commission was replaced • It is the non-statutory and extra-
with NITI Aayog on 1st January 2015. constitutional body set up on 1st January
2015 by replacing the Planning Commission.

• NITI Aayog is the Government of India’s • Upgrading technology and creating capacity
top policy ‘Think Tank,’ providing both for the implementation of programmes and
directional and policy inputs. initiatives.
• At the core of NITI Aayog’s creation are two Composition Of NITI Aayog
hubs: • The NITI Aayog will be made up of the
• Team India Hub: Leads the engagement of following members:
states with the Central government • India’s Prime Minister serves as the
• Knowledge and Innovation Hub: Builds NITI chairperson.
Aayog think-tank capabilities. • The Chief Ministers of the States and the
Objectives Lieutenant Governors of Union Territories
• The NITI Aayog’s goals are as follows: make up the Governing Council.
• Develop a shared vision of national • In addition to the Chairperson, the full-time
developmental priorities, sectors, and organisational structure will include:
strategies with the active participation of o Vice-Chairperson: The Prime Minister
states in order to achieve national goals. will designate this person.
• To promote cooperative federalism on a o The Prime Minister appoints the Chief
constant basis through organised support Executive Officer for a definite period,
mechanisms and efforts with the states, and he must be competent to serve as
recognising that strong states equal a Secretary to the Government of India.
strong nation. o Members: Full-time.
o Part-time members: A maximum of two
ex-officio members from renowned
universities, research institutions,
and other relevant organisations on a
rotating basis.
o Ex-officio members: The Prime Minister
will nominate up to four members of
the Central Council of Ministers.
• As special invitees nominated by the
Prime Minister, specialists, practitioners,
Fig. 12.1: Functions of NITI Aayog and professionals with significant subject
knowledge are invited to NITI.
• Develop systems for developing credible
plans at the village level, then aggregating o These will be established for a specific
these plans at higher levels of government, time period.
such as the state and finally the national o The Prime Minister is empowered to
level. convene Regional Councils and will
• To develop strategic and long-term policies, include Chief Ministers (CMs) of States
programmes, and initiatives, as well as to and Lt. Governors of Union Territories
track their development and effectiveness. (UTs) in the region.
• To provide a venue for inter-sectoral and o These are chaired by the Chairperson of
inter-departmental issues to be resolved in the NITI or any other person nominated
order to speed up the implementation of by him.
the development agenda. • As special invitees nominated by the
• To actively monitor and analyse the Prime Minister, specialists, practitioners,
implementation of various programmes and and professionals with significant subject
initiatives. knowledge are invited to NITI.

NITI Aayog’s Role Till Now grants to State development programmes

• The NITI Aayog framed the Make in India (other than tax devolution), and influencing
Strategy for the Electronics sector, National annual allocations according to priorities,
Energy Policy, and a Model Land Leasing among other things.
Law. • Planning Commission’s influence and
• Prepared a detailed Roadmap for impact were measured, felt, and perceived
Revitalising the Agriculture sector, designed through annual plan allocations, and
a Developmental Strategy for the North discretionary grants. But, NITI Aayog does
East region and Hilly areas and undertook not have the same ability to influence the
an appraisal of the Twelfth Five Year Plan. annual allocations and influence the annual
• NITI Aayog recommended closure of sick budget proposals.
PSUs, strategic disinvestment of other • As the planning commission, NITI Aayog
CPSUs and pushed for reforms in the is also without legal support or any
Medical Council of India and the University constitutional foundation.
Grants Commission.
NITI Aayog Planning Commission
• In April 2017, the Governing Council of NITI
Aayog approved the Three-Year Action Plan Full-time and Part- Only Full-Time
agenda aimed at changing the expenditure time Members. Members.
pattern by allocating a larger proportion Chief Ministers are
Chief Ministers were
of resources to high-priority sectors, represented directly
represented through
like health, education, agriculture, rural in the Governing
NDC.
development, defence, roads and railways. Council.
• Three sub-groups of Chief Ministers were Fund Transfers to
formed on Centrally Sponsored Schemes States are through
Used to transfer
(CSS), Skill Development and Swachh Bharat. the Finance Ministry.
funds to states.
• The Atal Innovation Mission was launched It has no financial
by NITI to seed innovations to teach young powers.
minds new skills. Increased flexibility
NITI Aayog vs Planning Commission to states in designing
• NITI Aayog is a Planning Commission with an Imposition of central
and implementing
expanded scope but without its financial sponsored schemes.
development
powers. programmes.
• The Ministry of Finance, Budget Division/ Prepared national
Department of Expenditure now has Prepared five-year
agenda for
direct control over financial powers such Plans.
development.
as designing schemes and programmes,
Table 12.2: NITI Aayog and Planning Commission
setting sectoral priorities, estimating


Q. How are the principles followed by NITI Aayog different from those followed by the erstwhile
planning commission in India? (250 Words, 15 Marks)
• In the Intro, write in brief about the Planning Commission and NITI Ayog.
• In Body, compare how principles followed by NITI Ayog are different from the erstwhile
planning commission.
• Conclude by mentioning what is expected from this transition.
Answer:
The Planning Commission was established in 1950 and it was dissolved in 2014. The National
Institution for Transforming India, NITI Aayog, was established by executive resolution in 2015.
NITI Aayog was constituted to bring changes in the Indian planning process. The Planning
commission was suffering from certain issues and experts were of the opinion that organisational
and structural changes in the Planning Commission were needed.
NITI Aayog is philosophically different from the former Planning Commission because NITI
Aayog aims to carry forward the transformation of New India. NITI Aayog will be guided by an
overall vision of development which is inclusive, equitable and sustainable. The seven guiding
principles for the NITI Aayog are:
• Antyodaya advocates prioritising service and uplift of the poor and marginalised.
• Inclusion of the vulnerable and marginalised sections and redressing identity-based
inequalities. Integrating villages into the development process.
• Harnessing India’s demographic dividend through education and skilling.
• People’s participation in the developmental process.
• Nurturing an open and accountable style of governance.
• Sustainability is at the core of the planning and developmental process.
Such differences in principles between NITI and Planning commission are reflected as:
Changed Organisational Structure:
• NITI Ayog: It has a CEO with a rank equivalent to the secretary. He/she is directly appointed
by the Prime Minister. It also has the post of Vice-Chairman. It also has 5 full-time and 2
part-time members, and 4 cabinet ministers will serve as ex-officio members.
• Planning Commission: It had a Deputy chairperson, A member secretary, and full members.
Secretaries and member secretaries were appointed by the usual process.
Co-operative Federalism:
• The planning commission’s approach was top-down and one size fits all approach, which
was not as very successful.
• NITI Aayog’s approach is completely different. Its approach is bottom-up and formulates a
national development strategy in a market economy with an integrated global world. This
approach of NITI is considered the need of the hour. Since its inception, NITI has been
playing a key role in integrating all key stakeholders in the planning and implementation of
the same.
Control over Finances:
• The role of the Planning Commission was very dominant when it came to resource allocation.
Due to this dominant role played by the commission, an extra-constitutional body, It had
made the Finance Commission, a constitutional body, lesser. This led to wide criticism of
the government.

• NITI Ayog does not play any financial allocation role. The finance commission decides
revenue distribution of states, funding to the central sector scheme and union assistance
to central plan etc. with due consideration of recommendations of the Finance Commission.
Constitution and Reporting:
• Earlier the Planning Commission used to report to the National Development Council which
consisted of Chief Ministers of all the states and Lieutenant Governors of UTs.
• NITI Ayog has a Governing Council which consists of the Prime Minister, Chief Minister,
Lieutenant governor etc.
Also, NITI Ayog has specialised wings such as the research wing, consultative wings, Team India
wing etc, which helps in improving policymaking and well-informed decision making for lawmakers
and policymakers. This thing was generally absent from the Planning Commission.
NITI Ayog has targeted the Sustainable Development Goals India index to prepare good
performing states on various criteria and rank them accordingly. This will create healthy and
competitive federalism to achieve the ultimate goal of development which the earlier planning
commission failed to bring to the planning process.
Achievements of Economic Planning in India • Development of Social Infrastructure

• Increase in National Income and Per o Services like education and health care
Capita Income are examples of social infrastructure.
o National income has risen dramatically Five-year plans are also capable of
throughout the planning period. achieving desired results in this area.
o Basic and Capital Goods Industry Failure of Economic Planning in India
Development: • Inequality in Income and Wealth
o During the Second Five-Year Plan, Distribution
the Nehru-Mahalanobis model of • Failure to control inflation.
development was adopted, and some • Regional Imbalance.
basic and capital goods industries,
• Inadequate infrastructure development.
such as the iron and steel industry,
• Unemployment is on the rise.
saw remarkable expansion.
• The standard of living of the masses has
• Development in Agriculture
not improved substantially.
o Agricultural productivity has also
• Huge Amount of Deficit Financing.
marked an upward trend during the
plan period. Resource Mobilisation
o The production of food grains which • It refers to the policy, mode, and means of
was 510 lakh tonnes in 1950-51 raising funds by the government for various
increased to 176.4-million tonnes in plan programmes/projects.
1990-91 and further to 316-million • The objective of resource mobilisation is
tonnes in 2021-22. the optimal utilisation of the resources.
• Self-Reliance • Means of resource mobilisation:
o Self-reliance refers to the lack of o Internal Resource
dependence on external assistance. o External Resource
o India has made tremendous achievements Internal Resource
towards self-reliance in food grain
• Internal resources can be defined as the
production, basic industries, etc.
economic resources that are present within
the territory of any country.

• Internal Resources include: The plan left the third, which primarily
o Balance from Current Revenue (BCR) consists of consumer industries, to the
■ It is the access of the Revenue private sector. A system of licences was
Receipt of government over its non- used to keep the private sector under
planned expenditure. strict control.
■ BCR = Revenue Receipt-Non Planned • Rapid industrialisation resulted in a
substantial reallocation of funds away from
Expenditure.
agriculture. In the second Plan, agriculture
o Additional Resource Mobilisation
spending was roughly reduced to 14 per
■ It includes revenue collected from cent. Food shortages worsened, inflation is
surcharge, cess etc. on high and imports of foodgrains depleted
o Surplus of public sector the foreign exchange reserves of India.
o Borrowing and miscellaneous capital o Chakravarti “Rajaji” Rajagopalachari, the
Receipts friend of Nehru, fell out with Nehru on the
o Deficit financing question of excessive state involvement
External Resource in the economy. On 27th May 1964 Nehru
• External Resource means a generation died, but despite the criticism then
and in later years, he had cemented his
resource located outside the country.
legacy as a moderniser in the economy.
• External Resources include:
• Lal Bahadur Shastri, who was a minister
o Bilateral Assistance
without a portfolio in the cabinet of Nehru,
Grants and loans from a foreign government. succeeded him as prime minister on 9
o Multilateral Assistance from June 1964. And after that, the war with
International Institutions China exposed India’s economic weakness.
Economic Planning Strategy food shortages and price rises convinced
The 1960s: Shift from Early Development him that India needed to move away from
Strategy centralised planning and price controls. He
• The second five-year plan (1956-61) provided started renewing his focus on agriculture,
and he accepted a big role for private
the groundwork for economic modernisation
enterprise and foreign investment and
to better support India’s long-term growth
trimmed the role of Planning Commissions.
goals. It was first published in 1956 and
was based on the PC Mahalanobis model of o India’s victory over Pakistan in the war of
1965 had given him the political capital
rapid industrialisation with a concentration
to consider economic reforms of the
on heavy industries and capital goods. PC
kind that had taken place 25 years later.
Mahalanobis was the only person in charge
of Indian development planning at the time. • Shastri’s focus on food security arose in
the 1960s, and India was on the verge of
o The Mahalanobis plan aimed to make
mass famine. Food aid imports from the
India self-sufficient. The resolution
US, on which the country was dependent,
was established as the nation’s goal
were beginning to hit India’s foreign policy
of establishing a socialist pattern in
autonomy. So, M.S. Swaminathan, along
society. It divided the industries into
with other scientists, stepped in with high-
three categories.
yield variety seeds of wheat, setting off and
o The public sector was to be solely called the Green Revolution.
responsible for industries of fundamental o Swaminathan, at that time, was an
and strategic importance. The second advocate for moving India towards
category included industries that would sustainable development. He
be directly held by the government. championed environmentally sustainable

agriculture, sustainable food security, ■ Excessive Socialistic Commitment:

and the preservation of biodiversity and As after liberalisation, privatisation
he called it the “evergreen revolution”. and globalisation the Indian
• Following the triumph of the Green Revolution, Government was importing more
Shastri Ji shifted his focus to the dairy equipment to make a stand for big
industry, particularly the Verghese Kurien-led industries. The import was done
cooperative movement in Gujarat’s Anand. to implement 2nd five-year plan
In the White Revolution, he assisted Kaira policies and in this, a big amount
District Co-operative Milk Producers’ Union of foreign exchange reserve was
Ltd in expanding their work. spent and which led to the economy
o The government’s Operation Flood downward.
resulted in a rapid increase in milk ■ Inflation: About 20% of inflation was
production in the years that followed. In prevailing in the economy because
the dairy industry, self-sufficiency was supply was short at that time like
reached solely through the cooperative lack of agriculture production due
movement. to natural calamities and lack of
Economic Crisis in the early 1990s industrial development due to lack
of funds, and it made our economy
• An economic crisis is a period in which the
downward.
economy of a country faces difficulties.
■ Fiscal Deficit: The government has
• It is the situation in which a country’s
taken a big amount as a loan from
economy faces a sudden downturn.
foreign countries, and it makes the
• Reasons for the economic crisis are as
fiscal deficit percentage increase
follows:
and leading to a decrease in the
o International Factors credibility of our country with foreign
■ The disintegration of the Soviet countries and it leads to a slowdown
Union, and at that time India’s export in the economy.
around 25% was with the Soviet Economic Reforms
Union and due to the disintegration
• Stabilisation Measures: These are
of the Soviet Union, it collapsed
short-term actions aimed at correcting
(stoppage of export).
balance-of-payments deficits and bringing
■ Gulf War: Due to the gulf war in inflation under control. To put it another
which Iraq attacked Kuwait and due way, it was necessary to maintain sufficient
to their quarrel oil prices drastically foreign exchange reserves and keep prices
increased and directly affected the under control.
Indian economy because at that
• Structural reforms are long-term changes
time, India largely depended on
aiming at enhancing the economy’s
crude oil for light energy.
efficiency and increasing its international
■ Global Recession: At that time the competitiveness by reducing rigidities in
economy of the world is facing a various divisions of the Indian economy. In
global recession and India is also a the country, the government implemented a
part of this recession. number of reforms, including liberalisation,
o Domestic Factors privatisation, and globalisation.
■ Political Instability: At the time of Need for Economic Reforms
1990 there were frequent changes • Weakness of Pre-1991 Policies: The first point
in the Prime Minister, it would make of weakness in agriculture. In agriculture,
our Government Unstable and lead there is low productivity because of lack
to a crisis.

of knowledge, high dependency on rainfall, relations. The trading of arms in exchange

small landholdings, conflicts between for the rupee had ended. It led to suffering in
tenants and landlords, outdated technology, trade, and less technology being imported.
and disguised unemployment. All these As a result, we had to face financial losses.
factors are responsible for agricultural Post-1991 Phase/Post-Reform Phase
downward production in the country. Liberalisation
• Industrial Policy: The variety of industries • The policy of Liberalisation of the Indian
was very limited. The cotton textile mill Economy
and jute industries were mostly available
o Liberalisation is a broad term, and it is
in India but for development, there will be
a practice of making rules, taxes, and
large industrialisation needed some factors
policies less severe. It is done by the
are barriers to that like shortage of capital
ruling government of a country. When a
with the private sector, lack of incentives
government removes instructions and
for work, objectives of social welfare, etc.
barriers, then it is called liberalisation.
• Major Foreign Exchange Crisis: At that time, It was enacted by the government to
India was facing a major foreign exchange remove some restrictions and open up
crisis because at that time the inflation various economic areas.
was in double digits and the Gulf War had
o In India, the concept of economic
started and oil prices jumped up which led
liberalisation was introduced to achieve
to India importing crude oil at higher prices.
many objectives like expansion in the
This resulted in a decline in foreign exchange
role of private and foreign investment,
reserves because payment of crude oil was
industrialisation and the introduction of
done in foreign currency. At that time the
a free-market system.
whole economy was in a global recession
• Features of Liberalisation Policy
and each and every person, country, the
organisation was not investing, but they were o Deregulation of Industrial Sector:
withdrawing their money, so it also led to In India, before liberalisation, every
a foreign exchange crisis because all these entrepreneur had to take permission
payments like investing and withdrawing from the Government of India to start a
were done in foreign currencies. company or close a company or decide
which goods are to be produced or
• Condition Imposed by the World Bank
not. Price fixation and distribution of
and the IMF: There are many conditions
selected industrial products all depend
imposed by the IMF and World Bank as the
on the Government.
IMF wanted the Indian Government to cut
their expenditure on social programmes and ■ But after 1991, when policy reforms
infrastructure, eliminate the subsidies given were introduced, the government
to states and start price support programme removed many restrictions. The
and the selling of the public companies at government has removed all
lower prices to the large business house and restrictions for almost all products
foreign capitals, free entry of foreign capital but only reserved sectors for the
as well as major reform in banking, financial public sector are defence equipment,
institutions and tax structure. So these railway transport and atomic energy
were the conditions which were imposed by generation. A lot of industries are
the IMF and World Bank to get India out of allowed to determine the prices of
inflation and economic crisis. their products.
• Fall of USSR: The fall of the USSR had a great o Financial Sector Reforms: Before 1991,
effect on India. As India had to readjust its the Reserve Bank of India (RBI) governed
foreign policy and had to realign its foreign all financial institutions in India, including

commercial banks, stock exchange the tax structure, and in 2016, the
activities, investment banks, and foreign government approved the Goods and
currency markets. Because the RBI Service Tax Act 2016 to streamline
determines the amount of money that and unify India’s indirect tax system.
banks maintain on hand, sets interest This is projected to generate more
rates, and oversees the process of lending income, and the government wants
money to various sectors, one of the main India to become a single nation with
goals of financial sector reforms is to a single tax and market.
transform the RBI from a regulator to a o Trade and Investment Policy Reforms:
facilitator of the financial sector. It means The liberalisation of the trade and
that commercial banks, stock exchanges, investment regime was implemented
and other financial institutions are free to improve industrial production’s
to make judgments on a variety of issues international competitiveness, as well
without consulting the RBI. as foreign investment and technology
■ Reform policies allowed the into the economy. The policy’s goal
establishment of many private sector was to increase the efficiency of local
banks in India and Many private industries and encourage them to
sector banks of Indian and foreign adopt contemporary technologies. India
nationals were established as a result had imposed quantitative restrictions
of reform programmes that met the on imports in order to preserve native
government’s rules and conditions. businesses.
FDI has been increased in various ■ Tight import prohibitions and
sectors. In India’s financial markets, the introduction of high taxes
foreign institutional investors such encouraged this. These measures
as pension funds, mutual funds, and resulted in decreased efficiency and
merchant bankers are permitted to competitiveness, resulting in the
invest. industrial sector’s poor expansion.
o Tax Reforms: Tax reforms are changes ■ The trade reforms attempted to
to the government’s taxes and public remove quantitative limits on
spending policies, which are referred to imports and exports, lower tariff
as the government’s fiscal policy. And it rates, and eliminate import licensing
is of two types: direct and indirect taxes. requirements. Import licensing has
Before 1991 the direct taxes which include been abolished, yet hazardous and
income, tax is of very high rate and due environmentally sensitive businesses
to which people will evade their income remain subject to a slew of regulations
from the government to save their high- and laws. Export tariffs have been
earned money but after 1991 as the tax eliminated in order to make Indian
rates gradually reduced the revenue of goods and products more competitive
government has comparatively increased, in international markets.
and now this time people voluntarily • Significance of Liberalisation Policy
disclose their income. o Economic liberalisation is generally a
■ Indirect taxes, which are levied on beneficial and desirable process for the
commodities or products, have also development of a developing country.
been targeted, with the government o The underlying goal of economic
lowering indirect tax rates in order liberalisation is to have unrestricted
to create a common national market capital flowing into and out of the
for goods and commodities. The country, boosting the economic growth
government has also simplified and efficiency of the country.

o After liberalisation, a country will benefit o These countries are considered high-
politically from the stability incurred by risk in their beginning stages, but that
getting foreign investment, which works doesn’t deter significant investment
almost like a booster for the economy from institutional investors who want
of a country. to get in first.
Q. The public expenditure management is a challenge to the Government of India in the context
of budget-making during the post-liberalisation period. Clarify it.
• In the Introduction, try to define Public Expenditure Management (PEM).
• In Body,
o Explain how PEM is a challenge when it comes to budget-making after a post-
liberalised period.
• Try to conclude with the significance of PEM.
Answer:
In general, Public Expenditure Management (PEM) is a prudent way of carrying out government
expenditure. PEM tends to promote the achievement of three outcomes, namely, aggregate
fiscal discipline, allocative efficiency, and operational efficiency.
PEM as a Challenge to the Budget-making after Post-Liberalisation:
In Liberalised India, the role of the state has changed. It is more of a facilitator and a promoter
of the competition. In such a scenario, the government is responsible for carrying out the
management of public money with respect to its new role. Moreover, institutions under
government are also expected to ensure a similar practice in financial management. Therefore,
practices of pre-liberalised India are acting as a hindrance to the modern demand. Challenges
are:
• Populist Measures: Vote bank politics has created a lot of pressure on wise public
expenditure.
o For example, in 2009, the Government in power announced 75,000 crore farm loan
waivers.
• Global Uncertainties: The 2008 US subprime crisis compelled the government to pump
more money into the economy to revive economic activities and help MSME sectors.
• Pandemic: During a pandemic, all economic activities were shut down, and the revenue of the
government fell drastically to revive economic activities the government announced a stimulus
package. This has led to a government fiscal deficit of double digits.
• Unchecked Subsidies: Substantial amount of subsidies has been rising in government
spending again every time elections come or making government policies a populist. The
government announces subsidies on LPG, kerosene, food grain subsidy, housing subsidy
etc. which create budgetary pressure on the government.
• Managing Public Debt: Management of public debt is necessary so that the current debt
burden should not fall oncoming generations.
• Containing Inflation: In the era of globalisation and India’s import dependency on fuels
made India always susceptible to price rise due to price in fuel prices. Controlling inflation

is the most important objective of monetary policy, which is also impacted by the revenue
and expenditure policies of the government. Falling GST revenues and loss-making PSUs
like Air India further strain government finances.
• Estimates of revenue and expenditure: In order to have effective PEM, comprehensive and
realistic estimates of revenue and expenditure are essential. Currently, there is uncertainty
in providing correct budget estimates.
To tackle this problem and manage public finances with economic prudence government has
taken various steps such as,
• Fiscal Responsibility and Budgetary Management Act 2003: The government is mandated
to a fiscal deficit of 2.5% by 2023.
• Monetary Policy Framework Committee: In 2015 Government of India and RBI both agreed
to inflation targeting and prepared a framework and constituted a committee called the
Monetary Policy Committee. It has set a target of 4 % inflation with a band of plus-minus
of 2%.
• Deepening of Fiscal Federalism: More tax revenue has been devolved to states from the
divisible tax pool. It would help in the better allocation of scarce resources based on the
needs of states.
• Public Financial Management System (PFMS): It has been developed at the central level to
enable outcome budgeting. Also, it enables the timely assessment of resource utilisation.
• Removing Plan and Non-plan Distinction: Now, the revenue-capital classification of public
expenditure will help in the allocation of more resources for the creation of capital assets
which in turn will help in improving the efficiency of the economy.
The element of prudence is essential in the management of public finances. Achieving it
through rationalising subsidies, sticking to the fiscal path, and rising tax revenues is the need.
The answer is in Public Expenditure Management. Therefore, short-sighted populist budgetary
exercises can take a back seat to long-term sustained economic growth.
Privatisation o It will lead to the development of capital

The Policy of Privatisation markets.
• The transfer of publicly owned or operated o It will lead to the modernisation of
means of production by the government technology.
to private ownership or private companies o It will increase efficiency in the production
is known as privatisation. It might signify a sectors.
variety of things, but in a nutshell, privatisation • Arguments Against Privatisation
is the transfer of public assets to the private o Social objectives are given less
sector. Disinvestment or privatisation is the importance if a business is operated for
process of selling a portion or all of a public a profit motive.
sector firm to the general public. o Government and taxpayers are lost out
• Rationale of Privatisation on dividend income from any future
o It will eliminate hidden unemployment. profits.
o It will increase the revenue of the o A large number of shares are purchased
government. by big institutions like pension funds,
o It will curb inflation as we can use mutual funds, etc, and after that, there
privatisation as a disinflation tool. will be a monopoly of big institutions.

o Infrastructure will not be developed into one of increasing interdependence and

in abundance because private-owned integration.
firms will depend on state support
• It entails a variety of actions, including the
infrastructure.
creation of networks and the crossing of
o There will be a financial burden on the economic, social, and geographical borders.
country because many times private Globalisation entails bringing the entire
companies will deliberately show them world together or establishing a world
sick or lack funds to get financial help without borders.
from the government in the forms of
• Effects of Globalisation
subsidies and tax rebates.
o It increases interdependence between
o The public interest will be less cared
countries and people.
for because big firms providing health
facilities will earn more profit than o It will allow the opening of international
providing the best health services to borders to allow the flow of goods,
the people of society, and in this way, people and ideas.
patients are less cared for. o It increases cross-border trade and
o More danger of employment loss the fast spread of technology and an
because companies will work on fire increase the flow of capital.
and hire policies, and they will use o It increases the flexible employee
machinery-intensive techniques to market and change of culture between
get their work done fast they will use countries.
labour-intensive techniques and, in this • The globalisation of the Indian Economy
unemployment, will be more after some o Globalisation and the Indian economy
time in the society. are both dependent on each other. If
• Feature of Policy of Privatisation in India the Indian economy wants globalisation
o Measures of Ownership: All public firms it will have to remove some barriers
eventually pass into the hands of private and if foreign countries want to invest
owners. In the country, denationalisation in India, then they will have to come
can be complete or partial. up with some positive things which are
o Organisational Measures: We use a variety beneficial for the Indian Economy. So,
of measures to limit the government’s globalisation and the Indian economy
authority over public corporations, are both dependent on each other
including holding company structuring, o Example:
leasing, and enterprise restructuring. ■ A few years ago, only a limited number
o Operational Measures: Both public of different company cars were
and private entities were losing a lot available in India like Ambassador,
of money. As a result, the efficiency of etc., and after globalisation, many
these businesses was to be improved, car companies come to India and
and the government will now be able to provide a good platform for cars like
gain some money. Suzuki, Toyota, etc., and after that,
Globalisation there will be a lot of cars available in
Policy of Globalisation the market at a comparatively lower
• Globalisation is commonly believed to refer price.
to the integration of a country’s economy ■ A few years ago, only landlines of
with the global economy. It’s a complicated BSNL, MTNL, and a very few brands
situation. It is the result of a variety of of hand mobile like Nokia, etc., were
policies aimed at transforming the world available, but after globalisation, we

got companies like Sony, Samsung, o It will lead to an increase in anti-

Apple, etc., and we will continue globalisation protests.
to get a lot of other mobile brands o In the year 1991, India’s economic
at lower prices with the latest planning policy shifted toward market
technologies. economies.
o So, one can say both globalisation and • Main changes under NEP (New Economic
the Indian economy will be dependent Policy)
on each other to increase their economic o Reorientation of fiscal and monetary
revenue and stand their country on a policies in response to market
good standard. conditions.
• Features of Globalisation o Foreign direct investment (FDI) and
o Liberalisation: It will allow or make it foreign institutional investment (FII) are
possible for big firms to establish their encouraged.
companies in any part of the world. o Import trade restrictions have been kept
o Free Trade: It will allow trade in any part to a minimum, while export promotion
of the world and trade-related there are has been prioritised.
agencies like WTO which means world o The government’s direct involvement
trade organisation which will help in trade. is limited to key industries like atomic
o The globalisation of Economic Activity: energy.
It will help domestic entrepreneurs or o The Indian Rupee’s convertibility.
companies to integrate with foreign
o Sustainable development.
countries.
Impact of the Reforms on the Indian Economy
o Privatisation: It will keep the states
• Positive Effects
away from their ownership of means of
production and distribution and allow o Through economic reforms, India
the free flow of industrial, trade and overcame its worst economic situation.
economic activity across borders in o Devaluation of the rupee was done, and
countries. structural reforms helped to come out
o Economic Reforms: It will encourage of the crisis of balance of payment and
fiscal and financial reforms with a view foreign exchange rose to $15.2-billion
to give strength to the world to do a free after that in 1991, one USD was around
trade, and free enterprise in countries. 24.58 INR.
• Effects of Globalisation on the Indian o It increased the competition in the
Economy banking sector and after that consumers
will get more choices and efficiency
o It has changed the food supply as we
increased.
will get any food any time during the
year. o Inflation tends to decrease as production
increases after reforms.
o It has made division of labour because
MNC has got cheap labour in developing o It helped to eliminate poverty as in 1993
countries. -1934 the poverty rate was 36% and
after that, in 2004-05 the rate of poverty
o It has made job security a lower level.
was 27.5% and the difference could be
o It will lead to harm to the environment
clearly seen. (Poverty rate in India will
because more trade will lead to more
ease in FY22, but will still remain closer
use of transport, and it will lead to more
to 10% levels, according to the World
pollution in the environment.
Bank.)

o It helps to increase the GDP, as from 1990- o Subsidies on fertilisers were removed
91 the overall increase in the GDP can be and it led to an increase in the cost of
clearly seen. Since 1991, the Budget size production.
grew around 21 times, the economy 9 o Imports were made cheaper as it
times; and per capita income 6 times. decreased the demand of the domestic
• Negative Effects sector who are producing in India.
o Agriculture, urban informal sector and o It accelerated growth but failed to grow
forest-dependent communities did not employment.
see any improvement.
Q. How globalisation has led to the reduction of employment in the formal sector of the Indian
economy? Is increased informalisation detrimental to the development of the country?
• In the Intro, try to define the term globalisation.
• In Body,
Discuss reasons behind the substantial amount of workforce.
o
o Discuss how informalisation is detrimental to economic development.
• Try to conclude the answer with the need for more formal sector jobs.
Answer: Integration and interaction among people across the borders are called Globalisation.
It also means the propagation of information and jobs across countries. Today every country
is dependent on every other country for trade and other things. It also results in the spread
of tourism activities. Before the LPG reforms of 1991, India followed an inward-looking policy
resulting in very less trade across the border. After the reforms in 1991 Indian economy started
actively following a policy which resulted in trade across the borders. The economy was closed
before and opened after. The policy after reforms led to interaction with the global stakeholders.
This led to a thriving private-sector which generated employment. But many of these jobs
either remained informal or lost with time. Following are the reasons.
• he government no longer remained the largest employer: In fact, with the de-licensing and
T
opening of industrial sectors for private entities, Public sector enterprises started becoming
uncompetitive. Subsequent closures and disinvestment led to retrenchment and retirement
of thousands of employees.
• Restrictive labour laws: Restrictive labour laws made industries hire human resources on a
contractual basis in order to circumvent rigid hiring and firing provisions.
• Overemphasis on service sector: The service sector requires skilled labour and required
skills that are available to a minuscule section of the population. Because of this, most
people did not get the opportunity to work in the formal sector of the economy.
• Less emphasis on manufacturing: The manufacturing sector has huge potential to offer
formal jobs and absorb large numbers of the population, but this has not happened in
India’s case. Less contribution from the manufacturing sector to the economy led to poor
employment generation.
• Market mechanism and competition: The reduction of formal jobs is due to industries
which are less labour intensive.

• The advent of the fourth industrial revolution and automation: This results in huge
automation which ultimately reduces man’s work and manpower. Skill upgradation will be
an absolute necessity to remain competitive.
• Global events: Globalisation comes with some demerits as well crisis in some country
affects India as well. For example the Southeast Asian crisis, the 2008 Subprime crisis, and
the Eurozone crisis in 2011.
Increasing Informalization is detrimental to economic development as:
• Informal workers lack proper wages: Development happens when wages are high because
low wage results in very less saving rates, poverty and inequality.
• Lack of welfare benefits: Apart from regular wages social and welfare benefits are also very
important. The absence of this results in low saving rates as it increases their expenditure.
• Hampering productivity: In the informal sector, things are not systematic because the
labours have no loyalty to the company.
• Financial inclusion: Lack of financial literacy and absence of financial inclusion deprives
labours of the banking system. It results in less domestic consumption.
• The informal sector is major ash-based which generates huge amounts of black money
and tax evasion. This deprives the state of legitimate tax collection of the government and
further increases the resources crunch to spend on developmental activities.
• A low tax base due to the informal sector does have multiplier effects such as low tax
revenue, increased government borrowing, higher fiscal deficit, and higher inflation. All of
these affect the low-wage informal workers the most, creating a vicious cycle hampering
development.
India presently has the opportunity to reap demographic dividends with a large workforce
entering the economy every year. Creating more and more formal sector employment
opportunities is the key intervention needed.
Major Achievements of New Economic Policy • Changes in the Composition of National

• Higher Growth Rates: The rate of economic Income: Prior to the implementation of new
growth increases. India’s GDP growth economic policies, India’s national income
accelerated from 5.6 percent in 1991 grew at a rate of 4.7 per cent per year. India’s
to 7.6 percent in 2015-2016. [The Asian growth rate decreased to 0.6 per cent when
Development Bank (ADB) forecasts India’s the new economic policy was implemented.
GDP growth to moderate to 7.5% in 2022-23 The growth rate increased to 5.0 per cent in
from an estimated 8.9% in 2021-22, but will 1993-94 at 1993-94 prices, 8.2 per cent in
pick up to reach 8% in 2023-2024] 1996-97, and 6.2 per cent in 2000-01.
• Foreign Exchange Reserve: From • Performance of the Industrial Sector: Now
$3362-million in 1990 to $ 25186-million industrial sector has only been reserved for
in 1995, the foreign exchange reserve only 3 sectors which are the railway, defence
increased. (Currently at USD 603.694-billion: equipment sector, and atomic energy
Latest RBI data from April 2022) generation plant. Now after economic policy
• Foreign Direct Investment: Foreign industries are allowed to import technology,
investment increased from $100-million in raw material, and machinery and it will be
1991 to $150-million in 1995. ($74.01-billion much more beneficial for their production
in the calendar year 2021- Ministry of and the result of the policy is much more
Commerce & Industry data) beneficial to industries.

• Foreign Direct Investment: The equity limit • Overseas Investment by Indian Companies:
of foreign capital investment has been Before 1991 companies were only limited
raised from 40% to 100% per cent by the and due to strict rules and regulations in
government. In 47 high-priority industries, India they were not allowed to operate
the limit of foreign direct investment (FDI) or invest in foreign companies, but after
will be extended to 100%, and they will 1991 the economy will be liberalised, and
be allowed without any restriction. In this now big companies are investing in foreign
regard, the foreign exchange management companies because now FDI rules are also
act will be enforced by the government of normalised. Investment is done to increase
India. the revenue of the government of India.
• Foreign Trade: In 1991, a comprehensive • Saving and Investment Performance: After
economic reform programme was initiated 1991 people got more options to invest
that focused on the external sector and their money in banks, funds, mutual funds
included a number of measures such as lower or purchase shares of companies because
tariffs, improvements to foreign investment, after 1991 there will be more competition
and relaxation and simplification of the rigid in the market to provide better services
import licensing system. than are given before 1991. So, after this
o The policy’s main focus is on liberalising economic policy, we can say that people
capital goods and industrial imports in increased their savings by investing their
order to promote domestic and export- money into the market.
oriented growth. After 1991, India’s Assessment of Reforms
trade altered dramatically. The volume • The GDP is used in India to quantify
of trade in India increased after the economic growth. Since its inception, the
new economic reforms, and the nature reform process has lasted three decades.
of trade altered as well. Machinery, Now we’ll take a look at how the Indian
chemicals, semi-precious stones, and economy fared during this time. For two
electrical goods and items are among decades after 1991, India’s GDP grew at a
India’s top exports. steady and rapid rate.
o On the other side, large imports such o GDP grew at an annual rate of 8.2
as fertilisers, gold, petroleum, and per cent from 2007 to 2012, up from
petroleum products were involved. 5.6 per cent in 1980–to 91. Agriculture’s
There was also an increase in the growth slowed throughout the reform
direction of India’s foreign commerce period, and the industrial sector saw
with other countries and regional economic fluctuations; however, the
trading committees as a result of the service sector’s growth accelerated.
new economic policy reforms. This suggests that the service sector is
o Prior to these reforms, India’s exports mostly responsible for GDP growth.
were limited to OECD and OPEC o The period between 2001-02 and
countries, but following the new 2011-12 was the best in terms of
economic policy, our country shifted economic growth and India’s GDP
its focus to new Asian countries, with increased by a multiple of 2.1 during
China being India’s one of its largest this decade. A slowdown since
trading partners. In terms of direction, 2016-17 and the pandemic-driven
India’s historic commercial partners contraction in 2020-21 has made the
have been the European Union and the decade from 2011-12 to 2021-22 not
United States of America. prosperous in terms of GDP growth
in the post-reform period.

o While agriculture produced a high limits on agricultural product imports.

volume of agricultural products in 2013– These factors would have had an impact
14, it had negative growth the following on Indian farmers, who are now facing
year. While the service sector continued more foreign competition.
to develop at a fast pace in 2014–15,
o Furthermore, as a result of export-
it grew at a rate of 9.8%, which was
oriented agricultural policy policies,
greater than the overall GDP growth.
there has been a movement away from
(Agriculture and the allied sector proved
production for the local market and
to be the most resilient to the Covid-19
toward production for the export market,
shock as they registered a growth of 3.6
with an emphasis on cash crops rather
per cent in 2020-21 and improved to 3.9
than food grains. This puts downward
per cent in 2021-22.)
pressure on food grain prices.
o During the years 2012–13, the industrial
• Industry Reforms: Growth in the industrial
sector saw a significant decline, but
sector has slowed as well. This is due to
in the following years, it will continue
a drop in demand for industrial products
to exhibit consistent positive growth.
due to a variety of factors such as lower
India’s economy has opened up,
import costs, insufficient investment
resulting in a rapid increase in FDI and
infrastructure, and so on. In a globalised
foreign exchange reserves.
world, developing countries are forced
o Foreign direct investment (FDI) and to expose their economies to a bigger
foreign institutional investment (FII) flow of commodities and capital from
have risen from over $100-million in industrialised countries, exposing their
1990-91 to around $30-billion in 2017- sectors to imported goods. As a result,
18. ($74.01-billion in the calendar year demand for native goods has been replaced
2021- Ministry of Commerce & Industry by cheaper imports.
data)
o Imports are putting pressure on
• Growth and Employment: While the rate domestic manufacturers. Due to a lack
of GDP growth has grown over the reform of investment, infrastructure amenities,
period, researchers have pointed out that such as power supply, have remained
reform-driven growth has not resulted in inadequate. As a result, globalisation is
enough job possibilities in the country. frequently viewed as facilitating the free
• Agriculture Reforms: Agriculture reforms flow of goods and services from foreign
have failed to assist the sector, which countries, which has a negative impact
has seen its growth rate decline. Since on native industries and employment
1991, public investment in agriculture has possibilities in emerging countries.
decreased, particularly in infrastructure, o Furthermore, due to substantial non-
such as irrigation, power, roads, market tariff barriers, a developing country like
linkages, and research and extension India still lacks access to developed-
(all of which were important before the country markets. Although all quota
Revolution). Furthermore, the partial
limits on textile and garment exports
withdrawal of fertiliser subsidies has
have been eliminated in India, the United
resulted in an increase in production costs,
States has not withdrawn its quota
which has harmed small farmers.
restriction on textile imports from India.
o A number of policy changes have
• Disinvestment: The government sets a
impacted this industry, including lower
target for PSE disinvestment each year in
import taxes on agricultural items, lower
order to generate a significant quantity
MSP, and the removal of quantitative
of revenue. For example, in 1991-92, it

was planned to raise Rs 2500 crore by o Restructuring of the Irrigation sector

disinvestment. The government was able (drip irrigation and minor dam
to raise Rs 3,040 crore more than it had construction)
expected. The aim for 2017–18 was over o Strengthening of Road Network
1,00,000 crores, and the actual achievement through PPP model
was around 1,00,057 crores. (For the year o State Public sector enterprises were
2022-23, the government of India has set a strengthened.
softer target of Rs 65,000 crore.) Kerala Model
Amartya Sen Vs Jagdish Bhagwati Debate on • It is characterised by achievements in social
Economic Policy indicators such as healthcare, education,
• The debate on economic policy between low infant mortality and low birth rate,
Amartya Sen and Jagdish Bhagwati is high life expectancy, and developing
between economic growth and economic productive social infrastructure instead
development. of materialistic infrastructure.
Amartya Sen Jagdish Bhagwati • The policies followed for development
are:
Economic growth is Economic growth is
just a means. crucial for achieving o High spending on Social services like
social ends. Health, Education etc.
Achieve intervention Supported LPG o Land Reforms.

of the government. (market-oriented o Effective Decentralisation to empower
approach). the local bodies.
Bottom-Up Approach Top-Down Approach. o Promotion of Trade.
(rejected trickle- o Rule of left domination, people
down completely). awareness.
First redistribution First growth and then Important Terms and Their Meaning
and then growth. redistribution. • Centralised Planning
Kerala and Sri- Gujarat Model o In centralised planning, the whole economy
Lanka models are supported. is administered by a single planning
supported. authority of the central government.
Table 12.3: Amartya Sen Vs Jagdish Bhagwati Debate

• Decentralised Planning
on Economic Policy o In Decentralised Planning, plans are
developed and implemented at different
Gujarat Model levels, i.e., from the national to sub-
• The period from 2002-03 to 2011-12 during national to the village level.
which Gujarat experienced a quantum • Democratic Planning
jump in its growth rate. o In Democratic Planning, people/
• The policies followed by Gujarat representatives of various sections/
government are: sectors are involved in all the stages of
o Business Friendliness preparation and implementation of the
o Economic Freedom plan.
o Good Governance (e-Governance) • Physical Planning
■ Inter-departmental Coordination o In Physical Planning, resources are
■ Stable tenure of bureaucrats estimated and allocated in physical
o Infrastructure Development terms like manpower, natural resource,
o Power Reform stock of capital etc.

• Financial Planning budget).

o In Financial Planning, resources are ■ Medium-term: Four to Six years
estimated and allocated in money terms. (specific targets and policies)
o For example, Tax revenue, Profit of PSU etc. ■ Long Term: Ten to Thirty years (Broad
• Fixed Planning policies and strategies)
o In Fixed Planning, the terms’ targets/ o India followed the rolling plan from 1978
objectives of economic planning are to 80.
seldom changed i.e., it remains fixed. • Perspective Planning
• Rolling Plan/Continuous Planning o Perspective Planning takes into account
o In Rolling Planning, a medium-term the implication of the medium-term
plan is prepared annually i.e., every year targets and policies of a plan over a
targets and policies are determined period of 10-30 years.
for the next four to five years and an • Comprehensive Planning
assessment is made of the previous o Comprehensive Planning encompasses
four to five years. all the sectors of the economy.
o There are three types of rolling plans: • Partial Planning
■ Short term: One year (like annual o In Rolling Planning, policies are prepared
for selected sectors of the economy.


13 Industries
Introduction other basic/key sectors were under

Economic progress has been aided by the government control.
advancement of the industry. Thus, the o Important industries: Some of the
industrial development of the country will Important industries are controlled by the
be guided and fostered by industrial policies. private sector. Heavy chemicals, sugar,
Before 1947 the industrial base of the economy cotton textiles, and woollen industries
was very small and the industries were based are all key industries. (But still, in these
with many problems like shortage of raw industries, the central government, in
materials, deficiency of capital, poor industrial consultation with the state government,
relations, etc. Following India’s independence will have general control over them).
in 1947, the government began the process of o Other industries: All other industries
industrial development. which were not incorporated in the
Evolution of Industrial Policies of India above three categories are open to
Industrial Policy Resolution of 1948 the private sector, with many of them
having the provision of compulsory
• The Industrial Policy Resolution of 1948
licensing.
marked the start of India’s industrial policy
evolution. Industrial Policy Resolution of 1956
• The resolution emphasised the economic • The first comprehensive statement of
importance of ensuring a steady increase in India’s industrial growth policy was the
production and its equitable distribution, as Industrial Policy Resolution.
well as the need for the government to play • The Industrial Policy Resolution of 1956
a more active role in industry development. prioritised the government’s position as
• This policy states that India is a mixed the primary and direct driver of industrial
economy with the overall responsibility development.
of the government for the planned • The policy’s major goal was to:
development of industries and their o To accelerate economic growth and the
regulation in the national interest. industrialisation process.
• The main features of the 1948 industry o To reduce disparities in income and
policy are: wealth and remove regional disparities
o Acceptance of the importance of both through the development of regions
private and public sectors with a low industrial base.
o Division of the industrial sector o Village and small-scale industries
o Role of small and cottage industries should be promoted.
o Other important features of the • Industries were reclassified into three
industrial policy categories.
• It classified industries into 4 categories: o Schedule ‘A’:
o Strategic industries (Public Sector): ■ It consisted of 17 industries
These industries come under exclusive prominent among them were arms
State Monopoly. Ex: arms and & ammunition, atomic energy, air
ammunition, atomic energy etc. transport, railway, etc.
o Coal, iron and steel, aircraft ■ The state was solely responsible for
manufacturing, shipbuilding, and the development of these sectors.
Industries 257
o Schedule ‘B’: Industrial Policy Resolution of 1973

■ It consisted of 12 industries prominent • In the Indian Policy Statement of 1973,
among them were Machine tools, high-priority industries were chosen,
chemicals, drugs, pharmaceuticals, and significant industrial houses and
antibiotics, fertilisers, etc. international firms were allowed to invest.
■ Though the state was planning • The 1973 Industrial Policy Resolution made
to develop and own most of the the following significant changes:
industries on this schedule, private o The term “core industries” was coined as
enterprise was expected to augment a new classification term. This category
the state’s efforts. includes industries that are critical to
o Schedule ‘C’: the development of other sectors, such
■ Residual industries were left open to as iron and steel, coal, cement, crude
the private sector enterprise. These oil, oil refining, and power.
industries were heavily controlled o The concept of a “joint sector” was
through licensing provisions. devised, allowing collaboration between
■ This is India’s most important the government, the state, and the
industrial policy because it private sector in the establishment of
determined not only the country’s certain sectors.
industrial progress but also the type o Some industries were placed on the
and scope of the economy till 1991. reserved list, which allowed only small
and medium-sized businesses to be
Industrial Policy Resolution of 1969
established. Coal and lignite, mineral
• The purpose of this licensing policy was to
oils, and so on.
solve flaws in the Industrial Policy of 1956’s
o The Foreign Exchange Regulation Act
licensing policy.
(FERA) was passed in 1973 to govern
• Major changes after the Industrial Policy foreign exchange.
Resolution of 1969:
o Multinational corporations (MNCs):
o The MRTP Act (Monopolistic and Were granted a limited licence for
Restrictive Trade Practices) was foreign investment and were allowed to
enacted. The Act was enacted to control establish subsidiaries in the country.
corporations’ trading and commercial Industrial Policy Resolution of 1977
practices, as well as to prevent monopoly
• George Fernandes, the then-Union Industry
and economic power concentration.
Minister of the Parliament, announced the
o Firms with assets of 25 crores or more Indian Policy Statement.
are required to seek permission from the • The main focus of the Industrial Policy
Indian government, before expanding, statement of 1977 was on the effective
embarking on greenfield projects, or promotion of small, cottage and village
acquiring other businesses (as per industries.
the MRTP Act). The MRTP Companies • The highlights of this policy are:
were a group of such businesses. In
o Small-Scale and Cottage industries:
1980, the top limit (known as the ‘MRTP
Small sector was classified into three
limit’) for such businesses was raised categories:
to ‘50 crores’ and then to ‘100 crores’
■ Cottage and household industries
in 1985.
produce wage goods with vast self-
o The government established the MRTP employment potential.
Commission to address the illegal and ■ The tiny sector with investment
restricted trading practices. in machinery and equipment up to
Rs. 1 lakh.
258 Industries
■ Small scale industries with o Regional inequities must be addressed.

investment up to Rs.10 lakh and o Export-oriented industries should be
ancillary units with investment in promoted.
fixed capital up to Rs. 15 lakhs. • The following are the policy’s most
o Large Scale Industries important initiatives:
■ Basic industries are crucial for o Foreign investment via technology
providing infrastructure as well as transfer was once again permitted.
for the development of small and o The ‘MRTP Limit’ was raised to ‘50 crore’
village industries, like steel, non- in order to encourage the formation of
ferrous metals, cement, oil, and larger businesses.
refineries.
o Licensing for businesses has been
■ Capital goods industries for fulfilling simplified.
the machinery requirement of basic
o It extended the provision of automatic
industries as well as small scale
expansion to more industries.
industries.
o The 1980 Industrial Policy Statement
■ High technology industries where
opened up new vistas for the private
production has necessarily to
sector to expand its activities and even
be on a large scale and which
set up industries the sector reserved for
help agricultural and industrial
the State in the 1956 Resolution.
development such as fertilisers,
petrochemical industries, etc. Industrial Policy Resolutions of 1985 and 1986
• Public sector undertakings were given • The industrial policy resolutions announced
the task of controlling the economy. in 1985 and 1986 were of very similar kinds.
By keeping these industries are under • The main highlights of the policies are:
government control, it was easy to check o Foreign investment was made easier
the concentration of economic power in with the opening of new industrial zones
the hands of a few individuals or groups. to foreign investors.
• To achieve equal distribution, employment- o For the sake of encouraging the idea of
oriented planning was to replace larger firms, the ‘MRTP limit’ was raised
production-oriented planning. to ‘100 crore.’
• The IPR of 1977 failed to make an impact o The process of obtaining an industrial
because though the policy tried to be licence has been simplified. Only 64
different, there was no radical change from industries remain subject to mandatory
the previous policies. licensing.
Industrial Policy Resolution of 1980 o Sunrise industries like
• The Industrial Policy of 1980 reiterated its telecommunications, computerisation,
faith in the ideology of the Industrial Policy and electronics are receiving a lot of
Statement of 1956. attention.
• The Industrial Policy Statement of 1980 o The importance of the public sector
emphasised the promotion of domestic undertakings’ modernisation and
market competitiveness, technological profitability was emphasised.
advancement, and industry modernisation. o In many Technology Missions, the
• The following are some of the policy’s government took a fresh scientific
socio-economic goals: approach to the agriculture industry.
o Maximising output and increasing o These industrial provisions were
productivity conceived with the goal of liberalising
the economy without the use of the
o Increased employment creation
phrase “economic reforms.”
Industries 259
o The government’s industrial policies, on structural reforms to ‘fulfil’ IMF

when combined with its overall conditions.
macroeconomic strategy, made it more • In order to achieve these goals, the
reliant on foreign capital. government chose to implement a set of
o It became difficult for India to repay measures in the following areas:
external debts when the economy was o Industrial licensing
unable to meet industrial efficiency. ■ Under the new policy, industrial
o Finally, by the end of the 1980s, India licensing was abolished for all
was engulfed in a serious balance of industries, except those specified
payment crisis, with higher inflation irrespective of the level of investment.
(over 13%) and a larger budget deficit ■ Only 18 industries needed a compu-
(above 8 per cent). lsory licence. Subsequently, this
o The profound crisis left the economy in was further liberalised and only 6
a financial bind, forcing India to adopt a industries as Alcohol, Electronic
new approach to economic management equipment and defence equipment,
in the future. Tobacco product, Industrial
New Industrial Policy, 1991 explosives, Hazardous chemicals,
• In June 1991, India experienced a serious Drugs and Pharmaceuticals.
balance of payment problem. Several ■ The objective was to provide
interrelated developments in 1990 and 1991 impetus to the attainment of the
grew in ways that were unfavourable to the fullest entrepreneurial and industrial
Indian economy. potential.
• The rising oil prices caused by the Gulf War o Foreign Investment
(1990–91) depleted India’s foreign reserves. ■ In high-priority industries, direct
• Following the Gulf War, there was a foreign investment of up to 51 per
significant reduction in private remittances cent of foreign equity was permitted.
from abroad, Indian workers, particularly This category included 34 different
from the Gulf region. industries.
• Inflation was close to 17 per cent at the ■ A Special Empowered Board was
time. also formed to negotiate with a
• The Gross fiscal deficit of the central number of significant international
government reached 8.4 % of the GDP. corporations and reach agreements
• By June 1991, India’s foreign exchange on direct foreign investment in
reserves had dwindled to only two weeks’ specific areas.
worth of imports. o Foreign Technology Agreement
• As a result of the BoP crisis, the initial phase ■ Bureaucratic clearance was no
of reforms focused on macroeconomic longer required for an Indian
stabilisation, with subsequent phases entrepreneur for his commercial
focusing on industrial policy, foreign technology relationship with his
investment policy, trade and exchange rate foreign supplier.
policies, financial and tax reforms, and ■ It was expected that the Indian
public sector reforms. industry would not only absorb
• The government’s new industrial policy, foreign technology efficiently, but
which went into effect on 23rd July, competitive pressure would induce
1991, kicked off a larger round of them to invest much more in
economic reforms in the country, focusing indigenous R&D activity.
260 Industries
o Public Sector Undertakings ■ Restrictions on mergers,

■ The public sector has always served as a acquisitions, amalgamations, and
focal point for development philosophy. takeovers were also sought to be
■ Introduced competition by inviting liberalised in the light of the new
private sector participation in the wave of liberalisation.
public sector dominated sector. Positive of New Industrial Policy, 1991
■ Disinvested government holdings • The end of licence-permit raj.
to bring market discipline to the • Foreign investment and foreign technology
output of public enterprises and to were supposed to encourage the investment
get out of places where government environment in the country and boost the
presence is not expected. competitive environment by shaking the
■ Due to the policy initiative and the complacency of Indian businesses.
government’s decision to get out of • Assets Threshold Limits for MRTP
the sectors which could be entrusted Companies and Dominant Undertakings are
to the private sector, the number of being removed. Allowing them to develop at
industries reserved for the public their own pace.
sector was cut down to three which • The role of the public sector was
include defence equipment, Atomic redefined, and attention was paid to
energy, and Railway transport. increasing its efficiency and productivity.
o Monopoly and Restrictive Trade Criticism of New Economic Policy, 1991
Practices Act • New Economic Policy (NEP) was criticised
■ The objective of the Act was the for promoting ‘jobless growth’.
prevention of the concentration of • Neglect on agriculture was another area of
economic power in a few hands which major weakness in the NEP.
may be detrimental to the objective
• Liberalisation of imports might offset
of social justice. But the present form
export growth leading to an adverse impact
of implementation of the Act resulted
on the BoP position.
in inhibiting industrial growth.
• The possible reverse flow of dividends,
■ The Act was to be restructured so as
royalties, and remittance of profit might
to minimise government interference
result in the outflow of foreign exchange
in the investment decisions of large
creating pressure.
companies.
Q. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic- Product
(GDP) in the post-reform period” Give reasons. How far are the recent changes in Industrial
Policy capable of increasing the industrial growth rate? (250 Words, 15 Marks)
• In the Introduction, try to write about Industrial growth in the Industrial Policy of the 1991
era.
• In body,
o Discuss the constraints in Industrial growth
o Discuss new industrial policy-related initiatives.
• Try to conclude the answer by writing about the Make in India targets and the $5 trillion
economy target.
Industries 261
Answer:
The Industrial Policy of 1991 set out a pathway for industrialization in newly liberalising. This
policy primarily aimed at liberalising licensing and measures to encourage foreign investments.
However, the industrial growth rate could not match the pace of the overall growth of GDP. In
the post-reform period, India’s GDP growth rate was on average above 6% but the industrial
growth rate was just around 3-4%.
Constraints for Industrial Growth:
• Inadequate infrastructure: The physical infrastructure suffers from substantial deficits in
terms of efficiency and capacity. The lack of industrial infrastructure resulted in a high cost
of logistics which in turn affected the competitiveness of Indian goods in global markets.
• Business environment: The complex multilayer tax system and a lot of tax law compliances
and high cost of compliances. Until the Goods and Services Tax, cascading effects of tax
affected the competitiveness of manufacturing in India.
• Restrictive labour laws: Complex number of labour laws made the business environment
complex and difficult to carry out business and compliance with laws. These overly
protective laws of the labour force in the formal sector inhibited the growth of the
manufacturing sector in the country.
• Labour intensive manufacturing sector: This sector has potential but is often neglected. It
is a highly unorganised sector rendering low factor productivity due to unskilled labour.
• Poor expenditure on R&D: Lower investment in R&D is one of the biggest challenges in the
development of the manufacturing sector. Inefficient technologies led to lower productivity and
higher cost of production making Indian products uncompetitive in the international market.
• Poor Technology Adoption by MSMEs: Slow adoption of technologies by MSMEs, which are
considered the backbone of the Indian manufacturing sector. This slow rate of technology
adoption made the MSME sector’s products internationally uncompetitive and the poor
capacity building of MSMEs resulted in lower contributions to the manufacturing sector.
To cope with these challenges and make Indian industries more competitive, recently Department
of Industrial Policy and Promotion (DIPP) has introduced some changes in industrial policies,
that will focus on increasing the industrial growth rate in the following manner,
• Attracting FDI: The new policy aimed to attract $100 billion dollar investment/ FDI in a
year, from $60 billion in 2016-17. It was also aimed at retaining investment and accessing
technology.
• Labour Market: The new policy aimed to push for reforms to enhance labour market
flexibility with an aim for higher job formations of informal sectors of the economy and
performance inked tax incentives etc.
• Harnessing Existing Strengths: The policy aims to harness the existing strengths in sectors
like automobiles and auto components, banking, new and renewable energy, software,
electronics and tourism etc.
• Commercially Viable Sectors: Policy targets to create globally scaled up and commercially
viable sectors such as renewable energy, waste management, financial services, green
technologies, medical devices etc.
• Transform, reform and perform: This new industrial policy aims to Transform, Reform and
Perform. Various policy initiatives and objectives led to increased industrial output and
growth rate.
• MSMEs and Global Supply Chain: This would depend on the integration of the MSME sector
with the global world and infusing modern technology into them. The global integration
262 Industries
of MSMEs on global supply chain management and making them key stakeholders for the
global supply chain management.
Therefore, to make India a global manufacturing hub and increase exports oriented manufacturing
the need is to focus on constant evolutions of policies which create the most favourable business
environment to attract and make Indian manufacturing the most competitive in the world. To
achieve a $ 5 trillion economy and increase manufacturing contribution in GDP to 25% then it is
imperative to continuously remove the challenges in the way of achieving these targets.
National Manufacturing Policy 2011: o Strategic industries: Launching

• In order to effect a quantitative and programmes to create national skills
qualitative change in the manufacturing to make India a major player in areas
sector, the Indian government chose to like aircraft, shipping, and others would
execute the National Manufacturing Policy. be acceptable if the government had a
It contains the following items: strategic need.
o Increase manufacturing sector growth o Small and medium enterprises (SME):
to 12-14 per cent in the medium run to The SME sector accounts for roughly
make it the economy’s engine of growth. 45 per cent of manufacturing output,
o It aims to raise manufacturing’s and 40 per cent of total exports, and
contribution to India’s GDP to 25% by 2022. provides self-employment and job
o Increase the manufacturing sector’s opportunities across a broad geographic
employment creation pace to produce spectrum.
100 million new jobs by 2022. o Public sector undertakings: Public
o To make growth inclusive, the rural sector undertakings, notably those in the
migrant and urban poor need to have dtefence and energy sectors, continue to
relevant skill sets. play an important role in manufacturing
o Improve Indian manufacturing’s global and the national economy.
competitiveness by providing adequate • India has a competitive advantage in the
policy assistance. following industries: In the automotive,
o The programme envisions the creation of pharmaceutical, and medical equipment
National Investment and Manufacturing industries, India’s large domestic market,
Zones (NIMZs) that are equipped with along with its strong engineering foundation,
world-class infrastructure and are has resulted in local competence and cost-
autonomous and self-regulating and are effective manufacture. The following are
built in collaboration with the private the instruments that were decided to be
sector. employed to attain the goals:
• Special emphasis will be paid to the o Rationalisation and simplification of
following industries: business regulations.
o Employment-intensive industries: To o Simple and quick departure method for
ensure job creation, adequate support will sick unit closures that protect workers’
be provided to promote and strengthen interests.
employment-intensive industries. o Measures to improve industrial training
o Machine tools, heavy electrical and skills.
equipment, heavy transport, earthmoving, o Incentives for SMEs.
and mining equipment are to be given o Financing and institutional processes for
specific attention. technological advancement, particularly
Industries 263
green technologies such as solar power Promotion (DIPP) will serve as the
plants. central government’s nodal body.
Ways to Achieve Land For NIMZ
• Allowing the flow of foreign investment and • NIMZ land size: A NIMZ would have to be at
technology along with leaving scope for least 5000 hectares in size.
indigenous development of manufacturing • Land availability: The State Government
capabilities and technologies. will be in charge of selecting land suitable
• Competition among the companies plays for the construction of the NIMZ, including
an important role in the shaping and any necessary land purchase.
implementation of policies and programmes. o The State Government will purchase
• To lessen the burden of compliance on land beneath existing industrial areas/
industries, rationalise the regulatory estates/sick and defunct units, including
framework for conducting business. PSUs.
• Improving the quality and quantity Ownership
of products produced by an industry
• It is up to the State Government to decide
encouragement to Research and
which model will work best for them.
Development.
• It may include:
• Effective consultation among all
stakeholders is required to make mid- o Keep the ownership with the state
course changes. government itself.
National Investment and Manufacturing Zones o Transfer ownership to a state
(NIMZs) government-run enterprise.
• One of the primary components of the o Have a private partner as a joint owner.
2011 National Manufacturing Strategy is o Use any other model that is acceptable.
National Investment and Manufacturing Administration
Zones (NIMZs). NIMZs are large swaths of • The administrative framework of NIMZ
developed land with the ecosystem needed would be made up of a Special Purpose
to support world-class manufacturing. Vehicle (SPV), a developer, the State
• This helps meet India’s growing desire for Government, and the Central Government.
world-class metropolitan centres while • The Central Government will announce the
also absorbing surplus labour by giving establishment of an NIMZ in the Official
possibilities for meaningful employment. Gazette.
• Special Purpose Vehicles (SPVs) administer • Any SPV that uses the NIMZ as its name
these NIMZs, ensuring that: must be a legal company. This SPV will
o Zone master planning. function as a company.
o Pre-clearances for the establishment • A prominent government official from the
of industrial units to be established federal or state level would serve as the
within the zone. CEO of the SPV.
• Other functions are described in this • The cost of master planning for the NIMZ
policy’s various parts. would be covered by the central government.
o The State Government will declare the Number Of NIMZ
NIMZ an Industrial Township in order • Prakasam (Andhra Pradesh), Sangareddy
for it to act as a self-governing and (Telangana), and Kalinganagar (Odisha)
autonomous organisation. are the three NIMZs that have gotten final
o In topics relating to NIMZs, the permission, while 13 others have gained in-
Department of Industrial Policy and principle approval.
264 Industries
• Apart from these, the Delhi Mumbai Industrial

Corridor (DMIC) initiative comprises eight
NIMZ-designated Investment Regions.
Delhi Mumbai Industrial Corridor (DMIC)
• It is a USD 90 billion infrastructure project
between Delhi (National Capital) and
Mumbai (Economic Capital) with financial
and technical help from Japan.
• Its length is 1483 Kms.
• In December 2006 an MoU was signed
between the State Minister of the Ministry
of Economy, Trade and Industry (METI)
Fig. 13.1: Route of the Corridor
of the Government of Japan and the
Secretary, Department of Industrial Policy Difference between SEZ vs NIMZ
& Promotion (DIPP) • In terms of scope, infrastructural development,
• In August 2007 Project was presented in governance systems connected to regulatory
front of the Prime Minister. procedures, and departure rules, NIMZs
differ from SEZs. SEZs are focused on the
• It passes through the six States- Uttar
concept of industrial growth in partnership
Pradesh, NCR of Delhi, Haryana, Rajasthan, with States and focus on manufacturing
Gujarat and Maharashtra, growth, the advancement of exports and
• Starts from Dadri in Uttar Pradesh. employment generation.
• Ends at Jawaharlal Nehru Port near Mumbai. • NIMZs are built on the notion of industrial
growth in collaboration with states, with
• Maximum parts of the corridor are in an emphasis on manufacturing expansion
Rajasthan (39%) and Gujarat (38%). and job creation.
Q. Account for the failure of the manufacturing sector in achieving the goal of labour-intensive
exports. Suggest measures for more labour-intensive rather than capital-intensive exports.
• In the intro, try to highlight the contribution of the manufacturing sector.
• In body,
o Discuss reasons for the failure of the manufacturing sector in achieving the goal of the
labour-intensive sector.
o Suggest measures for increasing labour-intensive sector export.
• Try to conclude with the need to increase exports from labour-intensive sectors.
Answer:
The Indian manufacturing sector has seen a transition from the initial industrialisation to
licence raj to liberalisation and the current phase of global competitiveness. However, India’s
share of global manufacturing stands at a little over 2% compared to China’s contribution of
22.4% per cent.
The Indian Manufacturing sector currently contributes 16-17% to GDP and gives employment
to around 12% of the country’s workforce. While most employment is generated in labour-
intensive segments in the manufacturing sector.
Industries 265
Fig 13.2: Change in Share of Manufacturing and Services in the Indian Economy
Indian Labour-intensive Manufacturing: It is an industry that requires a large amount of labour

to produce its goods like food processing, tobacco, textiles, apparel, and leather.
• In 2004-05, the low-value-added labour-intensive enterprises were 35 percent of organised
manufacturing employment in India.
• But, there is a continuous decline in total factor productivity of low-value-added labour-
intensive enterprises since 1991.
o The reasons for the decline could be due to the absorption of a more unskilled labour
force in the sector.
There are certain reasons for lower labour-intensive export:
• Economic growth: India’s growth story has been driven by service-producing industries that
employ skilled labour. Even in the manufacturing sector, India is considered a specialised
and capital-intensive sector. Despite the fact that India’s true comparative advantage lies
in unskilled labour-intensive activities.
• Poor Credit Availability MSME: India’s MSME sector is known as labour intensive sector as
it employs more labour than any other industry. However, India’s poor credit structure and
poor availability of loans lead to poor expansion and technology adoption by MSMEs.
• Slower Rate of Reforms: Slow growth of industries due to lack of labour reforms and exit
policies that mainly employ lower-skilled has caused manufacturing as a share of GDP to
remain stagnant at about 16 to 17% during the two decades of economic liberalisation.
• Lack of Basic Infrastructure Facilities: Like physical connectivity, electricity, water supply
waste management facilities are key to the proper functioning of the manufacturing and
unorganised sector struggle on these fronts.
• Import Substitution Policy: In a globalised world the share of intermediate and unfinished
goods trade has been consistently increasing. India’s import substitution policy regime
created a bias in favour of capital and skill intensive manufacturing, and the reforms have
not been comprehensive enough.
• Logistics cost: In India logistics cost is very high when it comes to the transportation of
goods. As per World Bank logistic cost in India is 14% of GDP while in Europe and the USA
it ranges between 8-10%. These high logistics cost made export uncompetitive in the
international market, which further reduced markets for Indian products.
To Improve Exports from Labour-intensive Manufacturing: The majority of firms have
highlighted two critical issues such as lack of incentives from the government and heavy tax
burden. They can act as a starting point. Other measures are:
266 Industries
• Investment in Physical Infrastructure: Improved physical infrastructure- roads, railways,

ports, inland waterways etc. can reduce India’s logistics cost and increase export.
• Credit Availability to MSMEs: This issue needs to be addressed on a priority basis. The
government has taken various policies in this regard like Credit Guarantee Trust Fund for
MSME, Market Promotion and Development Scheme. But in this area, we need to work more to
make credit to all MSMEs.
• Easy Entry and Exit from Business: Easy and hassle-free entry and exit will help to attract
companies and newer technologies which further helps in increasing export.
• Implementation of Labour Laws: Proper enforcement of labour laws and approval
for the same will help to enhance the confidence of investors and improve the export
competitiveness of Indian products in the international market. For example, the recent
labour codes and reforms are the right steps, taken in the right direction.
• Skill Development: Skilled workforce in India, and its availability is one of the biggest issues
facing industries in India. With 1 in 5 workers being skilled hence India’s ranking is 129 in
162 countries. This cheap and abundant unskilled workforce if converted into a skilled and
productive one will enhance India’s export by multiple times.
• Promotion-specific industries: The most labour-intensive manufacturers are food processing,
leather and footwear, wood manufacturers and furniture, and apparel and garments.
o These product groups account for 50% of manufacturing employment in India.
Unfortunately, it is the unorganised segment of these firms that employ most workers.
o The leather and textile industries are facing huge competition from Bangladesh and the
Philippines so need special attention.
The low-cost manufacturing and promotion of labour-intensive sectors are very essential
for increasing exports, especially from the labour-intensive sector. Various studies have
estimated that every job created in manufacturing has a multiplier effect in creating 2–3 jobs
in the services sector. Therefore, increasing exports from the labour-intensive sector are very
significant for employment generation and make India an export-dominated economy.
Make in India • It is an international marketing approach

• The government’s Make in India project was based on the Singapore model to enhance
started in 2014 to encourage enterprises to the competitiveness of the manufacturing
produce their products in India and to assure sector by promoting FDI, imposing ease of
dedicated manufacturing investments. doing business, labour reform, etc.
• It was launched by the Ministry of Commerce • Because it aims to tap into India’s current
and Industry’s Department of Industrial talent pool, create new job possibilities,
Policy and Promotion (DIPP). and motivate the secondary and tertiary
• Objectives of Scheme industries, the Make in India programme is
critical for the country’s economic progress.
o Improving the competitiveness of the
country’s private and public sector • By eliminating redundant rules and
businesses. regulations, streamlining bureaucratic
procedures, and making the government
o Integration into global value chains is
more transparent, sensitive, and
made easier.
accountable, the programme intends to
o Enhance Ease of Doing Business
enhance India’s Ease of Doing Business
o Enhance skill development
score. The Make in India initiative focuses
o Providing employment
on 25 industries.
Industries 267
• These include:
Automobiles Aviation Chemicals IT and BPM Pharmaceuticals
Defence Electrical Textiles and
Construction Food processing
Manufacturing Machinery Garments
Media and
Ports Leather Wellness Mining
Entertainment
Tourism and Automobile
Railways Renewable Energy Biotechnology
Hospitality Components
Space Thermal power Roads Highways Electronics Systems
Table 13.1: Industries focused in Make in India
• Targets of Make in India products can be produced in India or in
o The Government has targeted annual foreign national markets, but it is produced
growth in manufacturing of 12-14 %. only for use in India only but make in India
o By 2022, the government wants to boost means that the product is produced in
the manufacturing sector’s contribution India, but it can be used in any part of the
to the country’s GDP from 16 to 25%. world there is no restriction on its use.
o To create 100 million additional Made in India Made for India
manufacturing jobs in the Indian
The product India May or May
economy by 2022.
is Made in not in India
Make in India vs Made for India
Exporting of Yes No
• Make in India is an initiative started by
Products
the Government of India to encourage
companies to develop, manufacture and GDP Increase Not much
assemble their products in India. It was change
launched on 25th September 2014 by the Employment Increase Not much
Government of India. change
• Made for India means that the product is Import Decrease Increase
produced in any part of the world like as Table 13.2: Make in India vs Made for India
Q. “Success of the Make in India program depends on the success of Skill India programme
and radical labour reforms.” Discuss with logical arguments. (200 Words, 12.5 Marks)
• In the Introduction, try to write about the Make in India scheme and its targets and
objectives.
• In body,
o J
ustify how the Make in India initiative’s success is dependent on the success of the
Skill India Programme and radical labour reforms.
• In conclusion, try to write suggestions that help in achieving the targets of Make in India.
Answer:
Make in india (MII) is a major national programme of the Government of India designed to facilitate
investment, foster innovation, enhance skill development, protect intellectual property, and
build best in class manufacturing infrastructure in the country. The primary objective of this
initiative is to attract investments from across the globe and strengthen India’s manufacturing
268 Industries
sector. It is being led by the Department for Promotion of Industry and Internal Trade (DPIIT),
Ministry of Commerce and Industry, Government of India.
The Make in India programme is very important for the economic growth of India as it aims at utilising
the existing Indian talent base, creating additional employment opportunities, and empowering the
secondary and tertiary sectors. The programme also aims at improving India’s rank on the Ease of
Doing Business index by:
• Eliminating the unnecessary laws and regulations,
• Making bureaucratic processes easier,
• Making the government more transparent, responsive, and accountable.
For the success of Make in India (MII) we need to improve the skilled workforce, which is
currently very poor. The central problem with the scheme is that demography is not skilled as
less than 5% of our potential workforce gets formal skill training to be employable. (While the
corresponding figures are 96%, 80% and 75% respectively for Korea, Japan, and Germany).
The reason for this is a problem with ITIs, i.e., Poor training of trainers. (training capacity is only
3.1-million per annum whereas the requirement is to train 13 million), weak institute and industry
interaction, Curriculum not upgraded, New courses not introduced, Poor infrastructure (laboratories
lack modern equipment and testing facilities).
In this background, the Government of India launched the National Skill Training Mission to
provide skill training to 40.2 crore people by 2022. Therefore, the success of Make in India is
largely dependent on the success of the Skill India Mission, and this can be justified in the
following manner,
• Target to Make India Global Manufacturing Hub: To achieve this target India needs strong
skilled manpower, as India already has the world’s largest working-age group. If they are
skilled properly, they become a growth engine for the Indian economy.
• Make India Global Skill Capital: MKI gives very much emphasis on making India global skill
capital. Right now, India’s demographic dividend is the biggest in the world and this human
resource, if acquired with skills required today in the world, India can export talent and earn
huge remittances through it.
• Making India and $5 trillion economy target: To achieve the target of a $5trillion dollar
economy by 2025 success of MKI is very essential. The target of MII is to increase the
contribution of the Manufacturing or secondary sector from the current 16% to 25% of the
total GDP of India.
• Reducing stress from agriculture: Though MII is purely focused on the manufacturing
industry, the large population is dependent on agriculture to get skills under the Skill India
mission then they can contribute to the manufacturing sector actively.
• For attracting FDI: Cheap and well-skilled manpower in any country has always been
attractive to foreign investors. MII needs huge investment, and this investment needs can
be fulfilled mostly by foreign investors. To attract this foreign investment, India needs to
achieve objectives under the Skill India mission.
Skilling the population is not the only way to make MII successful, but large-scale reforms in
existing labour laws are very essential. Both skilled labour force and labour law reforms will
catalyse economic growth, which must be driven by the MII initiative. The need for labour law
reforms for the success of MKI can be understood in the following manner,
• Outdated Labour Laws: Most of the labour laws were enacted 50 to 70 years before. But
now, their utility in the modern globalised world has become completely outdated. Large
Scale reforms are needed to achieve targets under the Make in India (MKI) initiative.
Industries 269
•
Improve Ease of Doing Business (EODB): EODB is very crucial for attracting investment, and this
can be done only by making countries’ labour laws investors friendly. Easy and compliance-
friendly laws will not only attract investors in India but also give the biggest much-needed
thrust to the manufacturing sector.
•
Better compliance: Lesser labour laws will make compliance better and more efficient. Labour
laws should be familiar with current business needs to protect workers’ interests. To improve
compliance with laws and better enforcement of laws amendments are necessary.
•
The multiplicity of labour laws: There are more than 46 central laws, and 100 plus laws
are enacted by the state government. As labour is a concurrent subject therefore this
multiplicity of laws is becoming a hindrance to achieving the targets of MK.
•
Rigid labour laws: As most of the labour laws are enacted well 50 to 60 years before they
have now become rigid and absolute for the Make in India initiative. For example, currently,
factories employing 100 workers or more need approval for layoffs.
Thus, to make India a global manufacturing hub and increase the manufacturing contribution
to 25% of GDP, it is very essential to make reforms in labour laws and acquire an available
population with world-class skills.
Aatma Nirbhar Bharat ■ The rates of Tax Collection at Source

• Launched in May 2020. (TCS) and Tax Deduction at Source
(TDS) have been reduced by 25% for
• Fund Allotted to the scheme Rs. 20 Lakh
the following year.
crores.
■ For Low-income workers of
• The aim is to make India self-reliant.
organised groups under PMGKY EPF
• The five Pillars of the Scheme are: support was extended for another 3
o Economy months.
o Infrastructure ■ Reduction of PF payment to 10 %
o Systems from 12% for both employees and
o Vibrant Demography employers for the next 3months.
■ An emergency credit line of Rs 3
o Demand
lakh crore was announced to protect
• The Funds mainly focused on Land,
the jobs in about 45 lakh MSME
Liquidity, labour and laws.
(micro, small and medium
• Some reforms announced by the enterprises) units.
Government are: ■ Funding of Rs 20,000 crores
o Simplification and clarification of laws. was provided to stressed 2 Lakhs
o Rationalisation of Taxes. MSMEs.
o Reform the supply chain in agriculture. ■ A Rs 50,000 crore equity infusion
o Capable human Resources is planned, through an MSME Fund
of Funds with a corpus of Rs 10,000
o The financial system is made robust.
crores.
• The Scheme was divided into four Branches. ■ Funds for MSME would be released
o The first tranche within 45 days by the Government.
■ The Income tax returns filing for the ■ A fund of Rs 30,000 crores would be
financial year 2019-20 was extended invested in investment-grade debt
to 30 November 2020.
270 Industries
papers of NBFCs under a special ■ 67 crores NFSA (National Food

liquidity scheme. Security Act) beneficiaries in 23
■ Partial credit guarantee scheme connected states could use their
increased under which the govt. Ration cards to any shop anywhere
guarantees 20 per cent of the first in the country by August 2020.
loss to the lenders — NBFCs, HFCs, ■ The State governments were
and MFIs with low credit ratings. instructed to include the migrant
■ The government announced Rs workers returning due to covid 19
90,000 Crores funds for DISCOMS. lockdown to their native in place
■ For the Real Estates States and MGNREGA scheme.
UTs, it is suggested to increase the o The third tranche
deadline for the registration and ■ It was planned to enact a central
completion date by six months. law to have a barrier-free inter-state
o The second tranche trade for farm commodities and
■ The Central Government spent Rs e-trading so that farmers could sell in
3,500 crores to give Free food grains any market which it feels attractive.
for 2 months to migrant workers ■ Make laws to give a legal framework
and even for the workers of PMGKY. to contract farming.
(Pradhan Mantri Garib Kalyan Yojana).
■ The central government decided to
■ Rs 5,000 crore fund to give an initial deregulate the sale of Six agriculture
working capital of Rs 10,000 to Street products, namely edible oils, oilseeds,
vendors. cereals, potatoes, onions and pulses
■ Rs 2 Lakh crore worth concessional by making amendments to the
credit to 2.5 crore farmers who are Essential Commodities Act,1955.
not under Kisan Credit Cards, fish ■ It was through to remove the provision
workers and Livestock farmers. of Stock limits on processors and
■ NABARD will provide an additional exporters except for cases of national
Fund of Rs 30,000 crores to rural or any extraordinary hike in prices.
banks to give a crop loan. ■ Investing 1.5 lakh crores rupees to
■ 2% interest subvention relief for the build farm-gate infrastructure and
coming year will be given to Shishu provide logistic support required by
loans under the MUDRA Scheme. the people involved in agriculture
■ Under the Pradhan Mantri Awas and time livestock farming
Yojana, another scheme would be activities.
launched through PPP mode to build o The fourth tranche
affordable rental houses. ■ Banning the import of some specific
■ The existing government housing weapons and encouraging their local
will be changed into rental units production.
and also public and private, both ■ There is a separate rate budget for
agencies would be incentivised to
local procurement of weapons which
build on government and private
would reduce the import bills.
land.
■ FDI limit in defence manufacturing
■ The time period of credit linked
through automatic route was
subsidy scheme for the lower-
increased from 49% to 74%.
middle class to have houses was
■ Stock market listing Ordnance
increased to March 2021.
factory Boards.
Industries 271
■ Eliminating the government’s been developed by Infosys in a public-

monopoly on coal by introducing private partnership model.
commercial mining on a revenue- • India’s official agency for investment
sharing basis. promotion and facilitation is Invest India.
■ 50 coal blocks would be open to It is a non-profit, single-window facilitator
the private sector to bid. They could that operates as a structured platform to
also do exploration. attract investment for prospective overseas
■ Encouraging private investment in investors and aspiring Indian investors
the space sector by providing them wishing to invest in international regions.
to use of ISRO’s facilities for their Invest India is the Indian government’s
projects. investment promotion agency. Invest India,
■ Easing the geospatial data policy founded in 2009, is a non-profit organisation
to make remote-sensing data within the Ministry of Commerce and
more widely available to tech Industry’s Department for Promotion of
entrepreneurs also with safety. Industry and Internal Trade.
■ Auctioning of Six more airports on o Stable and predictable tax regime
PPP (Public-Private Partnership) i.e., avoiding litigation, retrospective
mode and private investment for 12 taxation etc.
airports. o Easing of environmental clearance norms.
■ Ease our space restrictions.
■ MRO tax structure would be
Rationalised to make India MEO Hub.
■ Privatising Power departments and
distribution units on the basis of the
new tariff policy.
■ To produce medical isotopes
research reactors would be set up
in PPP mode.
Government Steps To Promote Manufacturing Fig. 13.3: India’s Ease of Doing Business Ranking
Ease of Doing Business (EoDB)
Note:
• Starting a business, dealing with construction
• India jumped 79 positions from 142nd
licences, property registration, electricity
(2014) to 63rd (2019) in ‘World Bank’s Ease
supply, paying taxes, enforcing contracts, and
of Doing Business Ranking 2020’.
resolving insolvency are all areas where the
government has launched reforms. • The World Bank, in 2021, said it would
discontinue the practice of issuing a Doing
• The Department of Industrial Policy
Business report following an investigation
and Promotion’s eBiz initiative aims to
prompted by internal reports of “data
provide comprehensive Government-to-
irregularities” in its 2018 and 2020 editions
Business G2B) services to businesses with
and possible “ethical matters” involving
accountability, pace, and certainty.
bank staff.
• Its goals include reducing the number of
points of contact between businesses Steps Taken by India to Improve the EoDB
and government agencies, establishing Index Ranking
single-window programmes, and lowering Starting a Business
enforcement costs. eBiz – India’s first • For the industries, combining PAN tax
Government-to-Business (G2B) portal, has deduction and Collection Account Number
272 Industries
(TAN), Director Identification Number (DIN) • National Judicial Data Grid (NJDG) has
into a single form (SPICe). been open to the public since 2015 to have
• For corporations with a capital of up to Rs contract enforcement.
15 lakhs, the incorporation charge is waived. • Automated system used in Delhi and Mumbai
• Simplified the process for reserving the to allot cases to judges in district courts.
Company’s name by converting it to a web • E-filing of cases has been implemented in
basis. the district courts of Delhi and Mumbai.
• Employee State Insurance Corporation Getting Credit
(ESIC) and Employee Provident Fund • The Central Registry of Securitisation
Organisation (EPFO) registration are Asset Reconstruction and Security Interest
provided as a common online service on (CERSAI) is an electronic registry that
the Shram Suvidha portal with no physical allows asset types to be registered. Since
touchpoint. 2017, CERSAI has also offered a search by
• In Mumbai and Delhi, registration under the debtor’s name.
the Shops and Establishment Act can be • The Securitisation and Reconstruction
completed without inspection. of Financial Assets and Enforcement of
• By modifying the Companies Act, the Security Interest (SARFAESI) (Central
requirement for a corporate seal is removed. Registry) Rules, 2011 were amended to
Dealing with Construction Permits include additional types of charges, such as
a security interest in - immovable property
• Fast issuing of building permits.
by a mortgage, hypothecation of plant and
• Sanctioning of building plan within 30 days.
machinery, stocks, debt, including book
• Reducing the time it takes to get a debt or receivables, intangible assets,
construction permit in Mumbai from 128.5 patent, copyright, trademark, and a building
to 98 days and in Delhi from 157.5 to 113.5 under construction.
days.
• CERSAI can now register these additional
• The cost of obtaining a building permit charges because the definition of the
dropped from 23.2 per cent to 5.4 per cent property has been expanded to encompass
of per capita income in the economy. both movable and intangible assets.
Trading Across Borders Getting Electricity
• The Central Board of Excise and Customs • If no Right of Way (RoW) is necessary,
(CBEC) launched the Indian Customs Single electricity is connected within 7 days; if RoW
Window Project to make trading easier. is required, it is connected within 15 days.
• The number of documents required for • Cumulative service line In Delhi, development
import and export of goods were reduced costs is now capped at USD 339.84.
to three.
• The number of paperwork needed to obtain
• Traders can file all documents one-Sanchit. an electricity connection has been reduced
• Exporting companies can save time and to just two, with no physical documents
money by having the container electronically being accepted.
self-seal at the production. • In Delhi, the total number of procedures
• The Central Board of Indirect Taxes and was decreased to three, and in Mumbai, it
Customs may offer an Advance Bill of Entry was cut to four.
service. Registering Property
Enforcing Contracts • All sub-registrar offices in Delhi and Mumbai
• The Appellate Division of the High Court have been digitised, and their records have
and Commercial Courts have been formed been connected with the Land Records
in Mumbai and Delhi. Department.
Industries 273
• To promote transparency, Mumbai’s 6 lakh units will receive a Labour

property tax records have been digitised. Identification Number (LIN) and will be
• The time it takes to conduct a charge able to file online compliance for 16 of
search at the Registrar of Companies is the 44 labour rules.
greatly reduced by using an online service. o A brand-new Random Inspection
• In both Delhi and Mumbai, statistics on the Methodology: It is required to use
number of land disputes heard by Revenue technology to eliminate human judgement
Courts are available online. in selecting units for inspection and
Resolving Insolvency upload inspection Reports within 72
• In 2016, the Insolvency and Bankruptcy hours after the inspection.
Code was enacted. o 4.17 crore employees now have a
• The process for insolvency for mid-sized global account number that makes
enterprises under the Fast-track Corporate their Provident Fund account portable,
Insolvency Resolution Process (CIRP) must hassle-free, and universally accessible
be completed within 90 days, including a and acceptable.
45-day grace period. o Apprentice Protsahan Yojana:
Paying Taxes Reimburses 50% of the stipend provided
• For mid-sized businesses, the corporate to apprentices during their first two years
tax rate will be reduced from 30% to 25%. of training, primarily to manufacturing
• Domestic enterprises can choose a 22 per units and other organisations.
cent tax rate, but they cannot claim any o Revamped Rashtriya Swasthya Bima
income tax exemptions. However, they are Yojana: Introducing a Smart Card for
not required to pay the Minimum Alternate unorganised sector employees that
Tax (MAT). contain information on two additional
• The tax rate for new domestic manufacturing social security schemes.
enterprises is 15%. (17.01 per cent inclusive Factories (Amendment) Bill, 2014
of surcharge and cess). • The Factories (Amendment) Bill, 2014 was
• The IT infrastructure for filing online returns aimed to change the 1948 Factories Act.
for Indian taxpayers has been strengthened.
• The Act seeks to ensure appropriate safety
• Document submission to income tax measures and promote the health and
authorities using an e-verification mechanism. welfare of factory workers.
• The taxpayer must now file only two GST
• It proposes to grant the state government
returns.
the authority to allow women to work at
Labour Reforms night in a factory or group of factories that
Pandit Deendayal Upadhyay Shramev Jayate meet certain requirements. The Bill seeks
Karyakram to impose restrictions on the employment
• It was launched in October 2014 by the of pregnant women and persons with
Government of India. disability in certain works or processes.
• The foremost objective of the scheme is • Norms of hiring and firing were liberalised.
to provide a conducive environment for
Skill Development
industrial development and promote ease
Ministry of Skill Development and
of doing business through the introduction
Entrepreneurship (MSDE)
of several labour reforms.
• A separate dedicated ministry for skill
• The five main schemes launched under this
development was established in 2014 i.e.,
are:
the Ministry of Skill Development and
o Shram Suvidha Portal is a website
Entrepreneurship (MSDE).
dedicated to Shram Suvidha. Nearly
274 Industries
• The Ministry is in charge of coordinating • It integrates G2B across all levels and areas
all skill development efforts across the in India.
country, including bridging the skills gap • 11 union government services are provided
between demand and supply, developing on this platform.
a vocational and technical training system, • Provide all business information on a single
skill up-gradation, the development of new portal that is accessible 24 hours a day,
skills, and creative thinking, not only for seven days a week.
existing jobs but also for new ones.
Challenges to the E-BIZ Project
• The National Skill Development Agency
• Government employees’ technological
(NSDA), the National Skill Development
abilities.
Corporation (NSDC), the National Skill
• Business process reengineering
Development Fund (NSDF), and Sector Skill
• Management has shifted.
Councils are the functional branches that
help it with these programmes (SSCs). • Internet accessibility is low in India.
• Low level of confidence in security.
Sector Skill Council (SSC)
• Smooth implementation of the project.
• NSDC establishes Sector Skill Councils as
independent industry-led groups.
Gatishakti Plan
• They build competency frameworks, run
About ‘PM-Gatishakti’:
Train the Trainer programmes, perform
skill gap analysis, and assess and certify • It is a comprehensive infrastructure
trainees on curriculum related to National development programme aimed at increasing
Occupational Standards developed by industry productivity and job possibilities.
them. • It is regarded as the government’s
comprehensive approach to the
• New Skill Development programmes have
development of modern trains, motorways,
been initiated like Pradhan Mantri Kaushal
canals, and airways.
Vikas Yojana, National Apprenticeship
Promotion Scheme, Deen Dayal Upadhyaya PM Gatishakti’s Six Pillars
Grameen Kaushalya Yojana, etc. • Comprehensiveness: A single centralised
E-BIZ Project platform will include all present and
planned projects from multiple Ministries
• The e-Biz project is one of the National
and Departments. Every department will
e-Governance Plan’s 27 Mission Mode
now be able to see each other’s activity,
Projects (NeGP). It is being executed by
giving crucial information for project
the Ministry of Commerce and Industry’s
planning and execution.
Department of Industrial Policy and
• Prioritisation: Through cross-sectoral
Promotion (DIPP).
interactions, different Departments will be
• It’s a business-to-business concept with
able to prioritise their initiatives.
the goal of creating a virtual link between
• Optimisation: Following the identification
the government and business people.
of important gaps, the National Master
Benefits of the E-BIZ Project
Plan will aid various ministries in planning
• It will allow the entrepreneurs to submit initiatives. The plan will aid in the selection
Payment for licences on one platform. of the most efficient route in terms of time
• Reduction in the cost and time of approvals and cost for the delivery of products from
for starting and operating a business. one location to another.
• It would help improve the EODB Ranking. • Synchronisation: Individual Ministries and
• It would help in increasing business Departments frequently work in isolation.
competitiveness. There is a lack of cooperation in the project’s
planning and implementation, which
Industries 275
causes delays. PM GatiShakti will assist in indigenous technology output, reducing

holistically synchronising the activities of reliance on other countries.
each department, as well as multiple layers • PM GatiShakti will inform the general
of governance, by assuring work coordination. public and business community about
• Analytical: The plan will bring all of the data forthcoming connectivity projects, as well
together in one location, using GIS-based as other commercial hubs, industrial areas,
spatial planning and analytical tools with and the surrounding environment. This will
200+ levels, giving the executing agency allow investors to locate their enterprises
improved visibility. in the most advantageous places, resulting
• Dynamic: Using the GIS platform, all in increased synergies.
Ministries and Departments will be able • It will provide a large number of job
to visualise, review, and track the progress opportunities and help the economy.
of cross-sectoral projects. It will aid in the It will boost local products’ worldwide
identification of critical interventions for the competitiveness by lowering transport
master plan’s enhancement and updating. costs and strengthening supply chains, as
Need for Holistic Infrastructure Development well as ensuring optimal linkages between
• Due to a lack of coordination and advanced local industry and consumers.
information exchange, there was a Companies Act, 2013
significant gap between macro planning and • The Indian Companies Act of 1956 was
micro implementation, resulting in hindered replaced with the Companies Act of 2013.
construction and waste of budget resources. • The Companies Act, 2013 seeks to bring
• Building high-quality infrastructure for long- corporate governance and regulation
term development is a tried-and-true method practices in India at par with the global
for generating a wide range of economic best practices.
activity and large-scale employment. • Objective
• Studies show that multi-modal transport o It seeks to create a more friendly
networks significantly reduced the cost of environment and improve corporate
logistics, boosting export competitiveness. governance norms, increase
transparency, enhance the accountability
• A lack of scale in manufacturing due to
of corporates and auditors and protect
disjointed industrial networks and an
the interest of the investor, especially
inefficient logistics network hampered our
small investors.
global competitiveness.
• Features
Potential Impact
o Corporate Social Responsibility (CSR)
• Bharatmala, Sagarmala, UDAN, inland ■ The companies have an annual
waterways, dry/land ports, and other
turnover of over Rs. 1000 crore or a
infrastructure plans of the Union and state
net worth of Rs. 500 crore or more or
governments would be incorporated into
a net profit of Rs. 5 crores or more in
Gati Shakti. The strategy will also ensure
any financial year has to constitute a
that the work is completed in a timely and
CSR committee consisting of at least
cost-effective manner.
three directors out of which one
• Gati Shakti will also provide prospects for director should be an independent
new future economic zones, with the goal of director.
reducing travel time and increasing industrial ■ Such companies have to spend at
production through road connectivity. least 2% of the average net profit
• This investment programme will help to of the preceding 3 years on CSR
develop the country’s post-pandemic activities.
economy and improve the country’s
276 Industries
o Directors appointed for not more than five

■ At least one-third of the directors years and audit firms could be
in all listed companies should be appointed for not more than 10 years.
independent directors. ■ Auditors cannot provide any other
■ There should be at least one female service to the company.
director in the prescribed company o Investor Protection
(not all companies). ■ The class-action suit provision was
■ In all listed companies, at least one introduced for the first time. Under
director must be a resident director this, a shareholder, creditor, or any
i.e., stay in India for at least 182 days stakeholder can sue a company
in a year. on behalf of a particular class of
■ The Companies Act of 2013 also shareholder/stakeholder.
specifies the responsibilities of ■ Exit option to be provided to
directors. minority shareholders during the
o Auditing and Accounting Norms reorganisation of the company.
■ A National Financial Reporting o National Company Law Tribunal (NCLT)
Authority should be established to ■ The National Company Law
supervise and regulate the accounting Tribunal would replace the Board
standard of the companies. for Industrial and Financial
■ Mandatory rotation of auditors Reconstruction (BIFR) and Company
i.e., individual auditors could be Law Board (CLB).
Q. With consideration towards the strategy of inclusive growth, the new companies bill,
2013 has indirectly made CSR a mandatory obligation. Discuss the challenges expected in its
implementation in right earnest. Also, discuss other provisions in the bill and their implications.
• In the Intro, try to write about Companies Bill 2013 and CSR in brief.
• In body,
o Discuss in brief provisions of the bill.
o Discusses expected challenges in its implementation.
o Discuss implications of the bill.
• Try to conclude, answer by underlining the importance of the bill and CSR.
Answer:
The Companies Act, 2013 regulates the incorporation, functioning, appointments of directors
on the board of directors, and dissolution of all types of companies. The Companies Act
2013 replaced the 1956 Companies Act. Section 156 of the Companies Act 2013 talks about
mandatory Corporate Social Responsibility (CSR), making it the only law in the world which
made mandatory CSR contributions.
• orporate social responsibility (CSR) is a self-regulating business model that helps a
C
company be socially accountable—to itself, its stakeholders, and the public.
Industries 277
• y practising corporate social responsibility, also called corporate citizens, companies can
B
be conscious of the kind of impact they are having on all aspects of society, including
economic, social, and environmental.
• o engage in CSR means that, in the ordinary course of business, a company is operating in
T
ways that enhance society and the environment, instead of contributing negatively to them.
Provisions of the Companies Act 2013:
• Independent directors: Companies Act made mandatory that one-third of members
comprise independent directors and at least 1 woman should be there as an independent
director.
• Executive’s salary: The new act says companies should disclose executive salaries as
average employers’ salaries and this act also allows shareholders to file a class-action
lawsuit in case of violation of this section.
• CSR Committee: As per the act companies need to set up a CSR board committee, which
must consist of three directors and one of them should be an independent director.
• CSR contribution: The Companies Act made it mandatory that companies must spend an
average of 2% of the net profit made in the immediately preceding three financial years
on CSR activities. The requirement of CSR will only apply to those companies which are
incorporated in India, with a net profit of 50 million or more.
• Definition of CSR: As per the act CSR activities are those acts which promote poverty
reduction, environmental sustainability, education, vocational skill development, and gender
equity. Etc.
• Positive step: India is a country where the one-third population is illiterate, the two-third population
lacks sanitation, and at least 100 million population still lives on less than $2 dollars/ day, the
enactment of the company’s activities should be hailed as a positive step towards ensuring
equality and justifying article 39 and 40 of the Indian constitution.
Challenges In Implementation of New Act:
• The attitude of corporates: Most crucial is the attitude of big corporates, as foremost
companies having been compulsorily required to comply with the Act, CSR is being perceived
as an expenditure and not much attention has been paid to include the same as a part of
actionable business agenda practices.
• At Ground Level Companies should be involved in CSR implementation and the route of only
disbursing donations to NGOs or Trusts and remaining a silent spectator should not be the case.
• The attitude of companies: Companies still consider CSR contribution as a philanthropic
gesture rather than considering CSR as a holistic view of the impact of business on the
environment and society.
• No Focus on Outcome: As companies are looking at CSR just from a philanthropic point of
view, they are not interested in looking at actual implementations of work and effectiveness
of money and no focus on what outcome they are achieving through CSR activities in various
areas.
• High-Level Committee: The High-Level Committee [HLC] framed by the Ministry of Corporate
Affairs in its report has mentioned that HLC has been suggested not to take action against
companies, at least for the initial two to three years for non-compliance with CSR provisions
of the Companies Act, 2013.
• Women Independent Director: the provision related to the appointment of women
independent directors has not been implemented seriously, and there are very negligent
women present on companies’ board of directors.
278 Industries
Looking to the present social strata of the Country and a dire need for the balanced growth
of the country, there needs a broader vision by moving ahead from the triple bottom line
“People, Planet and Profit” to “Partnership, Progress and Prosperity”. CSR is in need of an
hour so as to contribute to the social innovation and development in India. India is the first and
only country across the globe having mandatory enforcement of provisions relating to CSR for
certain corporate entities vide Companies Act, 2013.
Public Sector Enterprise/Undertakings (PSU) • The framework for India’s public sector
• A government company is referred to as a undertakings/enterprises was established
Public Sector Undertaking or Enterprise. by the Second Five-Year Plan (1956-61) and
the Industrial Policy Resolution of 1956,
• Section 2 (45) of the Companies Act, 2013
which were expected to play a significant
defines a government business as one in
role in preventing economic power
which the government owns at least 51
concentration, reducing regional disparities,
per cent of the paid-up share capital. By
and ensuring that planned development
government, it means:
serves the common good.
o The Federal Government, or
• Initially, the public sector was restricted
o The State Governments, or
to the core and strategic industries such
o Partly by the federal government, and as irrigation (Damodar Valley Corporation),
partly by one or more states. fertilisers and chemicals (Fertilisers
• A company that is a subsidiary of a And Chemicals Travancore Limited),
government company is also included in communication networks (Indian Telephone
this category. Industries), and heavy industries (Indian
• “Public sector undertakings” refers to Telephone Industries) (e.g., Bhilai Steel
government-owned businesses that collect Plant, Hindustan Machine Tools, Bharat
fees for their services. Railways, Post Heavy Electricals, Oil and Natural Gas
Offices, and Security Undertakings, for Commission etc.).
example, are often government-owned and • Following that, the government nationalised
operated. several banks and foreign corporations
• On the other hand, Public sector enterprises (beginning with the Imperial Bank of India,
are companies registered under the which was renamed the State Bank of India
Companies Act, 1956, that are primarily in 1955). (Jessop & Co, Braithwaite & Co,
owned by the government and managed by a Burn & Co.).
Chairman and Managing Director appointed • Later on, public-sector enterprises began
by the government. Government candidates to produce consumer goods (e.g., Modern
serve the government’s interests on the Foods, National Textile Corporation, and
boards of public businesses. others) as well as provide consulting,
• The Comptroller and Auditor General (CAG) contracting, and transportation services.
of India audit public sector undertakings, • The Industrial Policy Resolution of 1991,
while Chartered Accountants audit public which reviewed the role of the public
sector companies first, with the Comptroller sector, decreased the number of industrial
and Auditor General of India performing the ventures to only six, which included
supplementary audit. strategic industries such as atomic energy,
Evolution of Public Sector Enterprises defence, coal, mineral oils, and railway
• When India acquired independence in 1947, transport, among others. Diverting non-
its industry was weak, necessitating a strategic public sector industries and
massive policy push. increasing private participation in the equity
Industries 279
of lucrative public sector industries were o Dismantling of APM

among the goals. o The price of most of the products of
Objective Of PSU PSU was deregulated.
• To create an industrial base with o Participation in Share Market
diversification in different sectors. o PSUs were permitted to raise funds
• Employment generation and creating an from the public through the issue of IPO
employee model. and get listed on the stock exchange.
• Accelerate economic growth. • Navratna Scheme 1997
• Reduce regional disparities. o In 1977, the government launched the
• Export Promotion and import substitution. Navratna scheme to recognise and
• To generate resources for the government. assist Central Public Sector Enterprises
Cause of Losses in PSU (CPSEs) with competitive advantages in
their quest to become global behemoths.
• Lack of autonomy and accounting.
• Excessive Social overhead costs like o The government provided significant
developing infrastructure, amenities for autonomy to such PSUs to invest up
employers etc. to Rs. 100 crore or up to 15% of their
net worth in India/abroad, entering
• Inappropriate location, technology, product
etc. into collaboration, establishing joint
ventures etc.
• The investment decision was based on
social welfare rather than economic welfare. • Miniratna Scheme 1997
• Overstaffing. o In 1997, the government created the
Miniratna plan as part of a policy to
• Trade Union interference.
make the public sector more efficient
• Administrative Price Mechanism: Under this
and competitive, as well as to provide
government, use to fix the prices of the
profit-making public sector firms with
product of PSU.
more autonomy and delegation of
Reforms in PSU
authorities.
• New Industrial Policy 1991
o Eligibility Conditions
o The changes made by the Industrial
■ Category I: CPSEs must have
Policy 1991 on PSUs were manifold:
produced a profit in each of the
■ Sectors where the PSUs are to be
previous three years, with a pre-tax
concentrated,
profit of Rs. 30 crores or more in
■ Removal of reservations for PSUs in
at least one of the three years and
most sectors,
positive net worth.
■ PSU restructuring by adopting
■ CPSEs in category II must have
market-oriented practices,
produced a profit for the previous
■ Selling of loss-making PSUs,
three years and have a positive net
■ Reduction of government ownership
worth.
through disinvestment.
• Maharatna Scheme
• Voluntary Retirement Scheme (VRS)
o The Maharatna plan was created by the
o Under this Employees of PSU were
government in December 2009 with the
encouraged to seek premature
goal of delegating expanded powers to
retirement.
the boards of recognised Navratna CPSEs
o It is also called the Golden Handshake
in order to encourage further expansion
Scheme.
of their activities in both domestic and
global markets.
280 Industries
o Eligibility Conditions • Improve the efficiency of an enterprise and

■ Having the status of Navratna. can convert the sick unit into productive
units.
■ Listed on the Indian stock exchange,
with a minimum public shareholding • Increase transparency and accounting to
requirement mandated by SEBI. the general public.
■ During the last three years, the • Releasing vast sums of scarce public
average yearly turnover has been funds locked up in non-strategic PSUs
more than Rs.20,000 crore. for development in sectors where social
priorities are far higher, such as public
■ During the last three years, the
health, family assistance, education, and
average annual net worth has been
social and necessary infrastructure.
more than Rs.10,000 crore.
Process of Disinvestment
■ During the last three years, the
company has had an average annual • The government initiated the process of
net profit of more than Rs.2500 disinvestment in 1991 under New Industrial
crore. Policy 1991.
■ International operations have a • Initially, the disinvestment process only
significant worldwide presence. involved financial institutions.
o The Maharatna CPSEs can invest • In 1992, the Government created a
Rs. 5000 crores or 15% of net committee on disinvestment under
worth whichever is lower in one project C. Rangarajan recommended that a
without government permission. disinvestment fund should be constituted,
and the government should go for strategic
Disinvestment
disinvestment (management control is also
• Disinvestment refers to the government
transferred).
selling its equity holding in Public
• In 1996, the Disinvestment commission (a
Enterprises to public or private parties,
permanent body to advise the government)
financial institutions, mutual funds etc.
was set up.
• At first, the disinvestment strategy declared
• In the 1998-99 Budget Address, it
that a limited sale of shares would be made
was revealed that the Government’s
with the goal of obtaining funds to close
shareholding in CPSEs would be reduced
budget shortages and bringing market
to 26% on a case-by-case basis, with the
discipline to the performance of public
exception of strategic CPSEs, where the
firms.
Government would maintain the majority
Objectives of Disinvestment
ownership. Workers’ rights were to be
• Modernisation and up-gradation of public safeguarded at all times. On 16 March, 1999,
sector enterprises. the government categorised PSEs into
• To reorient public investment i.e., to transfer Strategic and Non-Strategic areas for this
public investment from non-strategic to reason.
strategic areas.
Industries 281
Disinvestment in India statutory shareholding of 10%) compliant.

• The Department of Disinvestment was • Unlisted CPSEs that have not had any
created as a distinct department in 1999, cumulative losses and have made a net
and in 2001, it was renamed the Ministry profit in the past three years are eligible for
of Disinvestment. In 2004, the Ministry listing.
of Finance took over the Department of • In all circumstances of disinvestment, the
Disinvestment. government will retain at least 51 per cent
• Since 14 April, 2016, the Department of stock and management control.
Disinvestment has been renamed the • Every case of disinvestment will be handled
Department of Investment and Public individually.
Asset Management (DIPAM). It has been • Since 2014, the government has adopted
designated as the nodal department for a disinvestment strategy that involves
the sale of strategic stakes in PSUs (Public minority stake sales as well as strategic
Sector Undertakings). disinvestment.
As the government changed in 2004, so did • The government has approved the strategic
the attitude toward disinvestment policy. The disinvestment of 33 central public sector
United Progressive Alliance (UPA) promised to: undertakings ‘in principle’ so far (CPSEs).
• Successful, profit-making enterprises • NITI Aayog, a think tank, has been tasked
operating in a competitive market will not with defining such PSUs based on national
be privatised if entire managerial power security, sovereign functions at arm’s
and commercial autonomy are devolved to length, market imperfections, and public
them. interest parameters.
• The capital market is a source of funding • During 2014-19, the government received
for Navratna firms. Rs. 2,79,622 crores from public sector
• Efforts will be undertaken to refurbish undertakings (PSUs), compared to Rs.
and reform sick PSEs that have been 1,07,833 crores in 2004-14.
underperforming for years. Some of the Major Disinvestment
• It favoured the IPO/FPO sale of limited • NHPC Ltd., Oil India Ltd., NTPC Ltd.,
amounts of government shares without SJVN, NMDC, SJVN, EIL, CIL, MOIL, and
changing the nature of PSEs. others used public offers to disinvest in
• It also established the ‘National Investment companies including NHPC Ltd., Oil India
Fund,’ into which the earnings from CPSE Ltd., NTPC Ltd., SJVN, NMDC, SJVN, EIL,
disinvestment would be channelled. CIL, MOIL, and others between 2009 and
The NIF would spend 75% of its annual 2010.
income to fund specified Social Sector • The Finance minister in 2021 said that
Schemes, such as education, health, and the Disinvestment of Air India and Pawan
employment, and the other 25% to cover Hans would be completed in 2021-22.
the capital investment needs of profitable
• On 1st February 2021, during the budget
and revivable CPSEs.
(2021-22) presentation in the Lok Sabha,
• The government authorised some action the Finance Minister publicised that two
plans for disinvestment in profit-making public sector banks (PSBs) and one general
government firms on 5th November, 2009, insurance company are anticipated to be
which are mentioned below: disinvested this year.
• The government’s “Bid for Sale,” or the
CPSEs selling new shares, or a combination
of both, would make already listed
profitable CPSEs (without meeting the
282 Industries
• The government will develop a National lakh crore for CPSE disinvestment in 2020-21.
Asset Monetisation Pipeline and However, in 2020-21 the government has raised
Dashboard, according to the Finance less than 3 per cent of budgeted revenues from
Minister, with the aim of monetising the disinvestment process.
government properties.
• Assets of Railway, NHAI, Railways, Airports
Authority of India (AAI), HPCL and GAIL
will be Monetised.
The Union Government budgeted Rs. 1.75
lakh crore from stake sale in public sector
companies and financial institutions, including
2 PSU banks and one general insurance
company, in the 2021-22 Budget. The figure is
lower than the budgeted amount of Rs. 2.10 Fig. 13.4: Disinvestment Target and Achievements
Latest Disinvestment Data
Table 13.3: Latest Disinvestment Data
National Monetisation Pipeline earnings. It also covers industries including

• Over a four-year period concluding in 2024- telecommunications, aviation, mining, and
25, the National Monetisation Pipeline warehousing.
entails leasing out central government o Toll Operate Transfer (ToT) and
assets worth roughly Rs 6 lakh crore. NMP Infrastructure Investment Trust (IIT) are
is a viable alternative to selling assets two prospective road asset monetisation
outright. methods (InvIT).
• The main concept is to lease out brownfield • States’ participation: The federal
projects and utilise the earnings to fund government is encouraging states to join in
greenfield projects. this initiative.
• Only assets that are underutilised will be • The government expects to raise Rs. 88,000
monetised. crores through its asset monetisation
• However, the government will retain programme in FY22.
ownership of the monetised assets, with • The government intends to link the NMP
private players taking on the operating risk. to the previously announced National
• Major sectors: In terms of total asset Infrastructure Project.
value, the top three sectors indicated for • The Asset Monetisation initiative will
asset monetisation are roads (27 per cent), be implemented and monitored by an
railways (25 per cent), and power (15 per authorised committee. The Cabinet
cent). Roads, railways, and power account Secretary will lead the Core Group of
for roughly 65 per cent of the program’s Secretaries on Asset Monetisation (CGAM).
Industries 283
Monetisation of Assets o If a state government sells its stake in

a PSU, the Centre will compensate the
• In exchange for upfront money, a revenue
state 100 per cent of the value of the
share, and a commitment to invest in
sale.
the assets, the government transfers the
revenue rights of an asset to private parties o If a state lists a public sector venture
for a stipulated transaction period. The on the stock exchanges, the federal
major structures used to monetise assets in government will contribute half of the
the roads and power sectors, for example, proceeds from the listing.
are real estate investment trusts (REITs) and o When a state monetises an asset, it
infrastructure investment trusts (InvITs). receives 33 per cent of the proceeds
Other PPP (Public-Private-Partnership) from the sale from the Centre.
monetisation schemes include: • Promoting Public-Private Partnership:
o Operate Maintain Transfer (OMT) NMP’s ultimate goal is to enable
o Toll Operate Transfer (TOT) ‘Infrastructure Creation through
Monetisation,’ in which the public and
o Operations, Maintenance & Development
private sectors work together, each excelling
(OMD)
in their core areas of expertise, to provide
Advantages of the National Monetisation
socio-economic growth and a better quality
Pipeline
of life for the country’s citizens.
• Resource efficiency: It leads to the most
Challenges to the National Monetisation
efficient use of government resources.
Pipeline
• Fiscal responsibility: The cash generated
• In diverse assets, there are no identifiable
by leasing these assets to the private
revenue streams.
sector will be used to fund additional
• Gas and petroleum pipeline networks have
capital expenditures without putting the
insufficient capacity utilisation.
government’s finances under strain.
• There is no procedure for resolving disputes.
• Streamlining the process: Asset
• Tariffs in the power sector are regulated.
monetisation is not new, but the government
has now organised it into baskets, defined • Investors have little interest in national
goals, identified roadblocks, and established highways with fewer than four lanes.
a framework. • There are no sectoral regulators who are
• Mobilising private financing: Because the independent.
assets are de-risked because they are Way Forward
brownfield projects, private capital will • Preventing monopolies: The government
be easier to come by (both domestic and must avoid a system in which a few
foreign). Global investors have expressed an companies control the majority of the
interest in participating in projects that will assets.
be funded through a competitive bidding • Deal structuring: The key to success is to
process. structure the transactions in such a way
• Less resistance: The concept entails that they are appealing enough to attract
leasing to the private sector rather than increased private sector participation.
transferring ownership or selling assets • Smooth implementation: To get things
in a fire sale. As a result, it will face less going in the right direction, the government
opposition from the opposition. needs to get the first few initiatives in each
• Cooperative federalism: The Central sector correctly. The destiny of the Rs 6
government has already set aside Rs 5,000 trillion monetisation scheme would be
crore as an incentive to encourage states to determined by how well the initial Rs 10,000
explore monetisation. crore is implemented. As a result, meeting
284 Industries
the Rs 0.8 trillion first-year target is critical Recent Changes in Management of

for market confidence. Disinvestment Process
• Proper regulation: In order to maximise their • DIPAM and NITI Aayog would collaborate
profit over a short period of time, investors to identify public sector undertakings for
may raise prices, limit competition, or strategic disinvestment.
reduce maintenance costs. As a result, • Along with the secretaries of the
sufficient bureaucratic capacity and administrative ministries involved, the
regulatory systems are required to prevent DIPAM secretary will now co-chair the inter-
this from occurring. ministerial group on disinvestment.
• The federal government, notably the defence • Bidders would be able to seek information
forces and railways, own large tracts of about the PSUs for sale in a data centre.
land in key urban areas. It may be easier to • Bidders will be able to check up on
lease out some of this land because pricing information on the PSUs that are up for
benchmarks for privately owned properties sale in a data centre.
in the vicinity are accessible. Any capital
Micro, Small and Medium Enterprises
expenditures made by private parties to make
Development (MSMED) Act, 2006
the land usable could be subtracted from the
• The Micro, Small, and Medium Enterprises
government’s upfront leasing costs.
Growth (MSMED) Act was passed in 2006 to
National Investment Fund
address legislative concerns, as well as the
• The Cabinet Committee on Economic Affairs
sector’s coverage and investment ceiling.
(CCEA) approved the creation of a National
• The Act seeks to help these companies
Investment Fund (NIF) in January 2005.
expand and compete by establishing the
• The fund’s aim was to raise disinvestment
first-ever legal structure for understanding
proceeds from central public sector
the idea of “enterprise,” which encompasses
enterprises and invest them in order to
both manufacturing and service businesses.
generate earnings while not depleting the
corpus, with the earnings going to selected It also, for the first time, defines medium
Central social welfare schemes businesses and attempts to unify the three
levels of these businesses, namely micro,
• It was held outside of India’s consolidated
small, and medium.
fund.
• CCEA ruled in 2013 that the whole • The Act also establishes a legislative
disinvestment revenues would be credited consultation structure at the national level,
to the existing ‘Public Account’ under the with a diverse range of advisory roles and a
heading NIF, where they would remain balanced representation of all stakeholders,
until withdrawn/invested for the approved particularly the three classes of firms.
purpose. Definition of Micro, Small and Medium
o The NIF allocations will be determined Enterprises in India
in the annual Government Budget. • Micro, small, and medium enterprises
o The broad investment objectives are: as per the MSMED Act, 2006 are defined
■ Investment in social sector based on their investment in plant and
programmes that support education, machinery (for manufacturing enterprises)
health care, and jobs. and in equipment for enterprises providing
■ Capital investment in sustainable and or rendering services.
revivable public sector companies • The following are the current investment
that yield sufficient returns in order ceilings for firms categorised as micro,
to extend and diversify their capital small, and medium enterprises:
base.
Industries 285
Existing and Revised Definition of MSMEs

Existing MSME Classification
Criteria: Investment in Plant and Machinery or Equipment
Classification Micro Small Medium
Manufacturing Investment<Rs. 25 lakhs Investment<Rs. 5 crores Investment<Rs. 10 crores
Enterprises
Services Investment<Rs. 10 lakhs Investment<Rs. 2 crores Investment<Rs. 5 crores
Enterprise
Revised MSME Classification

Composite Criteria: Investment and Annual Turnover
Classification Micro Small Medium
Manufacturing Investment<Rs. 1 crore Investment<Rs. 10 crores Investment<Rs. 20 crores
and Services and and and
Turnover<Rs. 5 crores Turnover<Rs. 50 crores Turnover<Rs. 100 crores
Table 13.4: Existing and Revised Definition of MSMEs
Contribution to the MSME Sector • Dependence on local sources for availability

• The Micro, Small, and Medium Enterprises of raw material.
(MSME) sector has grown as a highly vibrant • Marketing problem: No brands and High per
and competitive sector of the Indian unit advertisement cost.
economy over the previous five decades. • Competition from large-scale industry.
• MSMEs not only play a critical role in providing • No availability for economies of scale.
significant employment opportunities at a Measures were taken by the Government
lower capital cost than large factories but • Financial Support
also, help in the industrialisation of rural and o Financial support to the MSME sector is
backward areas, thereby reducing regional provided through various mechanisms
imbalances and assuring food security. some of them are as follows:
• The Sector consisting of 36 million units, as o Mudra Bank
of today, provides employment to over 80 o Priority Sector Lending (PSL)
million persons. o Through the Credit Guarantee Fund
• The Sector through more than 6,000 Scheme for Micro and Small Enterprises,
products contributes about 8% to GDP. the Prime Minister’s Employment
• MSME accounts for 45 per cent of total Generation Programme, and the Credit
manufacturing production and 40 per cent Linked Capital Subsidy Scheme, among
of the country’s exports. other government programmes.
Problems in MSME Sector • Fiscal Support
• The problem in raising funds (limited access o A lower rate of 25 % Corporate Tax was
to formal credit and they have to pay high extended to companies with an annual
interest). turnover up to Rs. 400 crores from the
• Obsolete Technology. earlier cap of up to Rs. 250 crores.
• Non-Professional management/ o For the MSME sector, Rs. 350 crores have
entrepreneurship. been allocated for FY 2019-20 under the
Interest Subvention Scheme, for 2%
• Inadequate infrastructure in rural and
interest subvention for all GST registered
semi-urban areas.
MSMEs, on fresh or incremental loans.
286 Industries
o Doubling the exemption threshold under o Abid Hussain’s Committee on Reservation

the goods and services tax (GST) to Rs. of Items (1997) recommended stopping
40 lakh annual turnover will reduce reservations for small scale industries.
the burden on small and medium o As of today, there are 836 items reserved
enterprises (SMEs). for exclusive manufacture in the small-
o Price and preference purchase scale sector.
scheme: Under this, preference is Capital Formation or Investment
granted to products manufactured by • It refers to the process of increase in the
small-scale industries in the government physical stock of capital like machinery,
purchase programme (up to 15% higher equipment, factory, etc.
price than other sectors). • It is the most important determinant of
• Technical and Industrial Support economic growth because it increases
o Small Industries Development production, productivity, and the productive
Corporations (SIDCO) are state-owned capacity of the future of an economy.
companies or agencies in the states of • Our 1st five-year plan was based on the
India, which were established in 1954 for Harrod-Domar growth model.
the promotion of small-scale industries. It • Harrod-Domar growth model states that
provides technical, managerial, marketing the economic growth rate can be calculated
support etc., to small scale industries. as:
o The Government of India founded the
National Small Industries Corporation
(NSIC) Ltd. in 1955 to encourage,
Stages of Capital Formation
assist, and foster the growth of small-
scale industries in the country. The • Stages of capital formation include the
Corporation’s key responsibilities are to following stages:
promote, help and facilitate the growth o Saving: Saving is disposable income
of micro and small businesses in the minus consumption.
region, primarily on a commercial basis. It o Finance: Mobilisation of saving, of
offers a wide range of support services to household investment by firms through
micro and small companies, catering to a financial institution.
their unique needs in areas such as raw o Investment: Expenditure on capital
material sourcing, product marketing, goods.
credit rating, technology acquisition, Component of Investment
and the implementation of modern
• Component if Investment includes:
management practices, among others.
o Fixed investment: Fixed investment
o District Industries Centre (DIC) was
is the accumulation of physical assets
established in 1979 to provide support to
such as machinery, land, buildings,
MSME, skill development and technical
installations, vehicles, or technology.
issues etc.
o Inventories or stocks: It includes raw
• Reservation of Item for Small Scale Industry
materials, semi-finished goods, and
(SSI)
unsold goods.
o In 1967, 47 items were reserved for the
o Valuables: It includes commodities like
small-scale industry. These items were
Gold, Silver, etc.
increased to 900 by 1990.
Determinant of Investment
o The main objective of the reservation
• The determinant of investment are as
was to eliminate competition from large
follows:
scale industries.
Industries 287
o Interest Rates o Saving

■ Investment is inversely related ■ Household and corporate savings
to interest rates. If interest rates provide a flow of funds into the
increase, the opportunity cost of financial sector, which means that
investment rises. funds will be available for investment.
o Expected return on the investment o Government Policy
■ Businesses require a return on their ■ Public policy can have substantial
investment in order to cover their effects on the Investment.
cost. In terms of the entire economy, o Government taxation policy with
the amount of business profits is a respect to corporate profits, and
good indication of the potential for capital gains affect the demands for
investment. capital.
Fig.13.5: Human Capital Formation
288 Industries
Types of Capital Formation o Human Capital Formation

• There are two types of capital formation: ■ Human capital formation implies
o Physical Capital Formation additions to the skills, and knowledge
■ It refers to investments made in of the individuals.
the form of sophisticated tools, ■ It indirectly affects the production
machinery, etc. process.
o Its formation can lead to
■ It directly affects the production
improvement in physical capital.
process.
Q. Among several factors for India’s potential growth, the savings rate is the most effective
one. Do you agree? What are the other factors available for growth potential?
• In the intro, try to define potential growth and saving rate.
• In body,
o Discuss the significance of the savings rate.
o Discuss several available factors for India’s growth potential.
• Try to conclude with some suggestions on India’s growth.
Answer:
Potential growth is the rate of increase of potential output, the level of output an economy would
sustain at full capacity utilisation and full employment. The savings rate is a measurement of
the amount of money, expressed as a percentage or ratio, that a person deducts from their
disposable personal income to set aside for his retirement. Capital formation transfers savings
of households to the business sector, which leads to increased economic output and economic
expansion. So, capital formation is very essential in order to enhance economic activities and
ultimately achieve a higher growth rate in the economy.
Significance of Saving Rates:
The importance of saving rates has contributed a lot to economic development since the
Indian economy took off in the 1960s and 70s. In the past few decades, India’s saving rate has
floated between 33% to 35% of GDP. However, a high saving rate is a necessary condition but
not enough for economic development.
Other Factors to Achieve Potential Growth:
• Infrastructure Development: Sound infrastructure is necessary for potential economic growth.
These sound infrastructures are needed in terms of energy, ports, roads, railways, and even
internal waterways, faster and more efficient means of communications are much needed.
• Skilled manpower: Skilled workforce is one of the essential preconditions for any economy
to grow and develop. Skilled manpower is needed at various levels of production, services,
research, innovations, creativity etc.
• Government policies: Policies act as catalysts for economic growth and development. A
favourable business environment can be created only through pro-business policies and
other supports which help businesses to grow.
o For example, the Government introduced Goods and Service Tax (GST) for unifying the
national market and removing cascading effects of taxes at multiple levels to help
businesses in a very effective way.
Industries 289
• Ease of Doing Business (EODB): This is the most important aspect of any economy/country
to become a destination for investment, especially foreign investment. EODB is a multi-
prong approach of the government to reduce the major hurdles in establishing businesses/
investments in the economy from the government side.
o In World Banks EODB ranking 2020, India is at 63rd rank and shows constant improvement.
• Technology: Technology is a very important aspect of economic development. It helps
to increase productivity, and competitiveness in the international and domestic market.
Technology may help to reduce input costs and further reduce the cost of manufacturing,
and it makes it a favourite destination for investment.
• Social and political factors: Social factors include traditions, values, beliefs, customs etc.
which can help the growth of the economy. Stable political regimes push further economic
growth and development by ensuring safety for investors.
• Financial inclusion: In India still a large chunk of the population (19%) is away from the formal
banking system, which creates people to save money. If the accessibility of basic banking
services reaches all the people, it significantly increases the saving rate and achieves many
targets in one step.
Therefore, it can be rightly said that though the savings rate is an important aspect of economic
growth, other essential factors are needed for achieving the highest potential of growth. It is
a very much needed area when the government needs to increase its focus on extracting our
demographic dividend and make India a $5trillion dollar economy by 2024 by improving the skilled
workforce and upgrading EODB constantly with reaching out to the global investor community.
Q. Explain the meaning of investment in an economy in terms of capital formation. Discuss the
factors to be considered while designing a concession agreement between a public entity and
a private entity. (250 Words, 15 Marks)
• In the Introducyion, try to define investment and capital formation.
• In Body,
o Discuss factors to be considered while designing concession agreements.
• Conclusion: conclude as per the context.
Answer:
Investment usually alludes to Gross fixed capital formation (GFCF) which is a macroeconomic
aggregate. Investment is an asset or item acquired with the goal of generating income or
appreciation. Capital formation is a term used to describe the net capital accumulation during
an accounting period for a particular country. The term refers to additions of capital goods,
such as equipment, tools, transportation assets, and electricity. Countries need capital goods to
replace the older ones that are used to produce goods and services. If a country cannot replace
capital goods as they reach the end of their useful lives production declines. Generally, the higher
the capital formation of an economy, the faster an economy can grow its aggregate income.
Factors to be considered while designing a concession agreement between a public entity and
private entity: The factors to be considered for its reciprocity and win-win attribution number
provisions related to public assets.
290 Industries
• Ease of investments made and managed by the private entity, time period, risk sharing,
genuine risk transfer, output-based modalities, performance-linked payments, conformance
with performance standards, benefits allowed because of comparative advantage, effective
contract enforcement, focus on service delivery, monitoring mechanism and arrangement,
resource use rationalisation, the imposition of standards and conditions arising out of new
guidelines or orders and others.
• Comparative advantage: A private entity has comparative advantages as compared to a
public entity. This comparative advantage of private entities is a very important factor when
considering concession agreements.
o For example, In the Oil sector, ONGC is trying to build partnerships with private entities
such as Shell, Total etc to improve technical skills to explore oils and gas in high-
temperature areas.
• Time Period: While considering a concession agreement the time period of project completion
is a very crucial factor. The time period is central in deciding the cost of the project as well
as the feasibility of the project from a financial point of view.
• Contract Enforcement: Effective contract enforcement is very significant because in India
registering property and actual enforcement of contract take a long time and this increases
the cost of the project. Hence Contract enforcement is another factor considered.
• Service Delivery: Service delivery on time and an effective targeted delivery system are other
factors to be considered. Especially after the completion of infrastructure development projects
like roads, timely maintenance is a very significant factor in deciding concession agreements.
• Effective Resource Utilisation: Resource utilisation is very significant in the development of
the country. This is one of the significant factors in deciding concession agreement between
both parties. Effective use of resources may reduce wastage in a very significant manner.
Therefore, the concession agreement should be based on best international practices and
policies and regulations must be focused on addressing all the complexities and balance
between both entities can be improved. The best international practices will surely secure the
interest of all the stakeholders and make every stakeholder part of the development process.
Index of Industrial Production (IIP) series to 407 under the 2011-12 series. Each
• The Ministry of Statistics and Programme item group may encompass several sub-
Implementation’s Central Statistical Office industries.
(CSO) generates and publishes the all-India • Revisions to the IIP are required to keep the
Index of Industrial Production (IIP) monthly. goods and producing entities representative,
• It analyses short-term changes in the as well as to resolve concerns with the
amount of production of a basket of continual flow of production data.
industrial products over a given period in • The revised IIP (2011-12) not only reflects
comparison to a chosen base period. the changes in the industrial sector but
• The Central Statistics Office (CSO) revised also aligns it with the base year of other
the base year of the all-India Index of macroeconomic indicators like the Gross
Industrial Production (IIP) from 2004-05 to Domestic Product (GDP) and Wholesale
2011-12 on 12 May 2017. Price Index (WPI).
• The total number of item groups has been • The total number of item groups has been
enlarged from 399 under the 2004-05 enlarged from 399 under the 2004-05 series
Industries 291
to 407 under the 2011-12 series. Each item Ammonium chloride (A/C), Diammonium
group may encompass several sub-industries. Phosphate (DAP), Complex Grade Fertiliser
• The eight major core industries are and Single superphosphate (SSP).
electricity, crude oil, cement, steel, refinery o Steel: Production of Alloy and Non-Alloy
products, coal, natural gas, and fertilisers, Steel only.
which account for almost 40% of the weight o Cement: Production of Large Plants and
of commodities included in the Index of Mini Plants.
Industrial Production. o Electricity: Actual Electricity Generation
• For the purposes of IIP, industrial production of Thermal, Nuclear, and Hydro, imports
is divided into three categories: from Bhutan.
Sector Number of Item Weight • The Index is gathered and released by
Groups (%) the Office of the Economic Adviser (OEA),
Department of Industrial Policy & Promotion
Mining 1 14.373%
(DIPP), Ministry of Commerce & Industry,
Manufacturing 405 77.633%
and Government of India.
Electricity 1 7.994% • The all-India Index of Industrial Production
Total 407 100% (IIP) has had its base year changed from
Table 13.5: Index of Industrial Production (IIP) 2004-05 to 2011-12 by the Central Statistics
The IIP is used for policy purposes by public Office (CSO), Ministry of Statistics and
bodies, including government agencies/ Programme Implementation.
departments such as the Ministry of Finance Industry Weight (%) Source
and the Reserve Bank of India. Coal 10.33 Office of the Coal
Index of Eight Core Industries: Controller, Kolkata
• Before the Central Statistics Office releases Crude oil 8.98 Ministry of
the Index of Industrial Production, the Petroleum and
Monthly Index of Eight Core Sectors (ICI) is Natural Gas
a production volume index that intends to Natural Gas 6.88 Ministry of
offer an early indicator of the production Petroleum and
efficiency of “core” industries (IIP). Natural Gas
• These industries are expected to have Refinery 28.04 Ministry of
an impact on both general economic and Products Petroleum and
industrial operations. Natural Gas
• In the Index of Industrial Production, these Fertilisers 2.63 Ministry of
eight industries account for roughly 40% of Chemicals and
the total (IIP). Fertilisers
• The following are the components covered Cement 5.37 Ministry of
in these eight industries for the purposes of Commerce and
index compilation: Industry
o Coal: Coal Production excluding Coking Electricity 19.87 Central Electricity
coal. Authority.
o Crude oil: Total Crude Oil Production. Steel 17.92 Joint Plant
o Natural gas: Total Natural Gas Production. Committee, Kolkata
o Refinery products: Total Refinery Table 13.6: Index of Eight Core Industries
Production (in terms of Crude Throughput). Annual Survey of Industries (ASI)
o Fertiliser: Urea, Ammonium Sulphate • The Annual Survey of Industries (ASI) is
(A/S), Calcium Ammonium Nitrate (CAN), India’s primary source of industrial statistics,
292 Industries
providing data on key aspects of the country’s ecosystem and resulted in environmental
registered manufacturing sector. degradation.
• ASI is widely regarded as the most detailed • The creation of export surpluses would
and trustworthy source of structured result in more job possibilities and higher
manufacturing sector data, offering per-capita earnings.
disaggregated industry-specific information • Furthermore, people would be able to find
on production, investment, jobs, and work close to their homes rather than having
costs. It does not refer to unorganised, to travel to far-flung locations, preserving
unregistered, or informal companies. the institution of the family. This will help
• ASI is the main survey conducted by improve the country’s social integration.
the Central Statistics Office (CSO) Industrial • Industrial corridors have a wide range of
Statistics (IS) wing. It ensures timely socio-economic benefits, including the
dissemination of statistical information establishment of industrial townships,
to assess and evaluate the dynamics in educational institutions, highways, railways,
composition, growth, and structure of the airports, and hospitals, all of which will
organised manufacturing sector. generate jobs, and increase living standards.
• The ASI extends to the entire country. • Because of the better transportation system
• It covers all factories registered under and agglomeration effect, production
Section 2 of the Factories Act, 1948. costs will fall, making Indian goods more
ASI vs IIP competitive in both home and international
• Annual Survey of Industries (ASI) on markets.
yearly basis and Index of Industrial • Provide the required logistics infrastructure
Production (IIP) on a monthly basis. to achieve economies of scale, allowing
• The ASI has been conducted under the businesses to concentrate on their core
Collection of Statistics Act since 1959 competencies.
whereas IIP is compiled on the basis of data • People would be able to find work close
sourced from 14 ministries/administrative to their homes, reducing migration to
departments. cities and reducing stress on the already
Industrial Corridors overburdened metropolitan landscape.
• An industrial corridor is a network of multi- • Preventing the concentration of companies
modal transportation services that run in one region would avoid environmental
through states like main thoroughfares. exploitation and maintain a balanced
Significance of Industrial Corridors in India growth of the country.
• Industrial Corridors recognise the National Industrial Corridor Development
economy’s interdependence and provide Programme
effective integration between industry and • As part of the National Industrial Corridor
infrastructure, resulting in overall economic Programme, the Indian government is
and social development. High-speed establishing a number of industrial corridor
transportation and industrial corridors are projects.
examples of world-class infrastructure. o Each industrial project in the Industrial
• The construction of NMIZ (National Corridors will be conducted by a Special
Manufacturing and Investments Zones) in Purpose Vehicle (SPV), which will be
a haphazard manner along with the state’s formed as a joint venture between the
industrial corridor would avoid distress federal and state governments under
migration and offer people job possibilities the Companies Act, 2013.
near to their homes. • Objective
• It will avoid the concentration of companies o In India, the development of futuristic and
in a single site, which has overburdened the greenfield industrial cities can compete
Industries 293
with the world’s greatest manufacturing and play” infrastructure down to the
and investment locations. plot level.
o The creation of jobs and economic o Increased industrial output, as well as
growth leads to overall socio-economic improved residential and social facilities
development. for the new and rising workers.
o Build resilient and sustainable future- o Improve India’s manufacturing
ready cities while providing a multimodal competitiveness by building world-class
connection with a comprehensive “plug infrastructure and lowering logistics costs.
294 Industries
14 Financial Inclusion
Financial Inclusion Credit Cards (KCC), the opening of no-frills

• Financial Inclusion primarily aims to give accounts, mobile banking, Pradhan Mantri
credit to favourable conditions to the Jan Dhan Yojna (PMJDY) etc.
disadvantaged and weaker segments of Significance of Financial Inclusion
society in order to enable investment and • Financial inclusion facilitates good financial
economic development in the nation. Financial decision making through financial literacy
Inclusion (FI) facilitates equal socioeconomic and skilled advice, as well as access
development across the nation. to financial services for all, particularly
• It facilitates the empowerment of the vulnerable groups such as women,
underprivileged and destitute, particularly minorities, refugees, elderly micro-
women, with the goal of empowering people entrepreneurs and low-income groups at
to make sound financial decisions via self- an affordable cost so as to enable them to
sufficiency and education. manage their finances on an everyday basis
• The effort to increase access to the formal confidently, securely, and effectively.
financial sector, of which financial inclusion • Plan for the future to defend themselves
is a subset and is an ongoing process. against short-term fluctuations in income
• Financial Inclusion is defined as the provision and spending, as well as to build capital and
of a range of financial services at a cheap benefit from financial sector developments.
price, especially to large segments of the • Dealing successfully with financial distress
disadvantaged and low-income communities. reduces their vulnerability to the unexpected.
• It is the process of ensuring affordable • Financial inclusion and various financial
access to different financial services and a services for poor and low-income citizens,
timely and sufficient amount of credit to and micro and small enterprises are all
disadvantaged populations such as poorer essential and integral components of the
sections and low-income groups. financial sector, according to the United
• Facilities related to credit, savings, Nations Capital Development Fund (UNCDF),
insurance, and payments and remittance, which invests in LDCs (least developed
are among the financial services listed countries). Each has its own competitive
by the Rangarajan Committee; financial advantages and presents the market with a
inclusion refers to universal access to a business opportunity.
wide variety of financial services at a fair Financial Inclusion: Bank Accounts for Everyone
cost, according to the committee. Pradhan Mantri Jan-Dhan Yojana (PMJDY)
Various Aspects of Financial Inclusion • PMJDY was announced by Prime Minister
• The goal of financial inclusion is to make on 15th August 2014.
sure that everyone has access to a variety
Aim:
of relevant financial services and that they
• Assure affordable access to financial goods
are able to understand and use them.
and services. The utilisation of technology to
• The Government of India, the Reserve Bank of
reduce costs and expand the service area.
India, and the National Bank for Agriculture and
Basic Tenets of the Scheme
Rural Development (NABARD) have all taken
steps to achieve extensive financial inclusion. • Banking the unbanked: Opening basic savings
bank accounts for the unbanked people with
• Some of the important initiatives include
little paperwork, e-KYC, account opening at
the SHG-Bank Linkage Programme, Kisan
zero balance, and no fees.
Financial Inclusion 295

• Securing the unsecured: Issuing indigenous (increased to Rs. 2,00,000 after August
debit cards with free accident insurance 2018). Pension scheme for employees in the
of Rs. 2 lakhs for cash withdrawals and unorganised sector.
payments at merchant locations. • PMJDY Extension with New Features: After
• Funding the underfunded: Additional August 2018, the government decided to
financial products such as microinsurance, prolong the complete PMJDY programme
consumption overdrafts, micro-pensions, with certain adjustments.
and microcredit. • The emphasis was shifted from ‘Every
The scheme was launched based upon the Household’ to ‘every adult with unbanked
following 6 pillars: eligibility’.
• Access to financial services on a universal • RuPay Card Insurance : For PMJDY accounts
basis: branches and correspondent banks created after August 2018, the free accidental
• Every qualified person would get a basic insurance cover on RuPay cards has been
savings bank account with Rs. 10,000 doubled from Rs. 1 lakh to Rs. 2 lakhs.
overdraft capacity. • Enhancement in overdraft facilities: The
• Financial Literacy Program : Emphasising overdraft limit doubled from Rs 5,000
the need for saving, the use of ATMs, the increased to Rs 10,000. Overdraft up to Rs
usage of credit, the purchase of insurance 2,000 was without conditions. Increase in
and pensions, and the use of basic mobile upper age limit for Overdraft from 60 to 65
phones for banking. years.
• Establishment of a Credit Guarantee Fund: Average Balance in PMJDY
To offer banks some protection against • The average deposit in the PMJDY account
possible defaults. in August 2021 was Rs 3,398, which is
• Insurance : Coverage for accidental death 2.7 times the amount which was in August
and dismemberment up to Rs. 1,00,000 2015.
Q. Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing the unbanked to the
institutional finance fold. Do you agree with this for the financial inclusion of the poor section
of Indian society? Give arguments to justify your opinion. (200 Words, 12.5 Marks)
• In the Intro, try to Start the answer by defining financial inclusion
• In body,
⚪ Discuss in brief the need for PMJDY to bring the unbanked to the institutional finance fold.
⚪ Justify with arguments in supporting financial inclusion of the poor section.
Answer:
Financial inclusion refers to efforts to make financial products and services accessible and affordable
to all individuals and businesses, regardless of their personal net worth or company size. Financial
inclusion strives to remove the barriers that exclude people from availing benefits of financial
services to participate in the economy improving their lives. It is also called inclusive finance.
Various dimensions of financial inclusion are bank penetration, credit penetration, and deposit
penetration for which Pradhan Mantri Jan-Dhan Yojana (PMJDY) is a major initiative.
PMJDY is a national mission for the comprehensive financial inclusion of all households in the

country. In this direction, PMJDY has the vision to provide banking facilities to those who, to date,
did not have any bank account. Financial inclusion under PMJDY is needed for the following reasons.
According to the Census 2011, out of the total population, only 58.7% have access to banking services.
PMJDY aims to bring to the remaining 42% population who are out of formal banking services.
Under PMJDY, people would get a basic bank account with an insurance facility and an additional
facility of overdraft of rupees 10000. Thus, they would avail benefits offered by banks and the
government. This scheme is aimed to develop small saving habits, which will enhance the
capital pool available for credits and loans, thereby facilitating economic development.
Banks are now opening up zero balance accounts and providing facilities to poor and unbanked
people or sections of society. This is helping marginal sections of society to get banking facilities.
RuPay debit card is offered under the scheme which enables these poor sections to withdraw
money when they need it. RuPay debit card has inbuilt accident insurance cover of rupees 1 lakh
Under PMJDY, bank accounts can be opened with a single document (Easy KYC norm). These
easy KYC norms will help uneducated people to go to banks without any hesitation.
Use of Kisan Credit Card through Jan Dhan account shall offer loan and credit facilities at
affordable cost.
The PMJDY has started making accessible, low-cost financial services and banking facilities to
the marginal and disadvantaged population. Going forward, there is a need to impart financial
knowledge and awareness among people for their greater integration into the formal economy.
Jan Dhan Darshak App (2018) Provides protection against prosecution to the
It is a mobile-based application made to give official for acts in good faith.
a user-oriented platform to locate banking Department of Posts: IPPB vs POSB
contact points in the country.
IPPB POSB
Over 8 lakh banking touchpoints have been
mapped on the Geological Survey of India app. Zero balance A minimum deposit
The Jan Dhan Darshak App’s features may be accounts can be of Rs 20 is required to
accessed according to the user’s need and opened in it. open an account.
convenience. No minimum A minimum balance of Rs
Additionally, this software is used to detect balance limit 50 without a check facility
towns that lack financial touchpoints within is there in the account, and a minimum
a 5-kilometre radius. Following that, the account. of Rs 500 for a check
concerned SLBCs allot these designated facility account are to be
villages to different banks for the purpose of maintained every month.
establishing banking outlets or contact points.
There is an upper It does not have any
Financial Inclusion: Investments Other Than limit of the upper limit on balance.
Bank balance of 1 lakh.
Government Savings Bank Act, 1873
It is of 3 types of It has standard
Introduced on January 28, 1873.
savings account banking and remittance
It codifies the laws relating to government regular, digital and services.
savings banks. basic.
It specifies how payment can be made in
It provides It does not provide such
special circumstances such as deceased
doorstep banking. a service.
claims, minors, lunatics, etc.
Table 14.1: Department of Posts: IPPB vs POSB

Sukanya Samriddhi Yojana (2015) Samriddhi accounts/ PPF accounts. Funded

• It is a small deposit scheme for the girl post office savings account linked India
child launched as a part of the Beti Bachao post payments bank accounts. Postal life
Beti Padhao campaign. insurance policy/rural postal life insurance
Features: policy.Pradhan Mantri Suraksha Bima Yojana
• An SSY Account can be opened any time an account / Pradhan Mantri Jeevan Jyoti
after the birth of till she turns 10 years Bima Yojana account.
of age. A minimum deposit of Rs 250 in If a village attains universal coverage in:
starting, and in subsequent years between
• With the schemes from the above list,
Rs 250 and Rs.1,50,000 can be deposited
then that village gets four-star status. If a
during the ongoing financial year.
village successfully completes three plans,
• Accounts can be opened in post offices
it earns three stars status, and so on.
or any authorised branch of commercial
banks. The account remains operative for Implementation team:
21 years or till the marriage of the girl after • The project will be administered by a team
she turns 18 from the date of opening. of five Gramin Dak Sevaks who will be
• The amount can be used to meet the allocated to a village to promote all of the
requirements of the girl’s higher education Department of Post’s products, savings,
cost. Partial withdrawal of 50% of the and insurance schemes.
balance is allowed after she turns 18. • The Branch Post-Master of the concerned
Eligibility: branch office is the team’s leader. On a
Only parents or legal guardians can open the daily basis, it will maintain a personal eye
account. on the team’s growth.
Girls should be below 10 years. Concerned Divisional Heads, Assistant Supe-
The account can be in the girl’s name only. rintendents Posts, and Inspector Posts will
Only two SSY accounts are allowed per family lead and manage the teams.
for each girl in normal circumstances.
All branch offices in chosen villages would
Benefits: get the necessary training and infrastructure,
High-interest rates which would cover all initiatives.
Guaranteed Returns Campaign:
Tax benefits under section 80C. • Gramin Dak Sevaks will conduct a door-
Flexible investment between Rs 250 and 1.5 lakhs to-door information campaign about all
SSY accounts can be freely transferred from projects, reaching out to all competent
one part of the country to another. villages.
Five Star Villages Scheme by Department of
Post (2020) • The information would be displayed on the
Branch Office notice board.
• The objective of the plan is to close the gap
between public awareness and the reach of • Important places of concerned villages
postal products and services, particularly in would also be used to display information
rural areas. Under the programme, all postal and brochures would be distributed.
products and services would be made Small meals would be organised following
accessible and promoted at the village COVID-19 safety guidelines.
level. Branch offices will serve as one-stop
Sampoorna Bima Gram Yojana (2017)
shops for locals’ postal requirements.
The Minister for Communications launched
The schemes covered under the scheme are:
the Sampoorna Bima Gram (SBG) Yojana on 13
• Savings bank accounts, recurring deposit
October 2017
accounts, NSC / KVP certificates. Sukanya

Aim: weather index products or hybrid products

• For the purpose of growing Postal Life combining weather index and indemnity-based
Insurance’s customer base. The provision insurance protection are available,
of financial services through the postal Flexible farm insurance plans that address the
network must be advanced in order to give requirements of crops, animals, farmers, and
inexpensive life insurance to rural residents agricultural implements.
of the nation. Provide distinct products for the high-value
Features: agricultural, contract farming, and corporate
farming sectors according to their distinct
• Villages (with a minimum of 100 homes)
demands.
will be designated in each of the country’s
revenue districts, and every household will Even governments may be issued micro-
be covered by a minimum of one RPLI (Rural insurance policies based on specified parame-
Postal Life Insurance) insurance. tric weather indices that cover big, complicated
• PLI benefits will no longer be restricted risks associated with natural disasters
to government and semi-government impacting agriculture and rural economies.
employees; they will also be available to Proposed Government Savings Promotion Act,
professionals such as doctors, engineers, 2019
management consultants, chartered accou- • The Government of India has proposed
ntants, architects, lawyers, and bankers, as an add up of the Government Savings
well as employees of companies listed on Certificates Act, 1959 and Public Provident
the NSE (National Stock Exchange) and BSE Fund Act, 1968 with the Government Savings
(Bombay Stock Exchange) (Bombay Stock Banks Act, 1873 and make it into one act
Exchange). with important provisions the of the above-
• It encompasses all villages that are part of mentioned Acts.zz
the Saansad Adarsh Gram Yojana. • Aim: To make the implementation of the
Model Insurance Villages (MIV) scheme simpler for the depositors to
• The Insurance Regulatory and Development understand the scheme.
Authority of India (IRDAI) recommended • Along With ensuring existing benefits, They
this model. will also:-
• The MIV concept’s objective is to provide • Presently, PPF accounts can’t be closed
complete insurance protection against all before five financial years. The amendment
main insurable hazards to which villagers can introduce the premature closing of
are exposed and to make coverage accounts. The proposed amendment would
inexpensive or subsidised. encourage youngsters to save.
• The strategy may be adopted in a minimum • In the current acts, there were no explicit
of 500 villages throughout the country’s provisions for the operation of accounts
districts initially, and then expanded to in the names of physically disabled and
1,000 villages over the next two years. differently-abled people. Provisions have
• The villages must be carefully selected, now been made in this respect.
taking into account a variety of essential • The new amendment clarifies the rights of
factors and features, in order to properly nominees.
execute the idea over a three- to five-year • Presently, there is no provision for nomin-
period. ation regarding the accounts opened in the
Areas covered under the model: name of minors, and present acts state
For many crops that remain unprotected under that if the account holder dies and there
the Pradhan Mantri Fasal Bima Yojana (PMFBY), was no nomination and the balance is

above the limit, the amount shall be paid to • This act adds many new terms to the list,
heirs. In this case, the guardian had to get including ‘fraternity fund,’ ‘rotating savings,’
a succession certificate. The amendment and ‘credit institution.’ The legislation
removed this provision for guardians. specifies the number of words pertaining
to chit funds. It specifies the chit value,
• The present acts do not talk about the
dividend value, and prize value. However,
grievance redressal. The amended placed
the amendment renames these phrases
mechanism for redressal of grievances of
gross chit amount, share of discount, and
accounts under the Small Savings Scheme.
net chit amount.
• The modified act will provide the Account
• Previously, the foreman was in charge of the
under Small Savings Schemes more
chit fund. He was entitled to a commission
freedom in its functioning.
of up to 5% of the chit system’s revenue.
• Aside from paying greater interest rates
The commission was raised to 7% under
than bank deposits, several modest savings
the statute.
plans also provide income tax advantages.
• The present law raised the aggregate
Problem with the act:
maximum of chits to Rs 3 lakh for individuals
• Protection against the attachment of a and Rs 18 lakh for firms with four or more
Public Provident Fund Account under any partners.
decree or order of any court in respect of any
• Previously, the statute did not apply to any
debt or liability incurred by the depositors
chit issued by the same foreman for less
may be decreased.
than Rs 100. The change eliminates the Rs
Chit Funds and Prize Chits 100 cap and empowers state governments
• Chit funds are a hybrid of a savings account to establish the threshold amount at which
and a lending product. It has a fixed value the act’s provisions apply.
and time limit (which is mostly two to Chit Fund Scams
three years). Each plan requires a certain • Chit fund scam refers to the collapse of
number of participants to make monthly money earned in chit funds as a result of
contributions that add up to the entire Ponzi schemes. The Saradha Chit Fund is
amount of the chit fund at the scheme’s an example.
maturity. Banning of Unregulated Deposit Schemes Act
• Any transaction or arrangement, by 2019
whatever name termed, in which a person • By removing gaps in previous legislation
collects money in whole or in instalments that were utilised by many parties to
by means of contributions or subscriptions, perpetrate frauds involving large numbers
or by selling units, certificates, or other of small investors, the restriction is
securities, whether as a promoter, foreman, designed to protect investors against
agent or in any other position. fraudulent investment schemes, such as
Chit Fund (Amendment) Act, 2019 Ponzi schemes.
• The legislation took effect on 5 December • All deposit schemes, whether with or
2019. It altered the 1982 Chit Funds Act. It without interest, are prohibited under
attempts to protect investors in villages and the Act, with the exception of those
places with a dearth of banks and financial administered by the government.
institutions. Definition of the act:
Features: • The statute defines a deposit as “a sum of
• The amendment prevents the establishment money received in the form of an advance,
of a fund without the state government’s a loan, or in any other manner, with the
consent. promise of repayment with or without

interest.” Deposits received in the form of a • Deposit takers will be required to disclose
loan from relatives and capital contributions their operations as well as the state of their
made by partners in a partnership firm are business to the database’s governing body.
not included in this definition. Penalties for violating the provisions of the act:
• According to the statute, a deposit-taker is This Bill defines three types of offences:
defined as a person, a group of people, or a • Engaging in illegal money-laundering
business that solicits or receives deposits. activities (which include advertising, oper-
The act’s provisions provide that in the case ating, and accepting money for such schemes.
of a failure, the deposit-taker is penalised, • Fraudulently defaulting on deposits made
not those who made the deposits. under a regulated deposit-taking process.
• If deposit-taking schemes are undertaken • Deliberately fabricating information to get
for commercial purposes and are not investors to join in unregulated deposit
registered with one of the nine regulatory schemes.
bodies authorised by the Bill to monitor • Conducting unregulated deposit-taking sc-
such schemes, the law characterises them hemes carries a sentence of two to seven
as unregulated. years in jail and a fine of Rs 3 lakh to Rs 10
Mechanism to Control Unregulated Deposit lakh.
Schemes: • Fraudulently defaulting on deposits carries
• The competent authority will be designated a three- to a ten-year jail sentence and a
at a level not lower than that of a state fine of up to twice the amount received
or central government secretary. The Act from depositors.
empowers this authority to temporarily • Repeat offenders may face a five- to ten-
seize the depositor’s property and any year jail sentence and penalties ranging
deposits received by them. Additionally, the from Rs 10 lakh to Rs 5 crore.
Act empowers the competent authority to Financial Inclusion: Credit
call and examine witnesses and require the Credit Guarantee
production of documents.
• A Credit guarantee is an agreement bet-
• Additionally, the statute establishes ween the lender and a third individual or
specialised courts in certain places. Once party that guarantees a debt will be repaid
contacted by the appropriate authoriti- to a lender by the individual or party if the
es, the designated court will have the borrower defaults in paying the debt.
jurisdiction to make the temporary attachm- Refinance
ent permanent. • The process of modifying the terms of an
• The court will next order the appropriate existing financial transaction, such as a loan,
authorities about the equitable is known as refinancing. When a company or
redistribution of the deposits recovered in a person chooses to refinance a borrower,
this way. they are attempting to make improvements
• Following the responsible authority’s to their interest rate, payment schedule,
application to the court, the whole process and other contract conditions. If the loan
must be completed within 180 days. is granted, the borrower receives a new
• In addition, the federal government will contract, which replaces the prior one.
appoint a body to build an online database MSME: Definition Changed in AATMANIRBHAR
including data on various deposit takers. (2020)
The information in the database will be The definition of MSME is as follows:
utilised to determine which deposit- • Manufacturing and services unit with
taking institutions are regulated and which investment up to Rs. 1 crore and Rs. 5
are not. crores of turnover is termed as micro unit.

• Manufacturing and services unit with Rs. 500 crores as of 29.2.2020 and were
investment up to Rs. 10 crores and Rs 50 less than or equal to 30 days past due on
crore of turnover is termed as small unit. 29.2.2020.
• Manufacturing and services unit with • These entities/borrower accounts will be
investments up to Rs 20 crore and Rs. 100 eligible for up to 20% (fund-based, non-
crore of turnover is termed as a Medium unit. fund-based, or a combination of the two)
MSME Non-NPA Borrower: ECLGS 1.0 of their total outstanding credit (fund-
(Emergency Credit Line Guarantee Scheme) based only) as a collateral-free Guaranteed
• MSME Non-NPA borrower accounts with Emergency Credit Line (GECL), which will
an outstanding credit balance of up to Rs. be fully guaranteed by National Credit
25 crores as of 29.2.2020 and less than or Guarantee Trustee Company Limited
equal to 60 days past due on that date, i.e. (NCGTC).
Regular SMA 0 and SMA 1 accounts, and • The loans made under ECLGS 2.0 will have
annual revenue of up to Rs. 100 crores would a 5-year term and a 12-month grace period
be eligible for GECL (guaranteed emergency on principal repayment.
credit line) funding under the scheme. MSME NPA Borrower: Subordinate Debt
• As of February 29, 2020, the amount of • The government announced the creation of
GECL funding available to eligible MSME subordinate debt for MSMEs’ NPA Borrower
Non-NPA borrowers will be up to 20% of on 13th May 2020, under the Atma Nirbhar
their total outstanding credit up to Rs. Bharat Package.
25 crores, either in the form of additional • SMA-2 and NPA accounts are eligible for
working capital term loans (in the case of restructuring as per RBI guidelines on the
banks and FIs) or additional term loans (in books of the Lending institutions. This
the case of MSME Non-NPA borrowers) (in scheme was to remain in operation till
the case of NBFCs). 31.03.2021(now extended to 31.03.2022).
• Under ECLGS, NCGTC shall give a 100 per • Under the scheme, banks provide promoters
cent credit guarantee to MLIs for the whole of MSME NPA borrowers with subordinate
amount delivered under GECL. debt up to 15% of the promoter’s stake or
• The loan under the scheme shall have a four- Rs. 75 lakh, whichever is lower to be infused
year duration with a one-year moratorium as equity/quasi-equity in the business.
on the principal. MSME Loans: FM tells bankers Not to Fear 3C
• GTC (National Credit Guarantee Trustee • The Finance Minister said that the
Company Ltd) must not impose any administration had taken steps to eliminate
Guarantee Fee on the Scheme’s Member the public’s fear of the ‘3Cs,’ a codeword for
Lending Institutions (MLIs). the Central Bureau of Investigation (CBI), the
• Interest rates under the scheme are Comptroller and Auditor General of India
regulated at 9.25 per cent for banks and (CAG), and the Central Vigilance Commission
financial institutions and at 14 per cent for in banking and business circles (CVC).
non-bank financial companies. • Banks have gone through a troubling time in
MSME Non-NPA Borrower: ECLGS 2.0 which decision-making has been hampered
• The government expanded the ECLGS by the dread of the ‘3Cs’ scrutinising their
2.0 programme to include the 26 sectors actions.
specified by the Kamath Committee, as • The government is assuring banks th-
well as healthcare. at smart business choices would be
• Eligible organisations under ECLGS 2.0 are safeguarded, since bank lending boosts
those having an outstanding credit balance consumption, which has slowed in recent
of more than Rs. 50 crore but less than quarters, resulting in dismal GDP growth.

• To avoid the possibility of unlawful commu- • MUDRA partners closely with banks,
nication and subsequent harassment, it microfinance institutions, and other lending
was agreed that all CBI notifications would institutions at the state and regional levels
include a registration number, similar to to boost the country’s expanding micro-
how income-tax notices do presently. business sector, which presently has an
MSME: Equity infusion via Fund of Funds authorised capital of INR 5000 crores and a
• The fund of funds will benefit over 25 lakh paid-up capital of INR 1675.93 crores.
MSMEs under stress. • By operating the online portal, allowing the
• The Cabinet Committee on Economic Affairs, issuing of guarantees for loans provided
headed by the Prime Minister has approved under the PMMY, and executing other
a ₹50,000 crore equity infusion for micro PMMY-related operations as required, it
small and medium enterprises (MSMEs) also acts as the key vehicle for storing data
through Fund of Funds, and another ₹20,000 and providing refinancing assistance under
crore fund for the distressed sector. the Pradhan Mantri Mudra Yojana (PMMY).
• The government will set up a ₹10,000 crore MUDRA Impact:
fund, which, with leverage, will be able to • MUDRA’s refinancing enables lending
finance equity infusion of about ₹50,000 institutions to grow their loans up to INR 10
crores in small businesses. This step is lakh at a lower cost. This has further aided
expected to expand the size and capacity in lowering the end borrower’s cost.
of MSMEs.
• Through PMMY’s close supervision of
NBFC: Mudra (2015,100%SIDBI Subsidiary) lending at the ground level, a total of INR
• Micro Units Development & Refinance 3.37 lakh crore has been lent to 6,22,47,606
Agency Ltd (MUDRA) was established on borrowers (as per the 2019-2020 report
April 08, 2015, as a fully owned subsidiary onMUDRA). Among them, 63% were female,
of SIDBI with the objective of subsidising 19% were new loan accounts, and 48% were
the country’s underfunded micro firms. from the SC/ST/OBC group.
• Banks, microfinance institutions (MFIs), MUDRA Loans: Shishu Loans with 2% Interest
non-bank financial companies (NBFCs), and Subvention
other lending institutions have benefited
• Under the Pradhan Mantri MUDRA Yojana
from MUDRA in refinancing for onward
(PMMY), the Union government authorised a
lending to micro/small business entities
programme to offer Shishu loan borrowers
engaged in manufacturing, trading, services,
a 2% interest rate reduction. 30 million
tractor financing, agriculture-related acti-
borrowers will gain from it.
vities, and two-wheeler loans (not to
vehicles meant for personal use or for any • All loan accounts in the Shishu category
other institutional purpose). of the MUDRA plan will be eligible for the
interest subvention benefit for a period of 12
• MUDRA also assists NBFCs and MFIs with
months, however, such loan accounts must
financial support by securitising their loan
not have been designated as non-performing
assets, allowing them to acquire borrowed
funds from the capital market to fund their assets (NPAs) as of March 31, 2020.
operations. • The scheme will incentivise people who
• MUDRA services include social empower- will make regular repayments of loans,
ment measures such as financial literacy, an official statement issued by the Union
financial inclusion, and other social finance ministry.
services, in addition to financial help via • There are 93.7 million loan accounts under
credit expansion programmes. the Shishu category of PMMY, with loans
worth Rs 1.62 trillion, as of March 31, 2020.

Shishu loan holders account for half the total • Hassle-free user experience
number of loans disbursed under PMMY. • Simple to understand and easy to use
• The continuing Covid-19 crisis and subs- • Real-time processing
equent lockdown have wreaked havoc on the • Quick loan approvals
operations of micro and small businesses • The portal uses data from various sources
financed by Shishu MUDRA loans. Small like GST, ITR, MCA, bank statements, etc.
firms often operate on razor-thin operating to determine the creditworthiness of a loan
margins, and the current lockout has borrower.
significantly harmed their cash flows,
Benefits
impairing their capacity to repay their debts.
For borrowers:
• The interest subvention scheme comm-
• Transparency.
enced on June 12, 2020, till May 31, 2021,
and was implemented through the Small • Digital tracking of loan applications
Industries Development Bank of India. • Apply from anywhere, anytime
• Even those borrowers who have availed of • Option to select from multiple lenders
the benefit of a moratorium on payment of • The in-principle approval time is a maximum
interest of loans given by the Reserve Bank of 59 minutes (given that all the documents
of India (RBI) during the pandemic will be a are in proper formats)
part of the interest subvention scheme. • Loan disbursal within ~7 – 10 working days
• According to the government, the initiative of loan sanction
is anticipated to provide much-needed For lenders:
assistance to the industry, allowing small • Real-time processing
enterprises to continue operating without
• Multiple API integrations
having to lay off staff due to a lack of
• Latest modular systems
finances.
• Lower Customer onboarding costs
• Of all the MUDRA loan borrowers, Shishu
loan holders accounted for 65 per cent of • Data authentication from reliable sources
the net addition of 11.2 million jobs during • Lenders can set loan parameters and create
2015-17, according to a survey conducted loan products as per their respective credit
by the labour bureau under the Ministry of policies.
Labour and Employment. Things Offered
psbloansin59minutes.com (2018) Business loan:
• On September 25, 2018, the then union • MSME business loan (up to 5 crores)
finance minister launched the portal www. • MUDRA loan (up to 10 lakhs)
psbloansin59minutes.com, where MSMEs Retail loan:
(micro, small and medium enterprises) & • Home Loan (up to 10 crores)
retail borrowers could avail of in-principle
• Personal loan (up to 20 lakhs)
approval of loans within 59 minutes
from anywhere & anytime without visiting • Auto loan four-wheeler loan (up to 1 crore)
a bank. & two-wheeler loan (up to 1 crore)
• The platform is a strategic initiative of the Eligibility Criteria

SIDDI consortium of 5 psbs incubated under • A borrower’s loan eligibility is predominantly
the aegis of the department of financial determined based on:
services. • Income/ revenue
Features: • Repayment capacity
• No human bias • Existing credit facilities
• Minimal documentation • Any other parameters as set by lenders

Stand Up India Scheme (2016) requirements, as mentioned in the Union

• On 05th April 2016, Prime Minister Modi Budget announcement for 2008-09, and
announced the Stand Up India scheme the RBI has offered instructions to banks in
(now extended up to the year 2025). this regard.
• Comes under the Ministry of Finance. • Banks should give sufficient incentives
• The Stand Up India Scheme aims to to their branches to assist in funding Self
facilitate loans between Rs. 10 lakh and Rs. Help Groups (SHGs) and to create links with
1 crore from Scheduled Commercial Banks them while keeping the processes clear
(SCBs) to at least one Scheduled Caste and straightforward.
(SC) or Scheduled Tribe (ST) borrower and Guidelines to Banks
one woman borrower per bank branch for • Opening of a Savings Bank Account SHGs,
setting up a greenfield enterprise in the whether registered or unregistered, that
manufacturing, services, or trading sector. promote savings practises among their
• As of 28.06.2021, the scheme has issued members may establish savings bank
1,16,266 loans worth Rs. 26204.49 crore. accounts with banks.
• The government does not grant any funding • Lending to SHGs
for Stand Up India Scheme loans. SCBs is- • Each bank’s branch credit strategy, block
sue loans under the scheme in accordance credit plan, district credit plan, and state
with commercial factors, their board- credit plan should include lending to SHGs.
approved policies, and applicable RBI Additionally, it should be a component of
directives. However, the government the bank’s corporate credit strategy.
contributed Rs 500 crore each in FY 2016-17 • Banks may award savings-linked loans
and FY 2017-18 and Rs 100 crore in FY 2020- to SHGs in accordance with NABARD’s
21 to the Credit Guarantee Fund for Stand operating standards (varying from a saving
Up India’s corpus (CGFSI). to loan ratio of 1:1 to 1:4). However, in the
• The Government has taken many initiat- event of matured SHGs, the bank may
ives to ensure the scheme’s efficient extend the loan ceiling beyond four times
implementation, including the following: the savings.
• Include, among other things, the ability • Interest rates
for prospective borrowers to submit • Banks are free to set the interest rates on
online applications through the www. loans made to Self Help Groups/member
standupmitra.in portal. beneficiaries.
• Support on a one-to-one basis, extensive • Service/Processing charges
media campaign Form of loan application • On priority sector loans of up to 25,000, no
simplified. loan-related or ad hoc service/inspection
• Convergence of Credit Guarantee Schemes costs shall be imposed. This restriction will
with State and Central Government apply to qualified priority sector loans to
schemes whenever possible. SHGs/JLGs on an individual basis, not to
the group as a whole.
• Margin money reduction and inclusion of
• Separate Segment under priority sector
agricultural-related activities, etc.
• To make reporting on SHG lending simpler
Self-help Group: Credit
for banks, it has been decided that banks
• Self Help Groups have the capacity to bridge
must record their lending to SHGs for on-
the divide between the official banking
lending to SHG members under the proper
system and the rural poor.
category, namely ‘Advances to SHGs,’ rega-
• Recognising the importance of the SHG- rdless of why the loans were disbursed to
bank relationship, banks have been ordered SHG members. SHG loans from the priority
to meet all of the SHG members’ credit sector are classed as “Weaker Sections.”

• Presence of defaulters in SHGs patients would be compensated with

• Defaults by a few SHG members, their Rs 50 lakh.
families, or both to the financing bank • This scheme would include all government
should not prevent banks from financing health centres, wellness centres, and
SHGs in general, as long as the SHG is not hospitals in the federal and state
in default. The SHG, on the other hand, may governments, as well as roughly 22 lakh
not utilise the bank loan to fund a bank health workers combating the pandemic.
defaulter member.
PM Yojana Garib Kalyan Anna Yojana
• Capacity building and training
• The Indian government would not allow
• Banks may take appropriate actions to anybody, especially destitute people, to
integrate the SHG connectivity initiative and suffer as a consequence of foodgrain
offer special short-term training sessions shortages during the next three months
for field-level staff. In addition, relevant owing to interruptions.
awareness/sensitisation programmes for
• This system would cover roughly two-thirds
their medium-level controlling officers and
of India’s population or 80 crore people.
senior officers may be implemented.
Until the scheme’s end, each of them would
• Monitoring and Review of SHG Lending get double their current entitlement. These
• Given the potential of SHGs, banks will additional food grains would be given out for
monitor developments on a regular basis free.
at all levels. Monitoring SHG bank linkage Pulses:
initiatives will be a regular subject of
• Under the scheme, 1 kilogramme of pulses
discussion at SLBC and DCC meetings
per home would be provided according
in order to enhance the present SHG
to regional preferences to ensure enough
bank linkage plan for credit flow to the
protein availability for all of the above-
unorganised sector. It should be examined
mentioned people. The Indian government
at the highest corporate level every quarter.
will provide these pulses for free.
• Reporting to CICs
Farmers:
• Recognising the importance of credit
• Farmers would benefit from the PM KISAN
information reporting on SHG members
Yojana, since the first payment of Rs 2,000
for financial inclusion, banks should follow
due in 2020-21 will be made in April 2020.
the Department of Banking Regulation’s
It will apply to 8.7 million farmers.
Credit information reporting on Self Help
Help to Poor:
Group (SHG) members guidelines dated June
16, 2016, as well as the Credit information • For the following three months, a total of
reporting on Self Help Group (SHG), members 20.40 crore PMJDY women account holders
guidelines dated January 14, 2016. would get an ex-gratia payment of Rs 500.
Gas cylinders:
ATMANI: PM GaribKalyan
• For the next three months, the Prime
• The PMGKY scheme is announced by
Minister’s Garib Kalyan Yojana would offer
the Government of India by the Union
free gas cylinders to 8 crore needy homes.
Government in the months of May and June
Help to low wage earners in organised sectors:
2021. (now extended to March 2022).
• Employees earning less than Rs 15,000 per
Its components are:
month in enterprises with less than 100
• Insurance plan for COVID-19-infected
employees are in danger of losing their jobs.
healthcare workers at public hospitals and
• The government wants to deposit 24% of
healthcare facilities:
their monthly salary into their PF accounts
• Under the scheme, any health professional at the conclusion of the programme under
who gets wounded while treating Covid-19 this package.

• This would ensure that their work is not Street vendors’ AtmaNirbar Nidhi Scheme
disrupted. (SVANidhi)
Support for senior citizens (above 60 years), • The scheme is under the Ministry of Housing
widows and Divyang: and Urban Affairs.
• Around 3 crore elderly widows and persons • This is a Central Sector Scheme designed
in the Divyang group are at risk of economic to assist street vendors in obtaining
upheaval as a result of COVID-19. The inexpensive working capital loans in order
government would provide them with Rs to resume their livelihood operations after
1,000 to help them get through the scheme’s the lifting of the lockdown.
challenges. Reason:
MGNREGA: • The COVID-19 epidemic and subsequent
• Under the PM Garib Kalyan Yojana, MNREGA lockdowns have had a detrimental effect
salary would be increased by Rs 20 on April on street sellers’ livelihoods. They often
1, 2020. A pay increase under MNREGA will operate on a shoestring budget, which they
provide an additional Rs 2,000 in annual may have depleted during the lockdown.
benefits to a worker. This would benefit As a result, providing loans for working
around 13.62 crore families. capital to street sellers will assist them in
Self-help groups: resuming their livelihoods.
• Self Help Groups help 63 lakhs of women Aim:
who have organised 6.85 crore families • To enable the provision of working capital
(SHGs). The maximum for no-collateral loans up to Rs. 10,000 at a discounted
loans will be raised from Rs 10 lakh to Rs interest rate.
20 lakh. • To encourage timely loan payback
Organised sector: • To recognise and reward digital transactions
• Employees’ Provident Fund Regulations Features:
will be updated to include Pandemic as a • Up to Rs. 10,000/- in initial working capital
reason for non-refundable loans from their
• Interest subsidy of 7% on timely/early
accounts of up to 75% of their balance or
repayment
three months’ wages, whichever is less. The
• Monthly cash-back incentive for digital
families of the four crore EPF-registered
transactions
workers are eligible for this benefit.
• Increased loan eligibility contingent upon
Building and Other Construction Workers
timely repayment of the first loan.
Welfare Fund:
Beneficiary:
• The Welfare Fund for Building and Other
Construction Workers was created by a • Street vendors/ hawkers vending in urban
Central Government Act. Around 3.5 million areas, as on or before March 24, 2020,
people are registered in the fund. During including the vendors of surrounding peri-
economic downturns, state governments urban and rural areas.
will be instructed to utilise this fund to • Scheduled commercial banks, regional rural
assist and sustain this personnel. banks, small finance banks, cooperative
District Mineral Fund banks, non-banking financial companies,
micro-finance institutions and SHG banks.
• The State Government will be urged to use
cash from the District Mineral Fund (DMF) to • The scheme shall be implemented up to
complement and enhance medical testing, March 2022.
screening, and other procedures related to Progress:
avoid the spread of the COVID-19 pandemic • The total number of beneficiaries who have
and treating infected people. taken out a working capital loan under the

Prime Minister Street Vendors Atma Nirbhar • The Government of India provided interest
Nidhi (PM SVANidhi) Scheme is 26,37,266 at a rate of 2% to Public Sector Banks,
as of November 25, 2021. As of November Regional Rural Banks (RRBs), and Co-
25, 2021, there are 3,21,504 loans that have operative Banks for short-term production
been approved but not yet issued. credit up to Rs. 3 lakh given to farmers from
Kisan Credit Card (1998) their own resources, on the condition that
• In August 1998, the Kisan Credit Card (KCC) they make short-term loans available at a
initiative was launched to provide farmers rate of 7% per annum at the ground level.
with a term credit for agricultural projects. From 2013 to 2014, private sector banks
• The KCC programme was designed by were covered by the plan under comparable
NABARD (National Bank for Agriculture and terms and conditions.
Rural Development) in response to the RV The incentive to farmers on prompt repay
Gupta Committee’s recommendations. ments:
• All Indian banks, regional rural banks, and • Since 2009-10, the Indian government has
cooperative banks accept the KCC. given farmers an additional 1% subsidy as
• Farmers with KCC credit are covered by a an incentive for repaying loans quickly, i.e.,
personal accidental insurance policy worth on or before the due date or the bank’s
up to Rs 50,000 for permanent disability stipulated date, but for a maximum duration
and death, and Rs 25,000 for lesser of one year. In 2010-11, it was increased to
impairments. 2%, then to 3% in 2011-12.
• Farmers may apply for a collateral-free loan
Relief to farmers:
of up to Rs 1 lakh under this initiative.
• To assist farmers affected by natural
• The loan for the first year under this system
disasters such as floods and droughts, a 2%
was calculated on the basis of cultivation
interest subsidy has been made available to
costs, post-harvest expenditures, and farm
banks on restructured crop loan amounts
maintenance costs. Loans would be granted
based on the financial scale’s expansion for the first year. From the second-year
during the following five years. forward, such restructured loans will bear
regular interest rates in accordance with
• Under the programme, the bank and
borrower shared the premium in a 2:1 ratio. the RBI’s policy.
Interest was charged on the loan at a rate Interest Subvention to Small and Marginal
of about 7% simple interest per year. Farmers against Negotiable Warehouse Receipts
• If no repayment is made within the due • To deter farmers from selling their products
dates, interest would be compounded half- in distress and to encourage them to
yearly. hold it in warehouses against negotiable
Interest Subvention Scheme warehouse receipts, the Government of
• The government declared that farmers India created a plan in 2011-12 for giving
would be eligible for short-term financing concessional loans to farmers on negotiable
at a rate of 7% with a maximum principal warehouse receipts.
amount of Rs. 3.00 lakh. The policy became • Small and marginal farmers (SF/MF) who
effective during the 2006-07 kharif season. have a Kisan credit card will be eligible
• Subventions may be computed on the basis for a 2% interest subsidy on their own
of the amount of crop loan from the date funds used to extend credit support up to
of grant to the date of loan repayment or Rs 3 lakh at a rate of 7% per annum for
up to the due date specified by the banks, an additional period of up to six months
whichever occurs first. The maximum following crop harvest against Negotiable
length can be one year. Warehouse Receipts issued on produce

stored in warehouses accredited with the • DBT of subvention on a monthly basis under
Warehousing Development Regulatory Au- DAY-NULM provides small enterprises with
thority. timely cash assistance.
• SF/MF that have not used the banking • All 35 states / UTs, as well as all scheduled
system to get agricultural loans would be commercial banks, regional reserve banks,
ineligible. and cooperative banks, must participate in
Interest subvention on working capital to this site.
Animal Husbandry and Fisheries
• From 2018-to 19, the Government of India Farm Loan Waiver
has expanded the Interest Subvention Agri-Finance: Loan Waivers for the Farmers
Scheme on KCCs provided to crop loan • In India, when the loan remains unpaid by
farmers to KCCs issued to livestock and the farmers due to any natural calamity
fisheries farmers. or crop failure, both the central and state
• Aside from the present KCC for agricultural governments provide relief to farmers
loans, short-term loans up to Rs2 lakh to facing distress due to natural calamities/
animal husbandry and fishery farmers are crop failure by waiving partial or full loans
eligible for a 2% interest subsidy for banks is called loan waivers for farmers.
and a 3% subsidy for farmers, provided the Argument in favour:
loans are supplied at a rate of 7% per year • Increased prices and revenue declines,
by banks. as well as a rise in indebtedness among
• Farmers who own KCC for agricultural small and marginal farmers, have resulted
cultivation and are engaged in activities in an increase in suicides throughout the
relating to animal husbandry and/or fishing years. Loan waivers will act as a periodic
are eligible for interest subsidy on short-term instrument for temporary assistance until
loans up to a maximum of Rs.3 lakh per year. policies are redirected in favour of farmers
• From 1 April 2020, the Government of to manage their risks linked with production,
India has given instructions that Interest catastrophes, loan pricing, and market price.
Subvention to Banks and Prompt Repayment • The farmers’ issue is mostly due to two
Incentive to Farmers would be accessible factors: declining income and indebtedness.
solely for KCCs.
According to NABARD’s All India Rural
PAiSA Portal (2018) Financial Inclusion Survey, farmers’ primary
• PAiSA is an acronym for Portal for Access to sources of income are agriculture and
Affordable Credit and Interest Subvention. earnings (as agricultural and associated
• It is a centralised computerised platform for service workers). Between 2012 and 2017,
handling interest subsidies on bank loans agricultural families’ monthly revenue from
to Deendayal Antyodaya Yojana – National agriculture stayed roughly stable (Rs 3,081
Urban Livelihoods Mission recipients (DAY- in 2012-13 and Rs 3,140 in 2016-17).
NULM). • Companies and industrial enterprises
• It began operations on 26 November 2018. usually get debt waivers, but farmers, too
• Allahabad Bank, which will serve as the need, loan reductions followed by a new
Nodal bank, planned and constructed the influx of capital when their economic cycle
online platform. is in recession.
• PAiSA is also an attempt by the government to Arguments against:
establish direct contact with beneficiaries, • A loan waiver helps only a small number
assuring more openness and efficiency in of farmers and does not consider landless
service delivery. farmers. The last NSSO survey of 2013-14

showed that 52% of agriculture households (land less than 2.5 acres) and/or choose
were indebted, but only 60% of them had cash crops; however, these linkages have
taken loans from institutional sources. not been demonstrated conclusively. As
It shows that only 31% of agriculture with genetically modified (GM) cotton,
households (60% of 52% indebted which has been extensively blamed for
households) were likely to benefit from suicides, this may not be the case.
loan waivers. • Another factor to consider is the inaccuracy
• Loan exemptions undermine farmers’ repay- of suicide statistics as a result of government
ment discipline by rewarding defaulters, compensation paid to victims’ relatives.
resulting in arise in future defaults. Family members have ‘faked’ suicides in the
• Earlier loan waiver initiatives did not past when a farmer died of natural causes.
result in an improvement in agricultural As in a case in which a widow inserted an
investment or output. empty pesticide bottle between the lips of
• Following the implementation of loan her deceased husband in an unsuccessful
waiver programmes, a farmer’s access to effort to qualify for compensation.
formal sector lenders decreases, increasing • There is widespread agreement about the link
his dependence on informal sector lenders, between suicides and informal borrowing.
since banks become wary of lending to Microcredit agencies impose variable interest
farmers because they have a poor track
rates, although their expenditure on each
record of repaying debts.
borrower is little. Additionally, microcredit is
• It also increases the Stress Assets of (Non-
not practical for agricultural activities, and
Performing Assets) of banks.
microfinance borrowers are often women
• Loan waivers not only increase the
who are not in control of farming or its
government’s budget deficit and interest
finances. Private moneylenders exert great
burden but also restrict the government’s
pressure on their borrowers in ways that
ability to invest in agriculture’s productive
official lenders such as banks cannot, and
sector, limiting the industry’s long-term
there is evidence that private borrowing
growth.
from unauthorised financiers contributes
Argument: Loan waiver may not stop farmers’
significantly to suicides.
suicide
Atma-Nirbhaya FarmLoan Reforms (2020)
• Government loan exemptions that apply
solely to official bank borrowings: There is • Concessional Credit Boost to farmers: Kisan
none, and it has been shown conclusively Credit Cards would provide institutional
that debt forgiveness does not improve credit facilities.
suicide rates. Rather than that, the news of • Agri Infrastructure Fund: For the develo-
a waiver decreases debt payments by even pment of agriculture infrastructure projects,
those agricultural borrowers who can pay in a fund of 1 lakh crore rupees was created.
the prospect of benefiting. • Emergency working capital for farmers:
• Economic difficulties are undoubtedly An additional fund of Rs 30,000 would
the largest contributor, although there is be disbursed through NABARD to Rural
less evidence that poverty is the primary Cooperative Banks (RCBs) and Regional
contributor. As seen in the instance of Rural Banks (RRBs) for meeting their crop
Kerala, one of the most developed states in loan requirements.
terms of human development, the suicide • Support to fishermen: The Pradhan Mantri
rate is about ten times that of Bihar, often Matsya Sampada Yojana (PMMSY) would be
regarded as one of the least developed. launched for integrated, sustainable, and
• Another possible explanation for suicides is inclusive development of marine and inland
that farmers fall into the marginal category fisheries by spending Rs 11,000 crore

• Animal Husbandry infrastructure devel- primarily rural and semi-urban areas with
opment: Rs 15,000 crore for the development three adjacent districts.
of infrastructure for supporting private • LABs were created to enable rural
investment in dairy plant and poultry farm organisations to mobilise funds while
establishment. also making them accessible for regional
• Employment push using CAMPA funds: development.
Under the Compensatory Afforestation • LABs were founded in August 1996, after a
Management and Planning Authority (CA- statement in the Union Budget by the then-
MPA) government gave a fund of Rs 6,000 Finance Minister.
crore for job creation in tribals and Adivasis;
• LABs need a minimum capital of Rs. 5
the fund would also be used for:
crores.
• Afforestation in urban areas
• Private people, trusts, corporate entities,
• Assisted natural restoration. and societies with a minimum capital
• Forest management and protection of commitment of Rs. 2 crores may form the
wildlife bank’s promoters.
Financial Intermediaries • LAB’s operating region is limited to a
• A financial intermediary is an institution maximum of three physically contiguous
that serves as a middleman among two districts, and it is permitted to establish
parties in a financial transaction, like a additional branches solely within its
commercial bank, investment bank, mutual operating territory.
fund and pension fund. • Due to the fact that LABs are located
• They mobilise the saving of households for in district towns, their operations are
investment in firms. Hence, they promote primarily focused on lending to agricultural
capital formation. and associated activities, agro-industrial
Types of financial intermediaries are as activities, small scale enterprises, com-
follows: merce, and the non-farm sector. Additionally,
• Banks: It includes commercial banks, LABs are expected to adhere to the priority
cooperative banks, regional rural banks, sector lending targets established at 40%
and local area banks. of net bank credit (NBC) for other domestic
banks.
• Development financial institution (DFI): It
includes institutions like SIDBI, NABARD, • In 2014, the RBI permitted LABs to transform
NHB etc. into small financing banks if they met
certain qualifying criteria.
• Non-Banking Financial Institution (NBFI)/
Non-Banking Financial Companies Development Financial Institution (DFI)
(NBFC): It includes insurance companies, • These are a special type of financial institution
mutual benefit companies, etc. that provides finance and technical assistance
Banks to various sectors of the economy to promote
economic development.
• We have already discussed types of banks
and their evolution in detail in module no 6. • These are not permitted to accept
So, in this topic, we will discuss other types deposits from the public.
of banks. • They raise funds from RBI, the government,
Local Area Banks (LABs) and through the issue of their bonds to the
general public.
• They are small private banks established
as low-cost entities to offer effective • They provide finance in the following forms:
and competitive financial intermediation • Provision of medium- and long-term
services within a defined geographic region, loans.

• Refinance, i.e. the process by which one Industrial Development Bank of India Limited
loan is replaced by another loan, in most (IDBI)
cases with more favourable terms.
• The Industrial Development Bank of India
• Guarantee against the loan (this is also (IDBI) was established as a Development
called credit enhancement). Financial Institution (DFI) on 1st July 1964,
• Subscription, for example, shares and under the Industrial Development Bank of
debenture of the company. India Act, 1964. It was granted autonomy in
• Underwriting: Under this, a Financial 1976.
institution guarantees to purchase a certain • It is a top institution in the field of industrial
percentage of share of an initial public offer finance.
(IPO) of a company in case it remains under-
• In 2003, the IDBI was converted into a
subscribed by the public. An underwriting
universal bank.
commission is charged for such a guarantee.
• On 21st January 2019, LIC of India completed
• They also provide technical assistance
in the preparation of project Reports, the acquisition of a 51 per cent controlling
evaluation of investment projects, provision stake in IDBI Bank, making it the bank’s
of technical advice, and management of majority shareholder.
services and marketing information. Small Industries Development Bank of India
• Different types of development financial (SIDBI)
institutions are: • Small Industries Development Bank of India
For industry: IFCI, ICICI, IDBI, SIDBI etc. (SIDBI) was set up on 2nd April 1990 under
For foreign trade: EXIM the Small Industries Development Bank of
For agriculture: NABARD India Act, 1989; it was granted autonomy in
1998.
For Housing: National Housing Bank
• It performs as the principal financial
Industrial Credit and Investment Corporation
Institution for the development, promotion,
of India Limited (ICICI)
and financing of the micro, small and
• ICICI was founded in 1955 on the initiative of
medium Enterprise (MSME) sector. In
the World Bank, the Indian government, and
addition to this SIDBI also coordinates
representatives from the Indian business
various functions of institutions engaged in
community.
similar activities.
• The main goal was to establish a
development financial institution that • It is headquartered in Lucknow and
would provide medium- and long-term operates under the Department of Financial
project financing to Indian companies. Services, Government of India.
• ICICI transformed its business in the 1990s • It runs a refinance programme known as
from a development financial institution that Institutional Finance in order to increase
only provided project finance to a diversified and sustain the money supply to the MSE
financial services group that provided a market.
wide range of products and services both • SIDBI offers term loans to banks, small
directly and through subsidiaries. finance banks, and non-banking financial
• ICICI Bank was established in 1994 as a companies through this scheme.
wholly-owned subsidiary of ICICI Limited, • SIDBI loans directly to MSMEs in addition to
an Indian financial institution. refinancing activities.
• In 2002, ICICI Ltd was merged with ICICI • With 16.73 per cent of the shares, the
Bank Ltd. This ‘reverse merger’ converted State Bank of India is the largest individual
it into the first universal bank of India shareholder in SIDBI, followed by the
(financial institution undertakes various Government of India and the Life Insurance
types of financial business). Corporation of India.

Export-Import Bank of India (EXIM) handicrafts and other types of rural crafts,
• The Export-Import Bank of India (EXIM) was cottage and village industries, and other
created in 1982 under the Export-Import allied economic activities, with the aim of
Bank of India Act 1981. fostering integrated rural development and
• Its goal is to finance, facilitate, and ensuring rural prosperity.
promote India’s overseas commerce. National Housing Bank (NHB)
It is a completely owned subsidiary of the
• The National Housing Bank (NHB) is an
Indian government.
apex housing financial organisation that
• EXIM Bank provides Lines of Credit (LOCs) was established on July 9, 1988, under the
to foreign financial institutions, regional National Housing Bank Act, 1987.
development banks, sovereign governments,
• The National Housing Board was founded
and other entities to enable buyers in those
with the goal of functioning as a major
countries to import developmental and
agency for promoting housing finance
infrastructure projects, equipment, goods, and
institutions at the local and regional
services from India on a deferred credit basis.
levels, as well as providing financial and
• Exim Bank administers the Export Dev- other assistance. New Delhi is where the
elopment Fund (EDF) facility, which was organisation’s headquarters are located.
created by the Government of India under
• NHB has been established, For making
the Exim Bank Act to grant loans in the
housing credit further affordable, regulate
interest of international commerce to
the actions of housing finance companies,
accomplish strategic goals.
and promote a sound, healthy, viable and
• India’s first dollar-denominated green cost-effective housing finance system to
bonds were issued by Exim Bank. cater to all segments of the population.
National Bank for Agriculture and Rural
Development (NABARD) Non-Banking Financial Institution (NBFC)
• The agricultural credit functions of RBI • It is an institution which is incorporated
and the refinance functions of the then under the Companies Act of 1956 and
Agricultural Refinance and Development conducts business in the areas of loans and
Corporation were transferred to NABARD on advances, the acquisition of government
July 12, 1982. This is how NABARD formed. or local authority-issued stocks/shares/
• It was constituted on the recommendation securities/bonds/debentures, or other ma-
of the Committee to ReviewtheArrangements rketable securities of a similar nature,
For Institutional Credit for Agriculture and leasing, hire-purchase, insurance, and chit
Rural Development (CRAFICARD) under the business. It does not, however, include
Chairmanship of B. Sivaraman. any organisation whose primary business
is agriculture, industrial activity, the sale
• It was set up with a capital of Rs. 100 crore
or purchase of any products (other than
and had a paid-up capital of Rs. 14,080
stocks), the provision of any services, or the
crore as of 31st March 2020.
sale/buy/construction of real estate.
• NABARD is currently wholly owned by the
• NBFC include a heterogeneous group of
Government of India as a result of this
financial institutions: Insurance companies,
change in the share capital composition
microfinance institutions (MFI), Hedge
between the Government of India and
funds, venture capital funds, Collective
the Reserve Bank of India. NABARD, as a
investment scheme, Nidhi/Chit funds etc.
development bank is mandated to provide
and regulate credit and other facilities in Features of NBFCs
rural areas for the promotion and growth • Demand deposits are not accepted by
of agriculture, small scale manufacturing, NBFCs.

• NBFCs aren’t part of the payment and • NBFC depositors do not have access to the
settlement system; thus they can’t write Deposit insurance and Credit Guarantee
checks drawn on themselves. Corporation’s deposit insurance programme.
Q. “In the villages itself no form of credit organisation will be suitable except the cooperative
society.” – All India Rural Credit Survey
Discuss this statement in the background of agricultural finance in India. What constraints and
challenges do financial institutions supplying agricultural finance face? How can technology be
used to better reach and serve rural clients? (200 Words, 12.5 Marks)
• In the introduction, write about agricultural finance.
• In body,
⚪ Mention cooperative society and its role in agri financing.
⚪ Constraints and challenges faced by financial institutions in agriculture financing.
⚪ Role of technology in improving agriculture financing.
• Conclude with the importance of agriculture financing.
Answer:
For the development of any sector, finance is a prerequisite and agriculture is also no the
exception for it. There is also a key factor in the availability of this agriculture credit or finance
is key. However, the challenges in accessing finance have hampered the growth of this sector
specifically.
Cooperative societies have the objective of providing cheap credit to the farmers in order
to relieve them from the clutches of money lenders. The significance of agri-finance throu-
gh cooperative societies:
To promote the economic interests of the members in accordance with the co-operative
principles; to provide short and medium-term loans; to promote savings habits among members;
The existing financial infrastructure in India has not been able to meet the key financial needs
that arise along agricultural value chains and consequently:
Many Agri intermediaries, as well as farmers, are either left un-served or underserved due to the
lack of timely access to institutional finance via Agri-loans. The market demand for smallholder
agriculture finance is huge and is largely unmet. Without access to credit, most smallholders are
restricted to farming, trading, and processing practices that result in low levels of productivity.
Although various financial institutions have come up and have set up shops in rural India, the
majority of Agri stakeholders still have limited or no access to them.
Constraints and challenges faced by the financial institution engaged in agriculture:
• Inadequate financial base: In India, the financial base of farmers and banks has not been
that strong, which can sustain agricultural finance and repayment of loans.
• Erratic monsoon: Erratic monsoon som-etimes leads to the failure of crops. This failure of
crops leads to indebtedness, and also failure of crops leads to increasing NPA.
• Issue of accessibility: Many farmers in India still do not get adequate financial help but
many farmers do not get a loan due to the issue of compliance with documents.

• Small land holding: Due to small landholding and a large number of small and marginal
farmers is leading to less productivity, less income and erratic weather changes leading to
loss to everyone. Therefore, access to financial resources is becoming dry. But technology
can be transformative in increasing access to financial institutions. Technologies such as,
• JAM trinity: Jandhan, Aadhaar, and Mobile these days are playing a very important role in
increasing the reach of the financial institutions and improving the availability of financial
services to rural clients.
• Small payments bank: Small payments bank is another tool which can be used to increase
banking services through thor mobile apps, small mobile banking facilities etc.
• UPI and BHIM: Unified Payment Interface and Bharat Interface for Money, both are providing
very vital payment gateways for all types of financial transactions. Both digital payment
systems proved a thrust to acceptance of digital payment systems.
• Fintech companies: In India, the digital payments system is deepening its roots with increasing
digital payments companies, and a few telecom companies are providing payment services,
such as Airtel and Jio. This also helped rural communities to get access to financial services.
Although digital India programmers have improved access to financial services and larger and
deepening credit accessibility, India needs cooperative credit societies also. India has better
democratic control, fulfilling instant financial needs, and access to organised commercial
banking systems for satisfying needs for various purposes can be achieved.
Insurance Sector much more widely, especially in rural areas,

Insurance Companies with the goal of reaching all insurable
persons in the country and giving them
• These are financial institutions which raise
adequate financial cover at a reasonable
funds from the public through the sales of
cost.
insurance policies.
• Since its inception, the Life Insurance
• Insurance companies’ corpus is invested
Corporation of India has held a monopoly in
in security markets by asset management
the Indian life insurance market.
companies.
General Insurance Corporation (GIC)
• There are two types of insurance firms:
• General Insurance Corporation (GIC) was
• Life insurance: Life insurance covers
established in 1973 by nationalising the
provided financial compensation in case of
existing private sector general insurance
death or disability.
company.
• General insurance: General insurance offers
• It was created under the provision of the
you insurance or financial compensation
Companies Act, 1956 as a private company
for everything else in life
limited by shares.
Life Insurance Corporation of India (LIC)
• GIC was formed with the aim of controlling,
• On June 19, 1956, the Life Insurance
superintending, controlling, and carrying on
Corporation Act was passed, and the LIC
the business of general insurance.
was established on September 1, 1956.
It had four subsidiaries:
• The state-owned Life Insurance Corporation
o National Insurance Company Limited.
of India was formed by the merger of over
245 insurance companies and provident o The New India Assurance Company Li-
societies. mited.
• The goal of the Life Insurance Corporation o The Oriental Insurance Company Li-
of India (LIC) was to spread life insurance mited.

o United India Insurance Company Li- To impose regulations on insurance companies’

mited. accumulation of funds.
o The GIC was removed from the four To resolve disagreements between insurers
public sector general insurance firms’ and intermediaries. To frame regulations on
holding company status in March 2002. the protection of policyholders’ interests.
These four enterprises are now wholly
The IRDA has set up the grievance redressal cell
controlled by the Indian government.
to take up the complaints of the policyholder.
Insurance Reforms
Micro Insurance
The Government of India formed a committee
IRDA regulates micro-insurance policies, which
in 1993, chaired by R. N. Malhotra, former
are a special category of insurance policies
Governor of the Reserve Bank of India (RBI),
designed to encourage insurance coverage
to provide suggestions for reforms in the
insurance sector. among economically disadvantaged sections of
society.
The aim was to add to the changes already
underway in the financial sector. The IRDA Micro-insurance Regulations, 2005
describe and permit micro-insurance. Micro-
Some of the major recommendations of the
committee are as follows: insurance is described as a general insurance
policy (which may cover health, belongings,
Insurance companies are given greater freedom
house, tools, personal injury contracts, pets,
to operate.
and so on) or a life insurance policy with a
Private companies with at least paid-up capital
fixed amount of Rs. 50,000 or less. They can be
of One Billion are allowed to enter the insurance
completed either in groups or individually.
sector.
Microinsurance business is completed by
No company must be allowed to deal with both
means of the following intermediaries in India:
Life and General Insurance as a single entity.
Foreign companies may well be permitted Non-Government Organisations
to enter the insurance sector but only in Self-Help Groups
collaboration with Indian companies. Micro-Finance Institutions
Industry must be opened up to the competition In the Union Budget 2015-16, government-
in order to improve customer services and sponsored microinsurance was launched for
increase the coverage of the insurance industry. the disadvantaged units of society.
It also proposed the setting up of an independent The Pradhan Mantri Suraksha Bima Yojna
regulatory authority- the IRDA, to deliver (PMSBY) covers an accidental death risk of Rs.
greater autonomy to insurance companies to 2 lakh for only Rs. 12 per year (i.e. Rs. 1 per
improve their performance and enable them to month). It would protect all people between
function independently. the ages of 18 and 70 who have a savings
The Insurance Regulatory Development Au- account for accidental injury or death.
thority (IRDA) For the age group of 18-50, the Pradhan Mantri
The IRDA, as an autonomous body, was Jeevan Jyoti Bima Yojana (PMJJBY) will cover
constituted on April 19, 1999, by the Government both natural and accidental death risks of Rs.
of India. 2 lakh for a premium of Rs. 330 per year (less
The Insurance Regulatory and Development than Rs. 1/day). i.e., it would protect all people
Authority (IRDA) Act, 1999 vested the IRDA with between the ages of 18 and 50 who have a
the responsibility of regulating and developing savings account for death from any cause.
the business of insurance in India. This scheme is available via the Life Insurance
Important functions of IRDA are: Corporation of India (LIC of India) or other life
To control, ensure, and encourage the orderly insurance firms willing to sell life insurance on
development of the insurance industry. similar terms.

Micro Finance take a more active position in decision-making,

Microfinance, also known as micro-credit, and are better prepared to confront systemic
is a form of banking service that provides gender inequality.
financial services to low-income individuals or
unemployed or groups who would otherwise be Parameter Micro Finance Bank
unable to obtain them. It is small-scale financial Size of loan The small size The large size
intermediation, inclusive of savings, credit, of a credit of a credit
insurance, business services and technical Duration of Short Medium/large
support provided to the needy borrower. loan duration duration
Microfinance is vital because it provides
Saving Emphasis on Focus on
resources and access to capital to the
Saving as well loans only
financially underserved, such as those who are
as loan
unable to obtain checking accounts, lines of
credit, or loans from traditional banks. Without Nature of Social Commercial
microfinance, these groups would have to rely organisation organisation organisation
on moneylenders. form form
Micro Finance and the Indian Economy Table 14.2: Parameters of Micro Finance and Bank
There are four important Microfinance models
Micro Finance Institution (MFI)
predominant in India.
The informal institutions that undertake
Microfinance has become a movement in India.
microfinance activities are referred to as
At the same time, it has become an exceptional
Microfinance Institutions (MFIs).
instrument of capability enhancement and
empowerment. Micro Finance Institution means any entity
(irrespective of its organisational form), which
Firstly, it has added millions of individuals to
provides microfinance services in the form and
the banking sector by developing the habit of
way as may be prescribed but does not include:
thrift and saving.
Secondly, it aids in poverty alleviation. (i) a banking company.
Thirdly, it encourages group and individual (ii) a cooperative society.
activities which deliver livelihood on a regular In the 1990s, the savings, grants and soft loans
basis. were the main sources of funds, whereas in the
Fourthly, with the help of micro finance, financial late 2000s, commercial loans and equity were
inclusion is possible with the common effort of the main source of funding to the sector.
banks, microfinance institutions and NGOs etc. The illustration once again demonstrates how
Fifthly, it empowers women in all three MFIs have evolved from developmental tools
important domains, i.e. economically, socially, to sustainable enterprises to appealing asset
and politically. classes.
Need for Microfinance Micro Units Development Refinance Agency
Microfinance seeks to help economically (MUDRA) Bank
disadvantaged households to achieve higher MUDRA Bank is a microfinance refinancing
levels of wealth formation and income organisation.
protection at the household and community
MUDRA Bank would refinance Micro-Finance
level.
Institutions via a Pradhan Mantri Mudra Yojana,
Poor women can become economic agents of using a fund of Rs. 20,000 crore from priority
change by having access to financial services sector lending deficits. Additionally, the Union
and then receiving financial resources. Budget 2015-16 includes a credit guarantee
Women become economically self-sufficient, fund of Rs.3,000 crore for insuring loans to
contribute directly to their families’ well-being, micro-enterprises.

It was founded on 8 April 2015 and was renamed These loans are classed as MUDRA loans under
MUDRA (SIDBI) Bank after being turned into a PMMY.
wholly-owned subsidiary of SIDBI. MUDRA (Micro Units Growth & Refinance Agency
The MUDRA Bank is primarily responsible for – Ltd.) has been established by the government
Developing policy guidelines for the micro/ to monitor the scheme’s growth and refinancing
small enterprise financing industry, as well as activities, as well as to act as a regulator for
registering and regulating MFI organisations. the microfinance business in general.
MFI organisations are accredited and rated. PMMY’s purpose is to provide grants to small
Establishing responsible lending policies to businesses that aren’t companies and aren’t
avoid indebtedness and to ensure proper client eligible for PMMY loans.
security principles and recovery methods. Shishu: Covering loans up to Rs. 50,000/- given
Creating a standardised set of covenants for with no collateral, at a 1% rate of interest/
last-mile lending to micro and small businesses. month repayable over a period of 5 years.
Promoting appropriate technological strategies Kishor: Cover loans above Rs.50,000/- and up
for the final mile. to Rs. 5 lakh.
Creating and implementing a Credit Guarantee Tarun: Cover loans beyond Rs. 5 lakh to Rs. 10
System to provide loan guarantees to micro- lakh.
enterprises. Creating a good architecture of Last Approach of PMMY
Mile Credit Delivery to micro businesses under At least 60% of investment must go to
the scheme of Pradhan Mantri Mudra Yojana. enterprises in the smallest sector. MUDRA
MUDRA Bank operates through regional level Bank’s intermediary partners must comply with
financing institutions that in turn, connects the following broad guidelines:
with last-mile lenders like Micro Finance Entrepreneurs that are new to the business,
Institutions (MFIs), Small Banks, Primary Credit young entrepreneurs (under 30 years old), and
Cooperative Societies, Self Help Groups (SHGs), female entrepreneurs will be welcomed, with
NBFC (other than MFI) and other lending specific incentives prepared for them.
institutions. Priority would be given to cash flow-
In lending, MUDRA gives priority to enterprises based lending over security-based lending.
set up by the under-privileged sections of the Among other reasons, collateral secu-
society particularly, those from the scheduled rities must be avoided.
caste/tribe (SC/ST) groups, first-generation Payment obligations must be flexible and
entrepreneurs and existing small businesses. tailored to the entrepreneur’s business cash
Pradhan Mantri MUDRA Yojana (PMMY) flows.
On April 8, 2015, the Union Government Collective Investment Scheme (CIS)
announced the Pradhan Mantri MUDRA Yojana A Collective Investment Scheme (CIS) is an
(PMMY) to give loans of up to Rs. 10 lakhs to investment scheme in which many people pool
non-farm small/micro businesses and non- their money to invest in a specific asset(s) and
corporate entities. share the profits based on an arrangement
All banks, including public sector banks, private reached before the money was pooled.
sector banks, regional rural banks (RRBs), SEBI regulates CISs under the SEBI (Collective
state cooperative banks, urban cooperative Investment Scheme) Regulations, 1999.
banks, foreign banks, and non-banking finance A licensed Collective Investment Management
companies (NBFCs)/microfinance institutions Company is allowed to raise funds from the
(MFIs) are required to lend to non-farm sector general public for a specific Scheme and then
income-generating activities worth less than sell “units” to the public (which are essentially
Rs.10 lakh under the PMMY. shares of that scheme provided in proportion

to the contribution made by the investor). The beneficiary is normally chosen by a bidding
These units are required by means of law to be process, a lot drawing method, or, in some
listed on a stock exchange platform. cases, an auction or a tender.
Nidhi (Mutual Benefit Society) In any case, each chit fund member is
Nidhi refers to any mutual benefit society that guaranteed a turn before the second round
has been designated as a Nidhi Company by the begins, and any member becomes eligible for
Central Government. They are mutual benefit periodic selection once more.
societies since only members may transact Chit funds are basically savings accounts. They
with each other, and membership is restricted come in a different variety of forms and sizes,
to people. and there is no one-size-fits-all approach. The
The principal source of funding is donations Central Act of Chit Funds Act, 1982, and the
from members. The loans are generally secured rules issued under this act by the several State
and offered at reasonable rates to members Governments for this purpose, and regulate
for reasons such as home construction or the chit fund industry.
maintenance. State governments must register and regulate
When compared to the organised banking chit funds according to their own laws since the
sector, the deposits mobilised by Nidhis are federal government has not set any operational
small, and they were formed primarily to standards for them.
encourage members to practice thrift and save. Chit funds are functionally included in the
The companies doing Nidhi business, viz. RBI’s classification of non-banking financial
borrowing from members and lending to companies as miscellaneous non-banking
members only, are known under different companies (MNBC). The RBI, on the other
names like Nidhi, Benefit Funds, Permanent hand, has not developed a separate regulatory
Fund, Mutual Benefit Funds and Mutual Benefit structure for them.
Company. The Chit Funds (Amendment) Bill, 2019
Nidhi’s are companies controlled by the Ministry It seeks to amend the Chit Funds Act, 1982.
of Corporate Affairs (MCA) and registered Features:
under section 620A of the Companies Act, 1956 Names: The Bill adds new terms to the chit
(Section 406 of the new Companies Bill 2012, fund vocabulary, including ‘fraternity fund’
as approved by Lok Sabha). and ‘rotating savings and credit institution’. (in
Nidhis are also classified as Non-Banking the act, the terms chit, chit fund, and Kuri are
Financial Companies (NBFCs). Since Nidhis are used).
classified as NBFCs, RBI has the authority to Participation of subscribers: A chit may
issue directives to them about their deposit be drawn in the presence of at least two
acceptance activities. subscribers, according to the statute. The
Under the new provisions, Nidhi companies are Bill proposes to enable these subscribers to
mandatory to apply to the Union government participate through video conferencing.
for updating their status or declaration as Foreman’s commission: The foreman, as
‘’Nidhi Company’’ in ‘’Form NDH-4’’. defined by the act, is in charge of the chit fund.
Chit Funds/Chitty/Kuri The bill proposes raising the fee from 5% to 7%
It is a kind of savings plan in which a certain of the total chit amount.
number of members contribute in instalments The aggregate amount of chits: The bill raises
over a predetermined time. the maximum amount of chit funds permitted.
The periodic collection is provided to a member Between one lakh and three lakh rupees for
of the chit funds who are chosen based on a individual chits and each person in a business
previously agreed-upon criterion. or partnership with less than four partners.

Additionally, organisations with four or more Committee on Comprehensive Financial Services

partners may get between 6 lakh and 18 lakh for Small Businesses and Low-Income Households
rupees. (Chairman: Nachiket Mor).
Application of the act: The bill allows the state Small Finance Bank (SFB)
governments to specify the base amount over It is a private financial organisation dedicated
which the provisions of the act will apply. to advancing the goal of financial inclusion by
Payment Banks focusing on fundamental banking operations
Payment banks are a new class of banks such as deposit acceptance and lending to
authorised by the Reserve Bank of India with underserved and unserved populations.
the goal of increasing financial inclusion via the The notion of SFB was also included in the
provision of digital services. Committee on Financial Sector Reforms’ 2009
Various payments/remittance services to report, A Hundred Small Steps, led by Raghu
low-income households, migrant labour Ram Rajan.
workforce, small businesses, other types of Locals having ten years of banking and
unorganised sector entities, and other users finance expertise, as well as enterprises and
through high volume-low value deposits and organisations managed and owned by residents,
payments/remittance services using a secured will be allowed to establish small financial
technology-based platform. institutions. Residents who own and manage
Payment banks are banks that are distinguished existing Micro Finance Institutions (MFIs), Non-
or limited in their operations. The Payment Banking Finance Companies (NBFCs), and Local
Bank is not permitted to establish subsidiaries Area Banks (LABs) might opt to convert them
to engage in non-bank financial services into small finance banks.
operations (hire purchase, leasing, etc.) or to SFBs must have a minimum capital of Rs. 100
engage in lending. crore, with a 40% initial investment from the
Due to the critical nature of liquidity for such founders that must be lowered to 26% over
institutions, they would be subject to the a 12-year period. As with other private sector
Reserve Bank of India’s reserve requirement commercial banks, foreign investment is
restrictions (CRR, SLR etc.). authorised.
Payment banks would be required to invest at After the SFBs attain a net value of Rs.500
least 75% of their “demand deposit balances” crore, they would be required to offer their
in SLR-qualifying government securities/ shares on a public market within three years of
treasury bills with maturities up to one obtaining that net worth.
year and no more than 25% in current and In contrast to payments banks, which were
time/fixed deposits with other scheduled created about the same time, SFBs are full-
commercial banks for operational and liquidity fledged banks.
management purposes.
As a result, they are subject to all prudential
Payment banks must have at least Rs. 100 requirements and RBI norms and regulations
crore in paid-up equity capital, with the that apply to existing commercial banks, such
promoter providing at least 40% of the paid-up as the need to maintain a Statutory Liquidity
equity capital for the first five years of operation. Ratio (SLR) and a Cash Reserve Ratio (CRR).
The Payments Bank will be formed as a public They must devote 75% of their Adjusted Net
limited company under the Companies Act of Bank Credit (ANBC) to sectors eligible for
2013 and will be licensed under Section 22 of Reserve Bank designation as priority sector
the Banking Regulation Act of 1949. lending (PSL), with advances and loans of up
The development of payments banks was to Rs. 25 lakh accounting for at least 50% of
proposed in the January 2014 Report of the their loan portfolio.

National Strategy for Financial Inclusion (2019-24) Amongst its various recommendations, its
This is an initiative of the Reserve Bank of recommendations on financial inclusion paved
India (RBI) which seeks to promote financial the way for better governance in the nation.
inclusion across all Tier 2 to Tier 6 urban The following are its recommendations with
centres in India. Financial inclusion not only respect to financial inclusion:
promotes economic growth but also helps in A differentiation had to be made, and the special
poverty alleviation. needs of the poor had to be catered to. This
This policy was launched in 2019, and it seeks to would involve innovative financial strategies
drive economic growth through various financial which are tailor-made for the benefit of the
services and also reduce the dependence on poor and developing new products related to
cash in India (presently, the cash to GDP ratio banking, insurance savings and loans,
is expected to hit 14-15%). It critiqued banks and other public sector
Amongst others: banks for having narrow policies that hampered
It seeks to enforce behavioural changes and the functioning of the Self-Help Groups (SHGs)
educate the consumers on various financial in terms of their utilisation of various loans. It
services. limited the utilisation of loans,
Making consumers understand their rights and It recommended the extension of the Regional
responsibilities. Rural Banks to areas that hitherto remained
Making insurance available to all the beneficiaries non-banking areas. It stated that this will
of the Jan Dhan Yojana scheme. speed up the process of financial inclusion in
the country,
An increasing number of banking outlets which
will ensure that individuals have access to For the first time in governance, it discussed
banking services in a radius of every 5 km or the possibility of high telecom density and the
a location which has about 500 households in latest communication technology based on
the hilly areas by March 2020 the internet being used to increase the rate of
financial inclusion in the country.
Ensuring all adults have access to financial
services through mobile phones by 2024. It also recognised the role of, Micro-financial
institutions in the process of financial
Various NBFCs, Central and State governments,
inclusion.
and NGOs ,amongst others, have been made
stakeholders in the success of this scheme.
Poverty
The strategy also hopes to make the Public
It is both a social and multifaceted phenom-
Credit Registry fully operational by 2022 (it
enon. According to the World Bank, “poverty is
was set up on the basis of the YM Deosthalee
pronounced deprivation in well-being.”
committee report of the RBI and it contains
all information related to credit mechanisms, Amartya Sen’s capacity approach may have
consumer behaviour and the credit scores). (YM given the most expansive definition of well-
Deosthalee was the former CMD of L&T Finance being. According to him, happiness stems from
a person’s capacity to participate in society.
Holdings Ltd.)
Poverty arises when individuals lack critical
Recommendations of the Second Adminis
capacities due to insufficient money or
trative Reforms Commission on Financial
inadequate education, bad health or a feeling
Inclusion
of helplessness, the absence of rights such
The Second Administrative Reforms Com-
as freedom of expression or insecurity, or low
mission was set up in 2005 and was headed by
self-confidence.
M Veerappa Moily.

Fig. 14.1: Definition and Characteristics of Poverty
The Human Development Report (2010) many dimensions, adjusted for the severity
introduced the Multidimensional Poverty of deprivation in health, education, and living
Index (MPI), which is based on a capabilities standards.
perspective and is a novel method to In India, poverty is determined by income.
complement income-based poverty indices. In 1978, the poverty line was first determined
It encompasses a range of characteristics, in terms of income/food requirements. In rural
ranging from participatory exercises among areas, the recommended daily calorie intake for
impoverished people to the emergence of a a normal individual is 2400 calories, whereas,
worldwide consensus. The MPI indicates the in urban areas, it is 2100 calories.
proportion of the population that is poor on

Fig. 14.2: Challenges, Causes and Government Programmes related to Poverty
Poverty:
Poverty is one of the most serious and urgent issues confronting India’s economy today. It is
a socio-economic problem that extends beyond the economic sphere and encompasses
other dimensions, such as incapacity to engage in social and political life. However, poverty is
multifaceted in nature. Apart from the income-based approach to poverty, there are more ways
to conceptualise poverty, including deprivation in other areas such as literacy, education, life
expectancy, child mortality, malnutrition, and access to clean water and sanitation.

Relative vs Absolute Poverty

Absolute poverty occurs when a household’s income falls below a specific threshold, rendering
it difficult for the individual or family to satisfy fundamental living necessities such as food,
housing, clean drinking water, education, and healthcare.
Relative Poverty: It is defined socially as a level of living in comparison to the economic standards
of the surrounding population. As a result, it is a measure of income inequality.
Poverty Line, Poverty Line Basket and Poverty capita per year based on 1867-68 values. He
Ratio proposed a poverty level based on the price
Historically, poverty has been defined by of “rice or flour, dhal, mutton, onions, ghee,
establishing minimal spending (or income) vegetable oil, and salt.”
required to purchase a basket of goods Alagh Committee (1979)
and services essential to fulfil basic human In 1979, a workforce established by the Planning
requirements, referred to as the poverty line. Commission with the purpose of assessing
The poverty line basket (PLB) is a collection of poverty devised a poverty limit for rural and
commodities and services that are required to urban areas based on dietary needs, led by
meet basic human needs. YK Alagh. The dietary criteria and associated
The poverty ratio, often known as the headcount consumption expenditures are based on the
ratio, is the percentage of people living in task force’s 1973-74 price recommendations.
poverty (HCR). Area Calorie Minimum consumption
In India, poverty is being assessed by the NITI expenditure (Rs per
Aayog task force utilising data acquired by the capita/month)
National Sample Survey Office (NSSO) under Rural 2400 49.1
MOSPI to determine the poverty line (the Ministry
Urban 2100 56.7
of Statistics and Programme Implementation).
Table 14.3: Area, Calorie wise Minimum consumption
Note: Recently, the Ministry of Statistics and
expenditure
Programme Implementation (MoSPI) passed
Lakdawala Committee (1993)
an order to merge the Central Statistics Office
(CSO) and National Sample Survey Office (NSSO) In 1993, DT Lakdawala convened an expert
into the National Statistical Office (NSO). panel to explore poverty measurement
methodologies. The group made the following
From 1999 to 2000, the NSSO used the MRP
recommendations:
(Mixed Reference Period) approach to calculate
the consumption of five low-frequency As previously stated, consumption expenditure
categories (education, apparel, footwear, should be assessed in relation to calorie
durables, and institutional hedonics). consumption.
State-specific poverty limits should be
Fisher-Price Index is used on all India poverty
established and updated annually using the
line baskets to generate the state-specific
Consumer Price Index for Agricultural Labor
rural and urban poverty lines.
(CPI-AL) in rural areas and the Consumer Price
History of Poverty Estimation In India
Index for Industrial Workers (CPI-IW) in urban
The procedure and approach for assessing areas.
poverty and identifying below-poverty-line
The ‘scaling’ of poverty estimates based
families have proved contentious.
on National Accounts Statistics has been
“Poverty and the Un-British Rule in India,” a discontinued.
book by Dadabhai Naoroji, offers one of the This implies that the CPI-IW and CPI-AL
first estimations of poverty. He established a baskets of goods and services represent the
poverty limit ranging from Rs. 16 to Rs. 35 per poor’s consumption patterns.

Tendulkar Committee (2009) capita per month.

In 2005, the Planning Commission convened The committee also proposed a new method
another expert committee to examine poverty for updating poverty lines that accounts for
measurement approaches, led by Suresh price and consumption trends by using the
Tendulkar, in order to address the shortcomings consumption baskets of people living near the
of prior methods. poverty line, rather than indices derived from
It proposed four significant adjustments. the CPI-AL for rural areas and the CPI-IW for
A shift away from calorie-based poverty urban areas, as was previously done.
estimation; a uniform Poverty Line Basket (PLB) The main criticism of the poverty line computed
in rural and urban India; a price adjustment by the Tendulkar Committee is that, since it
procedure reform to address spatial and is so short, it risks excluding many deserving
temporal problems associated with price people from government assistance.
adjustment; and the inclusion of private health National poverty lines (in Rs. per capita per
and education expenditure when calculating month) for the years 2004-05, 2009-10 and
poverty. 2011-12.
The committee advised using Mixed Reference Year Rural Urban
Period (MRP) estimations rather than the
2004-05 446.7 578.8
Uniform Reference Period (URP) estimates
used in previous processes. 2009-10 672.8 859.6
Pulses, milk, edible oil, non-vegetarian items, 2011-12 816.0 1000.0
vegetables, cereal, dry fruits, fresh fruits, Table 14.4: National poverty lines (in Rs. per capita per
sugar, spices, and salt, as well as other foods, month) for the years 2004-05, 2009-10 and 2011-12.
intoxicants, fuel, clothing, footwear, education, Rangarajan Committee
entertainment, medical (non-institutional and The Planning Commission established a new
institutional), personal & toilet goods, other expert board on poverty estimation in 2012,
goods, and other services, were all estimated chaired by C Rangarajan, with the following key
to be consumed. objectives:
The Tendulkar Committee established new To develop an alternative technique for
poverty standards for each state’s urban and estimating poverty levels; and
rural regions.
To determine whether poverty lines should
In 2004-05, the poverty line in rural India was be defined solely in terms of a consumption
Rs. 446.68 per capita per month, while the basket or whether other criteria should be
poverty level in urban India was Rs. 578.80 per considered.
Fig. 14.3: Poverty Line

The Rangarajan committee increased the considered poor. The Rangarajan committee
regular per capita expenditure for the rural poor estimated that the poor were 19 per cent more
to Rs. 32 from Rs. 27 and for the urban poor to numerous in rural areas and 41 per cent more
Rs. 47 from Rs. 33, bringing the poverty line for numerous in urban areas than the Tendulkar
rural India to Rs. 972 and for urban India to Rs. committee had predicted using this method.
1,407, respectively. Although the recommendations of the Ran-
Instead of Mixed Reference Period (MRP), garajan Committee have yet to be approved,
it recommended Modified Mixed Reference the Tendulkar poverty threshold remains the
Period (MMRP). official poverty line and was used to produce
Those who spend less than Rs. 47 per day in official poverty estimates in 1993-94, 2004-05,
cities, and Rs. 32 per day in the countryside are and 2011-12.
Table 14.5: Tendulkar Committee and Rangarajan Committee’s data as per different parameter
Eliminating Poverty Employment-intensive growth in manufacturing

80% of the Indian poor are in rural regions. and services that grow faster create jobs to
Their livelihood directly or indirectly rests on which underemployed farmers can migrate.
the performance of agriculture. Effective Implementation of all the things for
But agriculture characteristically grows slowly. the success of Make in India.
Limited livelihood opportunities at the local Infrastructure (especially power, roads and ports).
level. Ease of doing Business (including trade
Subsistence incomes for small and marginal facilitation).
farmers. Credit access for MSMEs
Modernise agriculture & accelerate agricultural More flexible labour laws
growth. Reform of the Land Acquisition Law
Generate job opportunities in industry & A modern bankruptcy law
services for farmers wishing to exit agriculture. Skill development

Fig. 14.4: Ways of Sustained Rapid Growth
Making social programs more effective like capable of working at the current wage rate but
Midday Meal Scheme, the National Food is unable to find jobs.”
Security Act 2013, MGNREGA etc. Since its establishment in 1950, the National
Jan Dhan Yojana, Aadhaar, Mobile (JAM) trinity Sample Survey Organisation (NSSO) has been
could play a vital role in widening the reach of measuring jobs and unemployment in India.
government to the vulnerable sections. The NSSO defines following three broad Status
i) Working (engaged in economic activity)
Unemployment
i.e. ‘Employed’
Unemployment is described as “a situation in
ii) Seeking or available for the work i.e.
which an individual is physically and mentally
‘Unemployed’
Fig. 14.5: Unemployment Rate in India
iii) Neither seeking nor available for the work. employed or seeking employment in a nation
Individuals with broad activity status of I or or region.
ii) are classified as being in the labour force, The unemployment rate is the % of the labour
whereas those with activity status iii) are force that is without work.
classified as being outside the labour force.
Thus labour force constitutes both employed
and unemployed.
Types and forms of unemployment are as
In other words, the ltabour force (also called
follows:
the workforce) is the entire number of people

Structural Unemployment produces less than it is capable of, exacerbating

Because the nation’s resources are limited, the employment-income gap even more.
structural unemployment occurs when a Frictional Unemployment
country is unable to give work to all job Frictional unemployment occurs as a result
applicants. of an imbalance in the supply of labour and
It’s possible since investment hasn’t kept up demand for labour.
with the increase in the labour force. This form of unemployment is prevalent in
The remedy is a significant investment in industrialised countries as they strive for
new sectors, worker training, or large-scale further growth. The industrial structure of
migration from economically poor areas. these nations changes dramatically as they
India’s unemployment is basically structural expand, with old industries contracting and
in nature. It is related to the inadequacy of dying out and new ones forming.
productive capacity to create enough jobs for Individuals choose to remain jobless bec-
all those who are able and willing to work. ause they anticipate greater employment
Disguised Unemployment opportunities than those now available, which
It is a state of affairs in which more individuals they regard to be below their qualifications and
labour than is required. And removing some less remunerative.
has no effect on production. Workers must transfer from industry to
People seem to be engaged in agricultural industry in such a setting. Between leaving and
operations in Indian villages, for example, rejoining, the period during which employees
when this sector accounts for the bulk of are unemployed is referred to as frictional
unemployment. unemployment.
Underemployment Seasonal Unemployment
It is a state of being employed yet contributing Seasonal unemployment refers to job losses
less to output than they are capable of. induced by seasonal changes in production,
demand, or both.
For instance, a diploma holder in engineering
who starts selling shoes owing to a lack of an When the workers engaged in a particular
appropriate job may be termed underemployed. work or occupation, get employment only for a
limited period and remain idle for the remaining
Open Unemployment
period, it is called seasonal unemployment. It
This group includes everyone who is
is very common in Indian agriculture.
unemployed.
Demographic Unemployment
They are capable and eager to work, yet there
When the number of new employees joining
is no employment available to them.
the labour market as a consequence of
This kind of unemployment is characterised by
natural growth or inward migration exceeds
involuntary inactivity.
the number of workers leaving, demographic
This kind of unemployment unemployment occurs.
Cyclical Unemployment Demographic unemployment is very similar to
It is caused by the business cycle, in which structural unemployment in many ways and is
unemployment increases during recessions quite prevalent in India. This is because the pace
and decreases during periods of economic of population expansion in India is substantially
expansion. faster than the rate of job chances growth.
It is seen in capitalism or market-oriented Technological Unemployment
industrialised countries during the downswing Technological unemployment arises as a
and depression periods of the economic cycle. consequence of technological innovation; some
Income declines reduce demand for products types of employees’ abilities become outdated
and services. As a consequence, the economy

Fig. 14.6: Meaning and types of Unemployment
as a result of changes in production practices, Jobless Growth

generally via the use of machines instead of Employment is normally assumed to be created
manual labour. as a result of economic expansion.
Causes of Unemployment in India In India, however, the majority of economic
Important causes of unemployment in India development has been unemployed.
may be summarised as follows:

Fig. 14.7: Causes and remedies of Unemployment
In India, economic expansion has not resulted In these conditions, the nation should use
in the creation of many employers. labour-intensive production practices in both
Increase In Labour Force industry and agriculture.
Over time, the death rate has decreased fast The use of automated machines is both
without a matching decrease in the birth rate, sensible and acceptable in western nations
resulting in unparalleled population expansion where money is plentiful, however, in India,
in the nation. where labour is plentiful; this approach results
Naturally, this was followed by a significant in high unemployment.
increase in the labour force. Inappropriate Education System
Inappropriate Technology India’s education system is broken, and it
While money is in short supply in India, labour does not prioritise the development of human
is plentiful. resources.

Fig. 14.8: Employment
The curriculum and syllabus taught in schools An economy in which there is growth and
and colleges do not correspond to the current expansion but no reduction in unem-
industry needs. ployment is called jobless growth.
Jobless Growth Reasons for the jobless growth:
A country whose population is increasing has to Increase in investment in technology and
expand its economy to give them employment. automation.
Any business offers jobs first to the people Increased reliance on highly skilled labour.
who can have the skill to do the job and only if
Sectoral inefficiencies.
there are much more opportunities than they
Labour market rigidities.
employ people with less skill.

Some initiatives are taken by the Government to eliminate the unemployment backlog and
of India towards the matter of jobless growth: generate jobs for a substantial increase in the
• Employment guarantee scheme (EGS). labour force.
• Swarnajayanti Gram Swarozgar Yojana The labour that has to be increased must be
(SGSY). both wage and self-employment.
• Pradhan Mantri Rojgar Yojana (PMRY). The final path to increased employment must
• Training to Rural Youth for Self Employment pass via the industrial sector, as well as the
(TRYSEM). service sector.
• Mahatma Gandhi National Rural Employment Raising Capital Formation
Guarantee (MGNREGA). Additionally, capital accumulation must be
accelerated.
• Start-up India initiative.
It contributes to employment growth in two
• Skill India Mission.
primary ways: first, it enables the continuation
Consequences of Unemployment In India
of existing operations, as well as the extension
Unemployment is at the heart of a plethora
of existing activities and the establishment of
of social and economic issues. Several critical
new ones.
issues include the following:
Poverty: Poverty is a direct result of Second, capital creation directly supports the
unemployment since a jobless individual earns capital goods sector’s employment. Additionally,
nothing and so becomes impoverished. this generates capital goods for the manufacture
Inequalities in income: Unemployment also of consumer products and services.
contributes to income inequality. India’s Appropriate Mix of Production Techniques
economy is plagued by glaring economic Furthermore, selecting a balance of capital-
inequality. Income, consumption, and other intensive and labour-intensive production
inequities exist. processes that maximise employment is
Inadequate resource utilisation: Unemployment critical.
has a substantial economic impact since it While labour-intensive industries like cottage/
keeps a big amount of the country’s resources household activities and many agricultural
underused. India has vast natural resources, operations produce jobs, capital-intensive
but we haven’t been able to fully use them. technologies provide substantially more. When
Social issues: Unemployment contributes to people work in capital-intensive businesses,
a variety of social problems for two primary they not only generate capital productst but
reasons: first, an unemployed individual has also create employment in the industries that
nothing to do. He is unemployed. Conflict, provide them with inputs.
misunderstanding, and quarrels are the
Thus, the optimal combination of technologies
outcome of this circumstance.
can provide maximum employment at a higher
Secondly, an unemployed person is without
pay rate while still providing a surplus for future
a source of income. In the vast majority of
investment.
cases, such people fail to provide their families
with the required food, clothes, shelter, and Special Employment Programmes
prescriptions. It forces people to do things they It is critical to construct particular employment
don’t want to do and should avoid. Stealing, programmes for persons who do not benefit
dacoity, and robbery are only a few of the immediately from this kind of growth until the
crimes that stem from it. economy expands to the point where everyone
Remedial Measures finds a job in the way stated above.
The strategies that may assist us in eliminating Supplemental programmes are much more
or significantly reducing unemployment are as critical for impoverished individuals who live
follows: mostly in rural regions and small towns.
Expanding Volume of Work Specific employment programmes to suit
The solution to unemployment is to expand specific groups of people and specific areas.
job options. This must be finished in order

Q. “While we flout India’s demographic dividend, we ignore the dropping rates of employability.”
What are we missing while doing so? Where will the jobs that India desperately needs come
from? Explain. (200 Words, 12.5 Marks)
• In the introduction, try to write about India’s demographic dividend.
• In body,
⚪ Explain in brief employability.
⚪ In the second part of the answer, you need to discuss sectors that will boost employment
generation and employability.
• Try to conclude by writing demographic divid-end and significant employment generation
Answer:
India has long been touted as the next big economic growth story after China. One of the
primary reasons for that has been its young population. It is estimated that as the young Indian
population enters the working age, it will lead to higher economic growth – a demographic
dividend.
While the working-age population in India has been growing since the early 2000s, it is in 2018
that the number of people in the age bracket of 15-65 became larger than the number of people
in the dependent age group (below 14 and above 65 years of age). This working-age population
that is larger than the dependent-age population is expected to remain till 2055.
Employability refers to the ability to be hired for employment. It very much depends on physical
abilities as well as intellectual abilities as acquired my skills and education.
In India, it has been observed that we talk about demographic dividends but fail to discuss the
issue of employability.
In the absence of employability, income remains low, leading to stagnating economic development.
To improve employability, we need to focus on improving skills through the means of vocational
training, industry-specific vocational courses and certification, and a globally acceptable
certification system.
Apart from employability, another major concern is adequate employment generation. It is very
much visible in the fact that with the pace of economic growth, commensurate employment
generation has not taken place. To increase employment generation in-country following steps can
help in it.
Focus on Labour-Intensive Sectors: The government needs to focus on labour-intensive sectors
like leather, apparel, footwear industry, MSME etc. These sectors can absorb a large working
force which is experiencing distressing employment in the agricultural sector.
Focus on The Manufacturing Sector: India’s service sector can hardly absorb the surplus workforce
migrating from rural/agricultural livelihoods. Government must support the manufacturing
sector to spur employment and income, rather than focus only on deploying capital in large
units. In fact, the same strategy has been successfully tapped by China building up extensive
manufacturing capabilities for power equipment, electronic hardware, etc.
Increase investment in Agriculture: Stagnant agricultural and allied sectors need investment
to generate employment and productivity in rural areas. As more than 50% of the population is
dependent on the agriculture sector. Therefore, investment in this sector is much needed.

Infrastructure Development: To increase economic activities by attracting investment, world-

class infrastructure is essential. Infrastructure development attracts investors the world over
to invest in various sectors of the economy.
Thus, to use India’s biggest advantage, the demographic dividend the need of the hour is to
create millions of jobs as well as enhance the employability of the youth. If this demographic
dividend is not used properly, it will be the biggest demographic burden on India.
Q. The nature of economic growth in India in recent times is often described as jobless growth.
Do you agree with this view? Give arguments in favour of your answer. (200 Words, 12.5 Marks)
• In the introduction, try to define jobless growth in brief.
• In the body, give arguments in favour or against jobless growth and justify your opinions
with an explanation.
• In conclusion, write suggestions to improve the employment scenario.
Answer:
In a jobless growth economy, unemployment remains stubbornly high even as the economy grows.
This tends to happen when a relatively large number of people have lost their jobs, and the ensuing
recovery is insufficient to absorb the unemployed, under-employed, and those first entering
the workforce. In India, the trend of jobless growth can be seen during the post-1991 economic
reforms period. There is an absolute decline in the number of workers from 467.7 million in 2012 to
461.5 million in 2018.
Jobless Growth in India:

Agricultural employment: Though the share of employment in the agricultural sector has been
declining, the services and manufacturing sectors have failed to absorb all the people shifting
from the agriculture sector.
Poor job growth IT sector: While the IT or Service Sector has been the spearhead of economic
growth in India after the advent of globalisation, it cannot absorb any significant labour. Because
the sector requires highly skilled people only.
Rise in the informal sector: Rapid rise of employment opportunities in the informal or
unorganised sector in recent years is another aspect of employment generation in India, which
further marginalises labour.
More than 82 per cent of the workforce in India is employed in the unorganised sector, as noted
by the International Labour Union in its India Labour Market Update of 2016.
Mismatch in demand-supply: During 2005-10, only 1 million net jobs per annum were generated
in the organised sector, whereas 60 million people entered the labour market of India.
The World Bank calculates that a 1% increase in growth in India resulted in 540,000 more jobs
on average.
India would need to create 13.5 million jobs a year—significantly higher than the current job
creation rate and requiring an unfeasible 18% gross domestic product (GDP) growth rate.

Distressed employment: Large scale unemployment among engineering graduates, and

postgraduates with MBA and doctorates are other examples of jobless growth.
This is the reason why lakhs of students including engineers, MBA or PhD students applied for
only 300 posts of peon in Uttar Pradesh.
NSSO survey: The National Sample Survey Office’s (NSSO) estimates for the years 2017-18 show
that India’s joblessness was 6.1 per cent of the labour force, which is among the highest since
1972-73.
Way forward:
Promoting policy initiatives for the manufacturing sector and services sector.
Reforms in labour laws and provision of infrastructure for the encouragement of small-scale
industries.
Promotion of export-oriented labour-intensive industries like textile, leather etc.
To enhance the quality of life and improve economic growth with the distribution of wealth among
every section of society, employment generation is very key. Fruits of economic development
can be shared among citizens only by providing them with respectful jobs, especially for youths.
If we really want to achieve the target of “NEW INDIA” then employment generation is a must.
Critical evaluation of skill India’s mission In the functioning of the NSDC, there is a
Skill India Mission was launched by the “serious conflict of interests”.
Honourable Prime Minister on 15 July 2015.
Aim: Around 40 crore people will be trained in Mgnrega Discussion In Alleviating Poverty
India with different skills by The Ministry of Skill The MGNREGA has not been able to function
Development and Entrepreneurship by 2022. correctly in alleviating poverty due to the
The issues with the Skill India Mission are as following reasons:
follow: Poverty alleviation cannot be done alone by
Sectoral requirements were not considered MGNREGA as wages earned under it are not
while deciding the targets. sufficient to make assets of sufficient value to
Reviewing the first phase of PMKVY 2015 to the poor.
know whether the scheme is working towards The high number of unmet demands for work
its purpose or not was done. in rural areas makes the scheme makes it less
Short-term skill courses were the main focus of trustable for rural workers who are looking for
this scheme which led to minimal employment. work.
The problems in the design and operations of There has been a big fall in rural people claiming
the National Skill Development fund which led employment under this scheme according to
to the shortage in skill development aims, were NSO and the reason for it is problems caused
pointed out by the Comptroller and Auditor by the administration in the implementation of
General of India. the programme.
For the poor implementation of the Standard It is shown on the Rural Development Ministry
Training Assessment and Reward (STAR) site that there has been a fall in average days of
National Skill Development Corporation was employment provided per household nationally
made responsible by the Sharada Prasad from 46.2 days in 2012-13 to 39.99 days in
Committee in its report. It stated that: 2014-15.
Only 8.5% of the people who were trained The funds allocated to the scheme have
could get employment. Only 24% of the school declined over the years.
dropouts could get certificates, and less than
18% have received monetary rewards.

Multidimensional Poverty Index The United Nations Development Programme

The index represents the country’s numerous (UNDP) and the Oxford Poverty and Human
elements of poverty, including education, Development Initiative jointly publish it (OPHI).
health, and living conditions. India is ranked 66th out of 109 countries in the
It covers about 109 developing countries. MPI 2021.
MPI was released for the first time in 2010. The Multidimensional Poverty Index includes
It is released annually. the following indicators, dimensions, weights,
SDG targets covered, and deprivation cutoffs:
Dimensions Indicator Deprived Cutoffs Weight SDG Goal covered

Of Poverty
Anybody below the 70 years of
SDG 2: Zero
Nutrition age for whom, there is nutritional 1/6
Hunger.
Health information is undernourished.
(⅓) A child under 18 has died in the
Child SDG 3: Health and
family in the five-year period 1/6
mortality Wellbeing.
preceding the survey.
Years of No suitable family member has SDG 4:Quality
1/6
schooling completed six years of schooling. Education.
Education
Any child of school age not attending
(⅓) School SDG 4:Quality
school up to the age at which he/she 1/6
attendance Education.
would complete class 8.
A family cooks using solid fuel like
Cooking SDG 7:Affordable
dung, agricultural crops, shrubs, 1/18
fuel and Clean Energy.
wood, charcoal, coal etc.
The family has unimproved or no SDG 6: Clean
Sanitation sanitation facility or it is improved 1/18 Water and
but shared with other families. Sanitation
The family source of drinking water is
SDG 6: Clean
Drinking not safe or safe drinking water in 30
1/18 Water and
water minutes or longer walk from home,
Living Sanitation
round trip.
Standards
The families are without no SDG 7:Affordable
(⅓) Electricity 1/18
electricity. and Clean Energy.
The family has inadequate housing SDG 11:
Housing materials in any of the three 1/18 Sustainable Cities
elements: floor, roof or walls. and Communities.
The family does not own more than
one of these assets: radio, T.V.,
Assets telephone, computer, animal cart, 1/18 SDG 1: No Poverty
bicycle, motorcycle or refrigerator
and does not own a car or truck.
Table 14.6: Indicators, dimensions, weights, SDG targets covered, and deprivation cutoffs of Multidimensional
Poverty Index

Inequality disadvantaged parts of these social groups

Inequality refers to the difference in income/ are specifically impacted in terms of their
expenditure levels of various sections of opportunities, access to basic necessities, and
society. overall potential. Both these categories are
The United Nations describes inequality as “the deeply intertwined, and inequality in one often
state of not being equal, especially in status, affects the inequality in another.
rights and opportunities”. Measure of Inequality
Inequality can be broadly classified into: Lorenz Curve
Economic Inequality The Lorenz curve, created by American
The most predominant forms of economic economist Max Lorenz in 1905, is a graphical
inequality measured are those of income depiction of income or wealth disparity.
inequality and wealth inequality. It is generally used to depict income distribution,
Income inequality is the inequality in and where it indicates what percentage (y per
disparity in the incomes commanded by the cent) of total income the bottom x per cent
top percentile of the population in comparison of households have. The x-axis shows the
to the bottom percentiles. percentage of families, while the y-axis shows
the percentage of income.
Wealth inequality measures inequality by
calculating disparities in wealth instead of If the x-value is 45 and the they-value is 14.2,
income. the bottom 45 per cent of the population owns
14.2 per cent of the overall income or capital.
Social Inequality
A straight line at an angle of 45 from the start
The social disparity arises when a society’s
of the graph indicates perfect equality. The
wealth is distributed unequally.
curve below this line shows inequality. The
In India, one of the most distinctive types of
greater the inequality, the greater will be the
social inequity occurs within the domains of
degree of curvature.
gender and caste, where people from the most
Fig. 14.9: Lorenz Curve

Gini Coefficient Inheritance difference in the ability of

Gini Coefficient is an arithmetic measure of individuals.
inequality based on the Lorenz curve. The difference in access to credit facilities.
Corrado Gini, an Italian statistician, founded it Remedial Measure by the Government to
in 1912. Reduce Inequality
A Gini coefficient of zero denotes true equality, Land reform.
with all values being equal (for example, where Poverty alleviation and employment generation
everyone has the same income). programmes.
Cause of Inequality Other development programmes like rural
The difference in ownership of land and wealth. development programmes, skill develo-
Institution of private property and inheritance pment, education, health and social security
loss. programmes etc.
Scarcity of capital. Nationalisation of banks and financial institu-
Inadequate infrastructure, particularly social tions.
infrastructure like schools etc. Promoting financial inclusion.
Leakage in government developmental expe- Promotion of MSME.
nditure. Progressive taxation and progressive govern-
The difference in access to education and ment expenditure.
training.

15 Global Economic Institutions
International Financial Institutions • It lends to member countries facing balance

International financial institutions provide of payments problems, and also supports
financial support nd technical assistance economic adjustment and reforms aimed
for economic, and social development in at correcting the underlying problems.
developing nations, and uphold international • It provides the governments as well as
economic cooperation and stability. central banks of its member countries
The International Monetary Fund (IMF), the with technical assistance and training in its
World Bank Group, the African Development areas of expertise.
Bank, and the Asian Development Bank are all • Headquartered in Washington, D.C.
examples of international financial institutions.
• Member nations provide the majority of IMF
Bretton Woods Institutions lending resources, mostly through quota
• The Bretton Woods Institutions include the payments.
World Bank, and the International Monetary
• Quota subscriptions are a primary
Fund (IMF).
component of the IMF’s financial resources.
• The Institutions were established in July
Each member country of the IMF is allotted
1944 during a summit of 43 countries in
a quota, based broadly on its relative
Bretton Woods, New Hampshire, USA.
position in the world economy.
• Their goals were to aid in the reconstruction
• All members of the IMF are not sovereign
of the postwar economy, and foster
worldwide economic cooperation. states, and therefore all “member nations”
of the IMF are not participants of the United
International Monetary Fund (IMF)
Nations.
• The International Monetary Fund (IMF)
was formed as the core institution of World Bank
the international monetary system by an • The World Bank is a multilateral financial
international treaty in 1945. institution that gives loans, and grants to
• The International Monetary Fund (IMF) is a developing-country governments to assist
multilateral organisation with 189 member them fund capital projects.
countries whose mission is to promote • At the 1944 Bretton Woods Conference, the
global monetary cooperation, financial World Bank, and the International Monetary
stability, international trade facilitation, Fund were founded (IMF).
high employment, long-term economic • Originally, it provided loans to help rebuild
growth, and poverty reduction. countries wrecked by World War II.
• IMF targets to tackle the crises in the system Eventually, the focus shifted from
by motivating nations to acquire sound reconstruction to development, with a
economic policies, and monitoring their heavy emphasis on infrastructures such as
fidelity to such policies; it also temporarily dams, electrical grids, irrigation systems,
provides financing to address the balance roads, etc.
of payments problems.
Organisation
IMF Engages in three types of Activities
• The World Bank is analogous to a
• It monitors economic developments,
189-member country cooperative.
financial developments as well as policies,
together in its member countries as well as • A board of Governors, who is the World
at the global level, and offers policy advice Bank’s chief policymakers, assembles these
to its members. member countries like stockholders.
Global Economic Institutions 339

• The governors are usually the finance • IBRD focuses its services on middle-income
or development ministries of member countries or countries where the per capita
countries. income ranges from $1,026 to $12,475 per year.
• They meet once a year during the annual • These countries include Indonesia, India,
meetings of the boards of governors of the Thailand etc, which are among the fast-
International Monetary Fund, and the World growing economies and are also home to
Bank Group. 70% of world poverty.
• The World Bank Group President is a International Finance Corporation (IFC)
chairperson of the boards of directors, and • The International Finance Corporation (IFC)
looks after the management of the Bank. is the world’s largest development bank
• The board of executive directors elects dedicated primarily to developing countries’
the president for a five-year, renewable private sector.
term. Currently, David R. Malpass has been • It is the World Bank Group’s private-sector
working as the president since 2019. arm, whose mission is to promote economic
The objective of the World Bank development by investing in for-profit, and
• To supply long-run capital to member commercial initiatives that reduce poverty
countries for economic reconstruction and and promote development.
development. International Development Association (IDA)
• Focusing on social development, The IDA programme of the World Bank assists
governance, and institution-building as the the world’s poorest countries.
major elements of equitable growth. • IDA supports a range of development
• It helps in inducing long-term capital for activities that pave the way toward equality,
improving the balance of payments, and economic growth, job creation, higher
thereby balancing international trade. incomes, and better living conditions.
• To promote capital investment in member • IDA’s work covers primary education, basic
nations in the following ways: health services, clean water and sanitation,
o To provide a guarantee on capital agriculture, business climate improvements,
investment. infrastructure, and institutional reforms.
o Provide loans for productive activities Multilateral Investment Guarantee Agency
on considerate conditions. (MIGA)
The World Bank Group • The Multilateral Investment Guarantee
The World Bank Group is an advanced family of Agency (MIGA) is a multilateral financial
five international organisations. institution that provides credit
International Bank for Reconstruction and enhancement, and political risk insurance.
Development (IBRD) • The guarantees help investors secure their
• It finances only sovereign governments foreign direct investments in developing
directly or projects backed by sovereign nations against political and non-
governments. commercial dangers.
Fig. 15.1: World Bank Group

• MIGA was established in 1988 as an in IBRD will increase by 3.13% and will reach
investment insurance programme to 47.19% of the total voting power at IBRD.
encourage investors to participate in India’s voting power will increase to 2.91%
developing countries with confidence. from 2.77%, and India will move on to
International Center for Settlement of become the 7th largest shareholder in IBRD
Investment Disputes (ICSID) from the present 11th largest shareholder.
• ICSID is an international adjudication General Agreement on Tariffs and Trade- GATT
institution structured in 1966 for legal • GATT was established on January 1, 1948.
dispute resolution as well as conciliation • The GATT (General Agreement on Tariffs
between international investors. and Trade) is a legal agreement between
• The ICSID does not direct arbitration or countries with the objective of boosting
conciliation proceedings itself but only international trade by lowering or eliminating
provides institutional as well as procedural trade barriers such as tariffs and quotas.
support to conciliation commissions, • In Geneva, 23 countries, including India,
tribunals, and other committees which signed an agreement in October 1947 that
conduct such matters. took effect on January 1, 1948.
India and World Bank • It remained in operation until the Uruguay
• India is an associate of four of the five Round Agreements, which formed the World
institutions of the World Bank Group which Trade Organization (WTO) on 1 January
are 1995, were signed by 123 governments in
• International Bank for Reconstruction and Marrakesh on 14 April 1994.
Development - IBRD, • GATT supported establishing a strong as well
• The International Development Association as a prosperous multilateral trading system
(IDA), that became much more liberal in the rounds
• The International Finance Corporation (IFC), of trade negotiations. But until the 1980s,
and the system required a thorough overhaul.
• The Multilateral Investment Guarantee This resulted in the Uruguay Round and
Agency (MIGA). ultimately in the WTO.
India is not a part of ICSID (International Centre World Trade Organization
for Settlement of Investment Disputes). The WTO, or World Trade Organization, is the
• The World Bank (mainly through IBRD and only international organisation that deals with
IDA) is providing funds to India for various international trade rules.
development projects. The World Trade Organization (WTO) promotes
• India is one of the founder countries of a forum for negotiating agreements aimed at
IBRD, IDA and IFC. removing trade barriers and ensuring a level
• India also has executive director on the playing field, hence promoting economic
Board of Directors of IBRD/IFC/IDA/MIGA. growth and development.
• The Executive Director from India is a The WTO also advocates a legal and institutional
representative of the whole constituency of framework for implementing, and monitoring
Bangladesh, Bhutan, and Sri Lanka, along agreements, as well as resolving disputes over
with India. their interpretation and implementation.
World Bank Reforms The WTO now has 164 members, with 117 of
them being developing countries.
In April 2010, the World Bank Group permitted
the General Capital Increase as well as the WTO Guiding Principles
Selective Capital Increase for IBRD, after which • Open borders, or the opening of national
the voting power of the Developing Countries markets to foreign trade, is a goal.

• Non-discriminatory treatment by and General Council

among members is guaranteed under the • During the time between ministerial
Most-Favoured-Nation concept. conferences, the organisation’s business is
• Transparency is a priority in the company’s overseen by a General Council.
operations. • Representative of all countries, regular
• Encouragement of economic transformation meetings once a year headed by Directorate
and progress. General.
• Predictability - Countries to adopt a stable • It serves as a secretariat of WTO.
and transparent policy. Trade Policy Review Body (TPRB)
• Increase in fair competition. • It conducts a review of the trade policies
WTO Functions of each member country after two years to
WTO’s main activities are: ensure compliance with WTO norms by the
• Negotiation of trade concerns (import members.
tariffs, other trade barriers) being reduced or Dispute Settlement Body
eliminated, as well as agreement on norms • It serves as the court of WTO.
controlling international commerce (e.g. anti- Appellate Authority
dumping, subsidies, product standards, etc.) • Its decision is final and binding.
• Applications related to various trades such Agreements of WTO
as trade in goods, trade in services, trade-
Trade-Related Intellectual Property Rights
related intellectual property (IP) rights, etc.
(TRIPS)
are administered and monitored by WTO’s
• TRIPS is a global legal agreement that binds
rules
all member countries of the World Trade
• Monitor and review the trade policies of our
Organization (WTO).
members and ensure transparency of regional
• It establishes minimum criteria for national
as well as the bilateral trade agreements
governments’ management of several types
• Settle the disputes between the members
of intellectual property (IP) asserted by
related to the interpretation as well as the
citizens of other WTO members.
application of the agreements
• From 1989 to 1990, the World Trade
• Enhance the ability of government
Organization (WTO) was in charge of and
personnel in developing countries to deal
oversaw TRIPS as part of the Uruguay
with international trade.
Round of the General Agreement on Tariffs
• Assist with the accession of about 30 and Trade (GATT).
countries that have not yet joined the
• TRIPS brought intellectual property law into
organisation.
the global trading system for the first time,
• Conducting economic research and and it remains the most comprehensive
collecting and publishing trade statistics in multilateral intellectual property agreement
support of the WTO’s other key duties. to date.
WTO Organization • TRIPS also lays out the methods for enforcing
• Geneva, Switzerland, is home to the the agreement, as well as remedies and
Secretariat of the WTO dispute resolution.
• In the WTO, final decisions are usually made It includes:
by the consensus of the entire membership.
• Copyright rights • Geographical
Ministerial Conference
• Industrial designs indications
• The Ministerial Conference, which meets • The layout of the • Trademarks
usually every two years, is the highest Integrated Circuit • Trade Secrets
institutional entity. • Patent • Trade names

Trade-Related Investment Measures (TRIMs) tariff-rate quota. It should be at least 5% of

The Agreement on Trade-Related Investment domestic consumption.
Measures (TRIMs) establish norms that apply Domestic Support
to domestic laws that a country imposes Subsidies and other assistance programmes
on foreign investors, typically as part of its that directly encourage production, and distort
industrial policy. trade are included.
The objective of TRIMs is to ensure fair treatment Trade distorting subsidies to be maintained
of investment in all member countries. within the limit.
It has two components: Aggregate Measure of Support (AMS) comes
• Tariffication: Tariffication entails removing under domestic support.
all non-tariff barriers, such as quotas, and Export Subsidies
replacing them with an equivalent tariff. The provisions of the agreement concern
• National treatment: Under this member members’ commitment to reducing export
countries cannot impose a restriction on subsidies.
foreign firms beyond a certain limit. Over the next six years, developed countries
Agreement on Agriculture (AoA) must reduce their export subsidy spending by
• The 1995 WTO Agriculture Agreement was 36% and volume by 21% in equal instalments
an important step in reforming agricultural (from 1986–to 1990 levels).
trade, and making it more equitable and The percentage reductions for developing
competitive. countries are 24 percent and 14 percent,
• As per the provisions of the agreement, respectively, over a ten-year period in equal
• Developed countries would meet their annual instalments.
emissions reduction targets in six years, or Patenting of Plant Varieties
by the year 2000. • To protect plant varieties by three methods
• The developing countries’ commitments namely,
would be fulfilled in ten years or by the year • Patents
2004. • Union for the conservation of the New
• No reductions are necessary for the least Varieties of Plant (UPOV)
developed countries. • Sui Generis
• Market access, local support, and export • India chose Sui-Generis, and passed the
subsidies are three important areas of Protection of plant varieties and Farmers
agriculture and trade policy covered under Rights Act, 2001.
the WTO Agriculture Agreement.
Aggregate Measure of Support (AMS)
Market access
• The annual amount of subsidies in monetary
Tariffication, tariff reduction, and access terms for an agricultural product benefits
opportunities are all part of this. the producers (product specific) of the
Ordinary tariffs resulting from tariffication will fundamental agricultural product, as well
be reduced by an average of 36% over the next as non-product specific support provided
six years, with a minimum reduction rate of to agricultural producers in general, is
15% for each tariff item. referred to as the AMS.
Due to balance of payment concerns, developing • It covers all the support/subsidies or
nations with quantitative restrictions were a product-specific that does not qualify for
allowed to give ceiling bindings instead of the exemption.
tariffication. • According to the WTO norms, the AMS
Member countries to provide preferential can be provided up to 10 % of a country’s
market access to agriculture products to agricultural GDP for developing countries.

• In a mature economy, the cap is set at 5%. Mode 1 (Cross country supply):
• The de minimis degree of support is the Services are supplied from one country to
name given to this limit. another.
Green Box Subsidy For example, BPO, KPO etc.
• It includes non-trade distorting subsidies or Mode 2 (consumption abroad):
minimal trade-distorting subsidies, i.e. Consumer/firms making use of service in
these are decoupled (or separated) on another country.
production. For example, Tourism.
• For example, subsidies for research and Mode 3 (Commercial presence):
development, environment protection, Foreign companies abroad include MNCs.
regional development, disease control, Mode 4 (Movement of natural person):
direct cash transfer to farmers etc. Individuals travel from their native places to
Amber Box supply services in other countries.
• It includes trade-distorting subsidies, i.e. For example, Job visas etc.
linked with production. Non-Agricultural Market Access (NAMA)
• For example, Subsidies on input, fertilisers, NAMA refers to the World Trade Organization’s
seeds, pesticides, procurement subsidies (WTO) trade liberalisation regulations for large
like MSP, etc. non-agricultural goods.
• The ceiling for AMS: It regulates the trade of goods, such as
• Developed countries: up to 5% value of manufacturing and other industrial goods,
domestic output. mining, jewellery, forestry, and so on.
• Developing countries: up to 10% of the value Agreement on Anti-Dumping Duties
of domestic output. It prescribes the process of estimation of the
Blue Box extent of dumping and norms, and dealing with
the imposition of Anti-dumping duties.
• It is also known as an Amber box with a
condition. Major achievements of WTO:
• Under certain conditions, it contains trade- Now the overall combined share of global
distorting subsidies that are not included trade of WTO members exceeds 90% of the
in AMS. total international trade.
• For example, subsidies that require farmers The dollar value of global commerce has
to limit production. nearly tripled since the WTO was established,
while the real volume of international trade
General Agreement on Trade in Services (GATS)
has increased by 2.7 times. The average rates
GATS is a World Trade Organization (WTO)
have practically halved from 10.5 percent to
agreement that became effective in January
6.4 percent during this time period, which is a
1995 as a result of the Uruguay Round talks. significant factor.
The agreement was reached to extend the The rise of global value chains has been
multilateral trading system to the service enabled by the WTO’s predictable market
sector, in the same way that the General conditions combined with enhanced
Agreement on Tariffs and Commerce did for communication (GVCs). Today, commerce
merchandise trade. inside these GVCs amounts to over 70% of the
The goal of the GATS is to create a solid global global merchandise trade.
framework of principles, and norms for service
trade. Doha Ministerial Conference 2001
The GATS is a treaty that is signed by all WTO • It started in November 2001 in Qatar,
members. Members must liberalise trade-in Doha, with the purpose of lowering trade
services in a progressive way as a result of this. barriers and facilitating more trade in the
According to GATS, services are classified into: world.

• The round is known unofficially as the Bali Ministerial Meet and Bali Package (Trade
Doha Development Agenda because one of Facilitation and Peace Clause), 2013
its main goals is to boost poor countries’ The Bali package is a trade agreement that came
trading prospects. out of the WTO’s Ninth Ministerial Conference
• Around 20 trade categories are covered by in Bali, Indonesia, in 2013.
the labour programme. It is the first WTO agreement to be endorsed by
• Main issues of the Doha development all of the organisation’s members, and is aimed
Round: at decreasing global trade barriers.
Implementation Issue The agreement includes provisions for Import
These issues are concerns of developing tariffs and agricultural subsidies are being raised
countries that are related to inconsistency in with the goal of making it easier for developing
WTO norms. countries to trade with industrialised countries
Relaxation in TRIPS on global markets.
• The scope of compulsory licensing increased. Developed countries would no longer be able
to impose rigid import caps on agricultural
• Scope of geographical Indication increased.
items from poor countries, and instead would
Special and Differentiated Treatment (S&DT)
only be able to impose tariffs on volumes of
• S&DT to be made effective and operational. agricultural imports above certain thresholds.
• Under S&DT certain unilateral concessions Acceptance of trade facilitation: The TFA
are provided to Underdeveloped countries (trade facilitating Agreement) targets to lower
(UDC) under WTO provisions/agreements. red tape as well as streamline customs. It will
Special Safeguard Mechanism (SSM) be legally binding, which would require some
• Under this, developing countries can impose expense and a certain level of technology.
restrictions on the import of agricultural ‘Peace clause’ was agreed at. Countries were
commodities in case of a surge in import/ given four years to adjust to the restriction and
fall in price. avoid punishment under the peace clause.
Special Products Note: Later on, the Peace Clause was made
• Underdeveloped Countries (UDC) can specify permanent. It was agreed to provide perpetual
certain products as special products. protection to public stockholding programmes
• Imports of such products can be restricted of developing member countries for food
to protect rural development (mainly village security purposes.
and cottage industries). Nairobi Ministerial Meet, 2015
• Duty-free, quota-free market access by The Tenth World Trade Organization Ministerial
developed countries to least developed Conference was held in Nairobi, Kenya, in 2015.
countries (LDC). Ministerial Decisions on Agriculture, Cotton, and
Agricultural subsidies are to be eliminated by Issues Concerning Least Developed Countries
developed countries, i.e. to be kept in AMS. (LDCs) are included in the conference’s
Labour issue to be taken by ILO, i.e. WTO would conclusions, known as the ‘Nairobi Package.’
not take into account suo-moto by itself. These cover:
Singapore Issues to be taken up after • Special Safeguard Mechanism (SSM) for
concluding DDA (Doha Development developing countries
Agenda), which was introduced by the USA • Public stockholding for food security
and European Union, and deals with trade purposes
and competition policy and transparency in • commitment to scrap export subsidies for
government procurement. farm exports,
• Measures related to cotton

Decisions were made concerning preferential relevance of the WTO in the 21st century. The
treatment to LDCs in the area of services as organisation has failed to respond, adapt, or
well as the criteria determining if exports from deliver in critical areas.
LDCs may benefit from the trade preferences. Few important suggestions to improve the
It extended the provision to avert the functioning of the WTO
‘evergreening’ of patents in the pharmaceuticals Every member of WTO will have to accept the
sector. This determination would help in operative assumption of a rules-based order
maintaining an affordable as well as accessible steered by a market economy, competition,
supply of generic medicines. and the private sector.
Nairobi Ministerial meet also dealt with the Launch negotiations to address the intertwined
rules on fisheries subsidies. issues related to market access, and agricultural
Factors Affecting The Working Of WTO subsidies.
A trade war is going on between China and US A credible trading system needs a dispute
despite both being a participant in WTO. This settlement system that is accepted by every
negates the core non-discriminatory principle member of WTO.
of WTO. China and the US have levied counter- The COVID-19 pandemic has seen significant
productive duties, condemning each other for downward trends in international trade. A
damaging their domestic interests. conducive trade policy can facilitate global
The European Union, the Trans-Pacific Partnership trade with the help of imports and exports
(TPP), the Association of Southeast Asian Nations through reduced tariffs and non-tariff barriers,
(ASEAN), the North American Union, and other and dedicated lanes for the release, and
significant platforms enable more liberal, and
clearance of goods.
seamless access to member countries’ markets.
Some of the other important recommendations
This is in direct opposition to the WTO’s goals,
are: Closure of DOHA Round, and permanent
which are to establish an international trade
solution to peace clause, appointment to Dispute
system based on rules with minimal barriers.
Settlement Body (DSB) by majority rather than
The Doha round of negotiations is formally not
reverse consensus mechanism, and launch
completed.
serious negotiations to restore the balance etc.
The two major areas that have impacted
BRICS
implementation by developing nations
The BRICS acronym stands for Brazil, Russia,
have been the TRIPS and the Sanitary, and
Phytosanitary (SPS) measure agreements. India, China, and South Africa, a group of
five major emerging economies. The group’s
The WTO’s Dispute Settlement Mechanism is in
headquarters are located in Shanghai, China.
crisis, and it is trying to recruit new members to
its understaffed Appellate body, which handles In 2001, Goldman Sachs coined the term BRIC
trade disputes. More than 20 developing to refer to the world’s five biggest economies
countries met in New Delhi in 2019 to examine in the twenty-first century, together with the
measures to save the WTO’s dispute resolution United States.
mechanism from collapsing due to a backlog of BRIC countries began their communication
appointments. in 2006, and since 2009, it has taken place
While the international trade landscape has at yearly summits of chiefs of state and
altered significantly over the past 25 years, WTO government.
guidelines have not kept pace. The Covid-19 South Africa joined the group in 2011.
pandemic hastens the shift to e-commerce, The BRICS reached its ultimate makeup with
and guidelines to regulate online trade will be the addition of an African country.
more crucial than ever. These countries, unlike the European Union,
Technical functioning is now wholly insufficient are not a political alliance or a formal trading
to meet the main challenges to the strategic association; instead, they are a powerful

Fig. 15.2: BRICS Members
economic bloc with low labour and production institutions’ efforts for global development,
costs. so adding to collective commitments to
The BRICS countries account for roughly 42 achieve the goal of robust, sustainable, and
percent of the global population, 23 percent of balanced growth.
global GDP, 30 percent of the global territory, • The Bank’s first sanctioned capital will be
and 18 percent of worldwide trade. US$ 100 billion.
These countries have sought to build the fairest • The early contributed capital shall be
international governance possible, one that equally shared amongst the founding
is more conducive to their national interests, members, and shall be US$ 50 billion.
since their discourse began in 2006.
• India shall represent by giving the first
This goal would be realised by correcting the
President to the Bank.
International Monetary Fund quota system,
• The Headquarters of NDB is in Shanghai.
which would place Brazil, Russia, India, and
China among the top ten largest shareholders • The Articles of Agreement of the NDB state
for the first time. that any member of the United Nations may
New Development Bank (NDB) join the bank, but the BRICS nations’ voting
• At the Fortaleza Summit (2014), the New power must never be less than 55 percent.
Development Bank (NDB) was established, • Unlike the World Bank, which gives votes
and the Contingent Reserve Arrangement based on capital share, the New Development
(CRA) was unveiled. Bank will give each participating country
• India’s K. V. Kamath was elected as the one vote, with no veto power.
NDB’s first president. Organisation for Economic Co-operation and
• The NDB aspires to legitimise BRICS Development (OECD)
collaboration, while also supporting It’s a 36-member intergovernmental economic
international, and regional financial organisation that creates economic and social

It was founded in 1961 to stimulate economic

progress and world trade.
It has been headquartered in Paris, France,
since 1949, in the Château de la Muette.
Following the end of the Marshall Plan, the
OECD concentrated on economic challenges.
It comprises democratic countries that support
free-market economies.
The OECD has 37 countries that are its
members. They account for around 80% of
world trade and investment, giving them a
pivotal role in addressing the challenges facing
Fig. 15.3: Shareholding Structure of
the world economy.
the NDB policies
Fig 15.4: ADB Members
India participates in selected OECD committees, the global stage, Canada, as well as the US,
and their subsidiary bodies. Indian ministers joined OEEC members in signing the new OECD
and officials have also attended the OECD Convention on 14 December 1960.
Ministerial Council Meetings. Asian Development Bank (ADB)
History The Asian Development Bank (ADB) was
In 1948, the Marshall plan for the rebuilding founded on December 19, 1966, in Manila,
of a war-torn continent was handled by Philippines, as a regional development bank.
the Organisation for European Economic Since January 17, 2020, Masatsugu Asakawa
Cooperation, which was sponsored by the has served as President of ADB.
United States. (OEEC). The Asian Development Bank (ADB) was
It paved the way for a new era of cooperation established in the early 1960s as an Asian-
by making individual governments recognise focused financial institution with the mission of
the interdependence of their economies, which fostering economic growth, and collaboration
was to change the face of Europe. in one of the world’s poorest regions.
Motivated by the success as well as the The Asian Development Bank provides
expectation of carrying its work ahead on grants, loans, technical assistance, and

equity investments to its developing member It aims to encourage the free movement of
countries, the private sector, and public-private goods and services across the borders of its
partnerships in order to promote development. members.
It has 68 shareholders, 49 of which are from Examples of RTA are the European Union (EU),
the Asia-Pacific region. Asia-Pacific Economic Cooperation (APEC) etc.
The ADB, like the World Bank, has a closed Types of Regional Trade Agreement (RTA)
weighted voting system in which capital Various types of RTA are as follows:
contributions decide how votes are distributed. • Preferential Trade Agreement (PTA)
Japan is the largest stakeholder, owning 15.677 • A preferential trade agreement (PTA) is an
percent of the stock, followed by the United agreement that provides preference to certain
States, which owns 15.567 percent. products from the participating nations.
China has 6.473 percent of the market, India • This is done by lowering the tariffs but not
has 6.359 percent, and Australia has 5.812 by abolishing them completely.
percent.
For example, SAFTA by SAARC countries.
In 1986, India began receiving ADB support in
Free Trade Agreement (FTA)
areas such as industry, transportation, energy,
A free trade agreement, or FTA, is a preferential
agriculture, and human development.
arrangement in which members reduce tariffs
Asian Infrastructure Investment Bank (AIIB)
on intra-member commerce while maintaining
It is a multilateral development bank with their own tariff rates for trade with non-
the task to improve economic, and social members.
outcomes in Asia.
Take the India-ASEAN Free Trade Agreement,
Headquartered in Beijing, it began operations for example.
in January 2016 and has now grown to 102
Customs Union (CU)
approved members worldwide.
A customs union is a free-trade agreement in
100 billion is the Authorised capital stock of
which members apply a common external tariff
the bank.
(CET) schedule to imports from non-members.
The distributed shares are based on the size
For example, the Southern African Customs
of each member country’s economy, whether
Union (SACU).
they are an Asian or Non-Asian Member.
Common Market (CM)
Objective:
CM is a customs union in which member
• To invest in sustainable infrastructure as
countries’ movement of factors of production
well as the other productive sectors in Asia
is largely free.
and beyond.
For example, BENELUX (Belgium-Netherland-
• To promote regional cooperation, and
Luxemburg).
partnership in addressing development
Economic Union (EU)
challenges.
A single market in which member countries’
• To encourage private investment in projects,
macroeconomic, and exchange rate policies are
enterprises and activities contributing to
coordinated is known as an economic union.
economic development in the region.
For example, European Union (EU).
• The Asian Infrastructure Investment Bank
(AIIB) investments in India with total in- Other Agreement
country financing stand at USD2.9 billion. Comprehensive Economic Co-operation
Regional Trade Agreement (RTA) Agreement (CECA)/Comprehensive Economic
Partnership Agreement (CEPA)
A regional trade agreement (RTA) is a pact
between two or more countries that specifies These are bilateral agreements to promote
trade rules that apply to all parties. trade cooperation among member countries.

These include liberalisation of trade policy, • Regional trade agreements are more
investment norms, movement of labour etc. adaptable, and their provisions are
Only “tariff reduction/limitation on listed/all favourable to both parties.
items in a progressive manner on listed/all • Increased Foreign Direct Investment (FDI)
items excluding the negative list and tariff-rate investment adds capital to expand local
quota (TRQ) items” are included in CECA. industries and boost domestic businesses.
CEPA also covers trade in services, investment, Mega Regional Trade Agreement
and other aspects of economic cooperation. Mega-regionals are deep integration
Advantages of RTA relationships between states or regions that
• Lowered or eliminated tariffs. account for a significant percentage of global
• Trade promotion leads to better resource commerce and FDI.
allocation.
Fig. 15.5: TTIP and TPP Members
In addition to improving economic ties, The CPTPP, which contains most of the TPP’s
the agreements aim to increase regulatory terms and took effect on December 30, 2018,
compatibility, and provide a rules-based was negotiated by the prevailing countries.
framework for resolving discrepancies in Among the 11 countries are Australia, Brunei,
investment and business climates. Canada, Chile, Japan, Malaysia, Mexico, New
The Trans-Pacific Partnership (TPP), and the Zealand, Peru, Singapore, and Vietnam.
Transatlantic Trade and Investment Partnership The TPP aims to accomplish significant
(TTIP) are the two most important mega- liberalisation of both commodities and services, as
regional trade accords (TTIP). well as comprehensive coverage of services trade,
Trans-Pacific Partnership (TPP) investment, government procurement, non-tariff
The Trans-Pacific Partnership (TPP) is a measures, and a variety of regulatory issues.
proposed free trade pact between 11 Pacific Transatlantic Trade and Investment
Rim economies. Partnership (TTIP)
The United States was included initially, but it The TTIP discussions, which began in June
withdrew from TPP in January 2017. 2013, aim to create a far-reaching trade pact

between the United States, and the European involving Brunei, Cambodia, Indonesia, Laos,
Union. Malaysia, Myanmar, the Philippines, Singapore,
The purpose was to eliminate trade obstacles, Thailand, and Vietnam, as well as five ASEAN
align legislation and standards regulating FTA partners: Australia, China, Japan, New
commodities, services, investment, and public Zealand, and South Korea.
procurement markets, and maybe harmonise The RCEP discussions formally began at the
them. ASEAN Summit in Cambodia in November 2012.
Regional Comprehensive Economic Partnership Nearly half of the world’s population, a quarter of
(RCEP) global exports, and nearly a third of global GDP is
The Regional Comprehensive Economic concentrated in these countries (the value of all
Partnership (RCEP) is a free trade agreement goods and services produced in a year).
Fig. 15.6: RCEP Members
India, which is also ASEAN’s FTA partner, opted which has already expressed concerns about
out of RCEP in November 2019. increased competition from neighbouring
India and RCEP nations with cheaper and more efficient
There is concern that some indigenous Indian methods, is concerned that the agreement will
industries will be harmed by cheaper rivals from have a negative impact.
other RCEP countries. Fears have been made Issue of Dairy Products India is the largest
that China’s lower-cost goods will “flood” India. producer and consumer of milk, and milk
Dairy and steel industries, for example, have products in the world. Various dairy products
asked for protection. The textile industry, from Australia and New Zealand would have

been dumped into the Indian markets causing allowed India to raise taxes on products. Other
massive losses to the Indian farmers, and members of the RCEP, however, were opposed
producers. India would have had to cut duties to the proposal.
by almost 86% on dairy products from these Way forward
nations. Many experts, including Shri Rajamohan, believe
Trade Deficit Many of the free trade agree- that the RCEP can be a stepping stone to
ments signed between India and the ASEAN, India’s Act East policy, but at a time of rising
South Korea, and Japan have been to the protectionism and the China-US trade war,
disadvantage of India. The nation has run huge opening our market to China (through the RCEP)
amounts of trade deficits with these nations. could be disastrous, given the structural issues in
With respect to China, India has over USD 69 the Indian market. As a result, before concluding
Billion (2021) in the trade deficit, and China the RCEP negotiations, India must focus on fixing
refuses to address these concerns. structural concerns in the home market.
Non-acceptance of Auto-trigger mechanism: To prepare the economy for international
India had been looking for an auto-trigger competition, India needs to work on a variety
mechanism to deal with an impending rise of reforms and policies. This can be done by
in imports. If imports hit a certain threshold, Reforming labor laws, Easing land acquisition,
the auto-trigger mechanism would have Bridging infrastructure deficit etc.

16 Agriculture and Food Managements
The Situation of Agriculture in India Animal Rearing

Agriculture is extremely important in India’s Animal rearing consists of rearing cows,
economy. Agricultural and allied sector buffaloes, goats, camels, pigs, ships, etc.,
activities employ 54.6 per cent of the country’s besides directly supporting the national income
total workers (Census 2011) and generated 19.9 and the socio-economic development of the
per cent of GDP in 2020-21. (at current prices). country.
The country’s entire geographical area is Some of the major significance: It is more
328.7 million hectares, according to Land Use inclusive in nature, improves family income and
Statistics 2014-15, with 140.1 million hectares produces gainful employment in the rural area,
of reported net sown area and 198.4 million especially supports the small and marginal
hectares of the gross cultivated area at a farmers, landless labourers and women and
cropping rate of 142 per cent. The overall delivers cheap nutritional food etc.
geographical area covered by net sown area is At present pricing, the cattle sector contributes
43 per cent of the total geographical area. Net close to 25.6 per cent of the total value of
irrigated land covers 68.4 million hectares. output in the agricultural, fisheries, and
The country’s total food grain output is forestry sectors.
predicted to be 316.06 million tonnes as 20th Livestock Census Report (2019)
per the Second Advance Estimates of The entire Livestock population is around
production of major crops for 2021-22, which is 535.78 million in the country indicating a growth
1.71 per cent higher than 310.74 million tonnes of about 4.6% over the Livestock Census-2012.
in 2020-21. Overall Bovine population (Cattle, Buffalo,
Rice production is expected to reach a new Yak and Mithun) has displayed an increase of
high of 127.93 million tonnes in 2021-22, which around 1%.
is 2.86 per cent higher than last year’s output The livestock sector has expanded at a
of 124. 37 million tonnes. compound annual growth rate of around
According to 2nd Advance Estimates Wheat 7.9% during the last five years. The Indian
production is estimated to reach a new high Government has launched a new Central
of 111.32 for 2021-22 million tonnes, which is Sector Scheme “National Animal Disease
1.58 per cent higher than 109.59 million tonnes Control Programme (NADCP) for control of
from the previous year (2020-21). Foot & Mouth Disease (FMD) and Brucellosis”.
Total oilseed output in the country is estimated This program envisages complete control of
to reach 37.15 million tonnes in 2021-22, up FMD by 2025 with vaccination and its eventual
from 35.95 million tonnes in 2020-21. eradication by 2030.
Years 2014-15 2015-16 2016-17 2017-18 2018- 2019-

19** 20***
GVA in Agriculture and Allied
20,93,612 22,27,533 24,96,358 26,70,147 27,75,852 30,47,187
Sectors (Rs. in Crore)
Percent to total GVA 18.2% 17.7% 17.9% 17.2% 16.1% 16.5%
Table 16.1 Share of Agriculture in GVA
Agriculture and Food Managements 353

Crops Area (Lakh hectare) Production (Million Yield (kg/hectare)

Tonnes)
2016-17 2017-18 2018- 2016-17 2017- 2018- 2016-17 2017-18 2018-

19* 18* 19* 19*
Rice 439.9 437.7 437.9 109.7 112.8 116.4 2494 2576 2659
Wheat 307.9 296.5 291.4 98.5 99.9 102.2 3200 3368 3507
Nutri/Coarse
250.1 242.9 219.8 43.8 47.0 42.9 1750 1934 1954
cereals
Pulses 294.5 298.1 290.3 23.1 25.4 23.4 786 853 806
Food-grains 1292.3 1275.2 1239.4 275.1 285.0 284.9 2129 2235 2299
Oilseeds 261.8 245.1 255.0 31.3 31.5 32.3 1195 1284 1265
Sugarcane 44.4 47.4 51.1 306.1 379.9 400.2 69001 80198 78248
Cotton 108.3 125.9 126.6 32.6 32.8 28.7 512 443 386
Jute & Mesta 7.6 7.4 7.3 10.9 10.0 9.8 2585 2435 2403
Table 16.2: Agriculture Production & Yield
Table 16.3: Animal Rearing in India
354
Agriculture and Food Managements
Milk production: According to the provisional data for budget

India continues to be the world’s biggest 2020-21, the per capita availability of milk
producer of milk, with 209.96 million tonnes reached 427 grammes per day.
produced in 2020-21.
Q. India needs to strengthen measures to promote the pink revolution in the food industry for
better nutrition and health. Critically elucidate the statement. (200 Words, 10 Marks)
• In the intro try to write about the Pink revolution,
• In Body,
⚪ Discuss measures needed to promote the pink revolution in the food industry for better
nutrition and health. (write negative and positives both).
• Try to conclude your answer as per the context of the question’s demand.
Answer:
The pink revolution denotes the technological changes in the meat and poultry processing
sector. This pink revolution is aimed to give a boost to agriculture allied activities such as
promoting poultry and meat which will give a boost to the food processing industry. But to
promote it India needs to take measures.
Measures needed:
Breeding: Quality breeding is very essential for promoting the qualitative food processing
industry. This will not only help in the promotion of but can enhance the nutritional value of
meat and poultry.
Huge Population of Animals: India has one of the largest numbers of animals which can be
used for processing meat and exporting it. This will be a very good opportunity to generate
employment if modernised with modern technologies and related investments in this sector.
Just need to make sure this animal wealth can be used from the food processing industry’s
point of view.
Cold Storage: Modern means of storage facilities which can keep intact the quality and freshness
of meat, is the need of the hour. Investment and creation of cold storage chains will give a boost
to this sector.
Quality Assurance: Quality assurance of processed meat and creating testing labs is another
issue that needs to be resolved. When it comes to the export of these processed meat products
India needs to invest much more in this area.
The pink revolution and its modernisation can be used for improving nutritional value and for
the growth of a healthy population.
Nutrition: Meat provides more protein per serving. It can be useful to fight malnutrition in India.
It can even potentially diversify dietary habits.
Micronutrients: Meat consist of some of the essential micronutrients like phosphorus, potassium,
and selenium
Increased Consumption: Currently in India, meat consumption is around 6 grams/ day which
may increase to 50grams/day in the coming decade.
Economic Activities: If this sector is grown well this will generate a huge number of employment

and entrepreneurship in India, especially in rural India which can revolutionise the agrarian
economy.
However, even after looking at the potential of this sector, there are many challenges which
potentially become a roadblock to the growth of this sector.
Challenges are:
India has the largest livestock population in the world, but its share is about 2% of the global
market.
There is a constant difficulty in standardising the quality and safety aspects of meat and poultry.
Meat testing facilities are very limited.
Just like any other food product, it faces shortage, but waste generation is very high due to its
perishable nature.
Infrastructure facilities for modern slaughterhouses need special focus.
The high use of antibiotics in poultry is a serious concern for public healt,h and another issue
is the unhygienic conditions in which these animals are kept.
Creating standard policies for promotions of meat and export of the same. Currently, India lacks
in this, and different stakeholders of this sector have been demanding a separate policy.
Therefore, promotion and increasing technologies for food processing industries with the
promotion of the pink revolution. Pink revolution and its advancement have the potential to
improve the life standard of the Indian population by creating wealth and health or its dream
can come true “health is wealth”.
Q. Livestock rearing has a big potential for providing non-farm employment and income in rural
areas. Discuss suggesting suitable measures to promote this sector in India. (200 Words, 12.5
Marks)
• In the Introduction, write about livestock and the 20th livestock census.
• In Body
⚪ Discuss the role of livestock in providing non-farm employment and income in rural areas.
⚪ In the second part, discuss suitable measures to promote the livestock sector.
• In conclusion, write suggestions and underline their importance.
Answer:
The term “LIVESTOCK” is used in a broad sense to cover all domestic animals reared mainly for
economic benefits. Domestic animals included are large and small quadrupeds, poultry, insects
(bees) and larvae of insects (silkworms).
Indian Scenario of Livestock:
Livestock Census: As per the 20th livestock population, the total livestock population in the
country is 535.82 million which includes:
The total Bovine population (Buffalo, Cattle, Mithun, and Yak) is around 302.82 million, and the
total number of cattle is 192.52 million.
Female cattle are 145.12 million, etc this rich population of India’s livestock wealth has been the
356
strength of the rural economy.

India has vast livestock resources. India has 56.7% of the world’s buffaloes, 12.5% cattle, 2.4%
camel (10th in camel population in the world) and 3.1% poultry (2nd largest poultry market in
the world).
Economic Significance: The livestock sector contributes 4.11% of GDP and 25.6% of total
Agriculture GDP. The rapid growth of this sector can lead to more egalitarian and inclusive
growth. This is because those engaged in it are mostly small landholders and landless farmers.
Role of livestock in providing non-farm employment and income in rural areas:
Employment: In rural India livestock rearing is traditional work and it provides a huge level of
employment to unskilled and semi or illiterate people in rural areas. It provides employment
to about 8.8 % of the population in India. The landless and fewer land people depend upon
livestock for utilizing their labour during the lean agricultural season.
Income: Livestock is a source of subsidiary income for many families in India especially the
resource-poor who maintain few heads of animals. Cows and buffaloes provide regular income
to the livestock farmers through the sale of milk.
Source of Income During an Emergency: Animals like sheep and goats serve as sources of
income during emergencies to meet exigencies like marriages, treatment of sick persons,
children’s education, repair of houses etc. The animals also serve as moving banks and assets
which provide economic security to the owners.
Source of Income During Emergency: Livestock is the best insurance against drought, famine
and other natural calamities. The majority of the livestock population is concentrated in the
marginal and small size of holdings. Further, agricultural productions get valuable organic
manure provided by the livestock.
Social security: The animals offer social security to the owners in terms of their status in society.
Animal stocks act as social security in old age, during old age time animal stock provides food and
income source to fulfil old age needs.
Food: The livestock products such as milk, meat and eggs are an important source of animal
protein to the members of the livestock owners. The per capita availability of milk is around 375
g/day, and eggs are 74/annum during 2017-18.
Gender equity: Animal husbandry promotes gender equality. More than 3/4th of the labour demand
in livestock production is met by women.
The share of women’s employment in the livestock sector is around 90% in Punjab and Haryana
where dairying is a prominent activity.
To achieve actual potential and increase the income of farmers and rural populations, the Government
of India has to take suitable measures for the livestock sector of the country.
Measures:
Research and Development: Government shall focus on R&D in the livestock sector to increase
livestock productivity to provide more benefits to small & marginal farmers. It will also help
increase entrepreneurship in the agrarian economy of India.
Marketing: Marketing is very essential to increase the export and demand of Indian livestock
products inside and outside the country. Trade Policies like marketing have to be more effective
for the promotion of various livestock products like eggs, fish, milk etc. and providing sufficient
prices to farmers by reducing the influence of middlemen.
Promoting Indigenous Breeds: Our indigenous breed of cattle needs to be promoted because most

foreign breeds like cattle are not suitable for our climate and even provide low quality milk. There
are some exceptions like Jersey cows, but the overall introduction of foreign breeds has not been
very successful. Therefore, indigenous breeds will help to achieve various objectives in one go.
Sufficient Resources: Providing sufficient fodder and drinking water is the need of the hour
to increase the productivity of livestock rearing in India, in the rain-shadow region. Especially
during drought-like situations livestock are left at the mercy of God. These distressed leaving
of animal livestock wealth need to be taken care of during tough times.
Training: Necessary training and subsidies shall be provided to farmers to adopt livestock rearing
as an alternate source of income.
Skill development, like scientific management of weeds, intercropping which can provide
nutritious fodder, increasing the productivity of animals etc., in areas of animal rearing will give
an advantage over the industry with improved supply chains, productivity etc.
Thus, it is high time to give importance to and encourage the livestock industry in the country
on a scientific basis. It has the potential to bring our millions of populations out of poverty and
increase the income of rural households by many folds. If this livestock industry takes its actual
potential, it will bring multiplier effects to the Indian economy.
Cropping Seasons of India Note: The terms ‘Kharif’ and ‘rabi’ come from
The farming seasons in India are described in the Arabic language, where Kharif refers to the
a variety of ways. There are three major crop autumn season and rabi to the spring season.
seasons in India. Land Reforms in India
Kharif season: It is mainly grown during the As can be seen in the next two phases, India’s
monsoon season and harvested during the official strategy and emphasis on land reforms
onset of monsoon. The main crops of this have altered throughout time in response to
season are rice, maize, jawar, bajra, cotton, new issues.
sesamum, groundnut, etc. Need For Land Reforms In India
Rabi season: It starts with the onset of winter Historical Background
and is harvested in the summers. The main The act of transfer of land from the wealthy
crops of this season are wheat, barley, gram, to the poor is known as land reform. It
and oilseeds such as linseed, rapeseed, etc. encompasses land ownership, operation,
Zaid season: It refers to summer crops, and leasing, sales, and inheritance in a broader
mainly includes fruits and vegetables. Recently, sense (indeed, the redistribution of the land
some pulses have also been grown during this itself requires legal changes).
season.
Table 16.4: Cropping Seasons and Major Crops Cultivated
358
There are compelling economic and political of textual and spatial data, as well as map
reasons for land reform in an agricultural digitisation.
economy like India, where land is limited and Survey/re-survey, and updating of all survey and
unequally distributed, and a huge portion of settlement records, including the development
the rural populace lives in poverty. It was, of original cadastral records (records of area,
unsurprisingly, at the head of the policy agenda ownership, and value of the property) as needed.
at the time of independence. India enacted a Registration computerisation and integration
slew of land reform measures in the decades with the land records management system; and
that followed independence.
Capacity building and development of the
Legal Framework For Land Reform fundamental Geospatial Information System
India passed a considerable body of land (GIS).
reform legislation in the decades following The NLRMP (now DILRMP) plans to transition
independence. Land and tenancy reforms were from the current system of presumptive titles to
adopted and implemented by state governments conclusive, state-guaranteed titles in the future.
under the 1949 Constitution. As a result, there
The conclusive title system is based on four
were a lot of variances in how these reforms
basic principles:
were implemented between states.
A land records single-window system that will
The most obvious reason in favour of land reform allow for the preservation and updating of
is equity. From this point of view, the case for textual records, maps, survey and settlement
ensuring that everyone in a land-scarce country operations, and immovable property registration.
with a large rural population has access to a
The cadastral records contain all of the
minimum amount of land is persuasive.
important and accurate information about the
Measures Undertaken For Land Reforms property titles.
• Abolition of intermediaries between the The title record is an accurate representation
State and tenants. of the ownership status; mutation occurs
• Tenancy reforms that provide security to automatically after registration, and there is no
tenants rationalisation and regulation of need to consult previous records.
rent, and conferment of ownership rights Title insurance is a type of insurance in which
on tenants the government guarantees the title’s validity
• Fixation of ceiling on landholdings and compensates the title holder for losses
Consolidation of holdings caused by faults in the title.
Digital India Land Records Modernization Phase-1
Programme (DILRMP) This phase began immediately after
The National Land Records Modernization Independence. Until they were industrialised,
Program (NLRMP) has been renamed the all economies were agrarian; the only difference
Digital India Land Records Modernization was the time span. The first thing industrialised
Program (DILRMP), and it is now a part of the countries did after forming political regimes
Digital India project. In April 2016, the scheme was to accomplish agrarian reforms in a time-
was renamed a Central Sector Scheme. With bound manner. The land continues to be the
this modification, the scheme will now be primary source of income for the large majority
implemented by the federal government, with of people in an agricultural economy, successful
the federal government providing 100 per cent agrarian reforms benefited the greatest number
of the grants. of people, boosting their economic condition.
The following are the primary components of At the time of independence, India had an
NLRMP/DILRMP: inequitable agrarian system and a traditional
All existing land records, including mutations agrarian economy. Land reforms would be a
(or transfers), will be computerised Integration key component of independent India, and the

Indian National Congress pledged to implement Tenure stability, so a sharecropper can be certain
them as part of the agrarian reforms of 1935. of his future earnings and financial security.
The inherited agrarian framework will be Reorganisation of Agriculture: This stage
abolished. The three objectives of India’s land contained plenty of linked and rational provisions
reform, which were similar to those pursued aimed at implementing efficient agrarian reforms.
by other economies in the past, were to With a few exceptions, like West Bengal,
address organisational inconsistencies that Kerala, and a portion of Andhra Pradesh, land
hindered agriculture development, such as the redistribution among the landless poor people
magnitude of agricultural land, landholdings, following the passage of timely ceiling laws
land inherited wealth, tenancy initiatives, the failed miserably.
elimination of middlemen, the introduction
Cooperative farming, which had a strong
of innovative organizational characteristics to
socioeconomic moral foundation, was only
agriculture, and so on.
adopted by large farmers to defend their fields
Addressing India’s social inequities was another from severe ceiling rules.
purpose of the country’s land reforms. Land
Reasons for the Failure of Land Reform
ownership disparities had a significant impact
on the economy, but they were also intricately According to most experts, India’s overall land
related to India’s caste system and the social reform initiative has been a colossal failure.
respect and status afforded to people in general. India’s land reforms are largely recognised
as the world’s most serious social crisis. The
The agriculture system, which had inequitable
causes that contributed to India’s land reforms’
ownership of the commodity, i.e., land to gain
failure are listed below.
money, was inherited by more than 80% of the
population. Based on reasonable ideas and a Unlike other economies that have successfully
public benefit perspective, the government implemented land reform programmes, land in
determined to restructure land ownership in India is regarded as a sign of social prestige,
the economy. status, and identity, rather than merely an
Land reforms drew a lot of social and political economic asset for earning cash.
attention because they attempted to destabilise A lack of political will to carry out land reforms
the country’s centuries-old agricultural and assure the success of the plan.
framework. In India, the government acquiring Corruption in public life, political dishonesty,
land and allotting it to the landless population and leadership failure beset India’s democratic
has become such a contentious issue that land system.
reform has been given a bad name. Discouraging Achievements of Land
The third goal of India’s land reforms was to Reforms:
increase agricultural productivity in order to Tenancy rights have been improved as a result
address the interconnected problems of poverty, of tenancy adjustments, although only in
hunger, and food insecurity, which did not receive 4% of the country’s operational regions
enough socio-political attention at the time. (14.4 million hectares of the operated area
To achieve the land reform goals, the by 11 million tenants by 1992).
government chose these basic measures, each
Land ownership rights were redistributed,
with multiple internal sub-steps:
however just 2% of the entire operating
Abolition of Intermediaries: As a result of this area of the country was affected (less
action, the oppressive land tenure regimes of than 2 million hectares among the 4.76
the Zamindari, Mahalwari, and Ryotwari were million people by 1992).
all abolished.
Collectively, land reforms may help just 6% of
Tenancy Reforms: Three interconnected the nation’s operated land, with modest
measures safeguarding land tenants were socio-economic benefits.
affected as part of this broader step.
360
Phase 2 maximum potential—the country needs to

Economic reforms may be traced all the way shift the excess labour force from agriculture
back to the second wave of land reforms. Land to industry seamlessly and easily.
acquisition and leasing, food-related problems, Establishing a logical equation with
and World Trade Organization agricultural laws “environmental issue” in order to make the
were among the new and growing realities development process sustainable is the issue
exposed by economic developments. We see a of land acquisition.
shift in the Indian government’s attitude toward
land reforms (Economic Survey 2012–13), with Land Acquisition in India
a clear three-step plan emerging: Right to fair compensation and transparency
Mapping land carefully and assigning conclusive in Land Acquisition Rehabilitation and
title. Devising a fair but speedy process of land Resettlement Act, 2013
acquisition, and putting in place a transparent The Land Acquisition Act, 2013 (also
and effective land leasing policy. Finer points of known as the Right to Fair Compensation
this phase can be summed up in the following and Transparency in Land Acquisition,
way: Rehabilitation, and Resettlement Act, 2013) is
Considering farmer opposition to land an Indian Parliament Act that regulates the
acquisition experienced in previous years land acquisition and establishes the procedure
in several states, leasing seemed to be a and rules for compensating, rehabilitating, and
preferable option. If the country needs to resettling those who are impacted.
encourage private sector investment, land The Act contains provisions to ensure that
leasing appears to be a better alternative than people whose land has been taken away
land buying (domestic or foreign). receive just compensation, to begin the
In India, major corporate farming has not taken process of obtaining land for the construction
place, notably in the food grain production of buildings, industrial plants, and other public
areas, which India requires for food security works projects, and to ensure that those who
and to compete in the global grain market and have been impacted are treated fairly.
the agri-industry in general. The Act outlines land purchase restrictions
This is even more vital now that a huge portion as part of India’s largest industrialisation
of the population has been granted the Right programme, which is being led by a public-
to Food. private partnership. The Land Acquisition Act
Giving ‘lease’ priority will solve a number of of 1894, a nearly 120-year-old law issued during
issues, It will maintain existing farmers in British control, was repealed by the Act.
control of their land and will prevent major The Aims and the Objectives of the Act:
landlessness and unemployment among Provide just and equitable recompense to
farmers. those whose land has been acquired or
Farmers will have a stable source of income will be affected by such acquisition. Make
(in the meanwhile, they may be given skills suitable measures for the rehabilitation and
and better employment opportunities in the resettlement of such impacted people.
industry), and land will be more readily available In consultation with institutions of local self-
for public and private usage. government and Gram Sabhas established under
The recent emphasis on promoting the the Indian Constitution, ensure a humanistic,
“manufacturing sector” and “smart cities” is collaborative, educated, and fair system for
heavily reliant on a smoother and faster land land acquisition for industrial development,
acquisition process. The agriculture sector advancement of vital basic infrastructures,
can emerge as a remunerative profession if and urbanisation with the least disruption to
the industrial sector is not expanded to its landowners and other affected families.

Ensure that the cumulative result of As per the court, payment of compensation
compulsory acquisition is that affected persons does not only entail that money must be
become partners in development, resulting handed to landowners or placed in the court
in an improvement in their post-acquisition but also that money deposited in a government
social and economic standing, as well as for treasury will be considered.
items related to or incidental to compulsory This means that even if the compensation sum
acquisition. was deposited with the government, the 2013
Court’s decision: statute will not apply to new acquisitions.
In March 2019, the Supreme Court created In other words, if possession is taken but no
a Constitution Bench to review the validity compensation is provided, there is no lapse.
of two- or three-judge bench decisions on Supreme Court Order:
land purchases that had expired due to
When Parliament adopted the 2013 statute,
compensation difficulties.
which replaced the Land Acquisition Act of
The disagreement emerged on February 8,
1894, the Supreme Court’s ruling cleared
2018, when a three-judge bench in Indore
ongoing land acquisition issues. The court
Development Authority v/s Shailendra (Dead)
ruled that landowners who refused to accept
overturned a 2014 judgement by another three-
compensation under the 1984 statute cannot
judge bench in Pune Municipal Corporation V/s.
profit from the Land Acquisition Act of 2013’s
Harakchand Misirmal Solanki (2014).
presumed lapse of acquisition.
In Pune Municipal Corporation, the Court
The court also held that landowners who
concluded that land acquisition might be
refused to acknowledge compensation or
declared illegal under section 24(2) of the
demanded higher compensation during this
Land Acquisition Act of 2013 if compensation
time period could not claim that payment was
is not placed in the landowners’ bank accounts
not provided and that the property acquisition
or with the court. Money in the government’s
process had failed.
coffers would not be treated as a payment to a
landowner, it was stated emphatically. A conflict in two prior judgements on the Land
However, in a 2:1 judgment in Indore Acquisition Act of 2013 led to this ruling by the
Development Authority, the Court held that five-judge constitution bench. When the new
land acquisitions may not be delayed because provisions went into effect, section 24(2) of the
a landowner refused to take the terms of the act dealt with pending land acquisition cases.
compensation within five years. It was decided Impact of Decision
that if compensation is offered but the individual This decision will bring clarity to the provisions
refuses to accept it, the person is released of 24 (2). This section of the article was the
from his or her duties under section 31(1) of the most cryptic because the amendment of 9
Land Acquisition Act of 1894. Furthermore, the states in 11 states was on this subject.
majority of the judges - Justices Mishra and AK According to the decision, only the offer of
Goel - ruled that the prior 2014 Pune Municipal land acquisition was considered paid, which
Corporation decision was ‘per incuriam,’ while criticises the right of farmers to protest.
Justice Shantanagoudar dissented.
This decision will definitely increase
It has concluded that new land acquisition developmental projects but it will also
proceedings will be necessary only if: Possession
promote authorised governance. Also, when
of the land has not occurred, and compensation
the compensation will be actually paid, the
to landowners has not been provided.
time has not been determined.
362
Q. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013 has come into effect on 1st January 2014. What are the key issues which
would get addressed with the Act in place? What implications would it have on industrialization
and agriculture in India? (200 Words, 12.5 Marks)
• In the intro try to write about the land acquisition Act.
• In Body
⚪ Discuss how this act will address key issues.
⚪ In the second part of the answer, you need to write the implications of the new act on
agriculture and industries.
• Try to conclude your answer with a contextual conclusion.
Answer: In 2013 the government of India introduced a new act to reform the process of land
acquisition and rehabilitation. Land acquisition and rehabilitation of people are getting more
and more controversial with regard to infrastructure projects. In fact, it has emerged as the
key bottleneck in the Infrastructural development of the country. This act seeks to do away
with lacunas in previous acts and expedite the process of acquisition and rehabilitation. Major
provisions under the act are:
Consent: No land can be acquired in Scheduled Areas without the consent of the Gram Sabhas,
and no one shall be dispossessed until and unless all payments are made and alternative sites
for the resettlement and rehabilitation have been prepared.
No consent is required for government projects. Consent of 70% of landowners for Public-
Private partnership projects.
Consent of 80% of landowners is required for private projects.
Social Impact Assessment: SIA is mandatory for all projects except in cases of urgency or for
irrigation projects where an Environmental Impact Assessment is required.
Rehabilitation: Includes employment to one member of an affected family.
Compensation: Compensation will be 4 times in rural and 2 times in urban areas. The market
value of the land will be set higher than the minimum land value.
Irrigated and Multi Cropped Land: In case when state government acquires multi cropped
irrigated land, it can acquire land beyond a certain limit.
Safeguards: State Government needs to set up a dispute settlement chairman, of the rank
of District Judge. The act also made provision for the establishment of the Land Acquisition
Rehabilitation and Resettlement Authority for speedy settlement of disputes.
Return of Land: If the project does not start in 5 years, then the land has to be transferred back
to the original owner of the land or land bank.
Implications of the act on industrialisation and agriculture:
Dispute Resolution: This act would resolve conflicts effectively between the community and
industrialists on compensation value. This would remove the initial bottleneck of the project.
Negative Impact: Large scale agriculture land acquisition will have a negative impact on
agricultural development.
Compulsory land acquisition is inevitably “prone to litigation over compensation which was both
inefficient and socially regressive in its effects”.
A Centre for Policy Research (CPR) report, related to land acquisition, earmarks the problem

that the collector continues to apply the circle rates in defiance of the court orders (of using
market rates).
As there is the absence of a clause of only non-agricultural land will be taken for development.
The absence of a clear policy for returning unused land will not only hamper agricultural
development but also may negatively impact the industrialisation of the country.
The improper policy of returning unused land will create a trust deficit among farmers and
result in opposition to land acquisition for many projects. For Example, the Bullet train project,
Navi Mumbai airport land acquisition issue etc.
• The provision for 80% consent for private industries will make industrialisation of the
country a tougher task. It will defer private investors and corporations to invest in India.
In this scenario Make In India, ATMA NIRBHAR BHARAT, and other flagship missions of the
Government Of India will face a bleak future.
Acquiring large hectares of land: It will generate or create issues when it comes to land
acquisition for industries. It may also create bureaucratic hurdles.
Delay in the project: As the act says Social Impact Assessment (SIA) for all the projects, except
some of the projects, will become a big hurdle for land acquisition and starting the actual project.
This will again open Pandora’s box but not reduce issues related to land acquisition in India.
Thus, it is imperative to make a law that can give a boost to the country’s development, securing
food and developing the agrarian sector. India needs a holistic and comprehensive approach to
land acquisition that not only deals with issues in a quick manner but also plays a key role in
making India a $5 trillion dollar economy by 2025.
Analysis of Land Reform measures & eviction of the impoverished from their land.
Suggestions for the future Despite the fact that land ownership has been
Abolition of Intermediaries: abolished, absentee landlordism has survived.
During the 1950-55 abolition of zamindari and similar Rather than the true grower, the statute
intermediary tenures, the removal of intermediate handed rights of ownership to the legal tenant,
step levels or levels of various amorphous and who was himself a middleman with a network
parasitic groups in the land between the State of sub-tenants under him.
and the actual cultivators involved primarily the All this happened because:
ejection of intermediary levels or layers of various The earlier legislation & permitted the
amorphous and parasitic groups in the land intermediaries to retain their home farms
between the State and the actual cultivators. No limit was put on the area of land they could
However, removing intermediaries necessitated retain
compensating landowners.
The term ‘personal cultivation’ was ill-defined,
As a result of this policy, over 2.5 crore farmers and
have had direct contact with the government. This
No protection was given to sharecroppers and
allowed for the distribution of 61 lakh hectares
other tenants-at-will.
of land to landless farmers. The government
Without a doubt, the abolition of the zamindari
now owns a lot of privately owned woods and
has paved the ground for a significant shift in
wasteland. Even when middlemen privileges
the power balance. However, the “land to the
were removed, the poor peasantry was exploited
tiller” goal has yet to be accomplished.
in a number of ways. It resulted in the mass
364
Q. Establish the relationship between land reform, agriculture productivity, and elimination
of poverty in the Indian Economy. Discuss the difficulty in designing and implementing
agriculture-friendly land reforms in India. (200 Words, 10 Marks)
• In the Introduction try to write general information about land reforms.
• In Body,
⚪ In the first part of the answer, you need to establish a relationship between land reforms,
poverty alleviation, and agricultural development.
⚪ The second part discusses the difficulties of designing and implementing agricultural
land reforms.
• Try to conclude the answer by writing about the need for reforms and issues by taking
examples of recent three farm laws.
Answer:
The notion of land reforms was taken from communist nations to balance the structure of
landholdings. It means the management of land distribution through various institutional
measures and policies. Large farmers possess large tracts of land, and this increases the gap
between the rich and the poor.
As the First Five-Year Plan stated that land reforms are fundamental issues it has a political
significance which can be understood through what former Prime Minister Indira Gandhi said,
As land reforms are the most crucial test for our political system which must be passed.
Objectives of Land Reforms
Land reforms have played an important in Indian history. Several movements were organized
around it. Various key players like zamindars, the role of oppressing intermediaries, moneylenders,
etc, tried to take out every advantage and left their workers without any incentive.
Majorly, there were two main aims of these land reforms. One of them is to increase the
productivity of agricultural produce and the other is to socially uplift the vulnerable section of
the society. Apart from these two basic aims, there are many others like:
To achieve egalitarian outcomes from agricultural activities
Improvement in the socio-economic status of the rural section.
To eradicate the exploitation of the downtrodden section.
More focus on productivity.
Special concentration on rural areas.
To gain balanced socio-economic growth.
With the above objectives, it can be said land reforms lead to poverty alleviation and agricultural
development. This can be understood in the following manner,
Reduced Inequality: Land is basic for all the economic activities after redistribution of land
among actual sharecroppers reduced economic inequality, and this allowed marginal sections
to grow and earn money.
Land reforms lead to the consolidation of agricultural land and lead the development of agricultural
and allied sectors. For example, after land reforms, the Green revolution became successful and
achieved many objectives, like poverty alleviation, application of modern technologies, etc.

Improved Socio-Economic Status: Land redistribution among marginal sections of the society
such as sharecroppers, tenants, etc. improved their socio-economic conditions. Once they start
earning, they start investing money in agricultural land.
Improved socioe-conomic status has not only led to the development of agriculture, but also
has improved the living standard of the previously exploited farmers.
Security of Tenure: Secured tenure of land has implementation of land reforms very difficult.
encouraged farmers to invest in agriculture and High Land Ceiling: The ceiling defined by the
apply newer technologies such as HYV seeds, state government was very high, which gave
fertilizers, pesticides, etc. some opportunities to zamindars to keep
Security of tenure had an impact on improving maximum land in their name.
their economic condition and improved Loopholes in Laws: It has been criticized that
purchasing power resulted in access to good there were many loopholes in law-related
health care facilities, education, female land reforms which vanished the aim of land
education, etc. reforms.
Inclusive Growth: Resource reallocation made Poor Awareness: Poor awareness regarding
inclusive growth. Inclusive growth has been laws and poor masses was the combination
the main agenda of the government since that failed land reforms related to laws. Masses
independence, so land reforms played a crucial are not aware of their rights which made non-
role in it. participatory implementation of the law. Non-
An inclusive growth strategy focuses on participatory implementation of law gives
participation and sharing of growth benefits opportunities to big landlords to earn more.
with everyone. It helped in eradicating poverty, The land is State Subject: Land being a State
improving sanitation and demand for the subject and legislation by the Centre creates
same, improvement in basic infrastructure at federal issues which become a real blockade
the village level, etc, leading to agricultural behind achieving objectives of land reforms.
development. Structural Issues: Structural issues such as
Land Ceiling: It made land available to everyone small land holding, and fragmentation of land
and this was the reason behind the distribution are serious issues and major challenges in
of land among marginal sections of the society. implementing law of land reforms.
Though land reforms brought some relief and Poor Land Records: In India, poor land records
development to rural India, there is still a need are one of the major obstacles to land reforms.
for second-generation land reforms. Challenges As poor land records are meant to create issues
to bringing a new era of land reforms still of litigation, which create another challenge.
remain, such as- Hence, to achieve the constitutional goal of
Lack of Political Will: Land reforms need decreasing inequality, improving the standard
stronger political will which gives much-needed of living, and also achieving sustainable
thrust for the development of the agricultural development goals it is imperative to
sector and poverty eradication. Lack of politics implement land reforms successfully. Political
was one of the reasons behind less successful and administrative will are necessary for its
land reforms. success. The recent controversies over three
Administrative Loophole: Administrative new farm laws are supposed to bring much-
loopholes are the main reason behind limited needed changes. These three laws are the best
and unachieved objectives of land reforms example of non-participative laws made by the
in the past as there is a nexus between government and unawareness among people
political masters and big zamindars that made leads to conflicts against reforms.
366
Q. Discuss the role of land reforms in agricultural development. Identify the factors that were
responsible for the success of land reforms in India. (200 Words, 12.5 Marks)
• In the Intro, try to Start your answer with writing in the context of the demand of the
question (land reform background)
• In Body,
⚪ Discuss the role of land reforms in agricultural development and identify the factors
responsible for land reforms.
• Try to conclude your answer by emphasizing the need for second-generation land reforms.
Answer:
Before independence India had a semi-feudal agrarian system and the same system was
carried forward or inherited at independence. The feature of the feudal agrarian system was
the ownership and control of land were highly concentrated in the hands of a small group of
landlords and intermediaries, whose main intention was to extract maximum rent, which was
in cash or in kind, from tenants. It was considered the major hindrance to the development of
the agricultural sector.
Land reforms in very wide concept, which includes changing laws, regulators, or customs
regarding land ownership, play a great role, in giving ownership rights to tenants, abolishment
of absentee landlordism, giving due rights or ownership of land to the actual cultivators etc.
Role of Land reform in agricultural development:
Abolition of Intermediaries/Zamindari, Rent regulation and Security of tenure: These all
provided in reshaping ownership of land. At the same time, it also caused to attract private
investments in Agriculture, resulting in Agriculture growth.
Land Consolidation: It implies consolidating together with the scattered holdings of a farmer’s
land in one place. Such was successfully implemented in Punjab, Uttar Pradesh, and Haryana.
It resulted in better productivity of land and production increase.
Expansion of Rural market: Land reforms created favourable conditions for distributing
productive assets. It increased agricultural productivity and production significantly, especially
through large public investment in the agro-infra sector.
Factors responsible for the success of land reforms:
Ideals inspired during freedom struggle: Peasant movement formed a big part of our national
struggle. National leaders having fully understood the oppressive revenue regime as the reason
for India’s poverty and famines, sought to implement Land reforms at the earliest.
Constitutional amendments and Legislative measures: Land reform acts were brought and put
under the 9th schedule to prevent from being subject to endless litigation. While enacting the
land ceiling act helped to redistribute extra land after the maximum ceiling of land one can have.
Popular movements: The Bhoodan and Sarvodaya movements were instrumental in generating
favourable public opinion among the landholders and were successful in achieving redistribution
of land.
Fundamental changes: Land reforms brought very fundamental changes in rural social structure.
It dismantled power concentration in the hands of a few rural elites and empowered backwards
castes, which were the main beneficiaries. It inspired more regions to demand land reforms.

Hence, it can be said that land reforms played a very key and significant role in agricultural
development. The development of the agriculture sector needs further or second generations
of land reforms to increase agricultural productivity.
Tenancy Reforms have been abused to the detriment of renters.

Tenancy legislations have taken three forms: Many states’ tenancy laws included a clause
Regulation of rent that allowed landowners to reclaim land for
Providing security of tenure ‘personal cultivation,’ with the intention of
protecting landowners’ interests rather than
Conferring rights of ownership for tenants.
tenants’.
Landowners should not pay more than one-
Due to a fuzzy definition of personal cultivation,
fifth to one-fourth of the entire yield of the
landowners continued to recover lands for
land. All states have implemented legislation
self-cultivation. Tenancies could also be
governing rent fixing considering this principle.
surrendered voluntarily under the law. Oral
The method land rent costs are decided, on
tenancies are still common, as are informal or
the other hand, differs greatly between states.
secret tenancies.
Furthermore, there are significant disparities in
land rents between states. As a result, all tenancies have become insecure
due to the right of resumption of land for
Even tenancy reforms haven’t been able to
self-cultivation. Finally, under some states’
keep rent under control. Because of their bad
tenancy legislation, there is no legal provision
financial situation, tenants are sometimes
for granting ownership rights. In practice,
evicted from their homes because they demand
legislation granting ownership rights to renters
fair and just rent from landowners.
is unlikely to produce positive effects because
Tenancy laws have made it clear that renters
many tenants are unable or unwilling to
can only be evicted if the landlords themselves
purchase land from landowners.
want to begin agriculture. Even if the owners
Ceiling on Landholdings
resume farming, tenancy laws require that a
minimum space be left for the tenant. The Second Plan (1956-1961) advocated
imposing agricultural holdings ceilings to
A fundamental part of land reform is giving
decrease the existing discrepancies in land
renters ownership rights over non-resumable
ownership patterns and make some land
property. By the year 2000, only about 124.2
available for distribution to landless agricultural
lakh tenants who operated less than 4% of the
labourers.
cultivated area had acquired ownership rights
or had their rights guaranteed on 63.2 lakh It was planned that the government would buy
hectares of land as a result of this approach. land above a particular value and distribute
The area under tenancy was roughly 50% on it to landless labourers and small farmers in
the eve of tenancy reforms. By the year 2000, order to meet their land demands and allow
this area had been decreased to 15% of the them to expand their economic holdings.
total operating area as a result of this work. The law establishing the land ceiling was passed
Tenancy reforms have had a little impact in two stages. ‘Landholder’ was treated as the
overall. To begin with, there have been tenancy cultivation unit in the first stage, which lasted
law infractions. In Bihar, for example, the until the end of 1972. After 1972, the name of
highest rent cap was established at 25% of this ceiling type was changed to ‘family.’ In
gross production. Due to their poor social rank, the second phase, the ceiling limitations were
tenants, on the other hand, are required to pay similarly lowered, with distinctions between
significantly more than 50%. Second, in terms irrigated land with two crops, irrigated area
of tenant-cultivator security, escape clauses with one crop, and dry land. The ceiling limits
368
have been rendered essentially obsolete by land as a result of consolidation.

exclusions for orchards, grazed property, cattle Green Revolution
ranches, religious/charitable/educational trusts, The Green Revolution (GR) began in the early
sugarcane plantations, tanks, and fisheries. 1960s with the adoption of new agricultural
The total amount of land deemed extra up till techniques, first for wheat and then, in the
the end of September 2001 was 73.67 lakh acres, following decade, for rice. It changed the entire
with the states taking over 64.95 lakh acres. old paradigm of food production by increasing
On 53.79 lakh acres of land, 54.84 lakh tenants efficiency by more than 250 per cent.
have been given. Due to a multitude of issues, By the early 1960s, the adoption of US botanist
the most major of which was litigation, around Norman Borlaug’s High Yielding Variety (HYV)
12 lakh acres of land were unable to be allotted. seeds, developed while on a British Rockefeller
The operations of the ceiling law had relatively Foundation Scholarship conducting research in
little impact on the agrarian sector. A multi-year Mexico, had become fundamental to the Green
public debate preceded the implementation Revolution.
of the ceiling law. This allowed landowners to
He claimed that his in vitro-produced wheat
tamper with land records, resulting in false
seeds enhanced productivity by more than 200
(benami) and fraudulent land partitioning among
per cent. Farmers in food-insecure countries
relatives, friends, fictitious trusts, and so on.
such as Mexico and Taiwan began using the
The reported surplus is substantially smaller seeds by 1965 after thorough testing.
than the planned surplus due to a variety
of exclusions in the ceiling limitations, as Components of the Green Revolution
well as faults and loopholes in the rules and Many inputs/components where delivered on
insufficient enforcement of the laws. schedule and in sufficient quantities during
As a result, only a few minor landowners were the Green Revolution. Here’s a quick rundown
caught in the net, whilst the vast majority of the Green Revolution:
of huge landowners or jotedars were able to The HYV Seeds
dodge it, and their land was not shared among These seeds were generally known as ‘dwarf’
the landless peasants even if it was taken seeds. Using recurrent mutations, Mr Norman
away. The most significant impediment to its Borlaug was able to create a seed that was
quick adoption is a lack of political will. higher in nutrients distributed to different
Consolidation of Landholdings parts of the wheat plant—against the leaves,
stem, and in favour of the grain.
As a result, only minor landowners were caught
in the net, while most large landowners or The plant shrank as a result, and the grain got
jotedars managed to get around it and, even heavier, resulting in a large yield. These seeds
if their land was taken away, it was not shared were non-photosynthetic, which means they
among the landless peasants. The most grew without the help of sunlight.
significant stumbling challenge to its rapid Chemical Fertilisers
deployment is a lack of political will. If the seeds acquired enough nutrients from the
As of December 2001, over 163.3 lakh acres of soil, they were supposed to increase productivity.
land, or 1/3 of the total cropped area, had been Traditional compost is poor in nutrients due to
consolidated. As a result, this area’s success its low nutritional content and the fact that it
story is a bit of a let-down. Small farmers are necessitates a greater sowing area, implying
worried that unification will benefit large farms, that it will be shared by multiple seeds.
which is one of the reasons behind the slow Irrigation
pace of land reform in this area. As a result, the For regulated crop development and optimal
prospect of eviction of renters from land is the fertiliser dilution, a controlled water supply was
greatest worry of tenants being evicted from required. It outlined two major requirements:

first, the land where such crops are grown Commercial crops like sugarcane, cotton,
must be flood-free, and second, an artificial jute, and oilseeds also achieved a significant
water source must be constructed. increase in their production, relatively later
Chemical Pesticides and Germicides than food grains. Since 1960-61 sugarcane
Because the new seeds became less adapted production has increased more than 3.5 times
to local pests, infections, and diseases than while cotton production recorded about 5
the previous indigenous kinds, pesticides times increase.
and germicides were required to achieve the Negative Impact of the Green Revolution
desired results and protect the harvest.
The Green Revolution had both beneficial and
Credit, Storage, Marketing/Distribution negative socioeconomic and environmental
In order to use the Green Revolution’s newer consequences for countries all over the world.
and more expensive inputs, farmers needed Socio-Economic Impact
simple and affordable loans. Because the
Food production increased to the point where
farmlands suitable for this new technique of
several countries became food self-sufficient
farming were area-specific, the created items
(wheat in the 1960s, rice in the 1970s), and
had to be conserved in the region before being
some even started to export food (wheat in
dispersed throughout the country (Haryana,
the 1960s, rice in the 1970s) (self-sufficiency in
Punjab, and western Uttar Pradesh were the food must not be confused with food security).
only ones in India).
However, in India, the disparity in farmer
The countries that adopted the Green Revolution income exacerbated inter-personal and inter-
were once again food insecure, and the new crop regional inequities and inequalities.
had to be distributed throughout the country,
Large farmers with ten hectares or more of land
necessitating the development of sophisticated
gained the most from the Green Revolution
marketing, distribution, and transportation
because they had the financial means to
network. All of these ancillary facilities were
purchase better seeds, fertilisers, and other
built using less expensive World Bank loans by
necessary inputs. The lack of incentives for
countries that followed the Green Revolution,
small and marginal farmers has resulted in an
with India being the biggest beneficiary.
increase in socioeconomic inequality.
Some important outcomes of the Green Flooding has negative consequences, such as
Revolution an increase in malaria cases, a shift in balanced
One of the most important impacts of the cropping patterns in favour of wheat and rice,
Green Revolution (GR) was on raising the and the marginalisation of pulses, oilseeds,
production and productivity of cereal crops, corn, and barley.
especially wheat and rice. Ecological Impact
After the implementation of the Green
The most serious negative consequence of
Revolution, total foodgrains production
the Green Revolution was on the environment.
reached 316.06 million tonnes in 2021-22
When newspapers, academics, scientists, and
from merely 82 million tonnes in 1960-61 (GOI,
environmentalists expressed their worries,
2019) thereby recording a 3.5 times increase
neither governments nor the general public
in food grains in the last seven decades.
(many alone farmers in the Green Revolution
Economic empowerment of farmers with the area, who were not educated enough to grasp
increase in production of food grains and the Green Revolution’s adverse effects) was
other agricultural commodities, incomes of persuaded.
farmers had also increased.
However, there came a time when the government
Reduced India’s dependence on other
and other government organisations began
countries for the supply of food grains and
conducting studies and surveys on ecological
other agricultural commodities.
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and environmental issues. Second Green Revolution

Degraded soil fertility: Farmers’ repeated To see the negative impact of the Green
cropping patterns, as well as overexploitation of Revolution, a new agriculture policy was
the land, a lack of a proper crop combination and launched that aims at sustainable agriculture.
crop intensity, and other factors, were to blame. It is popularly known as the ‘Second Green
Water table on the verge of collapsing: Because Revolution’ or ‘EverGreen Revolution’.
the new HYV seeds required a disproportionately The Government, from time to time, also
high amount of water for irrigation—5 tonnes launched many other kinds of programs in
of water were required to produce 1 kg of rice— furtherance of the Second Green Revolution,
they were introduced. For example, the “Bringing Green Revolution in
Environmental Degradation Eastern India” (BGREI) program in 2010-11 as a
The environment has been damaged by sub-scheme of Rashtriya Krishi Vikas Yojana.
increased pollution levels in soil, water, and The BGREI program was launched with the aim
air, inappropriate and unregulated use of of enhancing agricultural production in seven
chemical fertilisers, pesticides, and herbicides. states of Eastern India - Jharkhand, Odisha,
It is primarily owing to deforestation and West Bengal, Assam, Bihar, Chhattisgarh, and
agricultural growth in ecologically sensitive eastern Uttar Pradesh.
parts of India. Recently, the PM of India has also spoken
The Green Revolution heartlands of Punjab and about bringing the Second Green Revolution
Haryana have essentially little forest cover, with to India.
only about 3% of forest area in each, whilst UP has Almost the entire current policy of the
slightly more than 5% forest cover due to forest government can be covered under the category
clearance to put more land under cultivation. of the second Green Revolution. It aims at
Toxic level in the food chain: The level of R&D, biotechnology revolution, information
toxicity in India’s food chain has reached a technology revolution, biotechnology revolution,
stage where nothing produced in the country R&D and targeting of specific crops etc.
is fit for human consumption. In essence, Some of the important government schemes
unrestrained use of chemical pesticides and aiming toward the second Green Revolution
weedicides, as well as their industrial growth, are Pradhan Mantri Krishi Sinchayee Yojana,
had contaminated the soil, water, and air to the National Mission for Sustainable Agriculture,
point where the entire food chain had become and Paramparagat Krishi Vikas Yojana (PKVY),
a victim of high toxicity. Rashtriya Krishi Vikas Yojna and Soil Health Card.
Q. Explain various types of revolutions, that took place in Agriculture after Independence in
India. How have these revolutions helped in poverty alleviation and food security in India? (150
Words, 10 Marks)
• In the Intro, try to write about agriculture in India.
• In Body,
⚪ Discuss various types of agricultural revolution in India after independence.
⚪ Justify how these revolutions helped in poverty alleviation and food security.
• Try to conclude by relating to inclusive growth.
Answer:

India is primarily dependent on agriculture and about 60% of the population is engaged in
agricultural activities. Since poverty alleviation and food security were major targets after
independence the Government of India introduced various revolutions to achieve twin objectives,
food security and poverty alleviation.
Major Revolutions in Agriculture in India:
Green Revolutions: It was launched in 1966. It led to the tremendous production of rice and
wheat food grains. At the time of the green revolution, India was dependent on American PL-480
schemes to feed its population. This revolution led India to become a food surplus country. For
example, an increase in agricultural output from 850kg/hectare to 2281 kg/hectare. Later on,
this scheme extended to various other parts of the country.
Blue Revolution: This revolution focussed on the fisheries sector and has helped to a phenomenal
increase in both fish production and productivity from aquaculture. It also helped in increasing
the marine and inland fisheries sector. At present, the fisheries sector value is about 1 lakh
crore. This sector became a new alternative for income and source of food for the people of
India which further helped in managing food security in a good manner and poverty alleviation.
White Revolution: Operation Flood was an initiative taken by the National Dairy Development
Board. It was the world’s largest dairy development programme which made India number one
in milk production with 209.96 million tonnes annually. This helped farmers especially women
to earn money to come out of poverty and nutrition insecurity
Many other important revolutions:
Yellow Revolution Oilseed

Brown Revolution Leather / Cocoa
Golden Fiber Revolution Jute.
Golden Revolution Fruits / Honey Production
Grey Revolution Fertilizers.
Pink Revolution Onion / Prawn
Silver Revolution Poultry Production
Silver Fiber Revolution Cotton.
Red Revolution Meat Production
Table: 16.5: Important Revolutions
Role of Revolutions in Poverty Alleviation and Food Security:
New innovation: These newer innovations lifted millions of people out of poverty by generating
income and providing additional income sources for farming communities. Farm labourers and
reduced costs for consumers helped people to start saving money.
Self-sufficient: India became self-sufficient in food grain production after the green revolution. This
has made India a food surplus and India started to export food grain. This led to poverty alleviation.
Dairy sector: White revolution is most significant as India is having one of the largest Bovine,
Cattles populations making farmers and people engage in the dairy sector.
Promotion of cooperative farming: Especially, in animal rearing cooperative dairies coming up
villages and permanent and another source of income created for farmers.
Tapping Untapped potential: For example, developing inland and sea fisheries sectors.
Traditionally farmers used to practice fisheries but the scale was small. This revolution led to
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increased fish production, and food security and reduced poverty.

Though these revolutions led to making Indian food secured and reduced drastic numbers of
poor people, their extent and coverage need to be improved for further development of the
agricultural sector and give opportunities for prosperity for small and marginal farmers.
Food management crops at the start of the sowing season, based

Post India got freedom, the successive on recommendations by the Commission on
governments have made it a priority to ensure Agricultural Costs and Prices. Government
that the local market had enough food. When agencies acquire the entire quantity given by
the country joined the WTO, a new ambition the farmers at the announced minimum price
emerged to produce excess and compete with if the market price for the product falls below
the rest of the world, so that the agriculture the declared minimum price due to bumper
sector could benefit from globalisation as well. output and market surplus.
The issues of food management in the country The MSPs are fixed at an incentive level, to
are discussed in this segment. fulfil the following purposes:
Minimum Support Price (MSP) To encourage farmers to invest more in the
The Minimum Support Price (MSP) is an Indian agricultural industry.
government market regulation that safeguards To encourage farmers to use better crop
agricultural producers against a major production technology, and
reduction in farm prices by guaranteeing a To increase productivity and, as a result, farmer
price, preventing producers from having to sell revenue.
their land. MSPs are established for individual
Q. What do you mean by Minimum Support Price (MSP)? How will MSP rescue the farmers from
the low-income trap? (150 Words, 10 Marks)
• In the Intro, try to define the concept of Minimum Support Price.
• In Body,
⚪ Justify how MSP prevents farmers from the low-income trap.
⚪ Add issues around MSP in two to three small points.
• Try concluding the answer with what can be the way out in a realistic way.
Answer:
The MSP is a minimum price guarantee that acts as a safety net or insurance for farmers when
they sell a particular set of crops. These crops are procured by government agencies at a
promised price to farmers and the MSP cannot be altered in any given situation. The concept of
MSP protects the farmers in the country in situations where crop prices fall drastically.
Wheat and rice are among the top crops that are procured by the government at MSP from the
farmers. The Centre fixes MSPs for 23 farm commodities:
7 cereals (paddy, wheat, maize, bajra, jowar, ragi, and barley),
5 pulses (chana, arhar/tur, urad, moong, and masoor),
7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower, and Niger
seed),

4 commercial crops (cotton, sugarcane, copra, and raw jute).

The MSP is set by the central government before every sowing season for select crops, based
on recommendations it receives from the Commission for Agricultural Costs and Prices (CACP).
The CACP is tasked with determining the MSP, which is somewhat based on a formula derived
from the Swaminathan Committee.
MSP as Farmers’ Rescuer from Income Trap:
Fixed remuneration: MSP gives farmers fixed remuneration for their agricultural produce. Even
if there is a lower price in the market, farmers can get fixed and relatively higher prices in the
market.
Diversification of crops: As the government announces MSP for 23 crops and farmers still focus
largely on producing rice and wheat. MSP on 23 crops helps farmers to grow other food and
non-food crops.
Social security: Fixed pricing of crops saves farmers from distressed selling of their produce.
This helps farmers to get at least what they aspire for and save them from the hefty interest
rates of money lenders.
Informed decision making: The government announces MSP 23 crops before the sowing season. It
helps farmers to make informed decisions about selling their products and can get a good price.
Acts as Benchmark for Private Buyers: MSP sends a price signal for private buyers if farmers do
not get a price above MSP then farmers cannot sell this product to private buyers.
Challenges with MSP
While the government does declare the MSP twice a year, there is no law making the MSP
mandatory.
Farmers across the country have been facing problems selling their produce at the Minimum
Support Price.
Only 6 per cent of farmers in India actually succeed in selling their crops at MSP.
The politics over MSP over the years is another reason why farmers in India want better reform.
Farmers are upset with the three farm Acts because none of them mentions anything about MSP.
However, despite these issues, MSP helps farmers to avoid the income-trap in three ways
such as preventing distress sales, helping farmers to make informed decisions about
sowing and assuring farming is a profitable business activity. The need is an expansion of
MSP in terms of farmers covered and a number of crops balancing the dominance of wheat
and rice.
The Market Intervention Scheme (MIS) Procurement Prices

The MIS is analogous to the Minimum Support In 1966–67, the Indian government set a
Price (MSP), which is implemented at state ‘procurement price’ for wheat that was
governments’ request for the procurement of somewhat higher than the MSP (the purpose
perishable and horticultural items when Market being the security of food procurement for the
Prices fall. When there is a 10% increase in demand requirement of the PDS).
or a 10% fall in ruling rates over the preceding The MSP was issued prior to planting, and the
normal year, the plan is applied. The MIS plan is purchasing cost was revealed prior to harvest,
adopted based on a specific request from state/ with the purpose of motivating farmers to sell
UT governments if the states/UTs are willing to and produce more. However, the higher price
lose 50% of their revenue (or 25% in the case of was insufficient to provide farmers with a
North-Eastern states) if it is implemented. meaningful incentive.
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It would have been better if it had been Direct farm subsidies: These are the forms
discovered before sowing instead of after of subsidies that provide farmers with direct
harvesting. As a result, the government has monetary benefits in order to increase the
only declared the MSP, also known as the competitiveness of their products on global
successful procurement price, since the fiscal markets. Subsidies for agriculture, farming,
year 1968–69. and fishing account for a large number of
Issue price: developing countries’ annual budgets (the
The price at which the government allows United States and Europe). Direct farm
food grains from the FCI to be sold (the price subsidies are useful because they provide the
at which the FCI sells its food grains). The FCI farmer with the necessary purchasing power
has been losing a lot of money because of food and can significantly improve the standard of
subsidies. living of the rural poor. They also assist in the
accurate identification of beneficiaries, which
Foodgrains are purchased and delivered to FCI
helps to prevent the theft of public cash.
godowns around the country (counted in the
buffer stock). They next head to the TPDS or Issues related to Direct Subsidies:
Open Market Sale, which are the selling counters. Cash can be mismanaged by the cultivators
Foodgrains are more expensive due to and diverted to non-farm requirements.
transportation, storage, and the cost of Lack of awareness amongst the cultivators
maintaining the FCI carrier losses, among other can hamper the overall growth of agriculture.
things (the ‘economic cost of food grains’ refers Cultivators will be open to the volatile market
to the additional expenses not covered by structure and can be conned by the middle
the MSP). man in the procedure.
Issuance prices are set lower than the total Indirect farm subsidies: Farm subsidies
cost of procurement and distribution to make include things like lower loan rates, farm debt
food grains more affordable to consumers; the forgiveness, lower irrigation and electricity
gap is referred to as a “food subsidy.” costs, fertiliser, seed, and pesticide subsidies,
Buffer stock as well as expenditures in agricultural research,
To ensure that food is available at reasonable environmental aid, and farmer training. Such
costs throughout the year, India maintains a incentives are also offered to increase the
minimum inventory of food grains (only wheat competitiveness of farm products on the global
and rice). The majority of the supply from market.
here goes to the Targeted PDS (the PDS was Issues related to Indirect Subsidies:
reformed in 1997 as the Targeted PDS) and,
It can lead to crop centric cultivation with
on rare occasions, to Open Market Selling to
distorted cropping patterns.
evaluate escalating rates.
Mostly not very successful in reaching the target
In view of the increased demand for food grains
beneficiaries due to the various loopholes
to run the TPDS in recent years, as well as the
such as corruption and identification etc.
implementation of the National Food Security
Can be misused for political gains during
Act, the Buffer Stocking guidelines (from 2005)
elections.
has been revised (NFSA).
This can lead to regional disparity and
Farm Subsidies
sometimes biased toward large farm holders.
Farm subsidies account for a significant
The exploitation of natural resources such as
portion of the government’s budget. In affluent
groundwater.
countries, agricultural or farm subsidies account
The fertiliser subsidies are given as ‘input’
for over 40% of overall budgetary expenditure,
subsidies, or indirect subsidies. When the
while in India, they are much lower (about 7.8%
government does not encourage the farmer
of GDP) and of a different nature.

through an efficient cost reduction in fertiliser outputs per year for developed and developing
prices but instead offers direct financial countries, respectively, under WTO rules.
incentives after the crop is produced, this is It implies that governments must cut subsidies
known as a direct subsidy. directly related to product promotion to the
The World Trade Organization (WTO) has limited set limits if they exceed the acceptable
the number of direct and indirect subsidies amount (which falls into either the blue or
that developing and developed countries green box).
could provide since such subsidies impair free Various proposals in the ongoing negotiations
market dynamics, which has its own set of address issues such as establishing the amount
consequences. by which such subsidies should be reduced
WTO and Agricultural subsidies (AMS) further, and deciding whether to set product-
The WTO refers to government subsidies to the specific subsidies or remain with the current
agricultural sector (i.e., domestic support) as ‘aggregate’ method.
Aggregate Measure of Support (AMS). Blue Box
Subsidies for both commodities and inputs The amber box with the strings is this one.
are factored in. According to the World Trade The parameters are determined in such a way
Organization, product subsidies, such as that distortions are minimised. Any subsidy
minimum support rates, and non-product that would ordinarily be in the amber box gets
subsidies, such as credit, fertilisers, irrigation, moved to the blue box if it assists farmers
and electricity, would lower farming production in meeting a specific output target. These
costs and provide developing countries with an subsidies are effectively direct payments from
unfair advantage in global markets. Subsidies the government to farmers (i.e., direct set-
such as these are referred to in international aside payments) as part of assistance programs
trade as “distortions.” to encourage agricultural activity, rural growth,
In one sense, such subsidies are prohibited and other activities.
since they are subject to the provisions’ At the moment, expenditure on subsidies in
deminimization limit, which is set at 5% and the blue box is limitless. Some countries want
10% of total agricultural output in developed to keep the blue box because they think it’s
and developing nations, respectively. a good way to avoid distorting the amber box
The Boxes: Agricultural subsidies are subsidies without inflicting too much pain in
characterised by ‘boxes’ with the colours the current debate.
of traffic lights—green (allowable), amber Some favour shifting these subsidies into the
(allowable but to be lowered), and red amber box, while others want to set restrictions
(allowable but to be eliminated/forbidden) in or reduction pledges.
WTO terminology.
Green Box
Amber Box
Subsidies to agriculture that have little or no
All agricultural subsidies, with the exception of
impact on trade are placed in the green box.
those in the blue and green boxes, fall into the
They can’t possibly have any pricing support.
amber box, which is designed to distort output
This category includes all government spending
and trade.
that isn’t targeted at a single crop, as well as
These programmes include minimum support
any direct income assistance programmes
prices (also known as MSP in India) for agricultural
for farmers that aren’t connected to current
products, as well as any additional aid explicitly
output or price levels.
linked to production quantities (such as power,
fertilisers, pesticides, irrigation, etc.). This is a broad category that includes all
government subsidies, such as public food
These subsidies must be lowered to a minimum
storage, pest and disease control, research and
of 5% and 10% of the total value of agricultural
376
extension, and some non-production-related Despite increased PDS supply and significant
direct payments to farmers, such as agricultural food grain inflation, reliance on the PDS is
reform, environmental conservation, regional decreasing. This could be attributed to only
growth, crop, and income insurance, and so on. two factors:
Food Security Foodgrains are not made available timely by
India had attained food self-sufficiency by the the PDS, and/or
late 1980s, however food security remained a The quality of the PDS food grains is inferior in
worry. Food security refers to all people having comparison to their counterparts in the open
access to food at acceptable costs at all market.
times and without interruption. Despite India’s There are a few discrepancies in India’s food
robust GDP growth and increasing agricultural management under the PDS that must be
production in recent decades, hunger and immediately addressed;
malnutrition continue to affect the country’s The percentage distribution of wheat and rice
poorest citizens economic costs has been rapidly increasing.
Two vital things need consideration regarding The combined cost of food grains accounts
India’s food security: for two-thirds of the economic cost of wheat
Enhancing its food production and rice (MSP plus bonuses granted by various
Strengthening supply chain states). As a result, the economic cost of food
Because of the high rate of malnutrition and the grains at the Food Corporation of India (FCI)
volatility of agricultural prices, India has one of has risen over time.
the most extensive food security programmes Rising labour, fertiliser, insecticide, and other
in the world. input expenses have made food production
There are entitlement feeding programmes such more expensive over time. As a result, the
as the Integrated Child Development Scheme government was obligated to maintain
(ICDS: which includes all children under the age increasing the MSPs of the crops as well.
of six, pregnant women, and nursing mothers) Over the time, several discrepancies seeped
and Mid-Day Meal Schemes (MDMS) into the PDS, such as:
Food security is ensured by food subsidy • High operation costs
programmes such as the Targeted Public • High levels of leakages
Distribution System (which implements • High administrative costs
the National Food Security Act), Annapurna • Corruption
(10 kg of free food grain for the poor), and job
• Mismanagement
programmes such as the Mahatma Gandhi
According to the assessment of an expert
National Rural Employment Guarantee Scheme
group established in 2009, PDS suffers from
(100 days of employment at minimum wages).
nearly around 61 per cent error of exclusion
PDS & Food Subsidy
and 25 per cent inclusion of beneficiaries, i.e.
The Public Distribution System (PDS) attempts the misclassification of the poor as non-poor
to improve food security by delivering food people and vice versa.
grains to the Impoverished population on
Subsidies resulted in a plethora of additional
a regular and low-cost basis, as this group
problems. For starters, subsidies distorted
cannot afford to pay market prices for food.
the market, harming both domestic and
This includes the government’s procurement international interests while draining the
of food grain at MSP, the establishment government’s finances. PDS becomes
and management of food stockpiles, their considerably more challenging when domestic
preservation and timely distribution, as well as or foreign prices rise and the government is
making food grains accessible to the needy. forced to increase agricultural MSPs.

Fig. 16.1: Suggestions of Shanta Kumar Committee
Q. What are the reformative steps taken by the Government to make the food grain distribution
system more effective? (250 Words, 15 Marks)
Decoding the Questions:
• In the Introduction, try to write the out Public distribution system (PDS).
• In Body, discuss various steps taken by the government to reform the food grain distribution
system.
• Try to conclude with the suggestions.
Answer:
The Public Distribution System (PDS) is a government-sponsored chain of shops entrusted with
the work of distributing basic food and non-food commodities to the needy sections of society
at very cheap prices. Wheat, rice, kerosene, sugar, etc. are a few major commodities distributed
by the PDS. The major objectives of PDS are:
Provide essential consumer goods at cheap and subsidised prices.
378
To maintain buffer stock to meet any exigencies in food security.

Maintaining the minimum nutritional status of the population.
Despite high budgetary expenditure on food subsidies, India’s ranking in the Global Hunger Index
(2021) is 101 out of 116 countries which shows India’s poor food security. It is partly due to issues
with PDS.
Issues with PDS
Poor Identification: It has legacy issues of inclusion and exclusion error of beneficiaries.
Leakages: Leakages in the delivery system are very high when food grains are transported, at
rations shops and at open markets.
Storage capacity: India’s most of the food grains are stored in poor conditions proper silos are
not available to improve the shelf life of food grains.
Environmental damages: Overemphasis on producing rice and wheat and food security
raised the issue of sustainability and reduced groundwater table.

With the coming of the National Food Security Act (NFSA), 2013 providing for the Right to Food
as a legal entitlement by providing subsidized food grains to nearly two-thirds of the population,
PDS has expanded exponentially. Steps taken by the government are:
End to end computerisation: Justice Wadhwa Committee report on PDS reforms recommended
computerisation to prevent diversion of food grains and enable easy identification of beneficiaries
at ration shops.
Universal PDS: Tamil Nadu implements universal PDS in which every household is entitled to
subsidised food. This way helps to prevent exclusion and inclusion errors.
Digitalisation: States like Madhya Pradesh and Chhattisgarh have adopted IT measures to
implement a Targeted Public Distribution System through digitising ration cards, and the use of
a GPS tracking system. Etc.
Use of Aadhaar: As part of Beneficiary Data Digitisation, States/UTs have been requested to seed
the Aadhaar Number wherever available to weed out duplicate beneficiaries. So far, 61.25 per
cent of beneficiaries have been linked to the Aadhaar Number.
Direct cash transport: To reduce corruption and leakages, the government is now using the DBT
tool which will help to deposit money directly into a beneficiary’s account.
Improving storage facilities: To stop the wastage of food grains and reduce the wastage of

government resources, the government has introduced a Public-Private Partnership under the
private entrepreneur guarantee scheme. Godowns are constructed through private investors
and hired by FCI for a guaranteed period of 10 years.
Grievance redressal: For grievance redressal mechanism every district is required to set up
vigilance committees at the state, district, block, and shop levels.
Shanta Kumar Committee: Shanta Kumar Committee Report recommended privatisation,
outsourcing and cash benefit transfer to cut food procurement and distribution costs.
Way forward
To Eliminate exclusion errors: For inclusion of excluded people from PDS during this pandemic,
experts like Abhijeet Banerjee are recommending a temporary ration card for a period of six
months to everyone who is in need with minimal checks.
For example, to tackle this problem Delhi Government started a coupon system to avoid
exclusion errors.
Doorstep delivery: During pandemics, many state/UT governments are given food grains at their
doorstep.
One Nation One Ration Card: This can also be an effective way to allow migrants the facility of PDS.
Thus, efficient functioning of PDS is very essential for feeding poor and vulnerable sections of
the society and improving India’s ranking in the global hunger index. With efficient and leak-proof
PDS India aims to achieve Sustainable Development Goal 2 (zero hunger).
National Food Security Act accordance with dietary guidelines.

The law was enacted by the Parliament in For the purpose of issuing ration cards, the eldest
December 2013, the Parliament had passed the woman of eighteen years of age or older will be
motion. It was a watershed moment in India’s the head of the family; if she is not present,
food and nutritional security. It is India’s most the eldest male member will be the head of
ambitious and biggest social welfare programme, the home. The Act also contains provisions
with about 82 crore people receiving legal for PDS changes such as food grain delivery to
entitlements to subsidised food grains. The doorsteps, end-to-end computerization, the
following are the program’s major highlights: use of “Aadhaar” for beneficiary identification,
It will provide standard monthly entitlements of and commodity diversification under the TPDS,
5-kilogramme food grains at highly subsidised among other things.
prices of Rs. 3, Rs. 2, and Rs. 1 per kg for rice, The Act established a redress process with
wheat, and coarse grains, respectively, to up designated officers at the state and district
to 75 per cent of the rural and 50 per cent of levels. If states prefer to avoid spending money
the urban population (about two-thirds of the on a new redress system, they will be able
entire population). The Antyodaya Anna Yojna to utilise the current apparatus for District
continues to provide 35 kg of food grains per Grievance Redressal Officers (DGROs) and
home each month at subsidised costs to the State Food Commissions.
lowest of the poor. It also imposes a penalty on public officials or
It places a special emphasis on nutritional support authorities who fail to comply with the DGRO’s
for women and children, with pregnant women recommendations for relief.
and breastfeeding mothers getting a minimum of Provisions for the release of PDS data,
Rs. 6,000 in addition to receiving nutritious meals social audits, and the formation of Vigilance
that meet the mandated nutritional standards. Committees have been made to ensure
Children aged 6 months to 14 years will be able transparency and accountability.
to take home rations or hot cooked food in
380
Q. Food Security Bill is expected to eliminate hunger and malnutrition in India. Critically discuss
various apprehensions in its effective implementation along with the concerns it has generated
in WTO. (200 Words, 10 Marks)
• In the Intro try to write about NFSA 2013
• In Body,
⚪ The first part of the answer discusses how to eliminate hunger and malnutrition in India.
⚪ The second part of the answer discusses challenges in the effective implementation of
this act and concerns related to the act at WTO.
• Try to conclude by writing about the need for food security.
Answer:
The basic concept of food security globally is to ensure that all people, at all times, should get
access to the basic food for their active and healthy life and is characterized by availability,
access, utilization, and stability of food. Though the Indian Constitution does not have an
explicit provision regarding the right to food, the fundamental right to life enshrined in Article
21 of the Constitution may be interpreted to include the right to live with human dignity, which
can include the right to food and other basic necessities.
Eliminate Hunger and Malnutrition:
The NFSA 2013 requires the existing Food Security policies of India into law. For example, the
Mid Day Meal Scheme, Public Distribution System, the Antyodaya Anna Yojana, etc, are expanded
and include provisions for reducing food deficiency in parts of India.
Right based approach: NFSA has now changed the food security approach from welfare to right
based which underlines the right to food as a basic human and fundamental right, though the
constitution has not declared the right to food as a fundamental right.
Coverage: The Act legally entitled up to 75% of the rural population and 50% of the urban population
to receive subsidized foodgrains under Targeted Public Distribution System. About two-thirds of
the population, therefore, is covered under the Act to receive highly subsidized food grains.
Gender inequality: As a step toward women’s empowerment, the eldest woman of the household
age 18 years, or above is mandated to be the head of the household for the purpose of issuing
ration cards under the Act.
Special provisions: Wherein special provisions have been made for pregnant women and
lactating mothers and children in the age group of 6 months to 14 years, by entitling them
to receive nutritious meals free of cost through a widespread network of Integrated Child
Development Services (ICDS) centres, called Anganwadi Centres under ICDS scheme and also
through schools under Mid-Day Meal (MDM) scheme.
Food allowance: In case of non-supply of the entitled quantities of foodgrains or meals to
entitled persons under NFSA, such persons shall be entitled to receive such food security
allowance from the concerned State Government to be paid to each person.
Grievance Redressal Mechanism: To be set up at the District and State levels.
Challenges in implementing this Act:
Challenges in PDS
Implementation/ distribution lies with the States/UTs
Governance ethos differs from State to State
Dynamic target population:
Migration.

Birth/Death.
Status mobility
Lack of Transparency:
Bogus/Ghost ration cards.
Manual records.
Inclusion/ exclusion errors
Leakages & diversion
No possibility of Portability
Subsidy Burden:
The burden on the government.
the World Trade Organization rules related issues.
Household identification:
Exclusion error and inclusion error.
Computerisation of Fair Price Shops:
Computerisation of such shops in remote areas with no electricity and internet facilities.
Since 2013, controversy has swirled around India’s National Food Security Act (NFSA), the most
ambitious food security initiative in the world, with its plans to buy food grains from small-scale
farmers to distribute to some 840 million poor Indians, two-thirds of the country’s people. The
controversy came at the World Trade Organization (WTO), where the U.S. government accused
India of unfairly subsidizing its farmers by paying a support price above-market prices.
At the WTO biannual ministerial conference in Bali, India stood firm, questioning the subsidy
calculation as an artefact of old WTO rulemaking.
PDS is used for legitimate food security purposes and should be exempt from such restrictions
but a “Peace Clause” granted India and other developing countries with such programs a grace
period while negotiators tried to reach a permanent solution.
With no progress on the matter at the 2015 conference in Nairobi, Kenya, India, and other
developing countries have called for a simple exemption of such programs from WTO restrictions.
If such provisions are considered under the price distorting subsidies, prices of food grains will
increase. This will further intensify the food inflation and make food security; a costly affair for
the State and very difficult for the poor.
Food security is a basic right at the same time India needs to take a firm stand on its food security
mission which again enables the government to achieve sustainable development targets and
improve its ranking in Global Hunger Index, in which India is currently underperforming.
“A permanent solution on public stockholding for food security purposes is a priority”. A decision
on this issue will signal WTO’s commitment to the UN Sustainable Development Goals and the
fight against hunger and malnourishment across the globe.
Agricultural Marketing variance in marketing strategies across the

Agricultural marketing refers to the commercial country. These procedures can be classified
functions involved in transferring agricultural into three groups:
products, such as farm, horticultural, and other Traditional marketing methods: This usually
allied things, from producer to consumer. begins with a farmer’s sale and involves a
It encompasses all actions related to moving number of middlemen at various levels, ranging
agricultural produce through time (storage), from rural markets to terminal markets. Nearly
place (transport), form (processing), and half of India’s agricultural produce is sold
ownership at various levels of the marketing through these channels.
chain. Agricultural marketing in India is not Cooperative based marketing: Agri-products
standard in its current form. There is a lot of are directly purchased from farmers through
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the NAFED (National Agricultural Cooperative Making data on the arrivals and rates of
Marketing Federation of India Limited) marketing agricultural produce carried into the market
network, removing the need for middlemen. area for sale available to the public; and
Anand Pattern Cooperatives (APC), Chicory Establish and promote public-private
contract farming cooperation in Jamnagar, Gujarat, partnerships in agriculture market management.
and Kerala Horticulture Development Program are The Ministry of Agriculture (GoI) developed a
just a few of the effective cooperative marketing Model APMC Act, in 2003, after state APMC Acts
models that have arisen over time (KHDP). created fragmented markets for agricultural
Emerging models of agricultural marketing: As commodities and limited farmers’ ability to sell
new inputs and technologies have entered the their products other than through commission
market, several innovative marketing tactics agents and other APMC-licensed functionaries.
have emerged, such as: It has been pursuing state governments to
• National Agriculture Market (e-NAM): It’s a modify their respective Acts along its lines.
pan-India electronic trading network that The Model APMC Act provides the following
links current APMC mandis to create a unified new things:
national market for agricultural commodities. The farmer’s direct sale of agricultural produce
• Commodity and Futures markets: To to contract farming sponsors.
support and improve price discovery for
Creating “special markets” for “designated
farmers by creating exchanges and trading
agricultural goods,” most of which are
alternatives. National Spot Exchange
perishables.
Limited, for example (NSEL).
• Private sector initiatives: Several start- Allows private individuals, farmers, and
ups and enterprises have developed consumers to open new marketplaces for
unique agriculture market pilot solutions. agricultural products in any location.
E-choupal, for example, is used by Indian In any market region, a single market fee is
tobacco companies. imposed on the sale of declared agricultural
• Apart from these, there are some other commodities.
methodologies like Farmer Producer Replaces licences with market functionary
Organizations (FPOs) and Contract Farming. registrations, allowing them to work in one or
Agricultural Produce Market Committee more separate market regions.
(APMC) The creation of consumer and farmer
The Agricultural Produce Market Body (APMC) marketplaces to allow for the direct sale of
is a legislative market committee established agricultural products to consumers.
by a state government to regulate commerce The APMCs’ money will be used to build
in specific agricultural, horticultural, and marketing infrastructure.
livestock products as described by the Allows farmers to sell their produce directly
Agricultural Produce Market Committee Act. to contract sponsors or in a market organised
APMCs are intended to be responsible for: by private persons, consumers, or producers.
Ensuring that the pricing structure and Increases the competitiveness of the
transactions taking place in the market agri-produce market by allowing market
area are transparent. Providing farmers with intermediaries to register in one place.
market-driven extension services. Ensuring Different issues faced by these markets:
same-day payment for agricultural produce Institutional challenges such as licencing
sold by farmers. requirements for establishing a store or
Agricultural processing, particularly activities godowns, a high prevalence of market charges
that add value to agricultural products, should (as high as 15% in some circumstances), and the
be promoted. lack of a consistent agricultural grading system.

Infrastructure issues, such as limited access They also charge a variety of functionaries
to agricultural produce markets in some parts minor licencing fees (warehousing agents,
of the country, malfunctioning infrastructure loading agents, etc.).
in agricultural markets (such as cold storage In addition, commissioning agents take a
facilities), and agricultural infrastructure cut of all sales made between buyers and
projects with low economic feasibility. farmers.
Issues with the market information system, Even the model APMC Act refers to the APMC as
such as the lack of real-time informational a state agency and the market fee as a state-
channels, which cause an lag in demand imposed tax rather than a price for providing
signals, information to farmers being limited services. This is a critical clause that obstructs
to main commodities, and farmers’ lack of the creation of a national common market for
agricultural commodities.
understanding of new information channels
(like SMS based advisories). Eliminating this restriction will open the path
for agricultural commodity competitiveness
Issues related to APMCs:
and a national common market.
State APMCs collect various large fees that Other Issues
are opaque, according to the Economic Survey
Limited public investment: Public spending on
2014–15, and hence serve as a source of
the agricultural marketing sub-sector accounts
political influence. for 4-5 per cent of total agricultural spending,
They charge purchasers a market price, as well whereas spending on marketing infrastructure
as commissioning agents who act as middlemen development is less than 1%.
between buyers and farmers, a licencing cost.
Q. There is also a point of view that Agricultural Produce Market Committees [APMCs) set up
under the State Acts have not only impeded the development of agriculture but also have been
the cause of food inflation in India. Critically examine. (200 Words, 12.5 Marks)
• In the intro try to write about APMC in brief
• In Body,
⚪ Discuss how APMC impeded the development of agriculture and caused food inflation.
• Try to conclude by underlining the need for reforms in the APMC act.
Answer:
Agricultural Produce Market Committee (APMC) is a statutory market committee constituted
by a State Government to regulate trade in certain notified agricultural or horticultural or
livestock products, under the Agricultural Produce Market Committee Act. Under this act,
Mandis have been set up at different locations in states where farmers have to bring their
produce to be sold through the auctions. The rationale behind this is to eliminate the role of
middlemen and artiyas. However, there are so many controversies surrounding the act and it
has been criticised by many experts that this act has impeded the growth or development of
the agricultural sector.
APMC impediments in the development of agriculture:
The state-level statutes have so far been unable to address the key such as expansion and
modernisation of marketing facilities, improving communications, linking small producers with
all the marketing channels, information dissemination to every farmer etc.
Regulations did not allow farmers to sell outside the mandis and poor price realization of
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agricultural produce at mandis did not allow farmers to adopt newer technologies and
investments in agriculture.
Burdened to carry to distant mandi and poor warehousing facilities, compel farmers to sell
produce as distressed selling, making them prey to exploitation by middlemen.
Does not support contact farming, hindering diversification of agriculture to more-valued produce.
APMC and Food Inflation:
APMC has been criticised for creating shortages of produce by middlemen in the market to earn
more profit. This artificial shortage made consumers pay more for the same amount of produce.
Several charges, and commissions increase the price of food grains and vegetable fruits etc.
which again contribute to increasing inflation
Poor storage in APMC is responsible for the wastage of produce generating inflationary pressure.
Disturbed supply chain: Due to any natural disaster sometimes the supply chain gets disturbed
and regulation of selling products in the market only creates a situation of inflation in markets.
Thus, it has been constantly demanded by agri-experts and economists to abolish the APMC act or
make amendments to the act. The amendments supporting One-nation One-market can provide
for better remuneration to propel agricultural development as well as reduce inflationary pressure.
Q. In view of the declining average size of land holdings in India which has made agriculture
non–viable for a majority of farmers should contract farming and land leasing be promoted in
agriculture? Critically evaluate the pros and cons. (200 Words, 12.5 Marks)
• In the Introduction, try to write some data about declining landholding in India.
• In Body,
⚪ Discuss the advantages and disadvantages of land leasing and contract farming.
• In Conclusion, try to write a positive note and what can be done to improve the effectiveness
of land leasing and contract farming.
Answer:
As per the 10th Agriculture Census, the average size of operational holdings has decreased from
2.28 hectares in 1970-71 to 1.84 hectares in 1980-81, to 1.41 hectares in 1995-96 and to 1.08
hectares in 2015-16. To increase the productivity of land from the declining size of land. In this
respect contract farming and land, leasing can be useful to deal with these problems.
Contract farming can be defined as agricultural production carried out according to an
agreement between a buyer and the farmers, which establishes conditions for the production
and marketing of a farm product or products. Land leasing is a commercial agreement in which
the user or less acquires the right to use the land in lieu of a certain amount of payment has
advantages both for the farm producers as well as for the Agro-processing firms.
Advantages of Contract Farming and Land Leasing
Small farmers become competitive: Makes small scale farming competitive; small farmers can
access technology, credit, marketing channels and information while lowering transaction costs
The assured market for small farmers: Assured market for their produce at their doorsteps,
reducing marketing and transaction costs. This market access will surely help small farmers to
bargain well and earn the desired amount of money.
Reduced risk: Contract farming ensures better optimisation of price and increased shelf life of
farmers’ produce to reduce price and marketing risks.

Wider market: Contract farming can open up new markets which would otherwise be unavailable
to small farmers. These new opportunities help small farmers to export their products to the
international market and get a better price and earn a decent income.
Higher productions: Ensured price and ensured market access may boost farmers’ morale to
enhance production with the support in terms of finance and technology.
Boost food processing industry: In the case of the Agri-processing level, it ensures a consistent
supply of agricultural produce with quality, at the right time and at a lower cost. Ensured supply
of raw material and establishments of supply chains from villages to cities makes the sunrise
sector’s growth possible at its expected level.
The corporatisation of small farmers, it would allow small farmers to participate in contract
farming and also would increase their bargaining power. - The KISAN insurance scheme should
be made mandatory for all the farmers participating in contract farming. It would reduce
production risk.
Agri based firms can be benefitted in the following manner:
Optimally utilize their installed capacity, infrastructure and manpower, and respond to food
safety and quality concerns of the consumers.
Make a direct private investment in agricultural activities.
The farmers enter into contract production with an assured price under terms and conditions.
Disadvantages of contract farming:
Contract farming arrangements are often criticized for being biased in favour of firms or large
farmers while exploiting the poor bargaining power of small farmers.
Problems faced by growers like an undue quality cut on produce by firms delayed deliveries at
the factory, delayed payments, low prices and pest attacks on the contract crop which raised
the cost of production.
Contracting Agreements are often verbal or informal in nature, and even written contracts often
do not provide the legal protection in India that may be observed in other countries. Lack of
enforceability of contractual provisions can result in the breach of contracts by either party.
New Farm laws try to set this issue right.
Single Buyer – Multiple Sellers (Monopsony) may shift the power away from the farmers.
Adverse gender effects - Women have less access to contract farming than men.
Disadvantages of Land Leasing:
Absence of Proper Land Records: It is the biggest issue in land leasing as there is a lack of
tamper-proof land records. This is the main reason why farmers fear losing land.
Diversion in Land Use: Once land is leased the land will be used to grow commercial crops and less
focus can be given to food crops. This will further add tension to the food security of the country.
Absentee Landlordism: The model land leasing act will prevent land redistribution through the
transfer of ownership. As the real owners will prefer to lease out land rather than give it to others.
The exploitation of small and marginal farmers: Small and marginal farmers are very prone to
exploitation as they don’t have good bargaining powers, so it is fear among these farmers that
they will get exploited.
Lack of uniformity: As land is state subject disparity and abundance of laws will further create
confusion among farmers and corporates.
Thus, even though contract Farming has significant potential to turn around in the Agriculture
sector, it has a number of lacunae that needs to be rectified. Hence contract farming and land
leasing can be used for increasing agricultural productivity, but the government has to take
steps to make it more friendly to small farmers than the big corporations. For example, the
issue between potato growing farmers and Lays company. Thus, it is imperative to build trust
between farmers and corporations and the new Law can be the right move.
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Recent Reforms The Farmers (Empowerment and Protection)

The Government of India recently passed three Agreement on Price Assurance and Farm
Acts with the aim to reform agriculture in India Service Act, 2020
The Farmers Produce Trade and Commerce Farmers would be able to compete on an equal
(Promotion and Facilitation) Act, 2020 level with processors, wholesalers, aggregators,
The Farmers (Empowerment and Protection) large retailers, exporters, and other businesses
Agreement on Price Assurance and Farm under the new law. Prior to planting their crops,
Service Act, 2020 farmers receive a price guarantee. If the Market
Price rises above the minimum, farmers will be
The Essential Commodities (Amendment) Act,
entitled to a greater selling price over and above
2020.
the minimum. The burden of market volatility
THE FARMERS’ PRODUCE TRADE AND
will be shifted from the farmer to the sponsor.
COMMERCE (PROMOTION AND FACILITATION)
Due to past price decisions, farmers would be
ACT, 2020
safeguarded from Market Price swings.
It will also promote barrier-free inter-state and
It will also give farmers access to new
intra-state trade and commerce outside of the
technology, better quality seeds, and other
physical premises of marketplaces registered
inputs, as well as lower marketing costs and
under state agricultural produce marketing
increase farm income.
laws.
With specific deadlines for redress, an
Under the new legislation, farmers will not be
effective dispute resolution process has been
charged a cess or levy on agri-produce sales.
established.
The bill also includes a proposal for an
Stimulus to research and new technology in
electronic exchange in the transaction network
the agriculture sector.
to ensure a smooth electronic trade.
Farmers will be able to trade at farm gates, Clarification with respect to some doubt
cold storage, warehouses, processing plants, regarding the provision of the bill
and other locations, in addition to mandis. In the contract, the farmer will have complete
Farmers will be able to participate in direct control over the sale price of the produce.
selling, removing intermediaries and achieving They will be paid within three days at the
maximum price realization. most.
Across the country, 10,000 Farmer Producer
Clarification with respect to some doubt Organizations are being formed. These FPOs
regarding the provision of the bill: will bring together small farmers and strive to
Minimum Support Price procurement will guarantee that farm produce is priced fairly.
continue, and farmers will be able to sell their Farmers will not have to look for traders after
output at MSP rates. The MSP for the Rabi signing a contract. The product will be picked
season will be published soon. up directly from the farm by the buyer.
Mandis will not be shut down; trade will There will be no need to go to court many
continue as usual. Farmers will be able to sell times if a dispute arises. A local dispute
their produce at other locations outside the resolution process will be in place.
mandis under the new arrangement.
THE ESSENTIAL COMMODITIES (AMENDMENT)
The e-NAM(National Agriculture Market) trading
ACT, 2020
system will also continue in the mandis.
Food regulation: According to the Act, the
Electronic platforms will see a rise in
federal government can only restrict the supply
agricultural produce trading. As a result,
of specific food commodities, like cereals,
there will be more transparency and time pulses, potatoes, onions, edible oilseeds, and
savings. oils, under extraordinary situations. These

include (i) war, (ii) drought, (iii) unusual price contract may lead to the exploitation of such
increases, and (iv) severe natural disasters. farmers.
The Federal Government can classify some Critics believe that loosening food regulations
commodities as essential under the Essential will lead to exporters, processors, and
Items Act of 1955. (such as food, fertilizers, and merchants storing farm produce during harvest
petroleum products). The federal government season, when prices are typically lower, and
may control or ban the manufacture, purchase, releasing it later when prices rise. This may
delivery, exchange, and commerce of such jeopardise food security.
essential items. Some suggestions and ways forward:
Stock limit: Any stock cap on agricultural Strengthening State Farmers Commissions:
produce must be based on price increases, Rather than opting for extensive centralisation,
according to the Act. Only if the following the focus should be on empowering cultivators
conditions are met, will a stock cap be imposed: with the support of State Farmers Commissions,
A 100% increase in the retail price of horticultural as proposed by the National Commission for
produce; and Farmers, to ensure a quick reaction from the
A 50% increase in the retail price of non- government to challenges.
perishable agrarian food items. Improve Agricultural Infrastructure to
The price increase will be based on the preceding Strengthen Competition: The government
12 month’s price or the average retail price for should invest heavily in expanding the APMC
the previous five years, whichever is lower. market system, attempting to dismantle trade
Issues Related to the New Reforms cartels, and providing farmers with adequate
Against the Principle of Cooperative federalism: roads, scale logistics, and real-time information.
The provisions of the new reforms are viewed Consensus Building: The Union administration
as against the spirit of cooperative federalism should reach out to individuals who are
enshrined in the Indian Constitution, because opposed to the Bills, particularly farmers, and
matters of trade and agriculture are the part explain why reform is necessary.
of subjects on the State list, have caused Modernising Agriculture
resentment in many States. The current production levels of the majority
Farmers are concerned that the recently proposed of crops are well below the global average. Low
revisions may bring the MSP regime to an end. irrigation, the use of low-quality seeds, a lack
They are concerned that encouraging tax-free of acceptance of improved technologies, and
private commerce outside of the APMC mandis a lack of awareness about better agricultural
will make these notified markets unviable, practices are the main causes. Water stress
resulting in a drop in government purchases. affects nearly 53% of cropped land. Rainwater
The lack of formal basis in the acts for the management activities and programmes are
MSP is a major source of concern, particularly severely limited in terms of resources. This
for cultivators in Haryana and Punjab, where limits a farmer’s ability to plant several crops at
the Food Corporation of India (FCI) and state the same time, resulting in wasteful land use.
agencies acquire roughly 65 per cent of wheat Large yield gaps have also emerged from
(2019) at MSP. ineffective extension delivery systems. There
Various mandis across the country bring in are two types of yield gaps in India. For starters,
revenue for the governments of states. The there is a disconnect between best scientific
deviation of agricultural trade towards private and best field practices. The second divide
mandis could lead to the loss of states’ is between the best field practices and the
incomes. average farmer’s practices.
The lack of ability of the small and marginal There are large yield differences between and
cultivators to recognise the terms of the within states. Even in highly productive states
388
like Punjab, yield gaps have been discovered. by a lack of resources, rules, and intellectual
Closing these gaps offers a huge potential property rights (IPR).
to boost productivity and earnings. This also Farmers are bewildered by the fact that various
suggests that states with low productivity (or private and official sources provide inconsistent
huge yield gaps) have a lot of room to make up information.
in terms of product development. There is a significant gap between the demand
Demand-side variables favour the extension of for agricultural skills and the supply of
farmland for fruits and vegetables, as well as those capabilities, preventing diversification,
livestock. These businesses also pay more money. precision agriculture adoption, and on-farm
Staple crops (cereals, pulses, and oilseeds) post-harvest value addition.
account for 77% of the overall Gross Cropped India’s technical progress has lagged the rest
Area (GCA), but only 41% of the crop sector’s of the world, culminating in the domination of
output. High-Value Crops (HVCs) generate nearly wasteful farm development practices like flood
as much to total output as staples, yet they only irrigation. To modernise agriculture in India, a
account for 19% of the GCA. Diversification into renewed focus on on-the-ground assimilation
the fruits and vegetable segment, according to of technologies, market knowledge, skills,
studies, will benefit small and medium farms and extension, as well as upgrading trade and
more than large ones. commerce in agriculture, is essential.
New development initiatives targeted at upgrading Inadequate capital affects both production
agriculture have been launched in recent years. and marketing; small scale is a key obstacle
The Pradhan Mantri Krishi Sinchai Yojana (PMKSY) to implementing innovative techniques in both
seeks to increase irrigation coverage while also the input and export markets.
encouraging water conservation. In the last
Solution/Way Forward:
four years, the area under micro-irrigation has
Productivity and efficiency
increased 2.5 times. The Soil Health Card (SHC)
programme is currently in its second cycle, with Increase irrigation coverage: By 2022-23,
a focus on job creation and entrepreneurial irrigation coverage must be increased to 53% of
growth through local entrepreneurship models. the gross cropped area (GCA). Increased coverage
In the second cycle, 3.76 crore SHCs have been by micro-irrigation should be the priority.
distributed so far. Increase adoption of hybrid and improved
Important Objectives seeds: States must take the lead through the
Improving income and employment through a following measures:
paradigm shift that preserves food security while Dynamic seed development programmes are
maximising agricultural value addition through required. Crop area (each season individually),
modernising agricultural technology, increasing seed rate per hectare used, desired/targeted
productivity, efficiency, and crop variety. seed replacement rate and crop-specific seed
Constraints: requirements could all influence this. Crop-by-
The key cause of low crop and livestock crop requirements should be calculated using
productivity is the use of obsolete and historical patterns, new variety introductions,
ineffective technologies. and low-yielding varieties being replaced.
Affordability becomes a key obstacle to farmers Increase Variety Replacement Ratio (VRR): To
adopting new technologies in India because of increase output, replace outdated seed varieties
the high concentration of small and marginal with hybrid and improved seed varieties.
farmers. Through farmer participatory plant breeding
There are many bottlenecks preventing on-farm and farm varietal trials, the Indian Council
implementation of public-sector technology. of Agricultural Research (ICAR) and State
The country’s agricultural research is hampered Agricultural Universities (SAUs) should grow

climate-resilient varieties of crops suitable for Liquid fertilizer subsidies: A targeted subsidy
the country’s 128 agro-climatic zones beginning on liquid fertilizers should be given to promote
in the third year of seed production. fertigation with micro-irrigation.
Improve seed testing facilities: Personnel as
Strengthening extension systems
well as technical skills are necessary to create
Agriculture Technology Management Agency
seed testing facilities. To maintain the quality
(ATMA) and Krishi Vigyan Kendras (KVKs)
of test results, regular performance monitoring
collaboration: The ATMA programme should be
is required.
restructured to include bottom-up planning at
Reorient fertilizer subsidy policy: Secondary
the district and block levels in order to develop
and micronutrients must be included in the
Strategic Research Extension Plans (SREP). For
same nutrient-based subsidy (NBS) network as
this initiative to succeed, more independence
phosphorus (P) and potassium (K) under the
and autonomy are essential. Subject matter
new asymmetric fertiliser subsidy policy (K).
experts at KVKs can use ATMA’s block action
Control pesticide use: To ensure widespread plans to guide their research.
adoption, align the pesticide regulation system Public-private partnership in KVKs: Promoting
with food safety rules. Extension efforts should PPP in extension delivery is one of ATMA’s
be bolstered to ensure that excellent practices guiding principles. Because each KVK controls
are accessible to the typical farmer. roughly 50 acres of land, they should incubate
Custom hiring centres: The bespoke recruiting private sector ventures in extension delivery.
centre approach in Madhya Pradesh has proven Market-led extension: Extension services that
to be efficient in speeding up the rate of farm give farmers information on crop selection,
automation. This concept, which employs (ii) crop demand and supply, (iii) commodity
and stimulates entrepreneurship among rural projected price, and (iv) infrastructure for
youngsters, should be copied across the storage, transportation, and marketing of
country. products should be prioritised.
Investment subsidies for micro-irrigation: Prioritize value-added extension services to
Instead of providing power and water subsidies, minimize post-harvest losses by transforming
the DBT (direct benefit mode) mode can be raw agricultural commodities into processed
used to provide micro-irrigation investment products. Farmers will be able to generate more
subsidies. money as a result of the greater price realisation.
Q. What is water-use efficiency? Describe the role of micro-irrigation in increasing water-

use efficiency. (200 Words, 12.5 Marks)
• In the Intro, try to define the concept of water use efficiency.
• In Body, Discuss how micro-irrigation is helpful in increasing water-use efficiency.
• Try to conclude with the need for water use efficiency in various areas.
Answer:
Water use efficiency is the ratio between effective water use and actual water withdrawal.
Water use efficiency is the measure of the cropping system’s capacity to covert water into
plant biomass or grain. It includes both the use of water stored in the soil and rainfall during
the growing seasons. It employs all the techniques such as water serving technologies,
reduction of excessive demand and other actions.
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Indian agriculture is facing the twin challenges of a fast decline in irrigation water potential as well
as increasing demand for water from different sectors. The government has introduced a number
of demand management strategies and programmes to meet these challenges. One such method
is micro-irrigation which includes drip irrigation and sprinkler irrigation.
Role of micro-irrigation in increasing water use efficiency:
In these systems, water is applied drop by drop nearer the root zone area of the crop, which
delivers only the required amount of water. This prevents the loss of most of the irrigated water
to vaporisation as in the case of traditional methods like surface irrigation.
These are specially designed for horticultural crops, small grasses, nurseries and lawns. A
curated water delivery system saves a lot of water.
On-farm irrigation efficiency, if a properly designed and managed drip irrigation system is
implemented then water use efficiency will reach 90%.
Application of Emerging technologies like precision irrigation methods further augments
water application to large farms in a more precise manner over a course of time. This method
specifically suits farming according to Agro-climatic conditions.
The government of India has accorded high thrust and priority to increasing water use efficiency
and management. The Pradhan Mantri Krishi Sinchayee Yojana is primarily focused on increasing
water use efficiency and efficient water use management through the ‘Per Drop More Crop’ method.
There is a need to use and come out with various water use efficiency methods and management
in various other sectors of the economy to prepare India for severe water stress in 2025.
Diversification: promotion of high-value crops be a priority.

(HVCs) and livestock Strengthen the demand for organic products:
High-value crops It is recommended that extra effort be put into
Encourage diversification to HVCs: Create developing a niche market. The Spice Board
a system of incentives to encourage farmers should brand spices that are distinctive to
to move from grain to HVC crops. Every year, each state to encourage the manufacture of
the amount of land planted with fruits and organic spices.
vegetables must increase by 5%. Promote indigenous cattle breeding with
The practice of hybrid technology in the exotic breeds: Indigenous cattle breeding with
vegetables: Vegetables that are hybrids can be alien breeds should be promoted to combat
used. Hybrids cover 10% of the cultivated area inbreeding. As a result, there would be more
in the vegetable sector. Switching to hybrids gene coverage, fewer diseases, and higher
has the ability to enhance income by 1.5 to 3 resistance to climate change.
times while also increasing yields. Promote and grow bull mother farms: Using
Create regional production belts: Under numerous ovulation and embryo transfer
the Mission on Integrated Development of processes, these farms can dramatically
Horticulture, local HVC producing belts, similar enhance milk output by providing farmers with
to the cluster-based model, shall be built and calves with increased milk potential.
funded (MIDH). In some cases, make SHCs a Village-level procurement systems: To boost
requirement. dairy production in states, milk storage chillers
Fruit rootstocks: Rootstock technology and high-value milk processing facilities
has shown that it is possible to quadruple are necessary. The private sector should be
production while staying climate change- encouraged to build a value chain for HVCs and
resistant. Standardizing and encouraging the dairy products at the village level.
use of rootstocks for fruit production should

Q. What are the major reasons for declining rice and wheat yield in the cropping system? How
crop diversification is helpful to stabilize the yield of the crop in the system? (250 Words, 15
Marks)
• In the Intro, try to define the cropping system and highlight the declining trend of rice and
wheat crop yields.
• In Body,
⚪ Discuss the reasons for the declining trend of rice and wheat yield.
⚪ Discuss the merits of crop diversification.
• Try to conclude by linking with the Sustainable Development Goals.
Answer:
A cropping system is the type and sequence of crops grown and practices used for growing
them. In India rice and wheat is the dominant cropping system. Rice and wheat cropping system
is - water, capital, labour and energy-intensive and becomes less profitable as these resources
diminish. According to the Economic Survey 2015-16 yields of major crops like paddy and wheat
are declining:
In wheat, India’s average yield in 2013 of 3075 kg/ha is lower than the world average of 3257 kg/ha.
In paddy production, all Indian states have yields below that of China and most states have
yields below that of Bangladesh.
India’s best state, Punjab, has a paddy yield of close to 6000 kg/ha whereas China’s yield is 6709
kg/ha.
Reasons behind declining yields of rice and wheat are:
Declining soil fertility: With excessive use of nutrients and use of flood irrigation systems the
soil in paddy and wheat-producing areas has become saline and losing its fertility. Decreased
soil fertility and increasing demand created a lot of pressure on limited agricultural land, this
led to excessive use of inputs like fertilisers, faulty irrigation practices etc.
Increased cost of inputs: Inputs such as seeds, labour cost, newer machines, fertilizers costs
transportation cost etc. has been constantly increasing which made the cultivation of rice and
wheat cultivation costly affair.
Climate change: Changing climate made the monsoon unpredictable. Climate change has
adversely impacted the yield of crops like wheat, rice etc.
Changing groundwater: Over-exploitation of groundwater led to a declining groundwater table.
The declining groundwater table becoming unsustainable for such crops.
Poor crop diversification: Due to Minimum Support Prices farmers are increasingly producing
wheat and rice this made farmers not give emphasis on crop diversification. The poor practice
of crop diversification is largely responsible for declining soil nutrients and productivity.
The government has increasingly created awareness against domination practices of wheat
and rice sowing. The government also making policies for crop diversification and people are
becoming conscious about nutrition and accordingly, they are changing their food habits.
Therefore, it is imperative to focus on crop diversification. Crop diversification refers to the shift
from the regional dominance of one crop to the production number of crops. Crop diversification
helps in the following manner:
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Arrest declining groundwater: Declining groundwater can be stopped by crop diversification.

Growing crops according to the climatic conditions and available water resources will definitely
help in arresting declining groundwater sources.
Increase soil nutrients: Crops such as pulses, and coarse grains are known as hardy crops as
they can grow in less nutrient and less water available areas. These crops even help in fixing
nitrogen in the soil which is one of the very essential components for crop growth.
Nutritional security: Dependent on wheat and rice will create a challenge for nutritional security.
India is having one of the largest populations with malnutrition and micronutrient deficiency.
Crop diversification will help in solving these issues.
Soil biodiversity: Crop diversity helps in maintaining soil biodiversity. This soil biodiversity is
very essential for crops’ survival as they keep on recycling soil nutrients.
Increasing tolerance: With crop diversification, the crops in drier areas can be clubbed with less
water consuming crops like millets.
India, being a vast country, has wide variations in agro-climatic conditions. Such variations
have led to the evolution of regional niches for various crops. Therefore, the single domination
of one cropping system needs to be rejected. The government is promoting crop diversification
in green revolution areas of Punjab, Haryana and western UP to reduce negative impacts on
soil from rice and wheat cultivation. This is a necessary step to achieve the sustainable
development goal to ensure zero hunger.
Doubling farmers income an “Empowered Body” to review and track

In 2016, the government formed an Inter- progress.
ministerial Committee to look at concerns As of currently, there is no current estimate
surrounding the “Doubling of Farmers Income” of farmers’ yearly revenue and the % annual
(DFI) and offer measures to achieve it. increase over the base year 2015-16. The DFI
In September 2018, the Committee delivered Committee extrapolated the NSSO survey-based
its report to the Government, which contained income estimates for 2012-13 to arrive at the
a plan to double farmers’ income by 2022. average annual income for 2015-16, estimating
The DFI strategy contains seven revenue that the average farmer income for 2015-16 is
development paths, according to the Rs. 96,703/- per year at 2015-16 prices.
Committee’s recommendations. Farmers have observed an increase in
Increased crop productivity productivity across the board in terms of
Increased livestock productivity produce. The production of food grains,
oilseeds, horticulture, milk, and other products
Resource efficiency or cost-cutting in the
has all reached new highs. As per the Second
production process
Advance Estimates for 2021-22, Foodgrain
Increase in the cropping intensity
production in the country is estimated at 316.06
Diversification toward high-value crops million tonnes, up from 252.23 MTs in 2015-
Improvement in real prices received by farmers 16. fruits and vegetables produced 326.58 MTs
The transition from farm to non-farm jobs (2020-21) up from 259.3 MTs in 2015-16, and
Following the approval of the DFI Committee’s milk produced 209.96 MTs (2020-21) up from
recommendations, the government established 155.49 MTs in 2015-16.

Constraints In the Path Of Doubling The Income the agriculture loan portfolio is expanding, it
Of Farmers is not evenly spread across states and farmers
Lack of reliable data: After 2015-16, there is within each state.
no official data on farmer earnings. There is Farmers’ low share of the final price, low crop
no report card on the farmers’ current income insurance penetration, high and rising input
levels, and no plan to meet this goal. costs, and a lack of market infrastructure are
No implementation plan: For each state, the all major impediments.
ICAR devised a plan to double farmers’ income. Way Forward
However, there were no details on how states To ensure the future of agriculture and enhance
will implement the plan or how the government the livelihoods of half of India’s population,
will track progress. sufficient emphasis must be paid to improving
Lack of coordination between centre and farmer welfare and increasing agricultural
state: Because agriculture is a state topic, state revenue.
governments are responsible for implementing It is critical to motivate States and UTs to
programmes and strategies to promote the sector. own and realise the aim of doubling farmers’
Through numerous plans and programmes, income, with a strong emphasis on farmer
the Indian government supports the efforts of capacity building (technology adoption and
state governments. After two years, West Bengal awareness) as the trigger for increased income.
farmers received money from PM KISAN. The last survey of farm households was
Regional inequity benefits: Wheat and paddy conducted by the National Sample Survey
procurement has increased in recent years, Office in 2013. The revenue of the farmers has
however procurement of wheat and paddy at not been assessed further. As a result, it is
MSP in Bihar and Uttar Pradesh is much lower critical to keep track of farmers’ development.
than in Punjab and Haryana. Similarly, while
Q. What are the different types of agriculture subsidies given to farmers at the national and state
levels? Critically analyze the agriculture subsidy regime with the reference to the distortions
created by it. (200 Words, 10 Marks)
• In the Intro try to write about agricultural subsidies and related data.
• In Body,
⚪ Discuss direct and indirect farm subsidies at the national and state levels.
⚪ Write positives and negatives of subsidies.
• Try to conclude the answer by writing it in a contextual manner.
Answer:
In India, around 600 million farmers are dependent on agriculture and the maximum of farmers
are being under marginal small landholders who are having low income and resource-poor
and mostly engaged in subsistence farming. Under such conditions, farm subsidies are very
significant as they provide much needed financial support to farmers, and this is an integral
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part of the government budget. Subsidy plays a very important role in a welfare state, but the
absolutely free supply of inputs and consumer goods leads to wastage.
The government of India and state governments spend thousands of crore rupees every year.
The farm subsidies can be classified into direct and indirect ones.
Direct Farm Subsidies at the centre and state level:
These types of subsidies are directly provided to farmers, generally, these subsidies are paid in
cash form. Such as-
Raya Bandhu scheme of Telangana government which aims to provide Rs. 4000/ acre incentives
for farmers.
Kalia scheme, Krushak Assistance for Livelihood, and Income Augmentation (KALIA Scheme)
were launched by the Government of Odisha to provide financial aid to farmers.
PM KISAN is the scheme which provides 6000 rupees in a year in 3 equal instalments. This
scheme aims to give cash to farmers that can be used for various agricultural related input
costs, or it can be used for personal expenses.
A direct form of cash subsidy costs every year more than 70k crore rupees from the government
of India if we calculate the state amount then this huge sum of money is spent on just a subsidy.
Most of the state governments in India have launched schemes to provide direct cash benefit
schemes such as Bhavantar Bhughtan Yojana.
Food subsidy: Food subsidy is another direct form of subsidy. Though this is not given to the
farmers it is considered a farm subsidy as the government purchases food grains at subsidised
prices.
This MSP has the biggest pressure on the government budget as thousands of crore is spent on
it. But poor storage capacity leads to wastage of food grains and debt to the Food Corporation
of India.
Indirect Farm Subsidies: These are not given in form of cash, but it is given in the form of a kind.
Irrigation Subsidy: It is a subsidy provided for the usage of water from government-run canals.
The difference between the operation and maintenance cost of irrigation infrastructure is given
by the state government and a negligible amount is paid by farmers.
The distortion created by this subsidy is farmers are using faulty techniques of irrigation which
has a double impact, fertile becoming saline and wastage of precious sources.
Power subsidy: Every state bears thousands of crores on providing free electricity. This free
form of electricity has helped farmers to reduce their input costs.
But free electricity resulting from over-irrigation is increasing the infertility of soil. Farmers are
kept on pumps which also increases pollution as most pumps are diesel pumps.
Seed subsidy: Seed subsidy is the subsidy given to farmers to purchase seeds. This is done
through the distribution of quality seeds to farmers which are provided for less than market
prices.
Seed subsidy sometimes used by seed companies for their own benefits. They sometimes
provide poor quality seeds which impact the productivity of agriculture.
Credit subsidy: This subsidy interest charged from farmers and the actual cost of credit, bad
loans and write-offs given by the government is called a credit subsidy.
Loan waive is now becoming a political tool for vote bank politics. This resulted in an unnecessary
burden on the exchequer and a waste of money.

Nutrient based subsidy: Government provides every year subsidy on urea. This urea subsidy is
given to reduce farmers’ input cost and make the production of food grain easier and on large
scale.
But this nutrient-based subsidy has been one of the largest pressures on the government
budget. This needs to be reduced as it has a negative impact on the dorm fiscal deficit.
Although all these farm subsidies are meant to help farmers and keep all inputs supplied in a
sustainable manner. Farm subsidies have helped a lot to Indian farmers a lot since independence
and the greatest example is the Green Revolution. But on the other hand, farm subsidies are a
major chunk of government expenditure. As per the 2021-22 Budget, it is more than 1.50 trillion
rupees.
These farm subsidies are not only creating pressure on central finances, but they are becoming a
burden on states’ finances, as states are already facing a resource crunch. Hence, it is imperative
and much needed to rationalise agriculture subsidies as the Central and State governments
also need to improve fiscal indicators and financial prudence. Agricultural subsidies also cause
litigation in the WTO. For example, The USA has filed a case against India’s agricultural subsidy.
Q. Assess the role of the National Horticulture Mission (NHM) in boosting the production,
productivity, and income of horticulture farms. How far has it succeeded in increasing the
income of farmers? (250 Words, 15 Marks)
• In the Introduction, write a scenario of horticultural crops in India.
• In Body:
⚪ Discuss the role played by the National Horticulture Mission (NHM) in boosting the
production, productivity, and income of horticultural farms.
⚪ Also, analyse its success in increasing farmer income with the use of relevant examples.
• Conclude with the significance of NHM and suggestions.
Answer:
Horticulture is the cultivation, production and sale of high-value crops like vegetables, fruits,
flowers, herbs, and ornamental or exotic plants.
Horticulture in India: The diverse Agro-climatic conditions and rich diversity in crops and genetic
resources enable India to produce a wide range of horticultural crops round the year.
Horticulture production in India has more than doubled approximately from 146 million tonnes in
2001-02 to 326.58 million tonnes in 2020-21 surpassing the food grain production of 285 million
tonnes in 2018-19.
The area under horticulture crops increased to 25.5 million hectares in 2018-19, which is 20% of
the total area under food grain.
National Horticulture Mission (NHM): It is a centrally sponsored scheme launched in the year
2005-06. It has been playing a crucial role in improving productivity, production, and income of
farmers in the following manner:
Technology adoption: The mission will focus on production and productivity through the adoption
of improved technologies for ensuring the quality of all horticultural crops.
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Necessary infrastructure: Efforts will be made to generate the necessary infrastructure in the
form of nurseries and to improve the existing tissue culture units.
Production and distribution: Production and distribution of planting material nurseries for
producing planting material will be established through state or central assistance.
The assistance would be provided for the setting up of new nurseries under the Public as well
as Private sectors.
Vegetable seeds production: This programme will ensure the production of seedlings in vegetables
is free from a disease which is applied to the hybrid cultivars of vegetables. Under this there are
two types of assistance provided, these are,
The financial assistance for vegetable seed production will be rupees 50,000 per hectare for the
Public sector.
The assistance at the rate of 50% subject to a limit of rupees 25,000 to the Private Sector limited to
5 hectares per beneficiary as credit-linked back-ended the subsidy. The State Horticulture Mission
will ensure the availability of good quality seeds and planting material to the farmers at a nominal
price.
Seed infrastructure: To facilitate storage and packaging of seeds, proper handling, and assistance
would be provided for creating infrastructures like storage bins, drying platforms, packaging
units and 20 related types of equipment.
To an extent, 100% assistance will be provided to the public sector, and the assistance to the
private sector will be a credit-linked subsidy limited to 25% of the cost.
Creation of water resources: Under the Mission, the grant will be provided for creating water
sources through the construction of community tanks, and farm reservoirs/ponds with plastic
lining.
Integrated Pest Management and Nutrient Management: Assistance for INM/IPM will be at the
rate of 50% of cost subject to a maximum limit of rupees 1000 per hectare. The assistance will
also be available for developing facilities like disease forecasting units, biocontrol labs, plant
health clinics, and leaf/tissue analysis labs.
Organic farming: For adopting organic farming, additional assistance will be provided at the rate
of rupees 10,000 per hectare.
Economic Benefits:
Stable income: Various crops are cultivated under horticulture and diverse Agro-climatic
conditions made farmers grow various horticulture in different seasons. This helped farmers to
earn a stable income in any season and at any time of the year by taking these crops.
Market demand: Rising income and rising middle class, that is very cautious about health,
demanding fruits, high nutrients, green vegetables, and other horticulture products. In western
countries such as European countries, the USA, China, Australia etc. Indian horticulture produce
demand is rising, resulting in increased export to these countries, and resulting income rise for
the farmers.
The government of India has proposed to double farmers’ income by the year 2022. It is
increasingly being recognised that horticulture will remain an integral component of the strategy
to achieve this goal.

Food Processing and other needs. Food technology has made

A well-developed food processing sector it possible to provide a wide range of safe and
with a greater level of processing minimises convenient foods. This quickly increasing and
wastage, improves value addition, encourages developing field has aided in improving food
crop diversification, assures a better return security in poor countries and has created
to farmers, creates jobs, and boosts export opportunities for employment at all levels.
earnings. Basic concepts in food processing methods to
This segment is also capable of tackling crucial prevent food spoilage are:
challenges such as food security, food inflation, Application of heat
and feeding the world’s population wholesome, Removal of water moisture
nutritious food.
Lowering of temperature during storage
Development of Food Processing and Technology
Reduction of pH
Researchers have been working in the field of
Controlling the availability of oxygen
food technology for decades. The discovery
Processed foods Classification
of the canning method by Nicolas Appert in
1810 was a watershed moment. Canning has Minimally processed foods: These are
a significant impact on food preservation processed as little as possible to preserve
methods. Louis Pasteur’s study of wine spoiling the freshness of the ingredients. Cleaning,
and explanation of how to avoid decomposition, trimming, shelling, chopping, slicing, and
published in 1864, was an early attempt to storage at low temperatures (refrigeration) are
scientifically root food technology. In addition the most common procedures.
to wine spoilage, Pasteur researched the Preserved foods: Frozen peas and vegetables,
processing of alcohol, vinegar, wines, beer, and dried peas and vegetables, and canned fruits
milk sourness. Pasteurisation, which includes and vegetables are examples of commodities
treating milk to destroy disease-causing where the preservation methods utilised do not
germs, was invented by him. Pasteurization materially alter the character of the product.
was a significant step forward in ensuring the Manufactured foods: The natural properties of
microbiological safety of food. the raw product are lost in these things, and
Food technology was first created to fulfil certain fundamental preservation techniques
military requirements. Food Technology grew are applied, such as the use of salt, sugar, oil, or
in the twentieth century as a result of world even chemical preservatives. Some examples
wars, space flight, and rising market demand are pickles, jams, marmalades, squashes,
for a range of items. Products like fast soup papads, and wadis.
mixes and ready-to-cook meals were created Formulated foods like bread, cookies, ice cream,
expressly for the demands of working women. cakes, and kulfi are prepared by mixing and
In addition, the food industry was forced to processing different ingredients to generate
concentrate on health issues. People began shelf-stable food.
integrating food items/preparations from Food derivatives: Components of foods can
various regions and countries into their diets be purified from raw materials in the food
as their food tastes and choices shifted. The business, such as sugar from sugarcane or oil
desire to eat seasonal foods throughout the from oilseeds. In some circumstances, such
year has grown. Using new methods, food as when oil is transformed to vanaspati, the
technologists attempted to provide food that derivative or component may be refined further
was both safer and fresher. (the process is called hydrogenation).
Food technologists face a problem in the Functional foods: These are foods that can
twenty-first century in producing foods that improve human wellbeings, such as probiotics
are suitable for consumers’ increasing health and lycopene.
398
Medical foods: These are foods that are used segments, is a significant gap in Cold Chain
in the nutritional treatment of illnesses, such capability. Individual food processors cannot
as low sodium salt and lactose–free milk for afford to invest in cold chain infrastructure
lactose-intolerant people. because it requires a large upfront cost with a
Status of Food Processing Sector long payback period.
The Gross Value Added in the food processing The inadequate linkage between processors,
sector was 2.24 lakh crore in 2019-20, exporters, bulk purchasers and farmers, results
contributing 1.69 per cent of the total GVA in the in a mismatch between industry needs and
country. The GVA in the food processing sector farmer availability of agri-produce. The problem
was 9.87 per cent of GVA in the Agriculture, is often exacerbated by legal requirements
Forestry and Fishing sectors, respectively. governing product storage and movement
restrictions.
This industry employs almost 7 million people.
In the absence of an exclusive supportive
Processed food exports totalled Rs 43798
platform at the state level, processors have
crores, in 2020-21.
trouble obtaining benefits under programmes
Harvest and post-harvest losses of major enforced by various agencies of the federal and
agricultural harvest totalled Rs.92,651 crore at state governments. Their issue is exacerbated
the national level, based on production data by a lack of understanding and an effective
from 2012-13 at 2014 wholesale prices. information sharing and advice platform.
India is the world’s biggest producer of food Setting up food processing units necessitates
grains. It produces the most milk, pulses, multiple clearances.
ginger, bananas, guavas, papayas, and mangoes
Sector-specific entrepreneurship development
in the world. In addition, India is the world’s
training and incubation services are two fields
second-largest producer of rice, wheat, and
where the sector’s growth is being stifled.
a variety of other fruits and vegetables. India,
Several research institutes are working on the
on the other hand, has a meagre 2.31 per cent
product, process, and technology development
share in global food exports.
and improvement. Coordination of research
Constraints in the Growth of the Sector efforts is required, as is the dissemination of
A lack of adequate supply chain infrastructure research findings to the industry.
and insufficient growth of processing and Way Forward
storage capacity corresponding with farm
Given the importance of the sector in terms of
products has been identified as the primary
its contribution to the economy, there is a need
causes of higher wastages, higher production
to greatly increase the allocations, given the
costs, and lower value-added in the food
need for waste reduction, value addition, and
processing sector.
the high employment potential of the industry.
Perishable items, such as meat, fish, and fruits
Government initiative convergence: Coordination
and vegetables, have a greater rate of waste and
between the ministries of agriculture, food
make up a tiny portion of total food output. In
processing, and commerce is required to build
order to reduce perishable loss, considerable
successful procurement links, processing
investments in farm gate infrastructure, storage
facilities, retail chains, and export operations.
and cold chain infrastructure, and processing
This will help to create synergies between
capacity development will be required.
various initiatives such as the Rashtriya Krishi
Despite being a major producer of agricultural Vikas Yojana (RKVY) of the agriculture ministry,
commodities, India’s food processing, and the Ministry of Commerce’s viability gap funding
value addition still lag behind, lowering the for cold chain and warehousing infrastructure
productivity, export output, and farmer income. growth, and the Pradhan Mantri Kisan Sampada
One of the major reasons for higher Agri- Yojana of the Ministry of Food Processing
produce wastage, especially in perishable Industries.

Promote the production of export-oriented chambers, and cold storages, including those
clusters: APEDA (Agricultural and Processed Food set up at the village level, should all be given
Export Development Authority) has long advocated complete infrastructure status so that they can
for the development of export-oriented clusters benefit from the tax breaks that come with it.
with shared infrastructure. These clusters should Connect production and processing: Village-
have a functional, end-to-end cold chain system level fruit and vegetable gathering centres
as well as processing facilities. should be linked to larger processing operations.
Regulatory frameworks to address rejections Actively include the business sector in the
in export markets: Regulatory frameworks for construction of processing facilities near rural
the use of pesticides, growth hormones, and periodic markets (RPMs).
antibiotics in marine food must be designed Food processing: The food processing industry
and implemented efficiently to lower the rate should be given more attention to improving
of rejection in the export sector. value addition in vegetable and fruit crops. The
Warehouse modernisation: Pledge financing government’s focus has now turned to support
via negotiable warehouse receipts (NWR) “agripreneurs” (agripreneur means those
at warehouses must be embraced and entrepreneurs whose business is agriculture or
popularised as a viable alternative source of agriculture-related). As a result, the agricultural
capital. The Department of Agriculture and sector will rapidly modernize.
Farmers’ Welfare should create guidelines State governments must become more involved
for warehouse-based post-harvest loans and in order to improve outreach, supervision, and
e-NWR trading (DACFW). monitoring (keeping this in view, the government
Infrastructure status for agriculture value has already launched a centrally sponsored
chains: Warehousing, packhouses, ripening National Mission on Food Processing).
Q. What are the impediments in marketing and supply chain management in developing the
food processing industry in India? Can e-commerce help in overcoming this bottleneck? (200
Words, 12.5 Marks)
• In the introduction, try to write the significance of the food processing industry in the
Indian economy.
• In body,
⚪ Discuss impediments to marketing and supply chain management in developing the food
processing industry.
⚪ In the second part of the answer, justify how e-commerce will help in overcoming these
bottlenecks.
• Try to conclude the answer by explaining the importance of the food processing industry.
Answer:
The Food Processing Industry (FPI) is very significant because it is vital to provide a bridge or linkages
between two sectors of the economy, agriculture and industry. However, currently, their issues of
agricultural marketing and supply chain management are serious concerns. But e-commerce has
been seen as a viable option to resolve issues like Agri marketing and supply chain management
and bring efficient supply chain management and effective agricultural marketing in India.
400
Issues in Agricultural Marketing affecting FPI:

Fragmented markets: The absence of an integrated market system increases transportation
costs and makes Agri produce expensive. It also causes the loss of perishable items like fruits,
vegetables etc.
Organised traders’ domination: Market domination by organised traders by dominating mandis
is an issue that prevents other farmers to gain benefits. This organised group of traders always
exploit farmers by not giving them good prices and creating an artificial condition in the market
which makes farmers sell their produce at a distressing rate.
Lack of direct access: There is a lack of direct access to the market for the farmers which
leads to their exploitation at the hands of intermediaries. Intermediaries charge various taxes in
various names and lack of access to the market makes farmers keep their products outside the
mandi sometimes. This results in damage to agricultural produce and loss to farmers.
Poor information dissemination: There is information irregularity between the buyers and sellers
that lead to corrupt practices, giving inaccurate input data. This poor information also made
farmers take ill-informed decisions and face gross losses.
Issue of storage facilities: There are issues with storage facilities that often lead to spoilage
of the produce. The lack of cold chain and warehouses led to poor storage conditions and
thousands of tonnes of food grains were lost because of mice and rodents.
Issues in Supply Chain Management Affecting FPI
The dominance of MSMEs: The food processing sector is mostly dominated by MSMEs and they
face issues of:
• non-availability of institutional credit,
• outdated technology,
• infrastructure constraints,
• lack of integrated cold storage,
• skilled manpower shortage.
Inefficient Transportation: Poor transportation (lack of multi-modal linkages) and storage
leads to delays in procuring perishable items and thus leads to losses. Inefficient supply chain
management led to delays and increased prices of raw materials.
Issue of APMC Act: Till recently, APMC laws in some states don’t allow food processing industries
to procure directly from farmers and thus increase costs due to the coming of middlemen.
Poor Connectivity Between Villages and Market: There is a lack of connectivity from villages
to markets. Poor conditions on the road, especially during monsoon season, make it very hard
to transport Agri produce. Sometimes many villages become inaccessible during the monsoon
season.
Poor Supply Chain Infrastructure: The food supply chain is complex with perishable goods and
numerous small stakeholders. In India, the infrastructure connecting these partners is very
weak.
Lack of Demand for Casting in The Market: Demand forecasting is totally absent, and the farmers
try to push whatever they produce into the market.
Other Issues: At present, the unorganized retailers are linked with farmers through wholesalers or
commission agents. The commission agents and wholesalers’ redundant supply chain practices
make unorganized further inefficient.

Significance of e-commerce in removing these issues:

Marketing: It has been successfully used by a few enterprising people in agricultural marketing.
For instance, Big Basket, and Amazon, book orders from online consumers and deliver sorted
and cleaned groceries, vegetables, and fruits to them.
Better quality: E-commerce authorities can work to encourage farmers to produce better quality
crops and meet exchange standards. Better quality products will also benefit end consumers as
well. Good quality products will increase demand in the international market also.
Better price: Price distribution alerts through mobile phones could serve as a reliable reference
price for farmers. Better price through information potentially helps in achieving doubling farmers’
income by 2022.
Synchronisation: With wide participation and perfect sync between markets and stakeholders
e-commerce can play a proactive role. This market and farmers’ synchronisation will help farmers
to produce according to the demand in the market.
Internet penetration: Rising internet uses, and penetration of smartphones provide a great
opportunity. Rising aspiration, greater consumer awareness and easy payment options would
help in a big way. Most importantly, the growth is fuelled by both Urban and Rural involvement.
Monitoring: Monitoring the warehouses for the incoming and outgoing stocks will make the
initiative stronger. This monitoring may help in planning in long term and also it can help
farmers to transport their products in the case one Warehouse is full.
Better sales: For the farmers, it promises more options for sale. It would increase their access to
markets through warehouse based sales and thus obviate the need to transport their produce
to the mandi.
Middlemen elimination: E-Commerce presents an advantage to both consumers and sellers. It
eliminates most middlemen and inventory reduction which makes it easy for a seller to pass on
the benefits to consumers at low prices.
Customer-Centric: For consumers, easy delivery becomes an advantage with low prices while,
on the other hand for sellers, cross-boundary selling gives multiple benefits, thereby making it
a saviour of search reduction and negotiation costs as well.
Accessibility: It helps by providing an accessible nationwide market for the farmer with equal prices
for the quality of his produce. With increased accessibility and availability of markets, farmers can
bargain well to get their expected prize.
Thus, to realise the potential of the sun rising industry and increase employment in the food
processing industry large scale reforms in marketing and supply chain management need to be
introduced with improved participation of farmers. The food processing industry may contribute
to achieving a $5 trillion dollar economy, doubling farmers’ income by 2022 and greatly boosting
agriculture entrepreneurship in rural areas.
Q. What are the reasons for poor acceptance of cost-effective small processing units?
How the food processing unit will be helpful to uplift the socio-economic status of poor
farmers? (150 Words, 10 Marks)
• In the Intro, try to write about the food processing industry.
402
• In Body,
⚪ In the first part of the answer, reasons for poor acceptance of small processing units.
⚪ The second part justifies how food processing will help in uplifting the socioeconomic
status of farmers.
• Try to conclude with the aim of doubling farmers’ income by 2022.
Answer:
Diverse and different types of Agro-climate made it possible to grow various types of fruits,
food grains, vegetables etc. offering ideal conditions for the development of the Food
Processing Industry(FPI) as the sunrise sector. Currently, the FPI contributes 12.8 % of total
GDP and 8.80 % ( According to IBEF) of all manufacturing output.
Factors favouring FPI in India:
• Easy availability of raw materials,
• Favourable recent policies,
• Scope for large exports of processed foods,
• Available low-cost workforce.
But the food processing industry is still in its infant stage with tremendous growth potential
due to poor acceptance of small units in the FPI sector.
Reasons for poor acceptance of small processing units:
High Cost of Procurement: Small food processing units do not go for large scale procurement
and this has become a big problem as they have to pay higher prices as compared to big
companies.
Lack of Warehouses: Small processing units are deficient in well maintained and well-equipped
warehouses to store their raw materials and end products. This becomes one of the big reasons
for the non-development of small processing units as it is increasing their cost and wastages
of raw material and final products.
Seasonality and Perishability: Most agricultural products such as fruits, vegetables, fisheries
etc are highly perishable items and the lack of cold storage facilities add more problems to
small processing units.
Inconsistency in Quality: Mainly due to production standardisation, poor storage facilities and
cold supply chain system resulting in poor quality of products.
The poor procurement system is also a major reason behind poor quality.
No Brand Value: Lack of funds and poor market presence of their products created a disadvantaged
position for them to sustain in the highly competitive market of food processing. Therefore, in
India, large corporations and companies dominate food processing centres.
Packaging and Promotion: They cannot stand when it comes to competition from big corporations
in terms of packaging and promotion. Similarly, this discourages small units from exporting their
products.
Development of multiple small food processing units and if their potentials are used at the
highest level then it will be very productive and helpful for increasing farmers’ income in the
following manner:
Vital Link: The food processing industry provides vital links between farmers and the industries
sector, helps in eliminating middlemen, reduces wastages of raw materials and increases the
shelf life of food products. This helps farmers to sell more in the long run.

Improve income: Direct linkages between manufacturers and farmers help farmers to bargain well
and get good prices for their produce.
Increased export: Processed food has big scope for export in various countries. This export
can help to increase Indian exports and gain foreign currencies and it also increases farmers›
income manifold.
Improve employment: The food processing industry will help to increase employment
opportunities for rural youths and farm labourers on a large scale. This will also help in
reducing distressing employment in the agricultural sector. On-farm employment or village
level employment will also help farmers to earn more and save more.
Cooperative farming: Better marketing opportunities may be provided by cooperative agricultural
marketing mechanisms. This will help farmers to make an organization on the village level for
better-informed decision making and price discovery.
PM SAMPADA: Pradhan Mantri Kisan SAMPADA Yojana (Scheme for Agro-Marine Processing and
Development of Agro-Processing Clusters) is the correct step in the direction of promoting small
processing industries. It is a comprehensive package which will result in the creation of modern
infrastructure with efficient supply chain management from farm gate to retail outlet with a
focus on MSME and rural sector.
Thus, to double farmers’ income by 2022 the government needs to focus on developing small
food processing units. The government is pushing for Agri- entrepreneurship, clubbing small
processing units with aspirational entrepreneurs in villages will help in achieving many objectives
like alleviating poverty, increasing entrepreneurship among youths and increasing agriculture
contribution to GDP. Hence food processing industry’s potential and scope need to be utilised.
Q. Elaborate on the policy taken by the Government of India to meet the challenges of the
food processing sector. (250 Words, 15 Marks)
• In the Introduction, try to write about the Food Processing Sector in India.
• In Body,
⚪ Discuss various challenges facing the Food Processing Sector.
⚪ Elaborate on policy initiatives taken by the government for addressing challenges.
• Try to conclude by writing about the significance of the Food Processing Industry.
Answer:
The Food Processing Industry (FPI) in India is a potential source for driving the rural economy as
it brings about the synergy between the consumer, industry, and agriculture. A well-developed
FPI increases farm gate prices, reduces wastages, ensures value addition, promotes crop
diversification, and generates employment opportunities as well as export earnings.
Status of FPI in India:
The Indian food processing industry accounts for 32 per cent of the country’s total food market,
and is ranked fifth in terms of production, consumption, export and expected growth.
Gross value added in food processing increased from Rs. 1.30 lakh crore to Rs. 2.08 lakh crore
in 5 years.
404
Challenges in Food Processing Industry: The Ministry of Food Processing Industries has identified
six key challenges faced by the food processing industry:
Gaps in Supply Chain Infrastructure: Such as lack of primary processing, storage, and distribution
facilities at the local or village level which results in wastage.
Seasonality of Operations and Low-Capacity Utilisations: India’s regional variations in climatic
conditions make it difficult to run FPI sustainably. As fruits, vegetables and other agricultural
products are seasonal in nature.
Institutional Gaps in Supply Chain: Dependence on APMC markets makes FPIs purchase raw
materials at high prices. This leads to higher prices of end products which makes these products
costly when it comes to exporting to international markets.
Quality and Safety Standards: The issues of quality and safety need to be improved to target
international markets for processed food export from India.
Lack of Private Investment: The food processing industry is a Sunrise industry and it needs a
huge investment to build infrastructure like cold storage, cold trucks, and vans, establishing
distribution and collection centres. Therefore, the role of the private sector is important.
Steps were taken by the Government:
Mega food park scheme:
Pradhan Mantri Kisan SAMPADA Yojana (Scheme for Agro-Marine Processing and Development
of Agro-Processing Clusters): PM Kisan SAMPADA Yojana is a comprehensive package for modern
infrastructure with efficient supply chain management from farm gate to retail outlet.
The Scheme of Mega Food Park aims at providing a mechanism to link agricultural production to
the market by bringing together farmers, processors, and retailers to ensure maximizing value
addition, minimizing wastage and increasing farmers’ income.
The scheme is based on the “Cluster” approach and envisages the creation of state-of-art
support infrastructure.
Scheme of Cold Chain, Value Addition and Preservation Infrastructure: The objective of the
Scheme is to provide integrated cold chain and preservation infrastructure facilities, without
any break, from the farm gate to the consumer.
Other important initiatives:
Key priority area under Make in India Scheme allowed 100% FDI under automatic route in this
sector, the government of India has constituted a rupees 2000 crore fund under NABARD.
100 per cent Foreign direct investment (FDI) in the marketing of food.
In the Union Budget 2017-18, the Government of India has set up a Dairy Processing Infra Fund
worth Rupees 8,000 crore (US$ 1.2 billion).
The Food Safety and Standards Authority of India (FSSAI) plans to invest around Rupees 482
crore (US$ 72.3 million) to strengthen the food testing infrastructure in India, by upgrading 59
existing food testing laboratories and setting up 62 new mobile testing labs across the country.
Thus, the Food Processing Industry has the biggest scope in the context of India, and it will be a
key model for developing the agriculture sector by improving technology adoption and doubling
farmers’ income by 2022. Moreover, villages will be self-sufficient and promoting industries
on the village level will increase the contribution to India’s GDP to achieve a $5 trillion dollar
economy.

Q. What are the challenges and opportunities of the food processing sector in the country? How
can the income of the farmers be substantially increased by encouraging food processing?
• In the Intro, try to write about the significance of the food processing sector.
• In Body,
⚪ Discuss challenges of food processing industries.
⚪ Discuss opportunities in the food processing sector.
⚪ Explain how the food processing industry will help in increasing farmers’ income
substantially.
Answer:
The Food Processing Industry (FPI) in India is a potential source for driving the rural economy as
it brings about the synergy between the consumer, industry, and agriculture. A well-developed
FPI increases farm gate prices, reduces wastages, ensures value addition, promotes crop
diversification, and generates employment opportunities as well as export earnings.
Status of FPI in India:
The Indian food processing industry accounts for 32 per cent of the country’s total food market
and is ranked fifth in terms of production, consumption, export and expected growth.
Gross value added in food processing increased from Rs. 1.30 lakh crore to Rs. 2.08 lakh crore
in 5 years.
Challenges in Food Processing Industry: The Ministry of Food Processing Industries has identified
six key challenges faced by the food processing industry:
•
Gaps in Supply Chain Infrastructure: Such as lack of primary processing, storage, and
distribution facilities at the local or village level which results in wastage.
•
Seasonality of Operations and Low-Capacity Utilisations: India’s regional variations in
climatic conditions make it difficult to run FPI sustainably. As fruits, vegetables and other
agricultural products are seasonal in nature.
•
Institutional Gaps in Supply Chain: Dependence on APMC markets makes FPIs purchase
raw materials at high prices. This leads to higher prices of end products which makes these
products costly when it comes to exporting to international markets.
•
Quality and Safety Standards: The issues of quality and safety need to be improved to target
international markets for processed food export from India.
•
Lack of Private Investment: The food processing industry is the Sunrise industry and it needs
huge investment to build infrastructure like cold storage, cold trucks, and vans, establishing
distribution and collection centres. Therefore, the role of the private sector is important.
Opportunities in the Food Processing Industry:
•
Size of the industry: By 2025 the food processing sector is expected to be worth over half
trillion a dollars. The very size of FPI in terms of monetary value will automatically help in
increasing or doubling farmers’ income.
•
Investment: By 2024, the food processing industry will potentially attract $33 billion in
investment.
406
•
Employment: It will generate employment for 9 million people by 2024 which will help to
reduce the dependence of the masses on agriculture and provide them gainful employment.
•
Multiplier effects: By 2030, Indian Household Consumption will make India the 5th largest
consumer of processed food. Increased demand for processed food will generate demand
and it will lead to multiplier effects.
•
Urbanisation: Increasing rate of urbanisation and increasing middle class will generate demand
for processed food. It will give rise to organised growth of the sector and retail sectors.
•
Advancement of MSME: MSMEs are playing a vital role in India’s food processing chain
through various advancements in skills and technology.
•
Healthy food habits: There is high demand for packaged, healthy and immunity booster
snacks such as roasted nuts, popcorns, and roasted pulses. It leads to a shift in focus from
loose to branded packaging.
The government’s ‘Atmanirbhar Bharat’ initiative places priority on this sector and offers
support through various policies.
Food processing Industry and Farmer’s Income: One of the critical areas that can enhance the
income of rural households is to provide higher opportunities for Agro-based food processing
activities.
Virtuous Cycle: FPI creates a virtuous cycle, as first (value chain), it provides the farmer with an
additional channel to the market beyond the mandi where he can expect better prices for his
commodities and an assured off-take while ensuring lower wastage.
Job creation: It warrants local on-farm jobs and near-farm work as local youth are trained for
sorting, grading and separating commodities needed for food processing factories.
Non-food processing industrial activities such as large-scale employment generation in building
infrastructure, transportation of food, and other maintenance in cold storage systems will also
occur.
Export: India produces large amounts of fruits, which is much more than what we consume.
We could turn this to our advantage if we process the excess produce and tap export markets
thus earning foreign exchange. These benefits finally ensure a trickle-down effect on farmers’
income.
Cooperative design possibility: The promotion of food processing industries on a cooperative
basis will give ownership of food processing industries to the farmers. It will also help farmers
to get familiar with market forces and demand in the market and produce various products
according to the market demand.
By promoting various opportunities and scopes in food processing industries will enhance
farmers’ income substantially. Making villages self-sufficient and promoting industries on
village level will increase contribution in India’s GDP. Food processing industry will also help in
achieving targets - a $5 trillion dollar economy and doubling farmer’s income.
Some Important Recent Government Initiatives to provide end-to-end irrigation supply chain
Related to Agriculture solutions, including water sources, distribution
Pradhan Mantri Krishi Sinchai Yojana (PMKSY) networks, and farm-level applications.
The Pradhan Mantri Krishi Sinchayee Yojana The PMKSY focuses on harvesting rainwater at
(PMKSY) was launched with the tagline the micro-level, using “Jal Sanchay” and “Jal
“Har Khet Ko Paani” during the 2015-16 fiscal year Sinchan,” to create sources for both assured
and protected irrigation.

PMKSY is made up of the following elements: Paramparagat Krishi Vikas Yojana (PKVY)
The Ministry of Jal Shakti is implementing the In India, the Paramparagat Krishi Vikas Yojana
Accelerated Irrigation Benefit Program (AIBP). is being used to promote organic farming.
Har Khet ko Pani (PMKSY): Ministry of Jal Shakti To attain premium prices, enhance soil health
is implementing this programme. and organic matter content, as well as the
The Department of Land Resources is farmer’s net income.
implementing PMKSY-Watershed. Important e-technology to assist the farmers:
National Mission for Sustainable Agriculture National Agriculture Market (e-NAM)
(NMSA) It establishes a national e-marketing platform
The National Mission on Sustainable Agriculture and stimulates infrastructure development to
(NMSA) is one of eight missions in the National support e-marketing.
Action Plan on Climate Change (NAPCC) that This unique market method is altering farm
aims to promote sustainable agriculture markets by providing enhanced price discovery.
through climate change adaptation. As the country develops toward a “One Nation,
The major goal is to increase agricultural One Market” paradigm, it provides openness
productivity, particularly in rainy areas, by and competition, helping farmers to obtain
focusing on synergies between integrated greater remuneration for their produce.
farming, soil health management, and resource iMandi:
conservation. The NMSA has also established It is the initiative launched by IFFCO (Indian
a goal of meeting national and international Farm Forestry Development Cooperative) and
commitments to the Sustainable Development it is in line with the Digital India initiative to
Goals (SDG) and Intended Nationally Determined encourage rural digital revolution.
Contribution (INDC) (INDC).
This Social Commerce app intends to benefit
Rainfed agriculture, soil health management, the cultivators and to bring the digital
organic farming, and other NMSA components revolution to rural India with the support of
play an important role in achieving the SDGs digital technology.
and INDC.
Export Inspection Council (EIC):
The National Integrated/Composite Farming
To promote ease of agricultural exports from
System (NMSA) is a programmatic intervention
India, the Indian government introduced digital
that encourages location-specific integrated/
initiatives by the Export Inspection Council
composite farming systems, soil and moisture
(EIC).
conservation initiatives, holistic soil health
For this, three portals have been developed
management, and rainfed technology
to decrease transaction time and cost in an
mainstreaming to make the farm sector more
effective and transparent manner: Single
effective, healthy, profitable, and climate
Laboratory for Accreditation and Approvals, for
responsive.
Safe Food Export Traceability, and for Monitoring
One of the components of Rainfed Area
Export Alerts from importing regulators.
Development is NMSA.
Meghdoot:
Soil Health Card Scheme
The Indian government has launched this
The programme began in 2015 to assist state
mobile application with the intention to further
governments in issuing Soil Health Cards to all
the Digital India initiative and bring technology
farmers around the country.
to cultivators.
The Soil Health Cards give farmers information
This app will assist farmers by providing various
about their soil’s nutritional status as well
forecast information relating to humidity,
as fertiliser application recommendations to
rainfall, temperature, wind speed and direction,
improve soil health and fertility.
and how to take care of the crops and livestock.
408
KisanSuvidha and PusaKrishi Mobile App: boost processed food exports, and lower
This application gives different information with the cost of sanitary and nutritious food for
respect to Market Prices, pesticides, fertilizers, customers.
seeds, weather, agricultural machinery, etc. Mega Mega Food Parks, Integrated Cold
It distributes information related to the Chain and Value Added Infrastructure,
latest technologies developed by the Indian Food Processing and Preservation Capacity
Agricultural Research Institute (IARI). Creation/Expansion, Infrastructure for Agro-
Pradhan Mantri Kisan Sampada Yojana: processing Clusters, Backward and Forward
Linkages, Food Safety and Quality Assurance
PMKSY provides subsidy-based support for
Infrastructure, Human Resources and
agriculture and agro-based companies across
Institutions, and Operation Greens are some
the value/supply chain. It is expected to reduce
of the scheme’s components.
agricultural waste, improve processing levels,
Fig. 16.3: Mega Food Park
Q. How can the Digital India program help farmers to improve farm productivity and income?
What step has the government taken in this regard? (200 Words, 12.5 Marks)
• In the introduction, try to write about Digital India Programme.
• In body,
⚪ Discuss how digital India helps farmers to improve farm productivity and income
⚪ Discuss steps taken by the government in this direction.
• In conclusion, try to write a way forward.
Answer:
Digital India was launched in the year 2015 with the vision to transform India into a digitally
empowered society and knowledge economy. The Digital India programme is centred on
three key vision areas. Digital infrastructure as a core utility to every citizen, governance and
service on-demand, digital empowerment of citizens. Given that about 70%(2011 census)
of India’s population is rural and agriculture is the main source of livelihood for 50% of the
population, Digital India can play an important role in the agriculture sector.

Digital India’s Role to Improve Farm Productivity and Farmers’ Income:

Virtual ecosystem: Digital India is important to create a virtual ecosystem to support the
delivery of timely, localised information and services to farmers, making agriculture profitable
and sustainable.
It can help in providing data regarding soil variability, moisture and nutrient levels, rainfall
variability, the timing of planting and harvesting and market price volatility to farmers.
Better prices: The greatest impact of Digital India is on realising better market pricing and
reducing transaction costs. It has the potential to connect each farmer to anywhere in the
country. This would help farmers to cut the cost born to intermediaries.
Interconnectedness will help farmers to make better-informed decisions before selling them in
the market.
Tailored recommendations: Digital technology can be the key to increasing agriculture productivity
by delivering tailored recommendations to farmers based on crop is sown, real-time observed
weather and projected market prices.
Social media: Digital India will also leverage social media platforms like Digital Green. Digital
Green uses participatory videos about one farmer’s best management practices for other
farmers. This approach is more cost-effective than traditional extension services as farmers
trust other farmers.
Direct cash transfer: The needy and poor farmers get Direct cash replacing agricultural subsidies.
This would help in increased agricultural productivity as well as reduce farmer’s debt burden.
When combined with data infrastructure, subsidies can be validated and targeted to increase
farm profitability that in turn give farmers confidence to invest in their farms to further increase
productivity.
Savings: Mobile money is the intervention that has unlocked tremendous opportunities for
rural consumers in Africa. Similarly, initiatives like PM Jan Dhan Yojana, Bhim etc. can play
an important role. Digital platforms allow farmers to bypass poor banking infrastructure and
support savings and access credit digitally.
Land Reforms and Land Record Modernisation: Digitisation of land record and conclusive titling
will solve the issues like insecurity of tenancy tenure, government schemes reaching to landless
farmers etc.
Steps were taken by the Government
BharatNet: BharatNet, also known as Bharat Broadband Network Limited, is the National Optical
Fibre Network.
It aims to provide connectivity to all 250,000-gram panchayats in the country, to improve
communication in India and reach the campaign goal of Digital India.
e-NAM: National Agriculture Market or eNAM is an online trading platform for agricultural
commodities in India. The market facilitates farmers, traders and buyers with online trading in
commodities. The market is helping in better price discovery and provide facilities for smooth
marketing of their produce.
Agri Market App: The mobile application has been developed with an aim to keep farmers
updated with the crop prices and discourage them to carry-out distress sale. Farmers can get
information related to prices of crops in markets within 50km of their own device location using
the Agri Market Mobile App.
e-Governance Efforts: The government has put in operation 3 portals viz. farmer portal, Kisan
call centre and mKisan portal to help farmers make informed decisions for efficient farming
410
under varying Agro-climatic conditions.

Also, soil health card software has been standardised and web-based software developed
to provide integrated nutrient management recommendations using soil test crop response
methods for eight states.
Bharat Nirman: Bharat Nirman is an effort for creating and augmenting basic rural infrastructure.
This plan aims to supply telecommunication facilities to remote areas of rural areas. It aims
to increase the rural telecommunication facilities by 40%. Bharat Nirman, has registered the
increased teledensity in rural areas.
National Mission On Agricultural Extension and Technology: The aim of the Mission is to strengthen
agricultural extension to enable the delivery of appropriate technology and improved agronomic
practices to farmers. This is envisaged to be achieved by interactive methods of information
dissemination, use of ICT, popularisation of modern technologies, capacity building etc.
Thus, digital technologies surely help farmers and the agricultural sector on a large scale. From
improving productivity to selling in the market and also in every aspect of farming activity. Now
there is a need for proper awareness and information dissemination in every possible language
that will increase the reach of all the schemes for farmers. If applied properly digital India
mission can help to achieve the target of “Doubling Farmers Income By 2022”.
Pradhan Mantri Fasal Bima Yojana (PMFBY) Indian agriculture, which is dependent on rain
The Pradhan Mantri Fasal Bima Yojana (PMFBY), for two-thirds of its production, is vulnerable
which is funded by the government, is a crop to monsoon whims, as well as drought and
insurance system that brings together a variety flooding in many regions of the nation. Drought
of stakeholders on a single platform. and flooding are common natural disasters in
Micro Irrigation Fund (MIF) many sections of the country.
As part of its goal to enhance agriculture Climate change will intensify these threats
productivity and farmers’ income, the and may have a considerable influence
government established a dedicated Rs. 5,000 on food security by directly and indirectly
crore fund to bring the additional land area impacting crops, soils, animals, fisheries,
under micro-irrigation. and pests. As a result, it’s critical to improve
The fund has been established under NABARD, climate resilience.
which will lend the money to states at a low- From 2014 to 2015, the National Mission for
interest rate in order to encourage micro- Sustainable Agriculture (NMSA) promoted
irrigation, which now covers just 10 million location-specific interconnected farming
hectares out of a potential of 70 million. systems, soil and moisture conservation efforts,
National Mission for Sustainable Agriculture comprehensive soil health management,
(NMSA) efficient water management practices, and
mainstreaming with the aim of boosting
In 2011–12, the National Mission for Sustainable
agriculture’s productivity, sustainability,
Agriculture (NMSA) was established with
profitability, and climate resilience.
the purpose of enhancing food security and
safeguarding natural resources such as land, Under NMSA following ten deliverables are
water, biodiversity, and genetic resources monitored:
in India by establishing climate-resilient i) Area under organic farming,
agricultural practices. ii) Production of Bio-fertilizers,
Following are the impacts of Climate Change iii) Precision Irrigation,
on Indian Agriculture: iv) SRI/Direct Seeded Rice from Transplantation,

v) Crop diversification, ix)

Climate Resilient genotypes with greater
vi) Additional Area under plantation in Arable adaptation to drought, flood, salinity, and
land, high temperature,
vii) Climate Resilient Varieties (CRV) Identified/ x)
Coverage of milch animals under ration
Released, balancing programme and
viii) Identification of genotypes of crops with xi)
Establishment of bypass protein feed
enhanced CO2 fixation potential and less making unit.
water consumption & Nutrients,
Sustainable
Agriculture
National
Solar Green India
Mission
Strategic
Knowledge National Energy
for Climate
Change
Mission E ciency
Mission for
Sustainaing Mission for
the Sustainable
Himalayan
Habitat
Ecosystem
National
Water
Mission
Fig. 16.4: National Missions Under NAPCC
Some important Schemes/Initiatives related Rainfed Area Development (RAD),

to NMSA National Bamboo Mission (NBM) and Sub-
The National Mission for Sustainable mission on Agro-Forestry (SMAF).
Agriculture (NMSA) under the National Action These and other programmes, such as Prime
Plan for Climate Change (NAPCC), involves Minister Krishi Sinchayee Yojana (PMKSY),
programmatic approaches such as; ensure that natural resources are used wisely.
Soil Health Card (SHC). Under the National Food Security Mission
Paramparagat Krishi Vikas Yojana (PKVY), (NFSM), assistance is provided for stress-
Mission Organic Value Chain Development for tolerant/climate-resilient food grain types,
North-eastern Region (MOVCDNER), among other things.
412
The Major Goals of IFS are: populations during droughts and other times.
Maximization of yield for stable income. To Feed Increasing Population: Higher food
Achieve agro-ecological equilibrium. production to equate the demand of the
Controlling insects-pest, diseases and weeds. exploding population of our nation.
Reducing the use of agro-chemical inputs. Some Challenges:
Mitigation of the negative impact of agriculture Financial Support: This can be a gamechanger
or livestock on the environment. for small and marginal farmers if financial
support is available.
IFS and Sustained Agricultural Production
Lack of Awareness: Most of the farmers are
Increased farm income: Through proper residue
not aware of the benefits of IFS and extension
recycling and allied components and preparing
services.
manure which can be again used for organic
farming. IFS also increases the yield of farming. Wheat-Rice Dominance: Mainly due to
Minimum Support Prices farmers are hesitant
Income stability: Regular stable income
to transition to IFS.
through the products like egg, milk, mushroom,
vegetables, honey, and silkworm cocoons from Therefore, promoting the Integrated Farming
the linked activities in integrated farming. System is a vital and prominent solution for
Stability in income can help in boosting rural various agricultural problems especially farmer’s
agricultural entrepreneurship. distress and improving the agrarian economy.
It is high time that the government should
Sustainable soil fertility: Organic waste
promote and include farming communities in
recycling helps to reduce problems of burning
adopting IFS on a large-scale basis.
of farm residue and increase soil fertility
sustainably. National Mission on Edible Oil-Oil Palm
Increased nutrition: Integration of allied Key points
activities will result in the availability of A new Centrally Sponsored Scheme, the National
nutritious food enriched with protein, Mission on Edible Oils – Oil Palm (NMEO-OP),
carbohydrate, fat, minerals, and vitamins. with a special focus on the Northeast region
Environment protection: Integrated farming and the Andaman and Nicobar Islands. Due to
will help in environmental protection through the significant reliance on imported edible oils,
effective recycling of waste from animal activities it is critical to take measures to increase local
like piggery, poultry, and pigeon rearing. edible oil production, which includes expanding
the area and productivity of oil palm.
Agriculture and allied activities: Cultivation
of fodder crops as intercropping and border By 2025-26, the revised plan seeks to plant
cropping will result in the availability of adequate an additional 0.65 million hectares of oil palm,
nutritious fodder for animal components like a increasing the total to one million hectares, up
milch cow, goat/sheep, pig and rabbit. from the existing 0.3 million. Crude palm oil
output would have climbed to 1.1 million tonnes
Agroforestry: Firewood and construction
by 2025-26, and 2.8 million tonnes by 2029-30.
wood requirements could be met from the
agroforestry system without affecting the The scheme also includes viability gap money,
natural forest. which is paid directly into farmers’ accounts
Avoidance of soil loss through erosion by as a direct benefit transfer to safeguard them
Agroforestry and proper cultivation of each from global price volatility.
part of the land by integrated farming. Concerns Associated With Oil-Palm
On-farm employment generation: Generation Plantations:
of regular employment for the farm family Large-scale forest conversion: Edible oil
members of small and marginal farmers. This will plantations, unlike oilseed crops, tend to
help to reduce distressed migration among rural substitute native tropical forests, diminishing

biodiversity. Commercial palm oil growing has Way forward

displaced tropical forests in the forested belts The scheme implementation plan should
of Sumatra, Borneo, and the Malay Peninsula, address sustainability issues and including
which produce 90% of the world’s palm oil. strict criteria in the scheme would help in
The massive conversion of tropical forests to oil sustainable palm oil cultivation.
palm plantations has resulted in endangered Any reckless expansion of palm oil in the Indian
species losing key habitats and an increase in archipelago of Andaman and Nicobar or Eco-
human-wildlife conflict. sensitive fragile regions of the northeast should
Air pollution: In both natural forests and oil be avoided.
palm plantations, burning is a typical means of The palm oil sector could bring advantages
clearing vegetation. Forest fires pollute the air without endangering the environment if better
and contribute to climate change by releasing management techniques are used. Oil palm
smoke and carbon dioxide into the atmosphere. plantations can no longer operate at the
Water intensive crops: Palm oil is a perennial expense of rainforests if strict production
crop that yields three times the quantity of oil criteria are applied to all levels of palm oil
per acre as coconut oil, but it requires three production.
times the amount of water. It must be cultivated
in rainy areas to avoid groundwater exploitation.
414
17 Infrastructure
Introduction/Definition infrastructure aids the country›s economic

Infrastructure implies the basic systems and growth. For example, the education sector does
services that a nation or organization requires not directly contribute to a country›s economic
in order to function appropriately. development. However, it helps indirectly by
providing students with high-quality education,
Infrastructure is the lifeline of an economy.
resulting in the development of physicians,
Whatever the primary driving force of an
scientists, engineers, and technologists.
economy is, whether it is primary, secondary,
or tertiary, a suitable level of infrastructure is Relationship between Infrastructure and
needed for growth and development. Economic Development
In a labor rich country like India, the infrastructure Increase in investment
itself is a huge employment provider. Investors always invest in the country
The infrastructure supports the key areas of where the infrastructure is good i.e. good
manufacturing and agricultural activity, as transport,good supply of power and a good
well as domestic and international trade and business environment and for this the
commerce. countries should invest in their infrastructure
as good infrastructure would attract more
These services consist of roads, railways,
investors and increase the investment in
ports, airports, dams, power plants, oil and
the country. This would help in economic
gas pipelines, telecommunication facilities,
development.
the country’s educational system, which
includes schools and colleges, health system, Industrial development
which includes hospitals, and sanitary For the development of an industry it is
system, which includes clean drinking water necessary that it is situated in a place from
facilities, and monetary system, which where it has uninterrupted and low cost supply
includes banks, insurance, and other financial of raw materials and an easy transportation of
institutions. finished products to the market. So a country
There are three sectors which are considered with good transport infrastructure leads to
as the infrastructure, universally around the industrial development.
world namely power, transportation, and Employment generation
communication. A country where there are infrastructure
Types of Infrastructure projects lead to employment generation
At times, the infrastructure is divided into two and when a good infrastructure is created
categories: economic and social. it generates new opportunities for
business which also lead to employment
Economic: Infrastructure associated with
generation.
energy, transportation and communication
are included in this category. Economic Trade and commerce
Infrastructure is directly linked with the Trade is defined as selling and buying goods for
economic development of a country or an money between two or more parties involved
organization. it includes the basic amenities in it and commerce is the entire process of
and services that directly influence and benefit delivering products from manufacturers to
the production process economy distribution. consumers. It includes things like transportation,
Social: Those related to education, health and banking and insurance, warehousing etc which
housing are included in this. Indirectly, social requires good investment in infrastructure and
Infrastructure 415
Fig. 17.1: Infrastructure
416 Infrastructure
good infrastructure would lead to economic In addition to the obvious correlation between
development. water and sanitation and health, the quality of
Importance/Relevance of Infrastructure transportation and communication systems will
affect access to health care. Improvements in
Infrastructure is the supporting framework that
water supply and sanitation have a significant
enables a new industrial economy to operate
impact by reducing morbidity (meaning the
efficiently.
likelihood of being ill) from major waterborne
Modern agriculture relies heavily on it for diseases and reducing the incidence of
the efficient and large-scale transportation disease when it occurs. Air pollution and
of seeds, pesticides, fertilizers, and produce transportation-related safety hazards have
through modern highways, railways, and an effect on morbidity, particularly in densely
shipping facilities. populated areas.
Agriculture has become increasingly reliant on
insurance and banking services in recent years
as a result of the need to operate on a large
scale.
It should be stressed that good infrastructure is
crucial not just for faster economic growth but
also for inclusive growth. When we talk about
sustainable development, we mean that the
benefits of growth are shared by the majority
of a country’s people. As a result of inclusive
development, poverty will be alleviated, and
income inequality will be reduced in the
country.
Micro, small, and medium enterprises (MSME)
are distributed across the economy, and their
development and growth necessitate access
to high-quality, dependable infrastructure
facilities in order to compete effectively
Fig. 17.2 Growth drivers for Infrastructure
with large-scale enterprises, which can also
develop some of their own infrastructure, The State Of Infrastructure In India
such as small power plants or generators. Energy
Furthermore, large-scale companies There are both industrial and non-commercial
may position themselves near ports and energy sources. Coal, petroleum, and energy are
transportation hubs where the requisite industrial sources since they can be purchased
infrastructure is available. and sold. Firewood, farm waste, and dried
On the other hand, small businesses are dung are also non-commercial energy sources.
distributed across the economy and must rely Since they are found in nature/forests, they are
on the availability of general infrastructure non-commercial.
facilities. As a result, constructing general Solar energy, wind energy, and tidal power are
infrastructure facilities aids small businesses some examples of non-conventional energy
in competing efficiently with large-scale firms, sources. Since India is a tropical country, it
and being labor-intensive, creates a large has virtually unlimited capacity for generating
number of job prospects for employees. This all three forms of energy if appropriate cost-
will aid in the reduction of poverty in developed effective technologies are used.
countries.
Infrastructure 417
modern energy to all.” It also expects to pass

through the following checkpoints along the
way:
By 2022, produce 175 GW(gigawatt) of renewable
energy potential.
By 2022-23, cut oil and gas imports by ten per
cent.
Continue to reduce GDP-based emission
intensity in a way that will assist India in
achieving its 2030 INDC(Intended Nationally
Determined Contribution) target.
Constraints
The constraints on achieving the milestones
Fig. 17.3 Consumption of Electricity by Sectors in set for 2022-23 can be divided into two broad
India (2017-18) categories: overall energy sector and sub-
sector specific.
Present status:
Overall energy subsidies and taxes:
According to Ministry of Power, Coal dominates
India’s energy mix, accounting for 51.1 % of total Various subsidies and taxes distort the energy
energy consumption, followed by Wind, Solar market and encourage the use of inefficient
and other RE (27.5%) and Hydro (11.7%). India is fuels over efficient fuels, as well as, making
the world’s third-largest user of energy. In 2017, Indian exports and domestic output
however, its per capita energy consumption uncompetitive since energy taxes are not
was about 625.6 kilograms of oil equivalent covered by the GST, and therefore no input
(kgoe), compared to 1860 kgoe globally. In 2015, credit is provided.
per capita energy consumption in the United Solution/way forward:
States and China was 6800 kgoe and 2170 kgoe, Oil, natural gas, electricity, and coal should
respectively. (kgoe - kilograms of oil equivalent). be subjected to GST to allow for the input tax
According to Power Ministry, as on 31st March, credit.
2022 in the power sector, India’s total installed To ensure a level playing field, all sources of
capacity is about 399.4 GW with 163.3 GW of energy should have the same GST rate.
renewable energy (including Hydro). Energy- End-consumers should be given all types
related sub-sectors continue to face difficulties. of subsidies as practical subsidies, allowing
According to PPAC India imported 212.2 million them to select the most appropriate and cost-
tonnes of crude oil in 2021-22, which implies that effective energy source for them.
we imported 85.5 % of our crude oil requirements.
ENERGY
In 2020-21 we imported 33 bcm of LNG (PPAC).
Break up total installed capacity
There is still approximately 16000 km of gas
pipeline networks in use today. Energy Break up total installed capacity as on
In the coal industry, the government only 31.03.2022
recently approved commercial mining in 2018. CATEGORY INSTALLED % of
Furthermore, power companies, especially GENERATION SHARE IN
state government utilities, continue to face CAPACITY(MW) Total
financial difficulties.
Fossil Fuel
Some Of The Important Objectives/Targets Of
Government Coal 2,04,080 51.1%
The government’s new energy policies seek to Lignite 6,620 1.7%
“provide affordable, secure, renewable, and
418 Infrastructure
CATEGORY INSTALLED % of Energy Efficiency

GENERATION SHARE IN Energy efficiency means using minimum energy
CAPACITY(MW) Total to perform the task, i.e, eliminating energy
waste.
Gas 24,900 6.3%
Benefit:
Diesel 510 0.1%
reduce the greenhouse gas emissions
Total Fossil 2,36,109 59.1%
reduce the demand for energy imports
Fuel
lower our costs on a household and economy-
Non-Fossil
wide level.
Fuel
Energy Efficiency Mission
RES (Incl. 1,56,608 39.2%
It is the national mission under National Action
Hydro)
Plan on Climate Change (NAPCC)
Hydro 46,723 11.7% Its aim is to strengthen the market for energy
Wind, Solar & 1,09,885 27.5% efficiency by applying innovative business
Other RE models in the energy efficiency sector.
Wind 40,358 10.1% India Energy Security Scenario 2047
Solar 53,997 13.5% The India Energy Security Scenarios 2047 is an
open-source web-based tool launched by NITI
BM Power/ 10,206 2.6%
Aayog.
Cogen
Aim: To explore a range of potential future energy
Waste to 477 0.1%
scenarios for India, for different energy requirements
Energy
and supply sectors leading up to 2047.
Small Hydro 4849 1.2% It searches India’s possible energy scenarios
Power all over the energy supply areas like solar,
Nuclear 6780 1.7% wind, biofuels, oil, gas, coal and nuclear and
Total Non- 1,63,388 40.9% energy demand areas like transport, industry,
Fossil agriculture, cooking and lighting appliances.
Fuel This allows users to actively make choices for
Total 3,99,497 100% energy and search for a range of ways for the
Installed country to reduce carbon footprint and import
Capacity dependence and efficient land use.
(Fossil Fuel It offers basics to policymakers to create an
& Non-Fossil energy pathway which is secure and addresses
Fuel) the needs of the people and climate.
Table 17.1: Energy Break up Total Installed Capacity It would help India in future energy planning.
Projected Energy Demand It would be a step for the Government toward
achieving the goal of power for all.
It is projected that India’s energy demand will
double by 2040. Energy Pricing
Oil consumption is projected to rise from Pricing of Petroleum Products
5million barrels a day to 8 million barrels a day There are mainly four factors that influence the
by 2040. rise in prices:
India would be third in energy demand in the Processing charges of Crude oil and freight
world by 2030 after China and the United States. charges to the dealer
Liquefied natural gas (LNG) demand is expected The central government charges excise duty.
to increase 4 times to 124 billion cubic metres. Dealer payment to the gas station.
Infrastructure 419
The state government takes Value Added Tax. Distribution Companies (DISCOMs) use load
82% of the crude oil needed by India is imported. shedding to mitigate losses as the difference
As OPEC countries, (Iraq, Iran, Kuwait, Saudi between the average cost of supply (ACS) and
Arabia and Venezuela) provide crude oil to average revenue realized (ARR) remains due
India that is why the benchmark for oil prices to high aggregate technical and commercial
in India is Brent. (AT&C) losses.
At 6 am every day the price for petrol and Although legally independent, Regulatory
diesel is revised and the price of crude oil in Commissions are unable to fully regulate
the international market directly affects the DISCOMs and fix rational tariffs.
price of fuel in India. Unmetered power supply to farming provides
34% as Excise Duty is central government no incentive to farmers to use electricity
charges and the state government charges efficiently.
their own per cent. There is a lot of hidden demand because of
2. Coal prices: unreliable supply and load shedding.
The Ministry of Coal has started an auction of Owing to their poor financial health, state
coal mines on a revenue share basis. In order to power utilities are unable to invest in system
reach a revenue share based on market prices upgrades, and the industrial/business tariff
of coal, NCI was proposed and cross-subsidy regime have harmed the
productivity of the industrial and commercial
The NCI is a price index that reflects the change
sectors.
in the price level of coal in a particular month
with respect to the fixed base year. Presently Way forward
the NIC FY 2017-18 is the base year. Promote smart grid and smart meters.
The Index includes all transactions of raw coal All PPAs, including those with state-owned
in the Indian market. power companies (GENCOs), should be
Indian Statistical Institute, Kolkata has made competitively bid. To promote the flexible
Index and the Representative Prices. capacity for peak demand and intermittency, a
capacity market should be created.
The NCI is released every month.
AT&C losses may be minimized by privatizing
3. Electricity prices:
state delivery utilities and/or using a franchisee
The Electricity Bill is an important part of the
model.
household budget and knowing the pricing is
Discoms in rural areas which use a franchisee
necessary to reduce the bill.
model for their retail business and set minimum
Energy bill:
performance requirements, such as the use of
One comes across basically two units while decentralized generation and storage systems
calculating Energy Bill in kW called connected/ for local reliability and resilience.
sanction load and another consumption of
Regulatory bodies must be strengthened even
energy in kWh (or also called unit).
further and made fully autonomous.
It should be known that if the actual demand
Instead of offering separate subsidies for
passes the sanctioned demand then the fixed
fertilizers, energy, crop insurance, and other
charge/kW would increase depending on the
products, an upfront subsidy per acre of land
state.
through Direct Benefit Transfer (DBT) could be
Some other charges on the bill are Electricity considered for agriculture.
Duty, Fuel Surcharge, Power Purchase
Encourage the use of solar pumps for
adjustment cost, surcharge etc
agricultural purposes. The farmer’s surplus
Power: power should be purchased by local utilities.
Inefficient plants are still working, whereas DISCOMs may be fined for load shedding.
more modern plants are underutilized.
420 Infrastructure
Ensure effective enforcement of a cap on cross- firms, and the lack of market-driven gas prices
subsidy and open access. It is also essential to for old fields discourages further development.
remove high open access charges. The gas pipeline infrastructure is also
Actively encourage cross-border electricity inadequate.
exchange in order to maximize the use of Way forward
current and future generation assets. Ensure a single carrier and unrestricted access
Introducing performance-based rewards into to gas pipelines.
the tariff system is a good idea. Land can be leased by the government to oil
To control power demand, 100 per cent marketing companies (OMCs) for energy crops,
metering, net metering, smart meters, and similar to how ‘solar parks’ can be extended to
metering of electricity supplied to agriculture biofuels.
must be enforced. Separate the Petroleum and Natural Gas
Important Developments in Power Sector Regulatory Board (PNGRB) developmental and
Amendments in Tariff Policy legislative roles.
Amendments to Electricity Act 2003 are with Ensure that the National Gas Grid is up and
the following objectives – running as soon as possible.
Ensure consumer centricity Promote city gas delivery so that natural gas
Promote Ease of Doing Business can be piped in (PNG).
Enhance sustainability of the power sector Review contract terms and provide the
Promote green power necessary flexibility to render stranded oil and
gas assets operational.
Amendment Is:
Enhance production from ONGC and OIL’s
The Selection Committee after the amendment
existing fields with cutting-edge technology
had that the committee will be headed by a
within a system of production enhancement
sitting Judge of the Supreme Court.
contracts.
The amendment will allow the state government
Take into account consumer rates for blocks
to pay the subsidy 3 to 4 months later also.
that are not viable due to low gas prices.
Cost reflective tariffs would be applied.
Provide shared infrastructure for evacuation of
Adequate payment security mechanisms are to
oil and gas from small and scattered onshore
be established.
and offshore fields.
Amendment will lead to the establishment of
2G bio-ethanol ventures should be designated
an Electricity Contract enforcement Authority.
as a “priority area.”
It will promote the generation of electricity
The government should provide 2G ethanol
from a renewable source.
project developers/technology partners with
Amendment also had a minimum percentage feasibility gap funding/financial assistance.
of purchase of electricity from hydro sources
Declare regasified liquified natural gas (R-LNG)
of energy to be specified by the Commissions.
as a transportation fuel and encourage
It will strengthen the Appellate Tribunal compressed natural gas (PNG) in rural areas.
(APTEL).
Create strategic reserves through various policy
It will facilitate trade in electricity with other options.
countries.
Hydrocarbon Exploration and Licensing
It will also have sub-license provisions for Policy(HELP)
distribution.
The Hydrocarbon Exploration and Licensing
Oil & Gas Policy (HELP) is the production and exploration
There is no nondiscriminatory access to the gas policy of the Government of India in the
pipeline network for private and public sector hydrocarbon sector, adopted in 2016.
Infrastructure 421
Objective: To boost the production of oil & gas The requirement of precious approval in cases
in the Indian sedimentary basin. in which the central Government did the
Features of HELP: allocation of coal blocks.
The single license that would cover exploration Control over the use of coal mined by the
and production. company that has been allotted the mine has
It gives a Revenue Sharing Model. been given in the act.
Reduced and categorised the duty. This act required CMSP Rules and CBA Rules
were also amended.
Full marketing and pricing freedom.
Coal Selling
Extension of period for exploration and
production for shallow water to 8 years and 10 SHAKTI Coal Policy (2017)
years for deep water and frontier areas. SHAKTI (Scheme for Harnessing and Allocating
Pre-determined Liquidated Damages (LDs) for Koyala Transparently in India) coal policy was
any shortage in the agreed work program. introduced in May 2017 by the Government to
replace the Letter of Assurance and Fuel Supply
Coal
Agreement (FSA)-based regime. The aim of the
Land for coal mining is becoming scarce, and
policy is to increase transparency, accountability
there is a move toward expanding opencast
and competition in coal allocation.
mining while discouraging underground
Features:
operations, including for higher-quality coal
reserves. This exacerbates the land scarcity All the power plants besides captive power
problem. plants are eligible to bid in the auction for
short-term linkage provided they have at least
There is no demand for coal that is competitive.
50%united capacity i.e. generation capacity
Mineral Laws (Amendment) Ordinance/Act
without Power Purchase Agreements.
2020
Only for a period of three months, the power
This act has been passed to amend:
plants will be provided with coal linkage for
Mines & Mineral (Development and Regulation) consumption of coal.
Act 1957.
Auctions for the coal Linkages would be held
The Coal Mines (Special Provisions) Act, 2015. quarterly and an annual calendar for this
Mineral Concession Rule 1960. purpose would be released.
The guidelines for preparation, processing and Competitive bidding would be held among
approval of the Mining Plan. the companies and the bid would include a
Aim: premium above the notified price of coal.
Improve efficiency. The sales of the power produced by the coal
Increase domestic production of coal to linkages would be sold in the day-ahead
decrease dependence on imports of coal. market by power exchanges and short term
Features of the Act: with transparency in the bidding process by
making use of DEEP Portal.
Composite Prospecting License-cum-Mining
Lease (“PL-cum-ML”) for giving of coal blocks DEEP Portal
is provided which will increase the information DEEP Portal stands for Discovery of Efficient
about the coal blocks for auction. Energy Price Portal.
Guidelines for the selection of companies in It is an e-bidding and e-reverse auction portal
the auction which do not have an experience for acquiring a short term supply of power by
in this area in India are given in the act. distribution companies.
The policy for allowing 100% FDI by automatic National Coal Index
route in mining, processing and sales of coal is As the ministry of coal started auctioning coal
provided in the act. mines on a revenue share basis. In order to get
422 Infrastructure
the revenue share based on the market price of The Survey suggested that the decision of the
coal National Coal Index (NCI) was introduced. government to open coal mining for the private
The NIC is a price index which shows the changes sector is a big step in the coal sector. It would
in the price levels of coal for a particular month bring efficiency and competition in production,
related to the fixed base year. The base year for attract investments and the best technology
the NIC is 2017-2018. and help in creating more jobs in the sector.
The NCI combines the prices of coal from all the The survey gave the steps initiated by the
sales channels-Notified Prices, Auction Prices public sector producers are as follow:
and Import Prices. The amount of revenue In the period of 2020-21, the PSUs brought
share per ton of coal produced from auctioned 56,000 hectares of land under green cover to
blocks would be arrived at by using the NCI by create a carbon sink of about 5 lakh tonnes of
means of a definite formula. CO2 equivalent per year.
The Index is meant to encompass all It envisaged bringing about 30,000 hectares of
transactions of raw coal in the Indian market. extra land (in and around coal mines) under green
This includes coking and non-coking of various cover by planting around 75 million trees by 2030.
grades transacted in the regulated (power and By March 2021 the PSUs had installed a
fertilizer) and non-regulated sectors. Washed renewable energy capacity of 1,496 MW and
coal and coal products are not included. during the next 5 years planned to install an
NCI has a set of five sub-indices of which two additional 5,60 MW of renewable capacity with
for Coking Coal and three for Non-Coking Coal. substantial carbon offset potential.
The three sub-indices for Non-Coking Coal are Way Forward
used to get at the Index for Non-Coking Coal Full comprehensive exploration as quickly as
and the two sub-indices for Coking Coal are possible using exploration-cum-mining leases
used to get at the Index for Coking Coal. based on a production/revenue sharing model.
It was developed by the Indian Statistical Make it the duty of concerned state governments
Institute, Kolkata. to provide the land required for mining.
The NCI is released every month. Commercial coal mining should be
Coal Energy: Economic Survey Suggestions / operationalized as soon as possible.
Observations “Carbon Imperialism Coal-Based Electricity
Electricity Is A Necessary Evil”
Ministry of Power
Some of the suggestions/observations of the
National Electricity Distribution Company
Economic Survey are as follows:
It was formed by a Memorandum of
As the demand for power is increasing in India,
Understanding(MoU) signed between National
the use of coal will continue in spite of taking
Thermal Power Corporation Limited (NTPC) and
big steps toward renewable sources.
Power Grid Corporation of India Limited.
It suggested the government review its decision
The National Electricity Distribution Company
to open the sector for commercial mining with
Limited(PGCIL) was a joint venture on a 50:50
keeping in mind the adverse impact on the
equity basis.
country’s net-zero goals.
Its main function was to distribute electricity
The survey suggested that the public sector
and do other jobs related to it.
coal and lignite producers are taking several
One Nation-One Grid
initiatives to mitigate their carbon footprint.
About National Grid
The survey observed that India would need
about 1.5 billion tonnes of coal annually by 2030 It is a high-voltage network of electricity in the
which would account for 55% of the country’s main part of India which interconnects the stations
energy sources and 70% of the electricity and substations so that electricity generated in
transferred to the grid. one place can be used in some other place.
Infrastructure 423
It is managed by the state-owned Power Grid the share of electricity from renewable sources
Corporation of India. to 40% by 2030.
Development of National Grid The target of 450 GW installation renewable
The concept of Grid management on a regional capacity by 2030 could be achieved by this
basis started in the sixties with state grids inter- scheme.
connected in five regions namely Northern, Eastern, It will reduce the carbon footprint.
Western, North Eastern and Southern regions. It would generate direct and indirect jobs.
The Northeastern and Eastern grids were It would help India to achieve commitments
interconnected in October 1991. They were made by India at the COP-26 summit in Glasgow.
connected to the western grid in march 2003 It has been implemented in two phases:
and north in august 2006 so the four regions
Phase I:
were connected.
Initially, it was implemented in 2015-16 by
On the 31st December 2013 southern grid was also
eight renewable source rich states namely
connected in a parallel manner by commissioning
Rajasthan, Karnataka, Tamil Nadu, Gujarat,
of 765kV Raichur-Sholapur Transmission line to
Maharashtra, Andhra Pradesh, Madhya Pradesh
form ONE NATION-ONE GRID.
and Himachal Pradesh.
Benefits:
The target was to lay down the 9,700 km of
It will help in the efficient transfer of electricity transmission lines and 22,600 MegaVolt-
from a region where it is abundant to a region Amperes(MVA) transformation capacity of
where demand is high. substations by 2022.
One standard frequency would be there The funds for the projects have been obtained
throughout the nation. from a 20% state equity, 40% Government of India
It could help in tackling backouts. Grant and a 40% loan from KfW Bank of Germany.
It would help in the establishment of a vibrant Phase II:
Electricity Market for its trading across the regions. It has been implemented in seven states namely
Grid → Green Energy Corridor Project: Uttar Pradesh, Tamil Nadu, Rajasthan, Kerala,
The aim of the Green Energy Corridor Project is Karnataka, Himachal Pradesh and Gujarat.
to interconnect renewable sources of electricity The target of this is to lay down 10,750 km
like solar and wind with conventional power of transmission lines and 27,500 MegaVolt-
stations in the grid. Amperes (MVA) transformation capacity of
Purpose of the Green Energy Corridor in India: substations by 2025-26.
The grid would help in reducing the country’s The 33% of the cost of the project would be
dependence on fossil fuels i.e. it would increase given by the Centre.
Q. Write a note on India’s green energy corridor to alleviate the problems of conventional energy.
• In the Introduction try to write about the Green Energy Corridor.
• In Body,
⚪ Discuss problems in India’s conventional energy.
⚪ Discuss how green energy corridors alleviate problems of conventional energy.
• Try to conclude by writing about Indian renewable energy targets.
424 Infrastructure
Answer:
For the acceleration of the flow of renewable energy into the national grid, the Government of
India plans to initiate the Green Energy Corridor project worth INR 43,000 crore (US$ 6.9 billion).
The purpose of the project is synchronizing electricity produced from renewable sources (such
as solar and wind) with conventional power plants in the grid. For developmental and technical
assistance, Germany has committed € 1 billion (US$ 1.33 billion) for the project. The project is
expected to reinforce the power distribution network in India. The Green Energy Corridor project
can be expected to lead to the development of an integrated grid across the country by making
its grid compatible with renewable energy distribution.
Problems in India’s conventional energy:
Climate change: Conventional energy sources such as oil, gas and coal, are generally called
fossil fuels. These fossil fuels raise concerns about climate change and pose challenges to
India’s Paris climate commitment under Intended Nationally Determined Contributions (INDCs).
Import bill: The use of conventional energy, increases import dependence that further leads to
increased forex burden. According to preliminary data from the Petroleum Planning and Analysis
Cell (PPAC), India’s oil import bill fell to $101.4 billion in FY20 from $111.9 billion in the previous
fiscal year.
Rising prize: OPEC countries charging extra rupees from Asian oil-importing countries by charging
an extra “Asian premium”. These additional costs add pressure to the country’s import bill.
Indoor Pollution: In most Indian villages, wood, cow dung and other traditional forms of energy
sources are still used to heat and lighten up their home. This has led to increased indoor
pollution, which is a serious health problem.
Green Corridor Resolves Conventional Energy Problems:
Different voltage: Different voltages: Currently, the National Grid is facing problems in connecting
sustainable energy sources due to different voltages and power supply. The goal is to make the
transmission system dynamic to deal with voltage changes. Germany’s technological assistance
would be crucial in this project as it has strong networks that can integrate sustainable energy
sources into its national matrix.
Future proof: India has an expected installed renewable energy capacity of 28,000 MW. Bringing
this into the national grid needs overhauling of the overall national grid. The National Green
Corridor will help in the smooth transmission of power in this grid system.
Connecting roof-top: Rooftop solar power generation has been supported by government
policies. This growing rooftop solar generation needs to be connected to the state or national
grid and the Green Energy Corridor will help reduce this problem.
Help to achieve targets: The government has set targets of 175 GW of renewable energy, with
solar and wind accounting for a significant portion. Connecting them to the national grid is
essential and this NGC will help in achieving the goals.
Reserving coal deposits: NGC will help reduce dependence on coal for thermal power generation,
therefore India can potentially retain coal reserves for future generations.
Thus, it is said that India’s Green Energy Corridor will not only help connect green energy from
different parts of the country but will also have a multi-fold impact on India’s green energy
production and distribution in different parts of the country.
Infrastructure 425
Prepaid Smart Meters for Electricity account the subsidy and the government could
In Prepaid Smart Meters customers pay first for directly transfer the subsidy to consumers’
the amount of electricity they want to use. accounts.
The reason for using Prepaid Smart Meters are Cost reflective Tariff: The commissions would
as follow: determine tariffs that are reflective of the cost
It will help in making state utilities more for the DISCOMs to recover their investment.
efficient and reduce their loss. Formation of Electricity Contract Enforcement
Authority: It has proposed to establish an
It will help in energy conservation.
authority with the powers of a civil court to
Make DISCOMs financially strong.
enforce the contracts related to purchasing
Make bill payment easier. or sale or transmission of power between
UDAY(2015) generating, distribution or transmission
UDAY stands for Ujwal DISCOM Assurance companies. It would be headed by a retired
Yojana. Judge of the High Court.
It was launched in November 2015 by the central Formation of adequate Payment Security
government under the Ministry of Power. Mechanism for scheduling of electricity: Its
It is a Centrally Sponsored Scheme. purpose was to give power to Load Dispatch
To reduce overall technical and commercial Centres to monitor the payment security
loss from 22% to 15% by removing the gap mechanism before scheduling the dispatch of
between the supply of revenue side and supply electricity as per contracts.
of cost side by 2018-19. The Appellate Tribunal (APTEL) strength would
Increase the operational efficiency by using increase: For quick disposal of cases, the
smart metering, up-gradation of transformers, strength of the tribunal would increase to
meters etc and using energy-efficient measures seven along with a chairman so that multiple
like LED Bulbs. benches could be set up.
To restructure the loans on DISCOMs of states Removal of multiple Selection Committees.
was optional for the states. It proposed to develop the National Renewable
Benefits are given to states who participate in Energy Policy.
the scheme: Cross Border trade in Electricity: It had
Decrease in the cost of power by centres provisions to facilitate the development of
support. trade in electricity among the countries.
Increase in supply of coal. By sub-licensing & franchisees to attract private
Coal linkages allotment at notified prices. investment in DISCOMs.
Rationalization of coal price. 7. Deendayal Gram Jyoti Yojana(2015)
Supply of washed and crushed coal. It was launched in 2015 by the Ministry of
Interstate Transmission lines were laid down at Power.
a faster rate. Aim:
Transparent bidding for power purchase. Electrifying the villages.
Electricity reforms Upgrade the Sub-transmission and distribution
DRAFT Electricity (Amendment) Bill 2020 network to improve the quality and reliability
of the supply.
It has been proposed for the amendments in
the Electricity Act 2003. Components of the scheme:
Some of the amendments proposed in the bill Separate feeder for agriculture and Non-
are as follows: agriculture consumers in rural areas
Direct Benefit Transfer: Tariffs were determined Upgradation of the transmission and distribution
by the state commission without taking into infrastructure in rural areas.
426 Infrastructure
Salient Features: Making camps in villages for spot registration

It replaced Rajiv Gandhi Grameen Vidyutikaran for connection.
Yojana (RGGVY). Identification of beneficiaries by using a Mobile
Under this scheme, all the DISCOMs are eligible App.
for financial assistance. Monitoring the implementation of the scheme
For the implementation of the scheme, the in real-time through the web.
nodal agency would be Rural Electrification Setting up SPV based standalone systems for
Corporation Limited (REC). areas where grid systems are not feasible.
Benefits of the scheme: Communication plans for making awareness
about the scheme and its benefits.
Electrification of village households.
Funding
Agriculture production would increase.
Under the scheme Rs. 14,109 crore has been
The development of small household businesses
sanctioned by the Ministry of Power to 26
increases employment opportunities.
States/Union Territories.
Banking (ATM) services, Education and health
9. Revamped Distribution Sector Scheme
system upgradation.
(2021-June)
Availability of radio, telephone, television,
It was launched in July 2021.
internet and mobile.
The scheme would be available till the year
Improvement in social security due to the
2025-26.
supply of electricity.
Availability of electricity to panchayats, schools, Nodal agencies are Rural Electrification
hospitals and police stations. Corporation Limited and Power Finance
Implementation period Corporation Limited.
The projects under this would be completed Aim
within a period of 2 years from the date of Reduce the AT&C losses to pan-India levels of
issue of the Letter of Awards by the utility. 12-15% by 2024-25.
Funding System Eliminate the ACS-ARR gap by 2024-25.
The central government would give a grant of Getting Institutional Capabilities for Modern
60%of the cost of the scheme to normal states DISCOMs.
and 85% of the cost of the scheme to the
Enhance the reliability, quality and affordability
special category states.
of power supply to consumers by financial
8. PM SAHAJ BIJLI HAR GHAR YOJANA
sustainability.
(SAUBHAGYA)
Features
It was launched in September 2017. Under the
Ministry of Power. The Scheme provided for the annual
Rural Electrification Corporation was the Nodal increment of the DISCOM efficiency against
Agency for the operationalization of the scheme. predefined and agreed upon performance
Aim: trajectories including ACS-ARRgaps, AT&C
Providing the electricity connection to the last losses, infrastructure upgrade performance,
mile in rural areas. hours of supply, consumer services, corporate
Providing last-mile connectivity to poor governance etc.
unelectrified sections. To get the funding under the scheme in that
For areas where grid systems are not feasible, year DISCOMs have to score at least 60% of
implementation of Solar Photovoltaic (SPV) marks and clear a minimum bar with respect
based standalone systems. to certain parameters.
Features: The main focus of the scheme was to improve
Provided metered connection for economically the electricity supply for the farmers and for
poor households for free and a charge of providing daytime electricity to them through
Rs. 500 for other households. the solarization of agricultural feeders.
Infrastructure 427
The separation of 10,000 agricultural feeders revised to 1,00,000 MW by the year 2022 in
was taken under the scheme. June 2015.
The scheme would empower the consumer World’s largest Hybrid renewable energy park-
by the way of prepaid Smart metering to be Khavda
applied in PPP mode. On December 15, 2021 Prime Minister Narendra
It proposed the installation of around 10 crore Modi laid the foundation stone of the world’s
prepaid Smart Meters in the first phase by largest hybrid renewable energy park which lies
December 2023. in Khavda village of Kutch district Gujrat. This
project lies close to the Indo-Pak border with
Renewable Energy
a capacity of producing 30,000 MW (megawatt)
High energy prices cause old power purchases of hybrid renewable energy. The word hybrid in
to agreements (PPAs) to be reneged on, eroding the project is used because there will be two
their sanctity. This creates confusion about sources of energy. First, from Solar energy and
power use, putting future investments at risk. secondly from wind energy.
Generating flexibility and balance criteria for The government’s renewable energy target is-
renewable energy integration are emerging as 175 GW by 2022
major issues. 450 GW by 2030
In the production of biomass power, there are The Government of Gujarat has identified
supply chain problems. 1,00,000 hectares of wasteland near the
KUSUM (Solar for farmer) 2019 Indo-Pak border in the Kutch district out of
Pradhan Mantri Kisan Urja Suraksha evam which in April 2020 the Ministry of Defence
Utthaan Mahabhiyan is a government scheme has approved the use of 72,600 hectares of
under which the Ministry of New and Renewable land for the development of a renewable
Energy (MNRE) aims at securing the required energy park.
energy power as needed by the farmers of the The renewable energy park will be divided into
country with the help of solar energy. two zones-
It is the first farm-based solar system scheme Hybrid park: It spreads in 49,600 hectares of
which was launched in the year 2019 and it is land occupying power both from solar as well
divided into 3 components- as wind energy.
Component A: To install 10,000 GW of the Exclusive wind park: It spreads in 23,000
ground-mounted grid system. hectares of land deriving power exclusively
Component B: To install 17.5 lakh solar-powered from wind energy.
agriculture pumps. Way forward
Component C: The solarisation of 10 lakh grid- Provide a method for balancing the power grid
connected agriculture pumps. at a low cost (gas-based, hydro or storage).
Jawaharlal Nehru National Solar Mission Renewable purchase obligations (RPOs) should
Jawaharlal Nehru National Solar Mission- be strictly followed, and interstate renewable
Building Solar India is a government scheme energy purchases should be made simpler.
that comes under the Ministry of New and The costs of balancing interstate transmission
Renewable Energy. This scheme was launched systems (ISTS) linked power plants should be
in the year 2010 and its main objectives are- socialized over the entire grid, on the lines
To make India stand among the global leaders of the point of connection (PoC) or a similar
in energy production. mechanism, by central level agencies like the
To set up an environment in the country that is Central Electricity Regulatory Commission or
favourable to solar energy technology. the National Load Dispatch Centre.
The pioneering target of this mission is to In rural areas, decentralized renewable energy
produce 20,000 MW of energy grid connected combined with the DISCOMMS grid will provide
to solar power by the year 2022 which was reliability.
428 Infrastructure
Solar PV + biomass hybrid renewable energy For new power plants, the Forum of Regulators
systems should be investigated. Subsidies and State Electricity Regulatory Commissions
for consumers are required to encourage (SERCs) should set lower heat rate standards.
commercial biogas. Plants that consume more than the threshold
Energy Efficiency amount of energy should be phased out over
Restricted technological capacities, high initial time.
capital investment, and industry and policy Encourage people to use public transportation.
concerns have all hindered energy conservation Electric public transportation networks may be
efforts. transformed in a timed manner. Expand the
Energy efficiency investments are unattractive corporate average fuel efficiency requirements
for investors due to high transaction costs (CAFE) to include other vehicle segments
(which include appointing suitable consultants besides passenger cars.
and vendors for execution) in relation to project
UDAY scheme
size, particularly in the micro, small-scale, and
Without improving the performance of the
medium-scale enterprise (MSME) market.
electricity distribution companies (DISCOMs)
Way forward
the state government’s efforts toward 100
State designated agencies (SDAs) should be
per cent village electrification, 24x7 power
more empowered and equipped with sufficient
supply and clean energy cannot bear fruit.
resources to enforce EE related programmes.
For the financial and operational turnaround
The Bureau of Energy Efficiency (BEE) should
of DISCOMs and to ensure a sustainable
release a white paper on its 5-year plan on
energy efficiency in different sectors and define permanent solution to the problem, the
energy consumption norms. UDAY (Ujwal DISCOM Assurance Yojana) was
It is necessary to ensure greater participation launched by the GoI, in November 2015.
of energy service companies (ESCOs) through The salient features of the scheme are as
the use of appropriate financing models with given below:
a risk-sharing mechanism, especially by public States shall take over 75 per cent of the
sector banks. DISCOM debt—50 per cent in 2015–16 and
States should incorporate the second edition of 25 per cent in 2016–17. This will reduce the
the Energy Conservation Building Code (ECBC) interest cost to 8–9 per cent, from as high as
into their building codes and ensure that it is 14–15 per cent.
implemented more quickly. GoI will not include the debt taken over by the
Encourage the use of LED lighting in government states in the calculation of the fiscal deficit of
buildings and the replacement of old the States in the financial years 2015–16 and
appliances with five-star appliances. Lower- 2016–17.
income households and small businesses
States will issue non-SLR including SDL (State
should be the priority of the UJALA (Unnat
Development Loan) bonds in the market or
Jyoti by Accessible LEDs for All) programme.
directly to the respective banks and Financial
It is suggested that the number of appliances
Institutions (FIs).
protected by the Standards and Labelling (S&L)
DISCOM debt not taken over by the State
programme is increased.
shall be converted by the Banks and FIs into
Expand and deepen the Perform, Achieve, and
Trade (PAT) programme; make Energy Saving loans or bonds with interest rates not more
Certificate trading under the PAT scheme more than the bank’s base rate plus 0.1 per cent.
successful by enforcing stringent penalties Alternatively, this debt may be fully or partly
against defaulters. issued by the DISCOM as State guaranteed
BEE should develop cluster-specific programmes DISCOM bonds at the prevailing market rates
for energy-intensive industries in the MSME sector which shall be equal to or less than the bank
to implement energy-efficient technologies. base rate plus 0.1 per cent.
Infrastructure 429
States to take over the future losses of 3.40 lakh in FY 2017, while the availability/
DISCOMs in a graded manner. supply was only about 1 lakh.
States accepting UDAY and performing as Some of the government objectives: Enhancing
per operational milestones will be given connectivity and internal and external trade
additional/priority funding through Deendayal needs to improve the coverage and efficiency
Upadhyaya Gram Jyoti Yojana (DDUGJY), of roads and highways. We should reach the
Integrated Power Development Scheme following targets by 2022-23.
(IPDS), Power Sector Development Fund Expand the road network to improve
(PSDF) or other such schemes of the Ministry connectivity:
of Power and Ministry of New and Complete 24,800 km of Bharatmala Phase-I
Renewable Energy. States not meeting roads by 2021-22, including 2,000 km of coastal
operational milestones will be liable to forfeit and port connectivity roads.
their claim on IPDS and DDUGJY grants. Finish Phase I of the Pradhan Mantri Gram
Such States shall also be supported with Sadak Yojana (PMGSY), with quality assurance
additional coal at notified prices and, in at each point.
case of availability through higher capacity Raise the length of national highways (NHs)
utilisation, low-cost power from NTPC and from 1.22 lakh km to 2 lakh km by 2022-23.
other Central PSUs. Increase the width of single/intermediate lane
UDAY is optional for all States. However, (SL/IL) highways and reduce the length of SL/
States are encouraged to take the benefit IL highways to less than 10% of total length by
at the earliest as benefits are dependent on 2022-23, down from 26.46 per cent now.
the performance. [By March 2017, most of the Improve the regulatory framework for roads
states/UTs had joined the scheme.] to achieve better compliance, seamless
Roadways/Surface Transport connectivity, road safety and quality.
India has the world’s second-largest road As a signatory to the Brasilia Declaration, reduce
network, with around 52.32 lakh kilometres of the number of road accidents and fatalities by
National Highways, State Highways, and other 50 per cent by 2020.
roads. The country’s NHS cover a total distance Constraints
of 1,00,475 km and carries about 40% of all The capacity of existing highways: According
traffic. to MoRTH, the existing length of the NH
Present Situation network is 1.32 lakh km, which is 2.2 per cent
In India, the road transport sector accounts for of the country’s entire road network of 58.98
the bulk of passenger and freight movement. lakh km. The existing NH length with 4-lane
According to the Ministry of Road Transport, and above NH standards is 31,067 km, and
the total number of registered vehicles in India that with single/intermediate lane (SL/IL)
increased from 58.9 million in 2001-02 to 295.8 width is 36,310 km and the remaining 65,123
million in 2019, Access to and the efficiency km (50.95 per cent) is of 2-lane NH standard.
of public transit, on the other hand, must Further, national and state highways are
continue to improve. already overstrained, carrying more than
Increased use of personal vehicular 65 per cent of the road traffic. National
transportation in urban areas causes traffic highways carry 40 per cent of India’s total
congestion, longer travel times, and higher road traffic.
levels of air and noise pollution. Inadequate funds for maintenance of existing
Expansion of the public transport fleets has infrastructure: The annual outlay earmarked for
been hampered by the short supply of vehicles. maintenance and repair of national highway stretch
The total demand for buses was approximately is only about 40 per cent of the funds required.
430 Infrastructure
This is one of the main reasons for the inability to less quality because the amount of traffic with
take up timely maintenance interventions. which they deal is usually low.
Accidents and safety concerns: Road safety Types of Roads depending upon the amount of
is a major issue in the country with nearly traffic which it carries:
400 road-related deaths being recorded daily. Light Traffic Roads: The type of roads that
According to NCRB, in 2020, India had an carry on an average of up to 400 vehicles daily
accident death rate of 27.7 for every 100,000 are termed light traffic roads.
people, higher than other South Asian countries Medium Traffic Roads:The roads dealing with
such as Bangladesh (11.6), Mauritius (12.2) and an average of around 400-1000 vehicles on a
Sri Lanka (13.7).9 At least a part of the fatalities daily basis are termed as medium traffic roads.
is because of the poor quality of roads.
Heavy Traffic Roads: The roads on which more
Cost escalation for roads: Delays in acquiring than 1000 vehicles move on a daily basis are
land can affect project costs as the average termed heavy traffic roads.
cost of land has escalated from Rs. 0.80 crore
NHAI: National Highway Authority of India
per hectare during 2012-13 to Rs. 3.20 crore per
The National Highway Authority of India was
hectare during 2017-18.
established with the help of the act of parliament
ROAD→TYPES
and the NHAI Act of 1988. The authority has
Roads are the major nervous system of any been operational since February 1995. It works
country on which the major traffic moves, under the guidance of the Ministry of Road
depending upon the location, need and function Transport & Highways (MoRTH).
roads can be classified into many different
NHAI was constituted basically for maintaining
types. These are-
and building the National Highways; besides
National Highways: These are the most this, they also undertake other minor projects
important roads of any country which under the administrative control of MoRTH as
run throughout the country, connecting deemed necessary.
different capital cities of different states and Composition of NHAI-
metropolitan cities.
The Authority consists of five full-time
National Highways are of a minimum of two members presided by a chairman and four
lanes. part-time members. The Central government
State Highways: These are the most important appoints four part-time members these are-
roads of the state, which connect the major 1. Secretary (Expenditure)
cities within the state. State highways ultimately 2. The Secretary (RT&H)
join the National Highways in the end. 3. Secretary (Planning) and
District Roads: These roads connect the major 4. DG (RD) & SS
marketplaces, offices and factories lying in the Besides this, the National Authority of India also
city to the state and national highways. District has different departments or wings namely
roads are of two types Major district roads and technical, administrative, finance and vigilance
Minor district roads- to assist the working of NHAI.
Major District Roads: These roads connect At present 1,32,499 km of the national highway
the major administrative buildings and have been laid including expressways and
headquarters of one district with another. highways.
Minor District Roads: These are the minor Vision of NHAI
roads within the district. “To meet the Nation’s need for provision and
Rural District Roads or Village Roads: maintenance of National Highways network
These roads are used to connect the nearby to global standards and to meet the user’s
towns and villages with each other. The material expectations in the most time-bound and cost-
used in constructing these roads is of usually effective manner, within the strategic policy
Infrastructure 431
framework set by the Government of India and PHASE-5: In this phase around 5,000 kilometres
thus promote economic well-being and quality of four-lane highways will be expanded into
of life of the people.” six-lane highways.
NHDP-National Highways Development Project PHASE-6: This phase deals with the
The first attempt at road maintenance and construction of expressways of 1000 kilometres
building in India was done by the Britishers in in length which would connect major industrial
Nagpur in 1943. But it failed due to a lack of and commercial hubs with each other.
proper negotiation between the princely states PHASE-7: In this the major emphasis is given to
and the ruling British government. Later, in the construction of the city roads by providing
independent India, the first attempt to look after ring roads and bypasses that would connect to
the development and maintenance of roads was major highways.
done in 1960. It was basically a 20 years road PRADHAN MANTRI GRAM SADAK YOJANA
development plan, to look after maintenance (2000)
development and betterment of existing
This scheme was implemented by the Central
roads. Later in 1995, The NHAI which looks
Government on 25 December 2000. Pradhan
after the development of National Highways
Mantri Gram Sadak Yojana is related to rural
and Expressways started a project named the
road construction. This scheme has been
National Highway Development Project under
started by Prime Minister Atal Bihari Vajpayee.
which the development of roads and highways in
At present phase 2 of this scheme has been
different parts of the country would take place.
completed. The third phase has come into
The process of construction and development of effect on 18 December 2019. The second phase
roads under NHDP is to be completed in 7 phases- of the Pradhan Mantri Gram Sadak Yojana
PHASE-1: Under phase 1 four major cities of was implemented in 2013. The first phase of
India i.e Delhi, Kolkata, Mumbai and Chennai Pradhan Mantri Gram Sadak Yojana was started
are connected by the four-lane highway. This on 25 December 2000
road is termed a golden quadrilateral which is The third phase of the scheme was started
5846 km long by the Union Minister for Rural Development,
PHASE-2: Under this phase two corridors are Agriculture and Farmers Welfare and
being built, one extending from north to south Panchayati Raj Narendra Singh Tomar on 10
and the other from east to west. The north- December 2019 in New Delhi. The objective
south corridor extends from Srinagar in the of Pradhan Mantri Gram Sadak Yojana 3
north to Kanyakumari in the south whereas the is to increase the connectivity of villages
east to west corridor extends from Silchar in with hospitals, schools and agricultural
the east to Porbandar in the west. The total markets.
length of both corridors is 7142 kilometres. Target of Pradhan Mantri Gram Sadak Yojana:
PHASE-3: This phase deals with the expansion Phase 3
of 12,109 kilometres of national highways on the Integration of 1 lakh 25 thousand km of road is
BOT basis i.e Build Operate and Transfer. The to be done through various routes and major
12,109 kilometres of road are identified on the rural link routes i.e. 1 lakh 25 thousand km long
basis of roads which are dealing with heavy connectivity is to be built. It aims to connect rural
traffic and lack connectivity to state capitals. agricultural markets, higher secondary schools
PHASE-4: Under this phase 20.000 kilometres and hospitals with settlements. Under this
of the road which are left uncovered in phases scheme, the roads constructed in the first phase
1,2 and 3 are to be covered. These single- of Pradhan Mantri Gram Sadak Yojna are also to be
lane roads will be converted into double lane maintained i.e. safe or improved roads are to be
highways with paved shoulders. constituted.
432 Infrastructure
Cost in Pradhan Mantri Gram Sadak Yojana 3: with improved quality. The Bharatmala project
The estimated cost for 2019-20 to 2004-05 passes through 13 different Indian states
is Rs 80,250 crore. The Central Government’s starting from Gujrat and passing through
share in this scheme is 55.800 crore rupees and Rajasthan, Punjab, Himachal Pradesh, Jammu
the states’ share is rupees 26,460 crores. The and Kashmir, and Uttrakhand. Uttar Pradesh,
funding ratio between the centre and the state West Bengal, Sikkim, Assam, Arunachal
will be in the ratio of 40 to 60. The funding ratio Pradesh, Mizoram and Manipal.
for the North Eastern and Himalayan states will E-toll collection via FASTag (2017)
be 90 to 10. There are basically two types of toll
Implementation of Pradhan Mantri Gram collection systems in India one is an
Sadak Yojana 3: existing system and the other is a proposed
Under the Pradhan Mantri Gram Sadak Yojana, system.
the period of the third phase has been fixed In the existing system when the car reaches
from the year 2019-20 to 2024-25. The road is the toll they have to stop at the toll, pay their
selected on the basis of the sum of the total toll tax in cash and then they can proceed on
marks obtained on human beings, service their further journey.
market, educational and medical facilities etc. The major drawback of this existing system is
of the population. that a large amount of traffic gets accumulated
Bharatmala Pariyojana (2017): near the toll plaza, which causes too much
The Bharatmala project was sanctioned by wastage of time. Therefore to tackle this
the central government on October 25th 2017 problem the proposed system, i.e system of
which is the second-largest road construction toll collection via fast-tag is brought into usage
project after NHDP. for the collection of tolls.
Under the first phase of Bharatmala Pariyojna, Besides this automatic toll collection also
India has to develop around 24,500 kilometers helps in the detection of theft vehicles with
of road and around 10,000 kilometers of the help of a unique RFID(Radio Frequency
road has to be revamped under the national Identification) tag.
highways development project. ETCS or electronic toll collection system is a
system that helps users in making payments
This project aims at the quicker movement
of tolls on national and state highways
of cargo and freight connectivity between the
automatically. In this system, the vehicle gets
regions in economic corridors and border areas.
identified with the help of RFID tags or also
It is expected that during the road construction
known as fast-tags which are installed at the
process under the Bharatmala Pariyojna project
front windshield of the vehicle and are nothing
100 million man-day jobs and subsequently 22
but a unique identification tag for each vehicle.
million job opportunities will be created across
the country. When the vehicle passes through the toll plaza,
the reader which is installed at the toll plaza
Thus under phase 1 of the project, a total
intercepts these RFID tags with the help of
of 34,500 kilometres long project will be
radio waves, after that, a particular amount
constructed. The Bharatmala project has a
of toll gets deducted from the vehicle owner’s
budget of 5.5 lakh crore rupees out of which
bank account through which that RFID tag is
3.5 lakh crore rupees are already endowed. In
linked.
the Bharatmala Project, International trade is a
Thus making the overall process less time
key aspect and a special focus is given to the
consuming, on the other hand, it also solves
North-Eastern states.
the problem of petty cash and is a great step
This is an integrated scheme under which for India’s cashless economy.
roads are built in different parts of the county
Infrastructure 433
Besides the collection of tolls with the help of petroleum use and air pollution and also to
RFID tags, they also help the toll authority in contribute to enhancing diverse and efficient
determining whether the vehicle is registered energy infrastructure.
or not and if there is any type of payment This mission is basically about the usage of
violation done by the vehicle on any of the hydrogen fuel cells in place of fossil fuels
toll plazas throughout the country then the because hydrogen fuel cells produce no harmful
authorities can easily detect it and can impose emissions besides this it is less expensive and
fines on the owner of the RFID tag. the only by-product of the fuel cells are heat
Fossil Fuel Use: and water hence the energy derived from these
When the plant or any other living organism fuel cells are also known as green energy.
dies, they get buried under the earth either by Hydrogen being one of the most abundant
natural or man-made processes. Over there, element on the earth and it would be a great
they experience high temperature and pressure step towards reducing pollution.
which cause their chemical decomposition, Electric Vehicle: The electric vehicle with
which leads to their conversion into fuel. an electric engine works on the principle
The fuel thus formed by the decomposition of of electromagnetism. The EVs contain an
a dead and buried organism is termed fossil induction motor, inverter, Lithium-ion powered
fuel. These fuels are non-renewable sources battery and capacitors. The powerhouse of the
of energy because they take a very long time EVs is an induction motor.
to replenish therefore we should use them It consists of a two-part stator and rotor. The
frugally in a wise manner. stator is fed to 3 phase AC power input which
There are three types of fossil fuels widely used creates a rotating magnetic field(RMF). Then
these are – Coal, Petroleum and Natural Gas. this RMF induces a current in the rotor ball. In
Fossil fuels are used to heat our homes, run an induction motor, the rotor speed is always
vehicles, power vehicles generate electricity less than RMF speed.
etc. To solve the problem of limited available The advantage of the induction motor is that
fossil fuel, many alternatives are also found its frequency is directly proportional to the
and some of these are solar power, nuclear frequency of the alternating current. The speed
power, wind power etc. of the motor can vary from 0 to up to 18000 rpm.
E20 Blending: E20 or ethanol-blended fuel is Thus we can change the speed of the car just by
basically petrol blended with ethanol. Ethanol changing the frequency of the current. This is the
is an organic compound also known as ethyl basic principle on which electric vehicles work.
alcohol which is primarily extracted from Bharat Stage Norms
sugarcane.
Central Pollution Control Board (CPCB) which
Ethanol or ethyl alcohol usually has higher comes under the Ministry of Environment
octane numbers than that gasoline therefore Forest and Climate Change institutes the
when it is mixed with petrol it improves the Bharat Stage Norms.
quality of the fuel-making it more feasible for
These norms regulate, implement and decide
the environment.
the amount of output of air pollutant which
In the supply year, 2020-2021 India has is permitted from motor vehicles and engine
accomplished the target of blending 7.2% equipment. Bharat Stage Norms runs parallel
of ethanol in petrol whereas in the ongoing to the EURO norms with the lag of 5 years,
supply year India aims for blending up to 10% currently in India BS-VI (Bharat Stage 6) norms
of ethanol in petrol. are being implemented for light motor vehicles.
National Hydrogen Mission: According to BS-VI standards the emission of
The National Hydrogen Mission aims at bringing carbon dioxide would be brought down by 30%
down the emission of major greenhouse gases, and Nitrogen Oxides by 80%.
434 Infrastructure
Decarbonizing Transport in India (2020-June) EVs In India: Steps Taken To Promote Them
The project Decarbonizing Transport aims at The biggest problem in India when we discuss
reducing the carbon dioxide accumulation our automobile section is pollution. 6 out of
in environment due to vehicular emission. 10 most polluted cities in world are from India
This project is launched by the NITI Aayog in therefore the need of the hour is to shift our
June 2020 in collaboration with International focus from normal conventional cars to electric
Transport Forum (ITF). The main objective of vehicles or EVs.
the DTEE (Decarbonizing transport in Emerging There are various steps have been taken by our
Economies) project is decarbonizing the government to promote EVs in India and these
transport i.e. reducing carbon dioxide emission are-
from transport and sub transport sectors. The Indian government is giving incentives such
Besides India, countries like Argentina, as discounts on ex-showroom prices on buying
Azerbaijan and Morocco are also participants. electric vehicles.
Vehicle Scrappage Policy: The government is also giving incentives on
Different countries throughout the world have electricity bills to promote the usage of EVs
different scrappage policies. In India’s vehicle and charging them at home.
scrappage policy we are aiming to reduce The government have also launched many
the overall pollution and increase the fuel schemes to promote electric infrastructures
efficiency. and technology these are:
Beside the environmental factor the policy also • National Electric Mobility Mission 2013
aims at increasing the turnover of automobile • Faster adoption and manufacturing of
industry from 4.5 lakh crores to 10 lakh crores , hybrid and electric vehicles in India (FAME)
which in on other hand will also create around 2015.
35,000 new job opportunities. • MeITY’s Phased Manufacturing Programme
The main objectives of the vehicle scrappage 2016.
policies are: • National Mission on Transformative Mobility
• Fuel Efficiency. and Battery storage 2019.
• New job opportunities. ES19: EVs in India: Charging is the biggest
• Reducing pollution. challenge
• Great boost in the automobile manufacturing There are various challenges for adoption of
industry. EVs in India out of which setting up of the
• Huge profits in GST collection of around charging station is the biggest problem. Till of
40,000 crores. now only around 300 charging stations have
Fitness Certificate: The basis for a vehicle to been set up by the Indian government which is
be sent in scrap depends upon the fitness of very less as compared to petrol pumps which
the vehicle. The fitness of the vehicle will be are around 70,000 in our country. So, while
examined in Automated Fitness Centres. If the driving the EVs the owners are at high risk to
vehicle is found unfit for further use then it will run out of electric charge.
be sent to scrape, the owner of the scrapped Secondly, setting up the charging stations and
vehicle will get incentives on buying a new infrastructure requires a great amount of funds.
vehicle.
Thirdly, we lack fast charging technology for
In case of failure in the fitness test vehicles
automobiles as well as a trained and skilled
will be de-registered and sent for scrapping.
workforce.
In general, the commercial vehicle will be de-
Motor Vehicle Amendment Act 2019
registered after 15 years and in the case of the
private vehicle, the vehicle will be de-registered On July 15 2019 the Minister of Road Transport
after 20 years. and Highway introduced the motor vehicle
Infrastructure 435
amendment act 2019 in the Lok Sabha which Driving under influence of alcohol or drugs
then got passed by both the houses and rupees 2,000 to rupees 10,000.
got approved by the president. The Motor Fine on motor vehicle companies for not
Vehicle Amendment Act of 2019 amends the complying with motor vehicle standards up
original Motor Vehicle Act of 1988. The recent to rupees 1 crore or imprisonment of up to
amendments in the act basically deal with 1 year.
the grant of licences, and permits and setting Contractors failing to comply with the road
new standards for motor vehicles. The motor manufacturing standards up to rupees 1 lakh
vehicle amendment act 2019 deals with the
Way forward
following provisions-
Increase connectivity by expanding the road
Compensation for victims of road accidents:
network:
The central government has developed the
Improve State/UT Public Works Departments
scheme of cashless treatment of the patients
(PWDs) implementation capacity through
who are victims of road accidents in the golden
institutional strengthening and training.
hour of energy. The golden hour is the time
period of up to one hour from the time of the By 2022-23, each city with a population of more
accident. Besides this, the government has than 1 million people would need a dedicated
raised the compensation for Metropolitan Urban Transportation Authority.
- Hit and Run cases from rupees 25,000 to Improve Road Maintenance and Safety
two lakh rupees. Implement a maintenance management
- In case of severe injury from rupees 12,500 framework to protect NH properties (MMS). Set
to 50,000 rupees aside money from the Central Road Fund (CRF)
for upkeep.
Mandatory insurance for vehicles: It will
be mandatory for all road users to get their India should begin by allocating 10% of its annual
insurance done. These insurance funds help in budget to road and highway maintenance in
the treatment of the road accident victims and order to achieve the developed world standard
give compensations to the person who gets of allocating 40% to 50% of the budget to road
grievously injured in the road accident and to and highway maintenance.
the victims of the family members who died in Incorporate harsh penalties for low operations
the road accident. and maintenance (O&M) efficiency into
Good samaritans: Good Samaritan is a person contracts in all contract modes.
who helps the victims of the road accident by Streamline land acquisition
giving them medical or non-medical assistance Skill Development
without any sake of favour or any kind of Develop road construction vocational training
monetary support. Good Samaritan would courses in Industrial Training Institutes (ITIs).
not be liable to any type of civil or criminal Collaborate with original equipment
proceeding. manufacturers and other stakeholders to
create commercial vehicle driver training
Summoning back vehicles: The central
centres (DTCs).
government in its new vehicle amendment
Introduce technologically advanced approaches
act 2019 has brought a provision of recalling
such as the automated driving testing system
back the vehicle which is found violating the
to ensure stringent testing of driving skills
pollution standard which could cause harm
before issuing driving licenses.
to the other driver and road users of the
Increase Emphasis on Research and
country.
Development
Penalties and offences- The Vehicle Amendment
Set aside 0.1 per cent of the Ministry of Road
Bill 2019 has increased the penalties for several
Transport Highways operating budget for
offences. These are-
research and development.
436 Infrastructure
Create a national transportation data centre for Dedicated Freight Corridor (DFC)
applied road analysis. Dedicated freight corridor (DFC), as the name
Enhance R&D on IT-enabled traffic management defines, to create a safe and efficient freight
systems. transportation system in the country.
Develop new materials/techniques for Importance of DFCs
construction.
It will speed up the transport of goods by rail
Increase the Capacity and Reach of Public
route.
Transport
It will reduce load on traditional rail routes.
Improve public transportation, rural
transportation, and last-mile connectivity by It will make space for more passenger trains in
transforming state road transport undertakings future.
(SRTUs). Commission of Railway Safety
Additional funding for public transportation It is an independent body of the Ministry of
and the creation of interoperable systems will Railways but controlled by the Ministry of Civil
help expand the reach and capacity of public Aviation and deals with matters related to
transport. Safety of railway and function according to the
Expand the reach of the electronic toll Railways Act, 1989.
collection (ETC) system The Structure of Commission
Make the ‘FASTag’ charging system more It is headed by the Chief Commissioner of
effective. Railway Safety stationed at Lucknow.
Work with stakeholders and concessionaires
There are 9 Commissioners of Railway Safety
(for PPP toll plazas) to ensure that all toll
each administering over one or more Zonal
plazas are equipped with the required ETC
Railways and the Metro Railway, Kolkata and
infrastructure.
Konkan Railway Corporation Limited.
Complete targets for rural connectivity
The Commission of Railway Safety’s function
Railways
are as follow :
Indian Railways (IR) constantly faced a number
Inspection of new Railway lines prior to
of challenges. For speedy capacity creation,
authorisation for passenger traffic.
IR recognizes the importance of enhancing
project execution capabilities. Considering the Periodical inspection of open lines.
enormity of the resources required for plan Licensing in new works and renewals that
investment in rail infrastructure, and given the affect passenger carrying trains.
limitation of public resources, efforts are on by To investigations into accidents of trains,
IR to generate sufficient internal surplus, and To give general advice on matters concerning
tap innovative methods of financing, to meet safety in train operations.
these needs. Present Situation
The focus is on prioritizing investments in The Indian Railways (IR) is the fourth-largest
vital areas like dedicated freight corridors, network in the world in terms of route km
high speed rail, high capacity rolling stock, (67,368 km in the Financial year 2017).
last-mile rail linkages and port connectivity,
It is also the world’s largest passenger (1,150
and attracting private and FDI investments to
billion passenger-kilometres in the Financial
supplement available resources.
year 2017) and fourth-largest freight (620
Rolling Stock billion net-tonne kilometres in the Financial
The word rolling stock in the railway industry is year 2017) railway system. In the Financial year
defined as a vehicle that moves along a railway 2017, 13,329 passenger trains carried over 22.24
track. million passengers a day, almost the entire
Infrastructure 437
population of Australia, and 1.1 billion tonnes of Operating Ratio

freight were transported. The amount spent to earn every Rs 100 is called
Despite its extensive reach and the substantial Operating ratio. The lower it is the better.
growth in freight load, the modal share of In the year 2019-2020 Operating ratio was 98.36
railways in the transportation of surface freight percent and 97.45 percent for 2020-21.
has declined from 86.2 per cent in 1950- Modernisation
51 to 33 per cent in 2015, in part due to a
1. Personnel & Organisational Reforms
shortfall in carrying capacity and lack of price
Sam Pitroda Committee (2012):
competitiveness.
The Modernization of Indian Railways by Sam
Because passenger and freight traffic in India
Pitroda submitted a report in Feb 2012.
share the same tracks, we have not been able
to substantially increase speed or capacity in It major recommendation of the committee are
relation to global benchmarks. as follow:-
Railway spending as a percentage of total Removal of all Level crossings.
transportation spending dropped from 56 Automatic signalling should be introduced.
percent in 1985-90 (7th plan) to 30 percent in GSM based mobile train control system on
2007-12. (11th plan). A, B, and C routes.
Important Government Objective Induction of new generation locos
Increase the capability of the current railway technologies.
infrastructure. Modernise 100 major railway stations.
By 2022-23, increase infrastructure construction Develop 34 multi-modal logistic parks.
speed from 7 km/day to 19 km/day. Set Up a real-time information system.
By 2022-23, achieve “100 per cent” electrification Allow private investment by PP models.
of the broad-gauge track, up from 40% in Construction of Eastern and Western
2016-17. Freight Corridors.
Increase freight and mail/express train average Establish the Indian Institute of Railway
speeds to 50 km/hr (from around 24 km/hr in Research.
2016-17) and 80 km/hr (from around 60 km/hr), Create a safety fund.
respectively. Bibek Debroy Committee(2015)
Increase the capability of the current railway The Railway Board had constituted this
infrastructure. Committee to mobilise the resources for major
By 2022-23, increase infrastructure construction railway projects the Railway Ministry under
speed from 7 km/day to 19 km/day. chairmanship Mr. Bibek Debroy.
The committee gave its report in June 2015.
By 2022-23, achieve “100 per cent” electrification
The recommendations of the committee are as
of the broad-gauge track, up from 40% in
follows
2016-17.
Encouraging private participation.
Increase freight and mail/express train average
Establishment of Independent Regulator.
speeds to 50 km/hr (from around 24 km/hr in
2016-17) and 80 km/hr (from around 60 km/hr), Invest in improving Railways infrastructure.
respectively. Redesign the railway zones.
Concepts Streamline recruitment process.
Merge the railway budget with the General
Cross Subsidization
budget.
The practice of funding one product with the
Reform the accountability system of Railways.
profits generated by another product is called
Railways Personnel Reforms & Unification of
Cross subsidization.
Services
438 Infrastructure
Unification of services has been recommended 3 high level posts shall be taken from the
by various committees for reforming Railways Railway Board and all the remaining posts of
including - the Prakash Tandon Committee the Railway Board shall be open to all officers
(1994), Rakesh Mohan Committee (2001), Sam from all the services to which they belonged.
Pitroda Committee (2012) and Bibek Debroy The Board would also have some independent
Committee (2015). Members (the number to be decided by
1.1 Unification of Services → Controversy competent authority from time to time) from
Problems with the Unification of services are different fields with knowledge and experience
as follows: of 30 years in fields like industry, finance,
Age and seniority-based on rank in UPSC test economics and management . The Independent
years back alone cannot be a fair measure of Members would help the Railway Board in
suitability for the posts. setting a strategic direction.
The increasing anomalies and distortions 2. Private Train Operators
with regard to top general management (GM) In July 2020, Indian Railways offered private
posts. companies to run 151 passenger trains on 109
There is an issue that these top posts are train routes. It was announced that the private
being occupied by officers from certain trains would start from April 2023.
departments. India’s first private train is Lucknow – New
In government, career prospects mostly depend Delhi Tejas Express, which was inaugurated in
on date of birth and rank in UPSC results. October 2019.
The administration remains prone to Benefits
disadvantages of age encountered by officers It will help to provide world-class facilities to
through the civil services stream, against those passengers.
from the engineering services examination. Modern technologies will be introduced into
The former generally join the service when railways.
they are 25-27 years old, while the latter join The gap between the supply and demand of
technical cadres at 21-24 years. tickets can be fulfilled by private trains.
There’s a similar age anomaly in the case of As the Government of India said that these
Special Class Apprentices. trains would be manufactured in India under
This affects the morale of the staff. the ‘Make in India‘ program. It would create
The organisation is the major loser, as it fails more jobs and increase its GDP.
to optimally utilise its trained and experienced It will end the monopoly of Indian Railways
human capital. and can make the travels more economical.
1. 2. Restructuring of Railway Board 2.1 Challenges In Allowing Private Trains
The Railway boards can no longer be organised It will increase inequality among people.
on departmental lines and should be replaced With the use of modern technologies
with a leaner structure organised on functional unemployment as private companies do not
lines. give as many jobs as the government.
Features: If coaches are not manufactured in India as
It would be composed of a Chairman, who would promised and imported it will lead to a loss of
act as ‘Chief Executive Officer (CEO)’ along Indian foreign reserves.
with 4 Members responsible for Infrastructure, Although the private trains constitute only 5%
Operations & Business Development, Rolling for now, there is no guarantee that it won’t
Stock and Finance respectively. increase and if it increases in the coming
The Chairman’s cadre shall be the controlling years, Indian Railways can suffer like BSNL &
officer responsible for Human resources (HR) Air India.
with assistance from a DG (HR).
Infrastructure 439
3. Modernisation Attempts Before 2019 trains by 25 kmph in the next 5 years. It would
Project Uni-gauge complement Mission 25 Tonne to increase
Project Uni-gauge was launched on 1 April throughput of the railway system.
1990. It is an ongoing effort by Indian Railways Mission Hundred : Under this mission, at least
to change all rail gauges in India to 1,676 mm a hundred sidings would be commissioned in
(5 ft 6 in) broad gauge. the next 2 years. Siding refers to the low-speed
Benefits of Adopting the Uni-gauge track section / track branch distinct from a
There would be no transport hindrance as all running line.
routes will have the same tracks. Mission beyond book-keeping – It would
It will increase the speed of trains. establish an accounting system where
Routes of the train could be easily diverted. outcomes can be tracked to input.
There would be an improvement in the operating Mission Capacity Utilisation – It proposes
ratio of the railway system as a whole. to prepare a blueprint for making full use of
It will increase the efficiency of the tracks. the huge new capacity that would be created
through two Dedicated Freight Corridors
It will remove regional disparity and give
between Delhi-Mumbai and Delhi- Kolkata
balanced economic growth.
scheduled to be commissioned by 2019.
No multiple Tracking work required.
Rail Drishti Portal
Encourage investment of private players in
It is a step towards “Digital India, Digital Railways”.
railways.
Rail Drishti is an attempt to bring information
Project Saksham
from many sources into a single window for
“Project Saksham” would help to increase
digitally viewing, analyzing and monitoring the
productivity and enhance efficiency.
important aspects of Indian Railways with an
Under this project, all employees in each zone
aim to have transparency and accountability.
will have to do a week’s training in skills and
It enables every citizen of the country to
knowledge related to their work area.
know important information about the Indian
Under this project it is aimed to upgrade the
Railways openly and it also provides a platform
skill sets of lakhs of workforce with a single
to take the services offered on various digital
drive spanning nine months.
platforms of the Railways in one place.
Mission Avataran
Rail Development Authority
Avataran is an umbrella program that consists
The Union Cabinet proposed of setting up
of 7 missions they are as follows:
an independent regulator Rail Development
Mission 25 Tonne : It is to increase revenue by Authority (RDA) that would recommend
augmenting carrying capacity. passenger fares for Indian railways.
Mission Zero Accident : It comprises two The requirement of having a rail regulator has
submissions such as been recommended by various committees
Elimination of unmanned level crossings on for the past many years since 2001 including
Broad Gauge in the next 3-4 years and the Expert Group under the Chairmanship of
Equipping 100% of the High-Density Network Rakesh Mohan in 2001, the National Transport
with Train Collision Avoidance System (TCAS). Development Policy Committee (NTDPC) in
Mission PACE (Procurement and Consumption 2014 and the Bibek Debroy Committee in 2015.
Efficiency) : It aims to improve procurement It will be headquartered in Delhi.
and consumption practices to improve the It would work within the parameters of the
quality of goods and services. Railway Act, 1989.
Mission Raftaar : It targets doubling of average It will only make recommendations to the
speeds of freights trains and increasing the Ministry on the fares.
average speed of superfast mail/express
440 Infrastructure
It will improve the services offered to The speed of electrification of trains has been
passengers and provide comfort to investors increased in recent years by the Railway Ministry.
It will enhance transparency and accountability. National Rail Plan for India–2030
The RDA will have a Chairman and 3 members Indian Railways have prepared a National Rail
and can engage experts from relevant areas. Plan (NRP) for India 2030.
The Chairman and the members would have a The Plan is to create a Railway system future-
term of five years. ready by 2030.
The appointment of the Chairman and members Objective
will be done by the central government from a
To make plans based on both operational
list of names given by the Search and Selection
capability and commercial viability to increase
Committee which include Cabinet Secretary as
the share of the Railway’s good transport.
Chairman, Railway Board Chairman, Secretary,
Department of Personnel and Training, and To have a capacity more than demand will help
Chairman of any Regulatory Body of the to facilitate the demand of 2050.
central government nominated by the Cabinet Increase the share of Railways to 45% in goods
Secretary. traffic and help to maintain it.
It will make recommendations regarding Safety
policies for private investment to give safety to Indian Railways have taken various steps for
PPP investors and to hear disputes over future the safety and security of passengers in trains
agreements. as well as for railway stations and a few of
It would propose measures for the induction of them are as follows:
new technologies. The routes identified as prone to crimes by
Green Initiatives by Railways the trains are followed by Railway Protection
The Green Initiatives by Railways are as follows: Force (RPF) with Government Railway Police of
The Railway Ministry plans to have 1000 MW of different States every day.
solar power by 2020-2021. Railway Help Line number 139 is operational
Indian Railways has established a wind energy (24x7) .
plant of 36.5 MW, out of which, 26 MW was Railways are in regular contact with passengers
installed at Jaisalmer in 2015-2016. by social media platforms.
Use of LED lighting on electrified railway Announcements are made by the Public Address
stations and service buildings. System to the passengers to take precautions
In June 2015, the national transporter started against theft, snatching, drugging etc.
blending 5 per cent biodiesel in High-Speed An Integrated Security System (ISS) consists
Diesel (HSD) for diesel locomotives. of surveillance of more prone stations to
20% CNG substitution in diesel engines of 23 mishappenings through CCTV.
Diesel Power Cars of DEMU trains as well as Drives are done to stop the entry of unauthorised
the introduction of solar energy-based DEMUs. persons in trains and station areas.
To increase greenery in railway premises, trees Emergency Talk Back System and Closed Circuit
have been planted. Television Surveillance Cameras have been in
Indian Railways for better water management new coaches.
started water Audits at major centres of Railways Protection Force (RPF)
consumption and Water Recycling Plants and initiatives-2019
Rain Water Harvesting systems were instituted Some of the initiatives of RPF are:
at railway stations. RPF has initiated a drive to identify children in
Installation of bio-toilets in trains. problems at stations and in trains or in nearby
Infrastructure 441
towns/villages/hospitals orphaned due to The policy says that the states come up with
COVID-19 and help them to come out of their innovative ways to raise funds.
problems with the help of their staff. The most important aspect of the policy is the
The introduction of ladies in large numbers in last mile connectivity that lays down an area
RPF to increase women’s security. coverage of 5km.
The Meri Saheli program was started by RPF The policy gives states the power to formulate
from 17th Oct. 2020 across zones to help women rules and regulations and establish permanent
travelling alone for long distances by trains. fare fixation authorities.
In this a team of lady RPF personnel keep in
Metrolite, MetroNEO = Cheaper Metros for
contact with them throughout the journey from
smaller cities (2021)
boarding station till the deboarding station.
MetroLite and MetroNeo are low-cost mobility
The Security of Female passengers has been
solutions with reduced system requirements
enhanced by formation of Special Lady Squads
with the same experience.
like Bhairvi, Virangna, Shakti. Keeping in
contact with all ladies’ special trains in metro It is more environmentally friendly.
cities and local trains specially deployed in late These systems can also act as feeder systems
night and early morning local trains. for incurrent metro systems.
Railway Flood Relief Team (RFRT) : An RPF According to Metro Rail Policy-2017,the Central
disaster relief initiative has been launched Government gives financial assistance for these
for reaching out and providing succour to projects in cities or urban populations based
passengers stranded in trains due to flooding. on feasibility of the project and availability of
Dedicated Freight Corridor (DFC) resources required when recommended by related
Dedicated freight corridor (DFC), as the name State Government/ Union Territories (UTs) as urban
defines, to create a safe and efficient freight development matters come under state list.
transportation system in the country. Few projects under process are as follows:
Importance of DFCs
It will speed up the transport of goods by rail Sr State/UT City Name of
route. No Project
It will reduce the load on traditional rail routes. 1 Delhi Delhi Rithala-Narela
It will make space for more passenger trains in MetroLite
future. Corridor in the
Metro Rail remaining 03
A metro is a train that is designed to run in corridors of
metropolitan cities to connect the distances Delhi Metro
within the city and its suburbs. Phase-IV
Metro Rail Policy 2017
2 Maharashtra Nashik Nashik
Features
MetroNeo
The three models are given in the policy:
Public-Private Partnership with Central backing. 3 Jammu and Jammu Jammu
Kashmir MetroLite
The Grant from the Centre here 10% of the
Metro project cost would be given by the 4 Jammu and Srinagar Srinagar
Central government as a bailout. Kashmir MetroLite
50-50% Equity sharing between the Centre and 5 Uttar Gorakhpur Gorakhpur
state. Pradesh MetroLite
All three models require mandatory private Table 17.2: Metro Rail Projects under Process
participation.
442 Infrastructure
Hyperloop Using Vacuum Tube metropolitan levels while long term objectives
Hyperloop is a new form of land transport currently are for national and metropolitan levels.
in the development phase. In it passengers would At the National Level
be traveling above 700 miles an hour in a floating Making a high-level and independent Office
pod inside giant low-pressure or vacuum tubes of Transport Strategy (OTS) and shift towards
placed either above or below ground. investment and technique for transport as an
The differences between Hyperloop and integrated system.
Traditional rail are as follows: National Transport Infrastructure Finance
S.no. Hyperloop Traditional rail should be neutral with means of delivering
mobility, sustainability and inclusion goals.
1. It carries It carries
At the State Level:
passengers in a pod passengers in
in a vacuum tube. trains on rails. Make urban transport a subject at the
state level and develop ways for states to
2. It travels at a speed It travels at
participate in decisions about initiation,
of around 700 miles a speed of
siting, size and other aspects of airports and
per hour. around 90
railways.
miles per hour.
Formation of state-level counterparts OTS,
3. It floats in the tube They travel on
with particular focus on urban transport.
due to magnetic wheels.
At the Metropolitan Level
levitation.
Creation of Unified Metropolitan Transport
Table 17.3: Differences between Hyperloop and
Authority (UMTAs) as a statutory body.
Traditional Rail
Independent funds, experts in all urban areas
Benefits of Hyperloop
with a population greater than 30 lakhs and the
It would be cheap. formation of metropolitan planning committees
It will save travelling time. as per the Constitution.
It will pollute the airless. Creation of public-private centres of excellence
It will reduce pressure on the road to a large in urban transport in all cities larger than 10
extent. lakhs of population and fund the unification of
How Hyperloop Works metropolitan databases.
The basic idea of Hyperloop work is the suction Constraints
created by the removal of air from the tube- Congested networks: Over-stretched
like in an air pump and the use of magnetic infrastructure with 60 per cent-plus routes
levitation to reduce friction. being more than 100 per cent utilized, leading
Critics of Hyperloop to a lessening in an average speed of passenger
and freight trains.
It has been warned by critics of the hyperloop
Organisational structure: Delays in decision
that travelling in the tube may be uncomfortable
making, insufficient market orientation and
of nausea-inducing acceleration and additional
long project approval durations lead to slow
lateral G-force on bends on the route.
turnover times and delays in the implementation
Recommendations of Rakesh Mohan
of railways projects.
Committee (National Transport Development
Internal capital generation: Low non-
Policy Committee (NTDPC)
fare revenues and high freight tariffs have
The recommendations of the committee are resulted in a freight share that is less than
divided into short term reforms and long- ideal. The decline in the share of railways has
run objectives. The short reforms have been been attributed to the lower relative cost of
recommended at the national, state and transporting freight by road. Low and stable
Infrastructure 443
passenger segment prices have also led to low the safety of users in compliance with the
internal resource generation. General Rules of IR.
Protection and poor service delivery: In recent Separate suburban commuter transit from
years, there has been a range of incidents and the rest of the network and create a light rail
safety problems in the IR. Train and station system in all major urban areas under the
cleanliness, train departure/arrival delays, food jurisdiction of local governments.
quality, and ticket booking difficulties are all Rationalize Fare Structures and Subsidies, and
major concerns. Monetize Assets to Generate Revenues
The efficiency of terminals: Poor terminal Reconsider IR’s pricing model in order to keep
facilities lengthen loading and unloading times. the passenger and freight segments viable.
Eighty per cent of railway loads come from Tariffs for freight should be comparable with
terminals. The functioning of terminals needs those for road transport.
to be strengthened to improve rail freight.
Using railways to monetize land resources,
Economies of scale: The shortage of scale especially by developing non-railway revenues
economies especially impacts management such as retail or other activities.
quality and system accountability.
Invest in infrastructure, modernize stations,
Way forward
and lease space to private players to boost
Better use of existing infrastructure to address retail revenues from railway stations.
congestion:
Enhance the Safety of Trains to Reduce
Boost capacity efficiency by prioritizing Accidents and Modernize stations
ongoing projects. These ventures will produce
In 2017-18, the government formed the Rashtriya
more revenue if they are completed on time.
Rail Sanraksha Kosh (RRSK) to resolve critical
Simultaneously, we must preserve and update
safety issues.
the current network to ensure that supply
To avoid collisions, remove level crossings and
meets demand.
cattle crossings, and fence railway tracks in
Ensure that the dedicated freight corridors
areas with high levels of traffic.
(DFCs) and the Mumbai-Ahmedabad High-
Implement the 22 suggestions of Dr Kakodkar’s
Speed Rail (MAHSR) are completed on time,
High-Level Safety Review Committee.
especially by completing land acquisition for
the DFCs in a timely manner. By-pass crossings and grade separations should
be upgraded and kept in good working order.
Ease Organizational Rigidity through Structural
Reforms Enhance the Ease of doing Business
Consider allowing the private sector to own and Set up an independent homologation and
operate freight terminals, as well as locomotives standardisation agency to adopt new railway
and rolling stock, under a straightforward, technology and improve the speed and
neutral (non-railway) and equitable regulatory reliability of the railway network.
framework. This would boost efficiency while An internationally accepted liability regime
also attracting private investors and players. for domestic and international transportation
Consider transferring coach and locomotive and (ii) common carrier status to all rail-based
manufacturing and repairs to private players. service providers.
However, since human safety is involved in the Ensure that there are no interim amendments
case of coaches and wagons, IR should continue to tariff and non-tariff regulations to improve
to have regulatory and technical control over legitimacy.
their manufacture and maintenance to ensure
444 Infrastructure
Q. National Urban Transport Policy emphasises ‘moving people’ instead of ‘moving vehicles.
Discuss critically the success of the various strategies of the Government in this regard.
• In the intro, you need to write about NUTP 2006
• In Body,
⚪ Discuss provisions in the first part of the answer.
⚪ In the second part of the answer, you need to write various government strategies and
issues related to them.
• Try to conclude, by writing suggestions with prospects for urban mobility.
Answer:
The National Urban Transport Policy (NUTP) in 2006 was brought in by GoI to bring about
comprehensive improvements in urban transport services and infrastructure. The objective of
this policy is to ensure safe, affordable, quick, comfortable, reliable and sustainable access for
the growing number of city residents to jobs, education, recreation and other needs within the
cities.
Provisions of NUTP:
Incorporating urban transportation as an important parameter at the urban planning stage
rather than being a consequential requirement.
Encouraging integrated land use and transport planning in all cities so that travel distances
are minimized and access to livelihoods, education, and other social needs, especially for the
marginal segments of the urban population is improved
Improving access of business to markets and the various factors of production
Bringing about a more equitable allocation of road space with people, rather than vehicles viz.
safety for walking and cycling.
Hence, this policy is touted as aiming to move people rather than vehicles. Eight years have
passed since then and several new initiatives have been taken by MOUD to promote good
mobility in cities. It was revised in 2014 for addressing various other challenges with better
policies with fulfilling city-wise needs.
Various government strategies to promote National Urban Transport Policy (NUTP):
Public transport system:
Bus Rapid Transit System: This is gaining acceptance as a means to scale up mass transit in
Indian cities. BRTS has dedicated lanes but it has not been successful in cities like Delhi.
The mass rapid transit system needs huge investment and technical support system, experts in
big urban cities of India. Therefore, it is limited to some big metro cities only.
Except for some of the cities, the mass transit system is failing in most of the urban areas,
which need some other ways to improve people’s mobility.
Maintenance and repair of buses are the most critical issues in the urban transit system. Local
bodies are not having many resources to keep these buses in fit and environmentally good
conditions.
Metros: Metro is one of the best and the most promising urban transport systems right now in
Infrastructure 445
India. For example, the Delhi metro is the most successful mass transport system. It reduced
stress on roads and contributed to the conservation of the environment.
o But the issue with metros is to it is present in big metro cities only and tier 2 and 3 cities are
not connected by metro. This has become a key issue in the development of a faster and more
efficient transport system in tier 2 and 3 cities.
Monorail: Monorail is another mass rapid transport system that has a presence in cities like
Mumbai.
But again, the problem is it does not have as wide a network as metro rail in Delhi. Also, the cost
of metro rail construction is a topic of debate among policymakers.
However, as per the UN, population fund report by 2030 India’s 35% population will be staying in
urban India. By looking at this population trend India needs a strong, faster, and most efficient
transport system to carry increasing numbers of commuters. Hence revamped National Urban
Transport Policy is in need of the hour as well as building capacities of urban local bodies.
To increase asset efficiency and utilisation, general public. It will improve access to the
use technology to plan and route the freight countries underserved and unserved airports.
industry.
India is also catching up with other leading
Civil Aviation aviation markets in terms of market penetration.
Airport infrastructure development continues Domestic passenger traffic amplified at a CAGR
to be a matter of concern. Upgradation of many of almost 12.91 per cent between FY 16 to FY
airports, including the construction of new 20 and international passenger traffic grew at a
terminals, for improving air navigation services, CAGR of 5.01 per cent during the same period.
the Airport Authority of India (AAI) installed the (According to IBEF Research)
new ATS automation system.
Agencies related to Civil Aviation
Director-General of Civil Aviation (DGCA)
DGCA is civil aviation regulating body under the
Ministry of Civil Aviation (MoCA).
Headquarter in New Delhi.
The functions of DGCA are as follow:
It certifies the aerodromes and CNS/ATM
facilities.
It gives licenses to air traffic controllers and
Fig. 17.4: Civil Aviation Statistics conducts examinations for them.
Present situation Doing investigation of accidents and serious
In 2021, India’s civil aviation sector contributed incidents.
3.5% to the country’s GDP, supporting 1.31 Taking measures to prevent accidents.
million direct, indirect, and induced aviation It issues a YA number (read as an authority
employment. number) to Non-scheduled flights by foreign or
In 2016, China’s domestic air travel demand Indian operators to destinations outside India.
was twice that of the United States. Without this number, such flights cannot fly.
The Ministry of Civil Aviation’s regional Bureau of Civil Aviation Security (BCAS)
connectivity scheme, UDAN, is a 10-year It was set up as a Cell in the DGCA in January
initiative to facilitate sustainable regional 1978 on the recommendation of the Pande
development and make flying accessible to the Committee.
446 Infrastructure
The BCAS was made an independent It provides services in remote and hilly areas as
department under the Ministry of Civil Aviation well as charter services for the encouragement
on 1st April 1987. of travel and tourism.
The headquarters is in Delhi. It has played an important role in the
The functions of BCAS are as follow: development of the Helicopter Industry in India.
It lays down Aviation Security Standards in National Civil Aviation Policy (NCAP ) 2016
accordance with Annex 17 to the Chicago Mission
Convention of ICAO for airport operators, airline Providing safe, economical and sustainable air
operators, and their security agencies. travel for passengers and cargo to various parts
It monitors the enforcement of security rules of India and the world.
and regulations and carries out surveys of Objectives
security requirements.
Make an integrated ecosystem which would
It certifies that the persons enforcing lead to noticeable growth of the civil aviation
security controls are trained and possess all sector, which would promote tourism leading
qualifications required to perform their jobs. to increase employment and balanced regional
Mock checking to test the professional growth.
efficiency and vigilance of security staff. Provide safety, security and sustainability to
Airports Authority of India (AAI) the aviation sector by the use of technology
Airports Authority of India (AAI) is a Mini-Ratna and effective monitoring.
Public Sector Undertaking (PSU) under the Increase regional connectivity through financial
Ministry of Civil Aviation. support and infrastructure development.
Headquarter in New Delhi. Relax in doing business by deregulation,
It was established on April 1, 1995, by merging simplification of procedures and e-governance.
International Airport Division (IAD) and National Encourage the entire aviation sector chain in
Airport Division (NAD). an organized manner.
It was made by an Act of Parliament. Cheap flights to Small Towns → UDAN
The functions of AAI are as follows: UDAN stands for Ude Desh Ka Aam Nagrik
To Design, Development, Operation and scheme.
Maintenance of international and domestic The UDAN scheme was started by The Ministry
airports. of Civil Aviation in 2016.
To Control and Management of the Indian The aim of the scheme is to facilitate/stimulate
airspace extending beyond the territorial limits regional air connectivity and make air travel
of the country according to ICAO. affordable for the masses.
To Expand and strengthen the operation area. Udan 3.0 (2018)
Runways, Aprons, Taxiway etc. Important Features of UDAN 3.0 included:
Provision of Communication and Navigation Including Tourism Routes under UDAN 3.0 with
aids like ILS, DVOR, DME, Radar etc. the Ministry of Tourism in confidence.
Pawan Hans Helicopters Limited (PHHL) Including Seaplanes for joining Water
The Pawan Hans Helicopters Ltd. (PHHL) is one Aerodromes.
of the biggest helicopter companies in India Bringing in a number of routes in the North-
and is known for its reliability. East Region under the ambit of UDAN.
Headquarters is located in New Delhi. Build More Airports → NABH Nirman
It is the first ISO 9001: 2000 certified Aviation
The Government of India by the NABH
Company in India.
programme intended to expand airport capacity
Functions in the country by more than 5 times to handle
It gives helicopter services to the Oil Sector for one billion flights per year.
its off-shore exploration activities
Infrastructure 447
Important aspects of NABH are as follows: regional air connectivity and revive/upgrade
There is a fair and equitable land occupying 56 underserved airports and 31 underserved
policy. helipads (RCS-UDAN).
It has a long-term master plan for airport and Ensure that airport tariffs, fuel taxes, landing
regional development. fees, passenger facilities, freight fees, and
There should be a balanced economy among other fees are calculated in a timely, equitable,
all stakeholders. and transparent manner.
Airfare Price Ceiling AERA Amendment Bill, 2021
Restricting the price rise in aircraft is called Key Points
the airfare price ceiling. The Bill amends the Airports Economic
The reasons for which airfare price ceiling are Regulatory Authority of India Act, 2008. The Act
as follows: established the Airports Economic Regulatory
Rent takers often misuse government policies Authority of India (AERA).
to make undeserving profits. AERA regulates tariffs and other charges for
The capacity limit and price floors appear to be aeronautical services provided at civilian
a clientelist policy to cut down the wings of the airports with annual traffic above 15 lakh
big airlines in the market and give breathing passengers. It also monitors the performance
space to the financially weaker airlines. standard of services across these airports.
Drone Regulation Need for AERA: A few years back, private players
The regulation provided for the flight of Drone started operating civilian airports. Typically,
beyond the restricted areas is called Drone airports run the risk of becoming a monopoly
Regulation. because cities usually have one civilian airport
They help to monitor the flight of drones and which controls all aeronautical services in that
avoid any mishappenings. area. To ensure that private airport operators
GARUD Portal do not misuse their monopoly, the need for an
independent tariff regulator in the airport sector
GARUD is a short form for ‘Government
was felt. Consequently, the Airports Economic
Authorisation for Relief Using Drones’.
Regulatory Authority of India Act, 2008 (AERA
It is a portal for getting the necessary approvals
Act) was passed which set up AERA.
from the Competent Authority in less than
Key provisions of the Bill:
two weeks
Definition of major airports:
It is the work of officials at MoCA, DGCA, AAI
and NIC. The 2008 Act designates an airport as a major
Important Government Objectives airport if it has an annual passenger traffic of
at least 35 lakhs.
Make travel more affordable so that domestic
The central government may also designate
ticket sales can rise from 103.75 million in 2016
any airport as a major airport by a notification.
to 17 to 300 million by 2022.
The Bill adds that the central government may
Increase air cargo handling from 3.3 million tonnes
group airports and notify the groups of a major
in 2017-18 to 6.5 million tonnes in 2018-19.
airport.
Raise the maintenance, repair, and overhaul
The purpose of this amendment is to pair the
(MRO) industry from USD 1.8 billion to USD 2.3
smaller non-profitable airports with profitable
billion in 2017.
airports as a combination/package to bidders
Boost airport capacity by more than five times in to make it a viable combination for investment
order to accommodate one billion annual trips. under PPP(Public-Private Partnership) model.
By means of the Regional Connectivity This move is also likely to help in expanding
Scheme, Ude Desh Ka Aam Naagrik, the air connectivity to relatively remote areas
increase the availability and affordability of and as a result, expediting the UDAN scheme.
448 Infrastructure
Tariff: The amendment will allow The Airports Capacity and infrastructure constraints could
Economic Regulatory Authority (AERA) reduce efficiency and safety while also having
to regulate tariffs and other charges for a negative impact on the economy.
aeronautical services for not just major airports Skilled Workers
with annual passenger traffic of more than 35 According to a Ministry of Civil Aviation Report,
lakh, but also a group of airports. Indian aviation could sustain 1.0 to 1.2 million
Recommendations of NTDPC jobs directly by 2035. This means that over
The recommendations of the committee are the next ten years, approximately 0.25 million
divided into short term reforms and long- people would need to be educated.
run objectives. The short reforms have been Shortage and gaps in the availability of
recommended at the national, state and industry-recognized skills, from airline pilots
metropolitan levels while long term objectives and crew to maintenance and ground handling
are for national and metropolitan levels. personnel, could constrain the growth of
At the national level: different segments of the sector.
Making a high-level and independent Office High Cost to Passengers and Air Cargo
of Transport Strategy (OTS) and shift towards Tariff determination: All airports must move
investment and technique for transport as an from a single to a hybrid structure, according
integrated system. to the Ministry of Civil Aviation. While this
National Transport Infrastructure Finance is advantageous because it encourages
should be neutral with means of delivering infrastructure investment, it increases airline
mobility, sustainability and inclusion goals. and passenger prices.
At the state level: Taxes on aviation turbine fuel (ATF): ATF is
Make urban transport a subject at the state relatively expensive in India due to high taxes
level and develop ways for states to participate and a lack of competition among providers.
in decisions about initiation, siting, size and Since it is not part of the GST network, there
other aspects of airports and railways. are regional price differences. Because of high
central and state taxes, the price of aviation fuel
Formation of state-level counterparts OTS,
in India may be up to 60% higher than in ASEAN
with particular focus on urban transport.
and Middle Eastern countries. India has a 45 per
At the metropolitan level:
cent fuel cost as a proportion of operating costs,
Creation of Unified Metropolitan Transport compared to a global average of 30 per cent.
Authority (UMTAs) as a statutory body. Incidence of GST on Aircraft Leases and Spare
Independent funds, an expert in all urban areas Parts: GST of 5 per cent is applied on aircraft
with a population greater than 30 lakhs and lease rentals; GST ranges between 5 per cent
the formation of the metropolitan planning and 28 per cent on aircraft engines and spare
committees as per the Constitution. parts. This also raises expenditure costs for
Creation of public-private centres of excellence the sector.
in urban transport in all cities larger than 10 Aviation safety: Despite the fact that the
lakhs of population and fund the unification of amount of aviation safety violations in 2017
metropolitan databases. (337) is down from 2016 (442), the overall
Constraints number remains large.
Infrastructure and capacity: Way Forward
Enhance aviation infrastructure
As India’s civil aviation sector grows, airspace,
Complete the planned airports under the UDAN
parking bays, and runway slots will become
initiative as soon as possible. The rehabilitation
increasingly scarce in the coming years,
of 50 under-served and unserved airports/
especially at metro airports.
airstrips is scheduled to be completed.
Infrastructure 449
In addition to completing two new airports in Organization (ICAO) at all times. Additional
Delhi and Mumbai by 2022, the infrastructure skilling of personnel may be required for this
capacity of the world’s ten busiest airports and the DGCA should adequately build the
should be substantially increased. capabilities of its staff to ensure compliance.
Increase investment in the sector through Prioritize Aviation Safety
financial and infrastructure support Shift the attention to preventing and avoiding
Increase aircraft parking infrastructure and injuries and incidents.
facilities at metro airports.
Security breaches should be viewed with zero
Create additional parking hubs at suitable
tolerance.
locations, accessible through short-haul flights,
For an effective aviation safety oversight
to accommodate additional aircraft.
scheme, the DGCA should be granted
Monetize vacant real estate near AAI airports in
autonomy.
every major centre of traffic to increase non-
aeronautical revenues. For all aviation-related transactions, requests,
and grievances, the DGCA should develop a
Address shortage of skilled manpower
single-window system.
Promote cooperation between original
equipment manufacturers (OEMs), industry,
Ports, Shipping, and Inland Waterways
and educational institutions to teach the most
up-to-date concepts in the aviation industry, Present situation
such as management principles, aviation Ports and Shipping
information technology, and so on. India has a 7,500-kilometer coastline, making
Establish a manufacturing ecosystem in the it one of the world’s largest peninsulas, and
country by establishing long-term plans for ports handle roughly 90% of the country’s
advanced research in aviation technologies. foreign trade by volume and 70% by value. On
Facilitate greater involvement of the private India’s coast, there are 12 major ports and 205
sector in sponsoring aviation institutions, minor ports.
industrial training, and R&D projects. Despite this, roads and railways remain the
Using the National Air Cargo Community System most popular modes of cargo transportation.
(NACCS) network, create an integrated digital
Despite being the most cost-effective
supply chain or e-cargo gateway.
and efficient mode, water transport accounted
Promote “Fly-from-India” by creating trans- for 6 per cent of freight transport in India in
shipment hubs. Ease the regulatory environment 2016-17.
for airports.
Deregulate the aviation industry even further
and help India increase passenger and freight
traffic.
Adopt a consistent model for assessing tariffs
in order to reduce passenger costs.
Consider putting aviation turbine fuel (ATF)
under the GST umbrella to match taxation and
pricing systems with global benchmarks.
Strengthen regulatory capacity with respect Fig. 17.5: Various Modes of Transportation
to public-private partnerships and streamline
The Ministry of Shipping’s Sagarmala
the judicial review process to ensure timely
programme, emphasises modernizing and
implementation of DGCA’s decisions.
developing ports, enhancing port connectivity,
Meet the regulatory and security requirements supporting coastal communities, and
prescribed by the International Civil Aviation stimulating port-linked Industrialization.
450 Infrastructure
Sagarmala intends to reduce the logistics costs There has been an investment of Rs 1,00,339
for foreign and domestic trade, leading to an crore divided among Port Sector, Shipping
overall cost savings of INR 35,000 to INR 40,000 sector and Inland Water Transport Sector.
crore annually by 2025. It moreover aims to Shipping
double the share of water transportation in the Shipping is defined as the physical moving of goods
modal mix. from one place to another, such as the moving of
goods from the warehouse to the customer.
Coastal Shipping
Coastal Shipping refers to removing the
bottlenecks in the existing transport network
and taking a limited observation of the potential
of Coastal Shipping specifically in a country like
India which has a long coastline.
Inland Water Transport
The use of an internal drainage system
for transportation is called inland water
Fig. 17.6: Port Led Development
transportation.
Inland Waterways Inland Waterways Authority of India (IWAI)
Inland Water Transport (IWT) transports less The Inland Waterways Authority of India (IWAI)
than 2% of India’s organized freight and very came into existence on 27th October 1986 with
little passenger traffic. the function to develop and regulate the inland
The annual freight volumes carried on inland waterways for shipping and navigation.
waterways using National Waterways (NW- Headquarters: Noida
1, NW-2, and NW-3) and Goa Waterways was Functions:
21.91 MMT in 2016- 17. Moreover, Maharashtra Carry out surveys and investigations for the
Waterways alone transported over 33.29 MMT. development of National Waterways.
The Inland Waterways Authority of India (IWAI) Provide/Permit setting up of infrastructure
is responsible for developing and maintaining facilities.
fairways, navigational aids, and terminal Regulation of navigation and traffic.
infrastructure.
Enter into joint ventures concerning inland
The government is also proposing to fund NWs
shipping by way of equity participation.
through the Central Road Fund (CRF).
Regulate the construction of structures across
The ministry is augmenting the capacity of
the waterways.
NW-l under the ‘Jal Marg Vikas’ project.
Shipping Corporation of India
National Maritime Development Programme
(NMDP) The Shipping Corporation of India came into
The National Maritime Development Programme existence on 2 October 1961 by the merging
(NMDP) has been established by the Ministry of of the Eastern Shipping Corporation and the
Shipping of India. Western Shipping Corporation.
NMDP has undertaken 276 projects like Headquarters: Mumbai
construction/upgradation of berths, deepening Vision: To become a team of inspired performers
of channels, and rail/road connectivity in the field of maritime logistics, Offshore Port
projects. and Terminal Management, serving Indian and
79 projects are under the PPP model. global trade.
Infrastructure 451
Fig. 17.7: Port Led Development
Shipbuilding Industry countries. So it acts as an anchor point in

Strength the middle.
The shipbuilding industry is very important for
any country regarding the importance of ships Major Shipyards in India (Map)
in both trade and defence. Important Government Objectives
The shipbuilding industry encourages the Increase the proportion of freight transported
local development of difficult design and by coastal and inland waterways from 6% in
engineering skills which are essential for 2016 to 17 to 12% by 2025.
the sustenance and growth of local defence By 2022-23, raise port handling capacity to
capabilities. 2,500 million metric tonnes (MMT).
Weakness By 2022-23, reduce turnaround times at major
In Spite of 100% FDI in shipping since 1997 then ports from 3.44 days (2016-17) to 1-2 days
also the Indian shipping industry and India’s (global average).
national fleet is smaller than compared with Increase inland waterway throughout from
its global counterparts. 55.20 MMT in 2016-17 to 60-70 MMT by 2022-23.
Presently, the Indian fleet has 1.2% of the world Increase the minimum usable depth to increase
fleet in terms of capacity. inland water transport capability.
Opportunities Constraints
India is a place which lies in the middle Roads (54 per cent) continue to be the
of countries which produce and market dominant mode of transporting cargo, followed
452 Infrastructure
by rail (33 per cent). Transportation of cargo movement, which can pose an obstacle to
through waterways (shipping and inland water) inland navigation because the legislation may
accounts for a minuscule modal share (6 per not take safety into account.
cent) despite it being the most cost-effective
and efficient mode. Way Forward
Drought levels: Due to insufficient depth, most Open up India’s Dredging Market
Indian container handling ports are unable to The government needs to open up the dredging
accommodate large container vessels; mother market to attract more players, especially
vessels must dock at ports with a minimum foreign players, to increase and sustain draught
drought depth of 18 meters. With foreign trade depth at ports in order to attract large vessels
preferring more economically viable mother and allow them to become hub ports.
vessels, a port›s capacity to become a hub port
At the moment, the Indian dredging market is
is harmed by shallow drought.
served by the Dredging Corporation of India
Connectivity to ports: Weak hinterland (DCI) and a small number of private vendors,
connectivity between production centres and limiting competition.
gateway ports often leads to higher costs and
If the government takes steps like consolidating
delays because of sub-optimal mode choices.
dredging contracts through cohorts of ports
Transhipment port: A large percentage of and removing, at least temporarily, the right of
containers in India are currently transshipped first refusal granted to Indian vendors, foreign
through other ports, such as Colombo (just players would be attracted to the market.
south of India), Singapore (East), Dubai
Expedite the implementation of Sagarmala
and Salalah (West) due to the absence of a
Expedite the accomplishment of various
transhipment port in the country. This has
projects under Sagarmala, especially those
led to additional costs and delays due to the
aimed at improving port connectivity, setting
feeder voyage from India to the hub port.
up coastal economic zones (CEZs) and
Charges by the shipping lines: The business
establishing new ports.
practices of shipping lines have played a key
The setting up of a single-window facility for
role in the present negative perception of sea
cargo clearance and putting in place a fully
transport. A long-pending concern has been the
mechanized cargo handling infrastructure will
high rate and multiplicity of charges imposed
be critical to increasing throughput.
by shipping lines.
Ease the Business Environment Around
Capital for inland vessels: At present, the cost
Shipping and Ports:
of capital is very high and makes IWT freight
uncompetitive. It is tough to attract capital for The Indian government needs to rethink
building inland vessels, as it is a significant its import policy on a “Free on Board” basis
investment. (FoB policy) in order to balance risk between
importers and exporters.
Technical issues in inland waterways: The
varying and limited depths due to the Enhance technology use in ports and, wherever
meandering and braiding of alluvial rivers and feasible, draw lessons from successful global
the erosion of their banks causing excessive ports such as Rotterdam, Felixstowe and
siltation, lack of cargo earmarked for IWT, Singapore to improve efficiency.
non-mechanized navigation lock systems and Enhance last-mile connectivity to inland
insufficient unloading facility at terminals waterways
hinder the use of IWT by shippers. IWT should be integrated into multi-modal/inter-
Inland waterway regulatory issues: Ferries modal connectivity. Inland terminals with proper
Acts from different years regulate cross-ferry road and/or rail connectivity and the seamless
Infrastructure 453
transfer of goods from one mode to the other are Adequate water supply
important for an efficient logistics supply chain. Assured electricity supply
Procure floating terminals and cranes and Sanitation, including solid waste management
place them suitably so that access to roads is Efficient urban mobility and public transport
possible.
Affordable housing, especially for the poor
Facilitate Access to Capital for Inland Vessels
Robust IT connectivity and digitalization
Inland vessel financing could be included in
Good governance, especially e-Governance
priority sector lending by banks.
and citizen participation
Categorizing inland vessels as infrastructure
Sustainable environment
equipment would make it easier to access
Safety and security of citizens, particularly
resources for a sector with high capital and
women, children, and the elderly; and
maintenance costs.
Health and education
Address technical and regulatory constraints
in inland waterways to ease the movement of Strategy: The strategic components of area-
inland vessels based development in the mission are:
CCEA, led by the Hon’ble Prime Minister approved City improvement (retrofitting)
the implementation of the Jal Marg Vikas project City renewal (redevelopment)
(JMVP) to augment the capacity of National City extension (greenfield development)
Waterway-1 (NW-1) with technical assistance and A pan-city initiative in which smart solutions
investment support from the World Bank at a are applied.
cost of INR 5369.18 crore. It should ensure that
Pradhan Mantri Awas Yojana -Urban
the project is completed by March 2023.
This initiative was launched in 2015 by the
From a regulatory standpoint, the detention of
Ministry of Housing and Urban Affairs, in
a vessel without a valid reason should not be
which affordable housing will be given to the
allowed.
urban poor people with a goal of building 20
A clear directive needs to be issued for the million affordable houses by 31st March 2022.
security of inland vessels, crew, and cargo.
Strengthen existing Inland Water Transport It provides central support to Urban Local
Directorates or Maritime Boards or set them up Bodies (ULBs) and other types of implementing
in states where they do not exist to ease the agencies with the help of States/UTs.
IWT business and to ensure efficient regulation Eligibility criteria: Every statutory town as per
and facilitation of IWT for cargo movement. Census 2011 and towns notified subsequently
Smart Cities would be qualified for coverage under the
The GoI has launched the Smart Cities Mission scheme.
with the collaboration of states and UTs for urban Provisions:
development. The purpose of the mission is to Credit Linked Subsidy.
drive economic growth and improve the quality of Affordable Housing in Partnership.
life of people by enabling local area development In-situ Rehabilitation of existing slum dwellers
and harnessing technology, especially technology utilizing the land as a resource with the help
that leads to Smart outcomes. of private participation.
The Mission targets promoting cities that Subsidy for Beneficiary-led individual house
provide core infrastructure and give a decent construction/enhancement.
quality of life to its citizens, a clean and
The initiative encourages women’s
sustainable environment and the application of
empowerment by offering the ownership of
‘smart’ solutions. The smart city includes the
houses in the name of female members of
following core infrastructure development:
the family or in a joint name.
454 Infrastructure
Present Situation Constraints

The Government of India has so far selected The key operational challenge areas in the
99 cities with an outlay of INR 2.04 lakh crore. Smart City Mission include the non-availability
These cities have started implementing projects of the following:
such as smart command and control centres, For successful implementation, an operational
smart area-based development, smart roads, framework for inter-agency collaboration,
solar rooftops, intelligent transport systems including special purpose vehicles (SPVs).
and smart parks. A solid spatial plan that serves as an
overarching structure for smart city planning,
These projects have the unique feature of
and implementation.
integration between different infrastructural
Ingenious strategies for amplifying the voices
elements of the projects. As of 14 May 2018,
of urban poor, slum dwellers, refugees, and
projects worth INR 4,800 crores have been
other marginalised people.
completed and works worth more than INR
A digital strategy and roadmap, or a digital
20,000 crores are underway, as per the Ministry
master plan.
of Housing and Urban Affairs’ Smart City MIS
Decision-making is based on data for service
portal.
delivery and resource sustainability.
Important Objective
Human resources with the necessary skills
Leverage the ‘Smart Cities’ concept in select to manage different functional domains are
urban clusters to: available.
Drive job creation and economic growth. Financing smart cities and ensuring the
Significantly improve efficiencies in service financial viability of urban local governments.
delivery.
By 2022-23, use technology to encourage Way Forward
inclusive, sustainable, and participatory Four paradigms to leverage Smart Cities
growth.
Mission
Fig. 17.8: Four paradigms to leverage Smart Cities Mission
Infrastructure 455
Logistics Sector Constraints

Logistics is the backbone of the supply chain Cost of logistics: Logistics costs are still
(management of flows of goods from the point of high due to difficulties securing funding,
origin to the point of consumption). It includes underdeveloped infrastructure, inadequate
transportation, inventory management, connectivity, and an unfavourable modal mix.
warehousing, materials handling, packaging, Lack of coordination: Transportation,
and integration of information. warehousing, freight forwarding, and value-
The government has identified the action added logistics make up the bulk of the logistics
points to develop this sector in an integrated market. Each of these is subject to various
way. These action points are—adopting new forms of regulatory regulation, adding to the
technology, improved investment, skilling, system’s complexity. Duplicate procedures are
removing bottlenecks, improving inter-modal normal when several entities are involved.
transportation, automation, a single-window Warehousing capacity and fragmented
system for giving clearances, and simplifying structure: Handling and warehousing facilities
processes. are still largely un-mechanised with manual
Present Situation loading, unloading, and handling in the case of
The logistics industry in India employs over 22 many commodities.
million people (as of 2016). The logistics sector’s Competition and underutilised capacity: There
value grew at a compound annual growth rate is no level playing field as the public sector
(CAGR) of 7.8% between 2011-12 and 2015-16. is provided benefits that are not available
However, existing logistics costs in India are to private players such as container train
high relative to other countries. Logistics costs operators or foreign vessel owners, leading to
have been estimated at 14 per cent of India’s limited competition, capacity underutilisation
GDP relative to 9 per cent of GDP in the United and other inefficiencies.
States, 11 per cent in Japan, 12 per cent in Korea Interoperable technology across modes: The
and 14.9 per cent in China. lack of interoperability of software systems
Recognizing the importance of logistics for used by the authorities governing different
exports and development, the government has modes of transport leads to inefficiencies as it
included it in the infrastructure subsector’s increases transit time and the need for manual
harmonized master list. intervention when switching modes.
This will ease access to credit and simplify the
Border compliance and document processing
approvals process for building infrastructure in
time: India’s average border compliance time
the sector.
(including customs regulations and mandatory
The government has also created a new
inspections) for exports is 106 hours and for
Logistics Division in the Ministry of Commerce
imports 264 hours. India’s document processing
and Industry that will focus on the integrated
time (including documentary compliance for
development of the logistics sector.
various agencies including regulators) is an
Important Objectives of the Government
average of 38 hours for exports and 61 hours
Achieve multi-modal cargo movement that
for imports.
meets global logistics requirements.
Way Forward
Reduce the cost of logistics to less than 10% of
Tariff policies need to be rationalized. The
GDP, down from the current level of 14%.
Railway’s chapter provides details on rail freight
Boost the logistics market to USD215 billion by
while the Civil Aviation chapter highlights
2020, up from USD160 billion now.
the need to determine air cargo tariffs in a
Increase the number of jobs in the logistics consistent manner across airports.
sector to 40 million by 2022-23, up from around
Improve the efficiency of warehouses and their
22 million in 2016.
operations, especially to optimise food storage.
456 Infrastructure
Establish an overarching body that maintains a cost over-runs and uncertainties in traffic
repository of all transportation data. Setting up movement (commercial risk)—made the road
multi-modal logistics parks will help address projects economically unviable.
issues related to underdeveloped infrastructure, BOT-ANNUITY
an unfavourable modal mix and connectivity. This was an improvement over the BOT-
There is no level playing field for private container TOLL model, which sought to reverse private
train operators (CTOs) vis-à-vis the Container companies’ declining interest in road projects
Corporation of India (CONCOR). Providing shared by reducing risk for private players.
space at CONCOR terminals to private CTOs will
Apart from sharing project costs, the private
help utilise the infrastructure better. Similarly,
player was to build, maintain, and operate
opening up port terminals to private players at
road projects without being responsible for
a fee will enhance capacity utilisation.
collecting traffic tolls.
To increase efficiency and ensure compatibility,
The private players were offered a fixed
we should gradually adopt international
amount of money annually (called ‘annuity’)
standards, especially in operations, and adopt
as compensation—the party bidding for the
global benchmarking on unit load devices
minimum ‘annuity’ used to get the project.
such as containers and pallets. While this will
Toll collection was the responsibility of the
require changes in the overall infrastructure of
ships, ports, and railways, it will help realize Government.
savings in cost, time, and accounting. This was different from the previous model
PPP Models (BOT-TOLL) in one sense— private players
were not having any commercial risk (traffic)—
Managing an adequate amount of funds for
but they remained very much exposed to other
infrastructure development has always been
risks (land acquisition delays, inflation, cost
a challenge for India. In the reform era, the
over-runs, construction). Even this model, over
government evolved the idea of public-private
partnership (PPP) for the sector aimed at time, proved to be unviable for the private
attracting investments from the private sector sector due to the leftover risks they were
(domestic as well as foreign). A brief review of exposed to.
the major PPP models (a few of them are non- EPC MODEL
PPP models, too). The PPP model which was seen to be a better
BOT-TOLL way to promote the infra projects was visibly
The ‘Build-Operate- Transfer-Toll’ was one of failing by the year 2010 and the Government
the earliest models of PPP. Other than sharing was unable to attract the private players to the
the project cost (with the Government), the road sector. It was in this backdrop that the
private bidder was to build, maintain, operate Engineering-Procurement-Construction (EPC)
the road, and collect toll on the vehicular traffic. Model was announced.
The bid was given to the private company In this model, the project cost was fully covered
offering to share maximum toll revenue with the by the Government (it means, it was not a PPP
government. The private party used to cover “all model and was like normal contracts given to
risks” related to: land acquisition, construction the bidders) together with the majority of the
(damage), inflation, cost overruns caused by risks: land acquisition, cost over-runs due to
delays, and commercial. The government was delay, inflation and commercial.
responsible for only regulatory clearances. The private developers were supposed to design,
Due to inherent drawbacks, this model proved construct and hand over the road projects
to be unsustainable for the private bidder: to the government: maintenance, operation
undue delay in land acquisition due to litigation, and toll collection being the government’s
responsibilities.
Infrastructure 457
The contract was given to the private player commercial, while the risks of inflation and
who offered to construct roads at the quality cost overruns are shared in proportion to the
levels. It means that the private player in this project cost-sharing.
model was only exposed to the construction- However, the private sector is still exposed to
related risks which is a normal risk involved in construction and maintenance risks (delays
any contract given by the government to the from the government side in clearances and
private party. land acquisition have chances to enhance the
The EPC (Engineering, Procurement and degree of risks private players are exposed to).
Construction) Model could have been a But generally, this is the best PPP model for
temporary way out to develop road projects as it the time being, which is devoid of most of the
was fully funded by the government—the reform flaws of the past. The private sector has shown
era had aimed to attract investment from the a good response to this model. By early 2018,
private players by evolving a ‘business model’ this model was notified by the Government for
for the road sector—the need was to develop other infra sectors too.
a new PPP model. In this backdrop we see the Swiss Challenge Model
government coming up with a new PPP model
The Government of India, for the first time,
for road projects—the Hybrid Annuity Model.
announced the use of this model for the
HAM redevelopment of railway stations in the country
(in late 2015). This is a very flexible method of
The Hybrid Annuity Model (HAM) is a cross
giving contracts (i.e., public procurement) which
between the EPC and the BOT-ANNUITY models.
can be used in PPP as well as non-P PPP projects.
The cost of the project is split 40:60 between
the government and the private player in this In this, one bidder is asked by the government
model. to submit the proposal for the project which is
put in the public domain. Afterwards, several
The private player is responsible for building
other bidders submit their proposals aimed
and handing over the roads to the government,
at improving and beating the original (first)
which will raise tolls (if desired)—maintenance
bidder— finally, an improved bid is selected
is the private player’s responsibility until the
(called a counter-proposal). If the original bidder
annuity period ends. The government pays
is not able to match the counter-proposal, the
a fixed amount of economic compensation
project is awarded to the counter bidder. The
(called annuity, similar to the BOT ANNUITY
government has made it an online method.
model of the past) to a private player for a set
period of time (normally 15 years, though it is Though the Government of India used this model
flexible). for the first time, this has already been used
by several states by now—Karnataka, Andhra
The contract is awarded to the private player
Pradesh, Rajasthan, Madhya Pradesh, Bihar,
who offers the lowest annuity (in bidding). The
Punjab, and Gujarat—for roads and housing
government covers the majority of the major
projects. In 2009, the Supreme Court sanctioned
risks in this model, including land acquisition,
the method for the award of contracts.
clearances, operation, toll collection, and
458 Infrastructure
Q. Adaptation of the PPP model for infrastructure development of the country has not been free
from criticism. Critically discuss the pros and cons of the model. (200 Words, 10 Marks)
• An Introduction, define the concept of PPP.
• In Body,
⚪ In the first part of the answer discuss the pros and;
⚪ In the second part of the answer, discuss the cons of PPP.
• Conclude your answer with the underlying need for PPP.
Answer:
Public-private partnerships involve collaboration between a government agency and a private-
sector company that can be used to finance, build, and operate projects, such as public
transportation networks, parks, and convention centres. Financing a project through a public-
private partnership can allow a project to be completed sooner or make it a possibility in
the first place. Public-private partnerships often involve concessions of tax or other operating
revenue, protection from liability, or partial ownership rights over nominally public services and
property to the private sector for-profit entities.
Pros of the PPP model:
Advantages to Both Parties: Partnerships between private companies and governments provide
advantages to both parties. Advantages such as fastening project completions, and involvement
of the private sector will improve business opportunities for them also.
Newer Technologies: Once the private sector is allowed or given work to complete, they bring all
the available latest technologies to finish projects. Private-sector technology and innovation, for
example, can help improve the operational efficiency of providing public services.
Competitive Economy: The public sector, for its part, provides incentives for the private sector to
deliver projects on time and within budget. In addition, creating economic diversification makes
the country more competitive in facilitating its infrastructure base and boosting associated
construction, equipment, support services, and other businesses.
Ensure the necessary investments into the public sector and more effective public resources
management.
Ensure higher quality and timely provision of public services. Most investment projects
are implemented in due terms and do not impose unforeseen public sector extra expenditures.
A private entity is granted the opportunity to obtain a long-term remuneration. Private sector
expertise and experience are utilised in PPP project implementation.
Appropriate PPP project risk allocation enables to reduce the risk management expenditures.
In many cases, assets designed under PPP agreements could be classified on the public sector
balance sheet.
Although there are certain advantages of PPP, it has been criticised widely as it has some cons
as well-
Cons of PPP:
Infrastructure or services delivered could be more expensive.
PPP project public sector payments obligations postponed for the later periods can negatively
reflect future public sector fiscal indicators.
Infrastructure 459
PPP service procurement procedure is longer and more costly in comparison with traditional
public procurement.
PPP project agreements are long-term, complicated, and comparatively inflexible because of the
impossibility to envisage and evaluate all particular events that could influence future activity.
The private partner may face special risks from engaging in a public-private partnership. Physical
infrastructure, such as roads or railways, involves construction risks.
If the product is not delivered on time, exceeds cost estimates, or has technical defects, the
private partner typically bears the burden.
In addition, the private partner faces availability risk if it cannot provide the service promised.
A company may not meet safety or other relevant quality standards, for example, when running
a prison, hospital, or school.
Demand risk occurs when there are fewer users than expected for the service or infrastructure,
such as toll roads, bridges, or tunnels, recently the Tejas Train controversy, etc.
Public-private partnerships also create risks from the general public’s and taxpayers’ points of view.
Private operators’ partnership with the government may insulate them from accountability to
the users of the public service for cutting too many corners, providing substandard service, or
even violating peoples’ civil/constitutional rights.
At the same time, the private partner may enjoy a position to raise tolls, rates, and fees for captive
consumers who may be compelled by law or geographic natural monopoly to pay for their services.
Although PPP has been criticized for its negative fallouts, India needs a huge amount of
investment. The Finance Minister announced her plans at the start of the year to launch
$1.5 trillion in infrastructure spending over the next five years. These infrastructural needs can
be fulfilled by private sector involvement on a large scale. If India wants to become $5 trillion
by 2025, building world-class infrastructure is imperative and a prerequisite.
Q. Explain how Private Public Partnership arrangements, in long gestation infrastructure

projects, can transfer unsustainable liabilities to the future. What arrangements need to be put
in place to ensure that successive generations’ capacities are not compromised? (200 Words,
12.5 Marks)
• In the intro, write about PPP.
• In Body,
⚪ Discuss how PPP leads to stagnation in projects and the transfer of burden on future
generations.
⚪ The second part discusses the arrangements in which capacities cannot be compromised.
• Try to conclude, write some suggestions, particularly any committee’s recommendations.
Answer:
PPP refers to a cooperative venture between the public and private sectors for providing a public
asset or service, in which the private party bears significant risk and management responsibility
and remunerations, are linked to performance. Such joint venture models are usually undertaken
for infrastructure development projects. Infrastructure projects generally span over a longer
460 Infrastructure
period of time, as it involves many stakeholders’ activities like land acquisition, approval from
various government departments, fund availability, On-site conditions etc. While the PPP model
aims at expediting the project implementation, often despite PPP arrangements, long gestation
infrastructure projects can transfer unsustainable liabilities to the future.
Failing Scenario: To the World Bank database, India’s project failure rate is fast catching up
with the rest of the developing world—it was about 2% till 2011, but increased thereafter to 34
projects valued at $13 billion (out of a total of 1,103 projects valued at $275 billion, or 3.1% by a
number of projects and 4.9% by value of projects, respectively).
Major causes for the failure of PPP Projects are
Land acquisition: Difficulty in land acquisition leads to delays in operations. A further cost of
acquisition and overhead due to delay make projects unviable.
Regulatory clearance: Mainly involvement of multiple agencies in coordination. Also, some of
the regulations are strict in nature like environmental clearance.
Disaster: The occurrence of a macroeconomic shock increases the likelihood of project
cancellation (failure) from less than 5% to more than 8%, controlling for other variables. The
Covid-induced macroeconomic shock is similar in its impact on PPP projects, from the demand
and the supply side.
A number of parties involved: Parties involved such as farmers, banks for financing and various
government departments resulting in the delay in projects. For example, the Bullet train project
land acquisition has not been completed in Maharashtra due to land acquisition issues.
Complex relations: Involvement of various parties in the implementation of projects led to
complexities. Negotiations with all the parties and bringing them all on the negotiations table
made PPP project implementation overall time-consuming.
Financing issues: As infrastructure projects are long and time-consuming, banks are the largest
financiers for most of the infrastructure projects, resulting in increasing NPA issues. These
financing issues and long gestation periods automatically transfer the burden to oncoming
generations.
Involvement of public sector: Involvement of public sector companies in infrastructure projects
and their expenditure become government expenditure in various statistics books. This is again
criticised by economic experts that this leads to a burden on future generations through tax
and other measures.
Therefore, the following arrangements can be put in place so that successive generations’
capacities cannot be compromised,
Single window clearance: To give permissions as fast as possible and give them a green signal
to start the project, the Government needs to work on improving the single-window clearance
mechanism. As India still lacks project approval and registering properties as per Ease of Doing
Business.
Corporate bond markets reforms: As infrastructure development is time-consuming and time
taking then corporate bonds will be very useful in financing infrastructure projects. As they
will reduce the burden on financial institutions and further transfer the burden to the next
generations. For example, borrowing from the market does not lead to a direct burden on the
general public but it provides investment opportunities at the same time.
Project implementation mechanism: There is a need for a constant project implementation
mechanism which will help in the review of the progress of infrastructure projects. This will
Infrastructure 461
also help in the involvement of people in overall project monitoring indirectly.

Improving supply chain: Infrastructure projects need efficient supply chains as they need various
raw materials for construction activities. The faster, more efficient, and continuous nature of the
supply chain will also help in improving the speed of project completion.
Thus, India improving or fastening executions of PPP projects need design overhauling and the
creation of a much better mechanism for its implementation. Various committees for reforms in
various infrastructure projects such as the Deepak Pareekh committee on Energy sector reforms.
Infrastructure development projects need to align with the ease of doing a business report and
need to give greater emphasis on the faster development of infrastructure.
Q. Examine the developments of Airports in India through Joint Ventures under Public-Private
Partnership (PPP) model. What are the challenges faced by the authorities in this regard? (150
Words, 10 Marks)
• In the Intro, try to define Public-Private Partnership.
• In Body,
⚪ Discuss airports with the PPP model with examples.
⚪ Discuss challenges faced by authorities in the PPP model in airport development.
• Try to conclude with suggestions.
Answer:
Public-private partnerships (PPP) involve collaboration between a government agency and a
private-sector company that can be used to finance, build, and operate projects, such as public
transportation networks, parks, and convention centres.
Financing a project through a public-private partnership can allow a project to be completed
sooner or make it a possibility in the first place.
Public-private partnerships often involve concessions of tax or other operating revenue,
protection from liability, or partial ownership rights over nominally public services and property
to the private sector, for-profit entities.
Currently, the management of a few airport joint ventures under the PPP model is transforming
the civil aviation sector.
Construction and management: Build Operate Transfer (BOT) projects are awarded to private
players for both greenfield and brownfield projects. For Example, Greenfield airport in Bangalore
and Hyderabad.
The government of India has been inviting big private players for managing airports like GMR,
and GVK for the development and upgradation of Mumbai and Hyderabad airports.
Merits of Upgradation under the PPP Model: Most of the upgrading is for increasing consumer
experience.
Governments’ invitation for managing airports leads to better efficiency and capacity of airline
operators. This has resulted in higher profits for the Airport Authority of India.
462 Infrastructure
Modernisation of airports leads to improved local and national economy and it also helps in
changing India’s experience.
Private airports are making large scale profits due to increased traffic, higher aeronautical
charges and other non-aero revenue opportunities is a win-win situation.
However, there are certain concerns about higher charges on airlines and passengers. AAI has
not given commercial orientation to airports like Goa, Chennai, Kolkata etc. resulting in less
attraction of passengers.
Challenges Faced By Authorities Under PPP:
There is a lack of regulatory framework for the entire aviation sector which makes this sector
less attractive for private investment.
Projects are also delayed due to land acquisition, cost overruns, long gestation periods and
lack of funding and investment.
Lack of clarity over concessional agreements, revenue sharing and tariff structure framework. This
led to issues between private players and government agencies and it impacted private players’
participation in airport development and management.
There is a lack of clarity over certain issues such as the degree of risk transfer to the private players
in areas such as asset conditions, operation risk, construction cost and non-insurable risk etc.
Despite the successes of the PPP airports, there are certainly areas for improvement, particularly
in terms of economic regulation, land monetization, management of project costs and at a
broader level creating a more predictable operating environment on issues such as bilateral
policy, airspace efficiency and airline viability.
The Kelkar Committee report on revisiting and revitalising the public-private partnership (PPP)
model for infrastructure projects rightly pitches for pragmatism, transparency and a business-
like approach. The idea is that PPP contracts, like Operation, Management and Development
Agreement (OMDA), must focus on service delivery rather than fiscal benefits. Also needed is to
have a unified regulatory structure for the aviation sector for aeronautical and non-aeronautical
services.
Infrastructure 463

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3. Economic Growth and Development 25

6. Banking (Part II) 71

8. Financial Market 107

10. Government Budgeting 155

11. External Sector 189

12. Economic Planning 227

13. Industries 257

14. Financial Inclusion 295

15. Global Economic Institutions 339

16. Agriculture and Food Managements 353

17. Infrastructure 415

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Economics governments decide how much to contribute

o Basically, these kinds of economies o This is usually done to address

Primary Sector Secondary Sector Tertiary Sector

Fig.1.1: The Sectoral Contribution to GDP (Current)

force in IT industry as compared to some the emergence of various e-commerce

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Intermediate Goods Financial/Fiscal/Accounting Year

Table 2.1: Trade Balance

Previous Years’ Question (PYQ) (2020, Mains)

Net National Product (NNP) Factor cost:

In January 2015 Government of India started

Income Private Income = Earned income of private

• It is based on more sources of data (for

Facts Regarding National Income The Difficulty of Measurement of National

Closed Economy vs Open Economy on the consumption and production

Economic Growth Developments Economic Growth Developments

3 Economic Growth and Development

Is a person’s well-being solely dependent on his • Economic development is quantitative as

Economic Growth and Development 25

Castes, National Scheduled Castes Finance • There is backwardness in the agriculture

Previous Years’ Question (PYQ) (2014, Mains)

•  nequal distribution of power and materialistic things: Unequal distribution of materialistic

Previous Years’ Question (PYQ) (2016, Mains)

Economic Growth and Development 27

Previous Years’ Question (PYQ) (2017, Mains)

Economic Growth and Development 29

Previous Years’ Question (PYQ) (2019, Mains)

Previous Years’ Question (PYQ) (2020, Mains)

Q. Explain intergenerational and intragenerational issues of equity from the perspective of

Economic Growth and Development 31

Economic Growth and Development 33

Gender Inequality Index (GII) • It uses the following three dimensions to

Economic Growth and Development 35

Fig. 3.3: Gender Inequality Index (GII)

development, Good governance, Andhra Pradesh

o Generosity Water and Sanitation 69.99

World Happiness Report 2022 Health and Wellness 60.18

Environmental Quality 55.27

happiest country for the fifth year running, 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Economic Growth and Development 37

o Per capita income (gross national o Develop a global partnership for

Economic Growth and Development 39

Economics governments decide how much to contribute

Income Private Income = Earned income of private

• nequal distribution of power and materialistic things: Unequal distribution of materialistic

Money implies that if an individual needs one

Bank • By Act of Parliament in 1955, it was renamed