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Economic Environment of India

Prof. P.K. Brahma

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India at a Glance

A Sub-continent endowed with huge natural resources

and bio-diversity is protected by the mighty Himalayas

on the north , the Arabian sea on the West, the Indian

Ocean on the South and the Bay of Bengal on the East

.

7th largest country in geographical area. 2nd largest country in population (1.2 billion).

Largest democracy in the world.

An epitome of unity in diversity- a multi-ethnic, multi-religious, multi-cultural and multi-linguistic plural

society.

2nd fastest growing economy in the world.

Ranks 10th in GDP in nominal terms and 4rth in PPP

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Basic Economic Indicators:

GDP :$1.704 trn.,10th/ $4.447 trn(June2011),3rd.

GDP Growth: 8-5% (2010-11)

GDP per capita:$1,382(nomina:139th; 2011)/$3,608 (PPP:128th; 2011).

GDP bySector:Agri(16.1%),Ind.(28.6%),Services

(55.5) (2010).

Inflation: (CPI): 9.44% (June 2011)

Population below poverty line: 37% (2010)

Labour force: 478 million (2010, 2nd.).Labor

force by occupation:(agri.52%,ind.:14%Services:34% (2009).

Unemployment: 9.5% (2009-10)

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.

Gini Index: 36.8

Ease of Doing Business Rank: 134

Exports: $247.4 billion (2010)

Imports : $359.3 billion (2010)

FDI stock:35.6 bn(1010) downfrom$156.30bn(2009)

Gross External Debt: $237.1 billion (2010 est)

Public Debt:$758 billion (2010),55.9% of gdp.

Revenues: $170.7 billion (2010 est.)

Expenditure: $257.4 billion (2010 est.)

Economic aid: $2.107 billion (2008 est.)

Foreign Reserves:$316 billion (July,2011).

Credit Rating: BBB-

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Areas of Concern

High rate of Inflation( 10-12%)

Extreme Poverty (37% , more than 300 million belowpoverty level)

High Unemployment

Illiteracy and Education ( lack of quality education)

Lack of Health Care to the masses and Sanitation.

High Public Debt.

Corruption, Black money, stashing in foreign banks. Crime and Violence in politics and society- lack of

social justice.

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Concept of National Income

GDP---Gross Domestic Product: aggregate measureof total value of final products ( goods & services).

GNP---Gross National Product : GDP + ExternalFactor Income.

NNP---Net National Product : GNPDepreciation. PCI---Per capita Income : GNP / Total population.

National Income at current Prices and Constant Prices(Base Year: Index=100).

National Income minus inflation and taxes (i.e. NI atConstant Prices ) =Real national Income or NationalIncome in real terms.

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Methods of calculating National Income

Three Different Methods :

1. Output or Value-Added Method:

GDP = Total Value of outputs of Goods and Services.Value added at each stage of production or by addingonly the final value of the output produced.

2. Income Method:

Wages and salaries (W) Income of self employed (Se)

Profits and dividends of business corporations (P)

Interest and Rent (I and R)

Surplus of Government Enterprises (Ge)

Net Income from abroad. (Yex)

Thus, National Income = W+Y of Se +P + I + R +S of

Ge+Y from abroad.

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. 3. The Expenditure MethodGNP at Market Prices = C +I + G + X - M

C = Private consumption expenditure ( of all

households )

I = Investment Expenditure (of all firms)

G = Government consumption expenditure

X = Exports of goods and services

M = Imports of goods and services

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Problems in Calculating National Income

Illegal Activities

National Defence

Growing Service Sector

Household Services

Voluntary and Unpaid Social Services

Environmental Cost

Population Size Redistribution of Income andGrowing Income Disparities

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.Circular Flow of Economy

.

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Concept of Micro and Macro Economics

Indian Economy- both Micro and Macro Econ.

Impact of world economic trends on Indian Economy-the world is a global village.

The World Economic Recession 2008 -2011, a fargreater Economic Depression than the Great

depression of 1930s. The Sub-Prime Crisis in USA brought the whole

world on the brink of an economic disaster; startedwith bankruptcies of Lehman brothers and AIG.

Impact of world recession on India- minimal but itslowed down economic growth, led to food inflation,unabated inflationary pressures , loss of exports and amini-crisis.

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Unit 1. The Concept of Business

Definition

Aristotle in his classic work Politicssaid: the personality of a person is the product

of hereditary, education and environment. Similarly, growth of Business depends oncapital, Human and Technological resourcesas well as on Environment political, economic,social and cultural.

How do we define Business andEnvironment?

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A Varity of definitions of Business available.

Most acceptable definition has been given by PeterDrucker the objective of business is to create acustomer. The customer is the master and to servehim well is the only purpose of business. Modern

business aims at profits through service. In all the forms of business the commonelements visible are: (a) it is an economic activity; (b)there is a concept of profit and income; (c) there is a

customer and a seller.

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Metamorphosis of BusinessE-commerce

Objectives of E- commerce- the world is the market.

Benefits of E- Commerce Impact of IT- it has changed modern life.

Plastic cards have replaced cash transactions

ATMs, Internet Banking, Internet commerce e.g.

E-bay, Amazon TV ads, Home shoppingdot coms.

Revolution in business functioning -banks,insurance, Travelsworldwide connectivity.

Infrastructure needed for E-commerce: internetconnectivity, computer security & efficient deliverysystem.

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Concept of Environment Environment refers to the sum total of all .factors-

economic, political, social, cultural, legal and

international- which enterprises and theirmanagement

Business does not operate in a vacuum but in an areexternal to and beyond the control of individual

business environment Local. National and international

Market env and non-market environment

Env.is influenced by economic and non-economic

factors

Micro factors and macro factors

Static and Dynamic

Various techniques of scanning businessen ironment.

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Components of Environment

The Micro Environment: Directly concernedwith an individual business firm.

1.The Suppliers

2.The Customers

3. Labour

4.The Business Partners

5.The Competitors

6.The Regulatory Authorities

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The Macro Environment

1.The Political Environment & the role of the

Government- the Political and the Legal System2.The Economic Environment- the Economic System;

Economic policies, economic growth, interest rates,

currency exchange rates, inflation, exports-imports.

3.Socio- Cultural Environment-social acceptance

4.Demographic Environment- determines demand

5.Technological Environmentefficiency, productivity.

6.Natural Environment- natural resources, conditions

7.International Environment-globalization, competition.

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Unit2 Economic Environment

Perhaps, the most important role in BusinessEnvironment is played by the economic environmentof the country.

Economic Environment refers mainly to theEconomic system a country has opted for, underwhich flow the Economic policies of theGovernment, the Planning Process, if any, theIndustrial Policy and the Budgetary announcements.

An economic system may be either capitalism,Socialism or Mixed Economy.

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The Economic System has evolved overcenturies through a continuous struggle for

betterment of human society monarchy,Aristocracy, Feudalism, Capitalism, Socialism,Communism and Mixed Economy.

Capitalism is associated with laissez-faire

Philosophy- that government is the best whichgoverns the least. Features of Capitalism are:

(i) Competition and free trade

(ii) Right to private property,

(iii) Profit motive, and(iv) consumers sovereignty.

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This means the means of production and distribution shouldbe in private hands and government intervention in theeconomy should be the minimum.

In todays world (21st Century), there is no pure form ofCapitalism or Socialism. All Economies are MixedEconomies. Even communist China has become largely

capitalistic with maximum liberalization and opening of southChina to private enterprises.

Therefore, all countries have become Mixed Economies.

In Scandinavian countries, public expenditure constitutesmore than 60% of GDP, in France 50%+ and even in USA, it

is 30%+

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Capitalism is a much maligned word. It is better

to describe it as FreeEconomy. But in practice, nofree economy can survive without adequate

regulations. Therefore, all economies (practically all

mixed) are regulated or controlled with a set of

independent regulators.

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Features of Socialism are:

(i) Government ownership of productive resources.

(ii) Planning

(iii) Redistribution of Income.

(iv) Social welfare and

(v) Peaceful and democratic evolution.

In socialism or communism, the means of

production and distribution would be in the

hands of the state and the intervention of thegovernment in the economy would be the

maximum.

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The mixed economy is a compromise betweencapitalism and Socialism, while the economy

world be left to private initiatives and free playof economic forces, there would be substantialpresence of the public sector and the economywould be subjected to government interventionwhenever necessary.

Mixed economy is also known as controlledeconomy, originating from Keynes theory ofpublic investment and state intervention to fightthe Great Depression.

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Economic Planning in India- The Five- Year

Plans

Economic Planning is viewed as aninstrument of Social transformation and rapid

economic development. Planning inducescoordinated efforts for a steady and balancedgrowth in all sectors and all regions, whichwould not have been possible in a free-enterprise regime.

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.The Five- Year Plans

1 First Five-Year Plan, 19511956

2 Second Five-Year Plan, 195619613 Third Five-Year Plan, 19611966

4 Fourth Five-Year Plan, 19691974

5 Fifth Five-Year Plan, 19741979

6 Sixth Five-Year Plan, 19801985

7 Seventh Five-Year Plan, 19851990

8 Period between 19891991

9 Eighth Five-Year Plan, 1992199710 Ninth Five Year Plan, 19972002

11 Tenth Five-Year Plan, 20022007

12 Eleventh Five-Year Plan, 20072012

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First Five-Year Plan 19511956

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.

First Five-Year Plan, 1951 1956 The first Indian Prime Minister, Jawaharlal Nehru presented the

first five-year plan to the Parliament of India on 8 December1951. The plan addressed, mainly, the agrarian sector, includinginvestments in dams and irrigation. The agricultural sector was

hit hardest by the partition of India and needed urgentattention.[3] The total planned budget of 206.8 billion (US$23.6billion in the 1950 exchange rate) was allocated to seven broadareas: irrigation and energy (27.2 percent), agriculture andcommunity development (17.4 percent), transport and

communications (24 percent), industry (8.4 percent), socialservices (16.64 percent), land rehabilitation (4.1 percent), andfor other sectors and services (2.5 percent).[4] The mostimportant feature of this phase was active role of state in alleconomic sectors. Such a role was justified at that time becauseimmediately after independence, India was facing basicproblems like- deficiency of capital and low capacity to save.

The target growth rate was 2.1 percent annual gross domesticproduct (GDP) growth; the achieved growth rate was 3.6percent. During the first five-year plan the net domestic productwent up by 15 percent. The monsoon was good and there were

relatively high crop yields, boosting exchange reserves and theer ca ita income which increased b 8 ercent. National

The target growth rate was 2 1 percent annual gross domestic

http://en.wikipedia.org/wiki/Jawaharlal_Nehruhttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Partition_of_Indiahttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Irrigationhttp://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Community_developmenthttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Communicationhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Social_serviceshttp://en.wikipedia.org/wiki/Social_serviceshttp://en.wikipedia.org/wiki/Land_rehabilitationhttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Net_domestic_producthttp://en.wikipedia.org/wiki/Monsoonhttp://en.wikipedia.org/wiki/Crop_yieldhttp://en.wikipedia.org/wiki/Per_capita_incomehttp://en.wikipedia.org/wiki/Per_capita_incomehttp://en.wikipedia.org/wiki/Crop_yieldhttp://en.wikipedia.org/wiki/Monsoonhttp://en.wikipedia.org/wiki/Net_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Land_rehabilitationhttp://en.wikipedia.org/wiki/Social_serviceshttp://en.wikipedia.org/wiki/Social_serviceshttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Communicationhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Community_developmenthttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Energyhttp://en.wikipedia.org/wiki/Irrigationhttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Indian_rupeehttp://en.wikipedia.org/wiki/Partition_of_Indiahttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Jawaharlal_Nehruhttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_product

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The target growth rate was 2.1 percent annual gross domestic

product (GDP) growth; the achieved growth rate was 3.6 percent.

During the first five-year plan the net domestic product went up by

15 percent. The monsoon was good and there were relatively high

crop yields, boosting exchange reserves and the per capita income,which increased by 8 percent. National income increased more than

the per capita income due to rapid population growth. Many

irrigation projects were initiated during this period, including the

Bhakra Dam and Hirakud Dam. The World Health Organization,

with the Indian government, addressed children's health andreduced infant mortality, indirectly contributing to population

growth.

At the end of the plan period in 1956, five Indian Institutes of

Technology (IITs) were started as major technical institutions.

University Grant Commission was set up to take care of funding

and take measures to strengthen the higher education in the country.

Contracts were signed to start five steel plants; however these

plants did not come into existence until the middle of the second

five-year plan.7/28/2012 28

Second Five-Year Plan, 19561961

http://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Net_domestic_producthttp://en.wikipedia.org/wiki/Monsoonhttp://en.wikipedia.org/wiki/Crop_yieldhttp://en.wikipedia.org/wiki/Per_capita_incomehttp://en.wikipedia.org/wiki/Population_growthhttp://en.wikipedia.org/wiki/Bhakra_Damhttp://en.wikipedia.org/wiki/Hirakud_Damhttp://en.wikipedia.org/wiki/World_Health_Organizationhttp://en.wikipedia.org/wiki/Infant_mortalityhttp://en.wikipedia.org/wiki/Indian_Institutes_of_Technologyhttp://en.wikipedia.org/wiki/Indian_Institutes_of_Technologyhttp://en.wikipedia.org/wiki/University_Grants_Commission_(India)http://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/University_Grants_Commission_(India)http://en.wikipedia.org/wiki/Indian_Institutes_of_Technologyhttp://en.wikipedia.org/wiki/Indian_Institutes_of_Technologyhttp://en.wikipedia.org/wiki/Infant_mortalityhttp://en.wikipedia.org/wiki/World_Health_Organizationhttp://en.wikipedia.org/wiki/Hirakud_Damhttp://en.wikipedia.org/wiki/Hirakud_Damhttp://en.wikipedia.org/wiki/Hirakud_Damhttp://en.wikipedia.org/wiki/Bhakra_Damhttp://en.wikipedia.org/wiki/Bhakra_Damhttp://en.wikipedia.org/wiki/Bhakra_Damhttp://en.wikipedia.org/wiki/Population_growthhttp://en.wikipedia.org/wiki/Per_capita_incomehttp://en.wikipedia.org/wiki/Crop_yieldhttp://en.wikipedia.org/wiki/Monsoonhttp://en.wikipedia.org/wiki/Net_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_product

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Second Five Year Plan, 1956 1961

This plan functioned on the basis of a nude model. TheMahalanobis model was propounded by Prasanta ChandraMahalanobis in the year 1953. The second five-year planfocused on industry, especially heavy industry. Unlike the

First plan, which focused mainly on agriculture, domesticproduction of industrial products was encouraged in theSecond plan, particularly in the development of the publicsector. The plan followed the Mahalanobis model, aneconomic development model developed by the Indian

statisticianPrasanta Chandra Mahalanobis in 1953. The planattempted to determine the optimal allocation of investmentbetween productive sectors in order to maximize long-runeconomic growth . It used the prevalent state of art techniquesof operations research and optimization as well as the novelapplications of statistical models developed at the Indian

Statistical Institute. The plan assumed a closed economy inwhich the main trading activity would be centered onimporting capital goods.

Hydroelectric power projects and five steel mills at Bhilai,Durgapur, and Rourkela were established. Coal production

was increased. More railway lines were added in the northeast.

Third Five-Year Plan, 19611966

http://en.wikipedia.org/wiki/Heavy_industryhttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Mahalanobis_modelhttp://en.wikipedia.org/wiki/Economic_developmenthttp://en.wikipedia.org/wiki/Statisticianhttp://en.wikipedia.org/wiki/Prasanta_Chandra_Mahalanobishttp://en.wikipedia.org/wiki/Hydroelectricityhttp://en.wikipedia.org/wiki/Hydroelectricityhttp://en.wikipedia.org/wiki/Bhilaihttp://en.wikipedia.org/wiki/Durgapur,_West_Bengalhttp://en.wikipedia.org/wiki/Rourkelahttp://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Rail_transporthttp://en.wikipedia.org/wiki/Rail_transporthttp://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Rourkelahttp://en.wikipedia.org/wiki/Durgapur,_West_Bengalhttp://en.wikipedia.org/wiki/Bhilaihttp://en.wikipedia.org/wiki/Hydroelectricityhttp://en.wikipedia.org/wiki/Hydroelectricityhttp://en.wikipedia.org/wiki/Prasanta_Chandra_Mahalanobishttp://en.wikipedia.org/wiki/Prasanta_Chandra_Mahalanobishttp://en.wikipedia.org/wiki/Prasanta_Chandra_Mahalanobishttp://en.wikipedia.org/wiki/Prasanta_Chandra_Mahalanobishttp://en.wikipedia.org/wiki/Statisticianhttp://en.wikipedia.org/wiki/Economic_developmenthttp://en.wikipedia.org/wiki/Mahalanobis_modelhttp://en.wikipedia.org/wiki/Mahalanobis_modelhttp://en.wikipedia.org/wiki/Mahalanobis_modelhttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Heavy_industry

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Third Five Year Plan, 1961 1966

The third plan stressed on agriculture and improvingproduction of rice, but the briefSino-Indian War of 1962exposed weaknesses in the economy and shifted the focustowards the Defence industry. In 1965-1966, India fought a war

with Pakistan. The war led to inflation and the priority wasshifted to . The construction ofdams continued. Many cementand fertilizer plants were also built. Punjab began producing anabundance ofwheat.

Many primary schools were started in rural areas. In an effort

to bring democracy to the grassroots level, Panchayat electionswere started and the states were given more developmentresponsibilities.

State electricity boards and state secondary education boardswere formed. States were made responsible for secondary and

higher education. State road transportation corporations wereformed and local road building became a state responsibility.The target growth rate of GDP(gross domestic product) was 4.5percent. The achieved growth rate was 4.3 percent

Fourth Five Year Plan 196

9 1974

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Fourth Five-Year Plan, 19691974

At this time Indira Gandhi was the Prime Minister.The Indira Gandhi government nationalized 14 majorIndian banks and the Green Revolution in Indiaadvanced agriculture. In addition, the situation in EastPakistan (now Bangladesh) was becoming dire as theIndo-Pakistani War of 1971 and BangladeshLiberation War took place.

Funds earmarked for the industrial development hadto be diverted for the war effort. India also performedthe Smiling Buddhaunderground nuclear test in1974, partially in response to the United Statesdeployment of the Seventh Fleet in the Bay ofBengal. The fleet had been deployed to warn Indiaagainst attacking West Pakistan and extending thewar

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.Fifth Five-Year Plan, 19741979

Stress was laid on employment, poverty alleviation, andjustice.The plan also focused on self-reliance in agricultural productionand defence. In 1978 the newly elected Morarji Desai

government rejected the plan. Electricity Supply Act wasenacted in 1975, which enabled the Central Government toenter into power generation and transmission leaders.

The Indian national highway system was introduced for the firsttime and many roads were widened to accommodate the

increasing traffic. Tourism also expanded.Sixth Five-Year Plan, 19801985

The sixth plan also marked the beginning ofeconomicliberalization. Price controls were eliminated and ration shopswere closed. This led to an increase in food prices and an

increase in the cost of living. This was the end of and RajivGandhi was prime minister during this period.

Family planning was also expanded in order to preventoverpopulation. In contrast to China's strict and binding one-child policy, Indian policy did not rely on the threat of force.

More prosperous areas of India adopted family planning morerapidly than less prosperous areas, which continued to have a

Seventh Five-Year Plan, 19851990

http://en.wikipedia.org/wiki/Self-reliancehttp://en.wikipedia.org/wiki/Employmenthttp://en.wikipedia.org/wiki/Povertyhttp://en.wikipedia.org/wiki/Justicehttp://en.wikipedia.org/wiki/Self-reliancehttp://en.wikipedia.org/wiki/Morarji_Desaihttp://en.wikipedia.org/wiki/Indian_highwayshttp://en.wikipedia.org/wiki/Traffichttp://en.wikipedia.org/wiki/Tourism_in_Indiahttp://en.wikipedia.org/wiki/Economic_liberalizationhttp://en.wikipedia.org/wiki/Economic_liberalizationhttp://en.wikipedia.org/wiki/Price_controlhttp://en.wikipedia.org/wiki/Cost_of_livinghttp://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/Family_planninghttp://en.wikipedia.org/wiki/Family_planninghttp://en.wikipedia.org/wiki/Overpopulationhttp://en.wikipedia.org/wiki/One-child_policyhttp://en.wikipedia.org/wiki/One-child_policyhttp://en.wikipedia.org/wiki/Birth_ratehttp://en.wikipedia.org/wiki/One-child_policyhttp://en.wikipedia.org/wiki/One-child_policyhttp://en.wikipedia.org/wiki/One-child_policyhttp://en.wikipedia.org/wiki/Overpopulationhttp://en.wikipedia.org/wiki/Family_planninghttp://en.wikipedia.org/wiki/Family_planninghttp://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/Cost_of_livinghttp://en.wikipedia.org/wiki/Price_controlhttp://en.wikipedia.org/wiki/Economic_liberalizationhttp://en.wikipedia.org/wiki/Economic_liberalizationhttp://en.wikipedia.org/wiki/Tourism_in_Indiahttp://en.wikipedia.org/wiki/Traffichttp://en.wikipedia.org/wiki/Indian_highwayshttp://en.wikipedia.org/wiki/Morarji_Desaihttp://en.wikipedia.org/wiki/Morarji_Desaihttp://en.wikipedia.org/wiki/Morarji_Desaihttp://en.wikipedia.org/wiki/Self-reliancehttp://en.wikipedia.org/wiki/Self-reliancehttp://en.wikipedia.org/wiki/Self-reliancehttp://en.wikipedia.org/wiki/Justicehttp://en.wikipedia.org/wiki/Povertyhttp://en.wikipedia.org/wiki/Employment

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.

,

The Seventh Plan marked the comeback of the Congress Party to power.The plan laid stress on improving the productivity level of industries byupgrading of technology.

The main objectives of the 7th five year plans were to establish growth inareas of increasing economic productivity, production of food grains, andgenerating employment opportunities.

As an outcome of the sixth five year plan, there had been steady growth inagriculture, control on rate of Inflation, and favourable balance of paymentswhich had provided a strong base for the seventh five Year plan to build onthe need for further economic growth. The 7th Plan had strived towardssocialism and energy production at large. The thrust areas of the 7th Five

year plan have been enlisted below: Based on a 15-year period of striving towards steady growth, the 7th Plan

was focused on achieving the pre-requisites of self-sustaining growth bythe year 2000. The Plan expected a growth in labour force of 39 millionpeople and employment was expected to grow at the rate of 4 percent peryear.

Some of the expected outcomes of the Seventh Five Year Plan India aregiven below:

Seventh Five Year Plan India strove to bring about a self-sustainedeconomy in the country with valuable contributions from voluntaryagencies and the general populace.

http://en.wikipedia.org/wiki/Indian_National_Congresshttp://en.wikipedia.org/wiki/Indian_National_Congress

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. Period between 19891991 1989-91 was a period of political instability in India and hence

no five year plan was implemented. Between 1990 and 1992,there were only Annual Plans. In 1991, India faced a crisis inForeign Exchange (Forex) reserves, left with reserves of onlyabout US$1 billion. Thus, under pressure, the country took therisk of reforming the socialist economy. P.V. Narasimha

Rao)was the twelfth Prime Minister of the Republic of Indiaand head ofCongress Party, and led one of the most importantadministrations in India's modern history overseeing a majoreconomic transformation and several incidents affectingnational security. At that time Dr. Manmohan Singh (currently,Prime Minister of India) launched India's free market reformsthat brought the nearly bankrupt nation back from the edge. Itwas the beginning ofprivatization and liberalization in India.

http://en.wikipedia.org/wiki/Foreign_exchange_reserveshttp://en.wikipedia.org/wiki/P.V._Narasimha_Raohttp://en.wikipedia.org/wiki/P.V._Narasimha_Raohttp://en.wikipedia.org/wiki/Congress_Partyhttp://en.wikipedia.org/wiki/Manmohan_Singhhttp://en.wikipedia.org/wiki/Privatisationhttp://en.wikipedia.org/wiki/Liberalisationhttp://en.wikipedia.org/wiki/Liberalisationhttp://en.wikipedia.org/wiki/Privatisationhttp://en.wikipedia.org/wiki/Manmohan_Singhhttp://en.wikipedia.org/wiki/Congress_Partyhttp://en.wikipedia.org/wiki/P.V._Narasimha_Raohttp://en.wikipedia.org/wiki/P.V._Narasimha_Raohttp://en.wikipedia.org/wiki/Foreign_exchange_reserves

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. Eighth Five-Year Plan, 19921997 Modernization of industries was a major highlight of the

Eighth Plan. Under this plan, the gradual opening of theIndian economy was undertaken to correct the burgeoningdeficit and foreign debt. Meanwhile India became a memberof the World Trade Organization on 1 January 1995.This plancan be termed as Rao and Manmohan model of Economic

development. The major objectives included, containingpopulation growth, poverty reduction, employmentgeneration, strengthening the infrastructure, Institutionalbuilding, tourism management, Human Resourcedevelopment, Involvement of Panchayat raj, Nagarapalikas,

N.G.O'S and Decentralization and people's participation.Energy was given priority with 26.6% of the outlay. Anaverage annual growth rate of 6.7% against the target 5.6%was achieved.

http://en.wikipedia.org/wiki/Modernizationhttp://en.wikipedia.org/wiki/Deficithttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/Deficithttp://en.wikipedia.org/wiki/Modernization

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. Ninth Five Year Plan, 19972002 Ninth Five Year Plan India runs through the period from 1997

to 2002 with the main aim of attaining objectives like speedyindustrialization, human development, full-scale employment,poverty reduction, and self-reliance on domestic resources.

Background of Ninth Five Year Plan India: Ninth Five YearPlan was formulated amidst the backdrop of India's Golden

jubilee of Independence.

The main objectives of the Ninth Five Year Plan of India are:

During the Ninth Plan period, the growth rate was 5.35 percent, a percentage point lower than the target GDP growth of

6.5 per cent.

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.Tenth Five-Year Plan, 20022007

Attain 8% GDP growth per year.

Reduction of by 5 percentage points by 2007.

Providing gainful and high-quality employment atleast to the addition to the labour force;*All childrenin India in school by 2003; all children to complete 5years of schooling by 2007.

Reduction in gender gaps in literacy and wage ratesby at least 50% by 2007;*Reduction in the decadalrate of population growth between 2001 and 2011 to16.2%;*Increase in Literacy Rates to 75 per centwithin the Tenth Plan period (2002 to 2007

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Eleventh Five-Year Plan(2007-11)The eleventh plan has the following objectives:

1. Income & Poverty Accelerate GDP growth from 8% to 10% and then

maintain at 10% in the 12th Plan in order to double percapita income by 2016-17

Increase agricultural GDP growth rate to 4% per year toensure a broader spread of benefits

Create 70 million new work opportunities.

Reduce educated unemployment to below 5%.

Raise real wage rate of unskilled workers by 20 percent. Reduce the headcount ratio of consumption poverty by 10

percentage points.

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.2. Education

Reduce dropout rates of children from elementary schoolfrom 52.2% in 2003-04 to 20% by 2011-12

Develop minimum standards of educational attainment inelementary school, and by regular testing monitoreffectiveness of education to ensure quality

Increase literacy rate for persons of age 7 years or above to

85% Lower gender gap in literacy to 10 percentage point

Increase the percentage of each cohort going to highereducation from the present 10% to 15% by the end of theplan

3. Health

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. Reduce infant mortality rate to 28 and maternal mortality ratio

to 1 per 1000 live births

Reduce Total Fertility Rate to 2.1

Provide clean drinking water for all by 2009 and ensure thatthere are no slip-backs

Reduce malnutrition among children of age group 0-3 to halfits present level

Reduce anemia among women and girls by 50% by the end of

the plan 4.Women and Children

Raise the sex ratio for age group 0-6 to 935 by 2011-12 and to950 by 2016-17

Ensure that at least 33 percent of the direct and indirect

beneficiaries of all government schemes are women and girlchildren

Ensure that all children enjoy a safe childhood, without anycompulsion to work.

5.Infrastructure

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. Ensure electricity connection to all villages and BPL

households by 2009 and round-the-clock power.

Ensure all-weather road connection to all habitation withpopulation 1000 and above (500 in hilly and tribal areas) by2009, and ensure coverage of all significant habitation by 2015

Connect every village by telephone by November 2007 andprovide broadband connectivity to all villages by 2012

Provide homestead sites to all by 2012 and step up the pace ofhouse construction for rural poor to cover all the poor by 2016-17

6.Environment

Increase forest and tree cover by 5 percentage points.

Attain WHO standards of air quality in all major cities by 2011-

12. Treat all urban waste water by 2011-12 to clean river waters.

Increase energy efficiency by 20 percentage points by 2016-17.

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Objective of the Tenth Five Years plan(2002-07)

Doubling the per capita income in 10 years.

A Growth rate of 8 percent per year in GDP

Reduction in poverty from 26 percent to 21 percentby 2007.

Reduction in population growth from 21.3 percent(1991-2001) to 16.2 percent in 2001-11. Growth in gainful employment

Increase in Literacy rate from 65 percent in 1999-2000 to 75 percent in 2007.

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Objectives of the 11the Five Year Plan (2007-11)

Inclusive Growth:

27 Monitor able Targets which includes

Poverty reduction

Education -6%of GDP

EmploymentHealth care

Income disparity.

A GDP growth rate of 9% with an investment of36,44,718 crore.(13.64% ofGDP)

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Industrial Policy

Industrial Policy Resolution 1948 industriescategorized into (Heavy, Medium and Small scale)- 4categories role of the State/Public Sector and thePrivate Sector defined:

category-I : Strategic, Atomic, Railways (state)

Category II: Basic and key industries (state only,

existing private to continue for 10 years)Category III: 18 Basic (Private allowed butregulated)

Category IV: Other industries (Private &

cooperative)In addition, cottage & small given importance.

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Ushered in Keynesian Mixed Economy

Modifications made in

1956 :1973 :

1977 :

1980 : Major relaxations, modernization, expansion& spread to backward areas.

1985 : Procedural changesmade by Rajiv Gandhi.

1986 : De-licensing, Revision of MRTP limits,

exemptions from MRTP, Raising of limits-FE,automatic expansion etc.

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New Industrial Policy 1991:

Heralded Economic Liberalization in the country.

Aimed at Globalization, Liberalization andPrivatization.

Introduced New Industrial Licensing Policy exceptfor 18 industries, licensing abolished .DGTD abolished.

Foreign Investment and Technology Agreements-FDI up to 51% in 34 groups of high priority industries.Fast-track for approvals.

New Public Sector Policy- Redefined role of Public

Sector. PSUs reserved for 8 industries. MRTP Act practically scrapped.

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Effects New Industrial Policy :

Rate of Growth:

Flow of FDI:

Foreign Exchange Reserve:

Employment :

Removal of Poverty Economic Disparities :Social Equality

Inflation :

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Unit 3 : New Economic Environment

Liberating the Economy from the Licence Raj.

New Export-Import Policy- Reduction in CustomsDuties

Free Flow of FDI and Foreign Technology

New Look at the Trans-Nationals/ MNCs.Membership of WTO- acceptance of WTO norms

Resolve to integrate with the world economy

Economic Reforms in various sectors of the EconomyWithout abandoning economic planning and the

Planning Commission

Economic Liberalization or Economic Reforms, 1991

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z f ,

Three components, rather Aims:

1. Liberalization

2. Globalization

3. Privatization/ Disinvestment.

1. Liberalization:

(a) Abolition of Licence Raj.(b) Abolition of MRTP Act. (removal of 100 crore limit

for Business Houses)

(c) Abolition of industrial Licensing except for 18industries.

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(d) Allowing foreign equity up to 51 percent.

2. Globalization

(a) Integration of the economy to world economy.(b) Reduction of trade barriers.

(c) Creation of an environment for free flow of capital

(d) Creation of an environment for free flow oftechnologies.

(e) Creation of environment for free movement of labour.

Reduction of Import Duties-(Removal of import

restriction)

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Encouragement of foreign investment.

Encouragement to foreign technology agreement.

3. Privatization (Dis-investment)

a. Ownership measures.

b. Organizational.

c. Operational measures.

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Objective of Liberalization, Globalization &

Privatization

1. To achieve a high rate of growth (GDP & PerCapita)

2. To achieve full employment (creation of more

employment opportunities)

3. To achieve self-reliance.

4. To reduce inequality of income and wealth.

5. To reduce the number of people living below the

poverty line.

6. To develop a pattern of society based on equality and

absence of exploitation.

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Review of Economic Reforms:1. Reform process considered essential for rapid growth.

2. In India, higher growth was achieved after the process of

economic reforms was put into action. GDP grew as under:1991-92-------------0.9% 2000---------5.5%

1992-93-------------5.0% 2001---------6.0%

1993-94-------------4.5% 2002---------4.3%

1994-95-------------6.7% 2003---------4.3%1995-96-------------6.3% 2004---------8.3%

1996-97-------------6.8% 2005---------6.2%

2006---------8.4%

2007---------9.2%2008----------9.0%

2009---------7.4%

2010-11-----8.6-9.0%

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2. Control of Inflation :

1993-94-------------10.8%

1994-95-------------10.4%1995-96-------------5%

1996-2006----------around 5%

2007-2008-----------10-13%2008-2009-------------5-7%

3.PSU Reforms:

a. VRSStaff strength reduced by 8%b. Disinvestment-Total disinvestment/Privatization of

certain companies like BALCO

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Partial disinvestment ranging from 5-20 per

cent in selected 31 industries.

Govt. sold shares valued at Rs.9793 crore during1991 to 1994-95.

The pace of privatization slowed down because ofopposition from the left parties.

Flow of FDI:1991-92 to 1995-96:1,61,411cr.(US$38905 million).

Foreign Trade:Exports--640,172 cr.(US$159billion)-increase of 12%.

Imorts:Rs.964,850 cr.increase:14.8% Share in world Trade: has slowly picked up

Unit 4 : Political Environment : The Political

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Unit 4 : Political Environment : The PoliticalSystem

Indian constitution : Basic features: Federal StructureUnion Govt. & State Govts. Sharing of powersDistribution of powers betweenthe union and the StatesUnion list, State List,Concurrent list.

Democratic, Republic as against Monarchical orPresidential.

Parliamentary system of Govt.- collectiveResponsibility of the Cabinet-responsible to parliament.

Adult Franchise Elections on the basis of universalAdult Franchise (all citizens, literate or illiterate, rich orpoor, owners of properties or property less)

Separation of Powers Legislature Executive and

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Separation of PowersLegislature ,Executive andJudiciary (not like USA where there is completeseparation)

Independence of Judiciary (Supreme court and Highcourts)

Bicameral LegislatureParliament-Upper House(Rajya Sabha) and Lower House (Lok Sabha). Many

states abolished Upper House and opted for unicameralLegislature (Vidhan Sabha)

Fundamental Rights (cannot be taken away exceptsome during Emergency)

Directive Principles of State Policy (not mandatorybut optional)

Fundamental Duties (added during Indira Gandhis

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Fundamental Duties (added during Indira Gandhi s

regime)

Secularism (Perhaps no constitution in the world

made is so explicit)

Most distinguishing Principles of the constitution or

the Political System are enshrined in the Preamble of the

Constitution. Earnest Barker, the famous Political Scientist said: the

greatest Principles ever written in any constitution of the

world.

Constitutional offices/officers:

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Constitutional offices/officers:

1. The Election Commission (now a 3- mancommission)

2. The Union Public Service Commission (multi-Member)

3. The Chief Vigilance Commissioner (Single)

4. The Comptroller & Auditor General of India(single) common both for the centre and the states.

The CAG, according to B.R. Ambedkar, is perhaps themost important officer of the Constitution. Mostimportant instrument for ensuring PublicAccountability.

The Administrative System:

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The Administrative System:

Administrative System follows the Political system.

Allocation of Business Rules govern the conduct of

Got. Business by various Ministries/Departments headedby a Minister.

The Cabinet is the highest decision making authority.There are various committees of the Cabinet-like cabinetcommittee for Political Affairs (CCPA), EconomicAffairs (CCEA) etc.Administrative Powers flow from Cabinet to CabinetSecretary-to Secretaries-to Additional Secretaries/JointSecretaries-Deputy Secretaries and under Sectaries.

The President is the head of the Executive and all

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The President is the head of the Executive and all

Govt. of India orders, even signed by the Under

Secretary, are issued in the name of the President.

But the President discharges his duties on the advice

of the Council of Ministries.

The President is the Symbolic Head of the State like

the Crown in UK as against the President of USA.

Financial Bills Or Money Bills

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Financial Bills Or Money Bills

Under the Constitution, not a single rupee out of the

Consolidated Fund of India can be spent without the

approval of the Parliament.

Money bills are introduced only in Lok Sabha and

with the prior approval of the President. Failure to Pass a Money Bill in Parliament leads to

the fall of the Government.

Importance of the Union Budget:Th f i h U i B d i h

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The process of passing the Union Budget is the mostimportant annual activity of the Parliament.

The governance of the country would come to a

stand-still if the Budget or Vote or Account is notpassed by Parliament.

The Budget Process consists of the following:

(a) Pre-Budget Economic Survey is presented a

week before the Budget. The Economic Surveyindicates the progress and shortfalls in various sectorsand gives an appreciation of the health of the Economy.It contains a wealth of information as regards economicindicators in post- independent India.

(b) Th R il B d t i t d b th R il

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(b) The Railway Budget is presented by the RailwayMinister two days before the main Budget. It may beremembered that the Railways constitute almost 50% of

the Central Government.(c) The main Budget is presented by the Finance

Minister on the last day of February (28th or29th).TheBudget bag contains the following documents:

a. Finance Ministers Budget Speech.

b. Budget at a Glance.

c. The Finance Bill containing the Taxation and

Revenue raising proposals (Finance Act when passed)

Th A i i Bill i i h di

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d. The Appropriation Bill containing the expenditure

proposals and transfer of funds. (Appropriation Act

when passed)

e. Voting of Grants- Grant proposals on Budget lines.

The importance of the Union Budget:

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The importance of the Union Budget:

Policy statements on Liberalization, Globalizationand Privatization

Incentives and disincentives to Agriculture, Industry,Professionals, individuals, internal trade andinternational trade.

Briefly, it indicates the economic policy to be

followed by the Government and largely determines theeconomic environment of the country.

Determines the extent of State intervention in theEconomy-in controlling inflation, recession, stagflation,unemployment, poverty, illiteracy, disaster etc.

U it 5 L l E i t

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Unit 5 Legal Environment

In a broader sense, the legal environment refers to theprevailing legal system or the system of justiceprevailing in a country. Foreign investors always prefersto invest in a country where a well-developedindependent legal system exists. That way, India whichhas an independent, western and developed judicial

system offers great opportunities. In the narrower sense, it means the legal frameworkwithin which the industry has to operate.

Industries in India are mainly governed by thefollowing Acts/Guidelines.

The Companies Act 1956

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The Companies Act 1956

The MRTP Act 1969

FEMA (replacing FERA EXIM Policy

SEBI Guidelines on Capital issues.

Companies

Public

(Limited, Guaranteed, Unlimited)

Private

Holding Foreign Investment Government(PSU)

Objectives of Companies Act

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Objectives of Companies Act

Ensuring a minimum standard of business integrityand conduct in promotion and management ofcompanies.

Full and fair disclosure of accounts and otherinformation relating to affairs of the company.

Effective participation and control by shareholdersand protection of their rights.

Enforcement of proper performance of duties bymanagement.

Powers of intervention and investigation into theaffairs of the company in the event of mismanagement.

MRTP A t (Si l t b li h d)

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MRTP Act (Since almost abolished)

FEMA (Foreign Exchange

Management Act) Replacement of FERA

No longer criminal offence; would be treated as civil

offence.

Much more liberal foreign exchange regime.

Free convertibility for current Account transactions.

EXIM Policy (5 years)

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EXIM Policy (5 years)

Aim is to achieve a rapid growth rate in exports andincrease Indias share in world trade.

In conformity with WTO Agreements, removal oftrade barriers.

Removal of quantitative restrictions agricultural

products except a few items like jute & onions. Incentives to the cottage Sector and the smallindustries, leather, Gems & Jewelry etc.

Special Economic zones(SEZ)

Technology parks(IT industries)

SEBI G id li

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SEBI Guidelines:

Established control and regulation on the stock

Exchanges. Reforms in the primary market.

Registration of intermediaries like stock brokers, sub-

brokers etc.

Greater transparencyprevention of insider trading

etc. separate accounts for brokers and clients.

Merchant banking statutorily brought under SEBI.

Private Mutual Funds.

Iss ed separate g idelines for de elopment of

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Issued separate guidelines for development of

financial institutions.

Foreign institutional investors in pension funds,mutual funds, investment trusts, asset or portfolio

management companies etc. to invest in the Indian

Capital market.

Unit 6 Performance of Industries Sector wise

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Unit 6. Performance of IndustriesSector wise

Industries

PublicSector

PrivateSector

JointSector

CooperativeSector

Small-scale

Sector

Cottage& Khadi

Sector

The Public Sector:

History: Associated with the National Freedom

Movement.Objectives : Lahore Resolution in 1929 and Karachi

Resolution.

1 To Serve as an instrument of Social Transformation

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1. To Serve as an instrument of Social Transformation.

2. To build the basic infrastructure and core industries

for self- reliant growth.3. Rapid Economic Development- increase in GDP

4. Increase in per capita income and reduce disparity in

income.

5. Create substantial employment opportunities and

reduce unemployment

6. Balanced Regional Development

7. To achieve Socialistic pattern of Society byoccupying the commanding heights of the economy.

Performance of The Public Sector

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Performance of The Public Sector

Cannot be properly measured or assessed because it

has played a historical and evolutionary role. The Private Sector which existed in India for a long

time in a free-enterprise situation did not have the

resources or was not oriented to heavy investments in

heavy and core sectors, particularly in the infrastructuresector. Therefore, there was no alternative to Govts

intervention and setting up of public sector companies in

the core sector.

Some indicatorsa. Share of the public sector in the Net Domestic Product :

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p

Compound rate of annual Growth

Private Sector Public Sector

2.8 percent 6 percentRelative efficiency of investment

Profits Private Public

11.40 4.70 (for every Rs 100 invested)

Share of capital formation(%)1st&2ndPlan--------------------41%

3rd Plan ------------------49%

4rth Plan -----------------42%

5th Plan ------- -----------40%

6th Plan ------------------47%

7th Plan -------------------48%

8th, 9th, 10th 11th-------------NA

Very difficult to assess efficiency. PSUs are mostly in

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Very difficult to assess efficiency. PSUs are mostly incore and heavy sectors where returns are very low.

Dholakia Formula:

Total factor productivity criterion to judge the efficiencyof public sector enterprises, that is, the contributionmade by the enterprise to the countrys net

national product in terms of rent, wages and salaries,

interest and profit. According to this formula, for thedecade 1967-68 to 1975-76, the overall efficiency of thepublic enterprises increased at the rate of 2.44percentage points per annum as against privateenterprises 0.59 percentage points per annum.

4. Employment: 10 percent in the organized Sector; 90 percent in the

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10 percent in the organized Sector; 90 percent in theunorganized sector.

PSUs 7% of the total organized Labour Force in the

country (23.05 lakh in 1991). The private sectoraccounted for 3 percent of the organized labour force.

PSUs model employers

PSUs developed townships around the industries.

5. Foreign Exchange Earnings:1980-81 Rs 2,143 crore

1989-90 Rs 6,366 crore

2008-09 Rs. 74,206 cr.

2009-10 Rs. 77,745 cr.Contribution to Central Exchequer

2008-09 Rs.151,529 cr.

2009-10 Rs. 139,828 cr.

6. Financial Performance:

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f

1.Total Turnover:-----Rs. 586,140 cr. (2003-04)

---Rs.1,271,529cr.(2008-09)

--- Rs.1,235,060cr. (2009-10)2.Resource generation: ---Rs. 11,372 cr. (1990-91)

3.Taxes paid to Govt.---- Rs. 1,400 cr. (1990-91)

----Rs. 131,583 cr.(2008-9)

---- Rs. 119,529 cr. (2009-10)4.Interest paid to Govt. ---Rs. 4,100 cr. (1990-91)

---Rs. 39,300 cr. (2008-9)

---Rs. 35,720 cr. (2009-10)

5.Profits ------------------ Rs. 440 crore(1981-82)---Rs. 3,789 cr (1989-90)

---Rs. 53,168 cr.(2003-04)

--Rs. 98.488 cr.(2008-2009)

--Rs. 108,435 cr. (2009-10)

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.

.

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.

.

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.

.

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.

.

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.

.

Highlights of the CPSEs

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.Highlights of the CPSEs

In FY09, 158 CPSEs posted net profit as compared with 160 in

FY08. Subsequently, the loss-making companies increased innumber from 53 in FY08 to 54 in FY09

The net worth of the public sector registered a growth of12.6% from Rs 5,185.30 bn in FY08 to Rs 5,840.72 bn inFY09

The turnover of all the CPSEs grew by 15.4% from Rs10,944.84 bn in FY08 to Rs 12,634.05 bn in FY09

The total investments of all CPSEs stood at Rs 5,289.51 bn inFY09 up by 16.2% over the previous year

The dividend declared by the Central PSUs for FY09 was Rs

254.93 bn, registering a 9.2% decline as compared to Rs280.81 bn in FY08

During FY09, CPSEs foreign exchange earnings increased by9.6% over the previous year.

Shortcomings

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Shortcomings

Shortfall in targets

Gross under utilization of capacities Over capitalization

Nonprofessional management at the top level.

Bureaucratic and political interference . Overstaffing and lack of motivation and

obstructionism and aggressive trade union Activity

leading to sub-optimal management and low

productivity.

Privatization :The Debate

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Privatization :The Debate

Two Schools of thought one pro-public Sector and

another pro-private Sector. Historical process also a cycle like the Business

cyclenationalization-privatizationnationalization or

Govt. intervention.

Rationale

The private enterprise is the engine of growth (World

Bank)

Management Gurus like Lord Parkinson advocatesprivatization because of :

Better utilization of resources -human and material-

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Better utilization of resources human and material

leading to lower cost.

Greater competition and reduction in prices. Better customer service.

Flexibility and dynamism in Management

Greater motivation and rewards

Delegation of powers, quick actions & decisions -less

paperwork.

Greater discipline - free from external pressures.

Target & Result oriented organization at all levels.

Liberalization, Globalization & Privatization

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Liberalization, Globalization & Privatization

Seen as an essential corollary of the liberalization

process. Example of South China.

Example of India since 1992

Example of Japanese economic development since

the Meiji Restoration (Zaibatsu-Mitsubishi, Toyota-

Sumitomo)

Contrary Examples of stagnation and economic

crisis: Soviet Russia, East Europe countries, EastGermany vs West Germany (divided by Berlin Wall).

PrivatizationHow?

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A number of methods have evolved :

1. By outright sale of a public enterprise to the private

entrepreneurs.2. By disinvestment of its share holdings-more than 50percent or less than that. (Partial sale)

3. By appointment of a strategic partner keeping the

majority share but handing the management over to thestrategic partners.

4. By agreements for Public-Private Partnerships(Housing, Highways, Airports & Ports)-Joint ventures.

5. BOT, BOOT (Toll Bridges, Road, Ports etc.)

Is privatization a Solution?

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s p ivatization a Solution?

It is an inevitable process. Even in Defence

Industries, there is a need to infuse Private initiatives.

Since competition is never perfect, in order to ensure

fair competition, fair price and fair service, independent

Regulatory Authorities have been constituted TRAI,

CERC, IRDA, Ombudsman etc.

Current Scenario in India

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Privatization has not contributed towards reduction inpoverty in the country -the number swelled87 percent

of the people living on Rs. 20 a day! The disparity between rich and poor has increased.

A new class of high salaried people has emerged,who have boosted the luxury apartment, auto andconsumer durable sectors.

The ordinary workers and lower level executives areexploited in the new situation

No increase in employment in the corporate sector. Cases of gross mismanagement and collapse.

Frauds and criminal conspiracies.

Unit 7 Corporate Social Responsibilities

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Unit 7 Corporate Social Responsibilities

The responsibilities can be grouped into four:

1. Responsibility towards the Shareholders

2. Responsibility towards the employees.

3. Responsibility towards the consumers or

customers.

4. Responsibility towards the Society in general

and especially towards environment.

Responsibility to the Shareholders/owners

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p y

Fair return to the investors.

Fair and timely disclosure about the affairs of thecompany.

Annual Accounts.

Independent Auditing.

Annual Report & AGM.

Other up to date information.

Participation of shareholders in decision making and

affairs of the company

Responsibility to employees:

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Responsibility to employees:

Congenial and healthy working conditions.

Safety. Fair wage.

Fair workers benefits including retirement benefits.

Workers welfare and Recreation.Responsibility towards customers:

Ensuring quality and safety of products.

Full disclosure of contents. Competitive and fair price.

Customer care ensuring customer satisfaction and

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g

redressal of customer grievances.

Customeris the king philosophy.

Responsibility towards Society

/Environment:

Not to allow the water and air of the area to be

polluted.

Preventive measures like CEPT, air Precipitators,

waste management.

Welfare activities for he local community- roads,schools, sports, and providing other amenities.

Social Audit

S i l A di f TISCO (1980 h d d b i d Chi f

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Social Audit of TISCO (1980 headed by retired Chief

Justice of Bombay High Court)

Social Audit of Telecom (Justice Bhagwati)

Sachar committee (1978)

Social Audit seeks to determine to what extent the

corporate entity has discharged its social responsibilitiesto :

Share holders

Employees

Environment

Customers

Society in general

It also recommends corrective measures which

should be taken by the company to fulfill its obligations:

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should be taken by the company to fulfill its obligations:

Acts & Laws

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The Companies Act 1956, the SEBI Act The Factories Act 1948, Minimum wages

Act, The Provident Fund Act. The water (Prevention & Control of Pollution) Act,1974 The Air (Prevention & Control of Pollution) Act,1981 The Insecticides Act The Hazardous Substance Act.

The Environment Protection Act, 1986 (acomprehensive Act) The Consumer Protection Act 1986

A Plethora of Acts & Laws exist to enforce corporate

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responsibilities. Still, the responsibility was deficient in

many areas. Corporates have to go much beyond the

Laws to fully discharge their Liabilities to the Society.

Two developments during the last 2-3 decades:

The Consumer Movement.

The Environment Movement.

The Consumer Movement

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Consumer Protection Act, 19861.

Right to Safety2. Right to be informed3. Right to choose.4. Right to be heard5. Right to be seek redressal

6. Right to consumer education..

Consumer Courts District Forum (up to 5 lakh) State Commission (upto 20 lakh) National Commission (exceeding 20 lakh) Ombudsman (ADR-Alternative Grievance RedressalMechanism)

Banking Ombudsman (Banking Sector)I O b d (I S t )

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Insurance Ombudsman (Insurance Sector) Electricity Ombudsman (for Power Sector)

Income Tax Ombudsman (for Income Tax Dept.) Grievance Redressal Cells

The Environment Movement

The Environment Act, 1986 Air Pollution Water Pollution Noise Pollution Hazardous Waste Deforestation

Unit 8 Technological Environment

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History in India

India has a long history of Science and TechnologicalDevelopment and Medicine. Indian Mathematics hasbeen one of the greatest inventions in the world, if notthe greatest.

In the medieval period, there was a dark period fromthe 11th to 17th centuries when knowledge and scientificpursuits took a back seat.

Science and Technology revived with the Britishbringing the benefits of Industrial Revolution.

After Independence:Scientific Policy Resolution (March4 1948) by

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Scientific Policy Resolution (March4,1948) byJawahar Lal Nehru.

To foster, promote, cultivate and sustain both pureand applied research in Science and Technology toeducate, train and utilize the pool of scientific andtechnological personnel for rapid progress across avariety of scientific frontiers. To create a scientific temper among the people acrossthe country. To reach the benefits of science and technology tothe common people.

Develop Appropriate Technology (subsequentPolicy).

Era of Institutional Building

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Along with the operation of the India Constitution,Nehru, a firm believer in Science & Technology, committed

himself to building various Institutions of nationalimportance in Science & Technology.

1. Indian Council of Agricultural Research (PusaInstitute etc.) for Agriculture.-48 Insts

2. Agricultural Universities.3. Indian Council for Industrial Research (CSIR

about 30 Institutes)4. IITs and RECs .

5. Defence Research & DevelopmentOrganization (DRDO about 30 Institutes)6. Atomic Energy Commission (AEC for Nuclear

Science.)

7. Space Research Organization (ISRO for space)8 Department of Oceanography (for oceans)

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8. Department of Oceanography (for oceans)9. Forest Research Institute (FRI for Forest)

The research organizations encompassed all aspectslife and all sectors -foods, crops, fuel, dairy, animalhusbandry, horticulture, water, air, drug and medicine,industries, physics, chemistry, Botany, forests, wild life,ocean, space, Nuclear Science etc. These Institutions and our scientific & Technologicalcreations like the Bhakra Dam, Bhaba Research Centre,IITs etc. are the new temples of modern India (Nehru).

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Post Liberalization Period

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The liberalization, Globalization and Privatization

process has radically changed the Technological

environment. The existing Science and Technology

Policies have been swept away by the waves of foreign

technology. Special role played by I.T. technologies. All

industries one now greatly dependent on IT.

With Opening up of the Economy, the Private

I t d T ti l C ti h b ht

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Investors and Transnational Corporations have brought

with them their own new technologies e.g. Auto

Industry, Consumer Durables, Food Processing, MedicalIndustry, Telecom and Engineering industries.

Globalization has, to a large extent, served to

establish technological equilibrium throughout theWorld Japan, Korea, China, Malaysia, Indonesia,

Singapore and India.

Unit 9.The International

E i t

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Environment

The world today is a global village. Events in all

major countries have their ramifications and the

ripple effects in other countries. We may focus on

the following areas: Emergence of globalization.

Emergence of MNCs.

Role of IMF & World Bank.

Role WTO Flow of FDI

Globalization

I i i t ti ith th l b l

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Increasing integration with the global

economy and increasing interdependence

between nations in trade, production,

marketing and other economic activities.

Economic activities carried increasingly on

supra national scale creating a borderlesseconomy.

Manufacturing no longer confined to state

boundaries-setting up of manufacturing plants,sourcing of materials and components across

the globe.

Out sourcing of labour and processes to places

h th i l

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where they are economical.

Removal of trade barriers and increasing reduction

in tariffs.

Free trade flow of foreign capital and newer

technologies.

Emergence of Transnationals as the dominant

partner.

Effects Of Globalization

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Opening up of the economy to foreign players

and private enterprises especially to MNCs. Greater inflow of capital, Technology and

managers.

Greater competition faced by IndianManufacturers and up gradation of products tocompete in the Global markets.

Greater exports and larger reserve of FE &

gold. Moving towards full convertibility of current

& Capital Accounts.

MNCs

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MNCs in all sectorsConsumer Durables, Telecom,

Transport, Auto, Steel, Mines, Oil etc. MNCs account for onefifth of the worlds output.

Growing at a high rate-twice the world growth rate.

Establish new work culture, pay package etc.

Harbingers of new technologies.

The process is inevitable if a country embarks upon arapid rate of growth.

Role of WTO

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A step in Globalization.

Replaces GAAT came into effect on Jan 1,1995.

India is one of the 132 founding members.

Goal is to create a fair, equitable and rule-basedmulti-lateral system-transparent and non-discriminatory.

A significant principle is the Most Favoured Nationstatus for all members.

WTO covers all Goods, Services and IntellectualProperty Rights but does not include Labour.

WTO Agreements heavily favour the developednations

Problem Areas for India:

A i l l P d d P

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Agricultural Products and Patents.

The Traditional Indian Herbs & Medicines.

The Generic Modern Medicines .

Regional Groups/Blocs

The European Union (EEC)

NAFTA.

ASEAN

SAARC

APEC,OPEC etc.

10. International Economic Institutions

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The IMF (Washington DC,1946.)

All members of UN are members Fully autonomous organization affiliated to UN.

Each countrys contribution is fixed in terms of Itsquota which determines the borrowing and voting

rights.

15 per cent of quota payable in gold or dollars, therest in its own currency.

Special Drawing Rights based on basket ofcurrencies.

Functions of IMF : Five Major functions

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Serves as a short-term Credit Institution for countriesfacing Balance of Payments problems

Provides a Mechanism for improving balance ofpayments-mainly structural changes.

Provides a Machinery for internationalconsultationsmainly Experts.

Provides a reservoir of currencies enabling membersto borrow each others currencies.

Promotes orderly adjustment of exchange rates to

promote exchange stability.

The World Bank, Washington DC.1946(Bretton Woods

T i I tit ti )

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Twin Institution)

Every member of IMF automatically becomes

member of the World Bank-155 countries(1991). Capital subscription is similar to its quota and also

measures its voting power.

Authorized capital of $10 billion(100,000 shares of

$100,000 each) Members subscribed in accordance with its economic

positiondivided into 3 parts:

(a)2% to be paid in gold or dollars;(b)18%to be paid

in its own currency;(c)80%subject to call as and whenrequired to meet the Banks obligations.

Functions of the World Bank

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Bank gives loans to governments or to private

enterprises (with Govt. guarantee), the Central Bankand similar organizations on the basis of sound

financial and economic analysis with an acceptable

IRR (normal:10%)

Bank provides technical advice to borrowers and

engages experts.

Bank conducts Economic and Social Research-World

Bank Working Papers, World Development Report(Annual).

World Bank established two subsidiaries:

1 IDA for Govts & 2 IFC for private sector

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1.IDA for Govts. & 2.IFC for private sector

IDA provides soft loans ,almost in the natureof grants for various projects in developingcountries(1-2% for 30 years).

Bank organizes investment groups likeAid

India Consortium consisting of developedcountries who are willing to assist India in itsdevelopment programmes.

11. Indias Financial System

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Four Sub-Sectors:

1.The Banking Sector---Regul. AuthorityRBI.2.The Insurance Sector-- ,, -IRDA.

3. Non-Banking Fin. Instns. ,, RBISEBI.

4.The Capital Market ,, -SEBI.

The Banking Sector:

1.PSU BanksState bank & Asso.---8

2.Other Nationalized Banks-------------19.

3.Private sector Banks-----------81.

4. Foreign Banks.

5. Regional Rural Banks (RRBs).

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g ( )

6.Develoment Banks (IDBI, HDFC, National Housing

Bank)Role of the Reserve Bank (RBI)

Main Instrument of Monetary Policy & Credit Control.

.Fiscal Agent (Manages Public Debt).

Banker of the Central Government & State Govts.

Monopoly for Issue of Currency Notes. BankersBank. Reservoir of Foreign Exchange & Controller offoreign Exchange. Safeguards countries Gold Reserve.

Growth with Stability.

Methods of Credit Control

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Bank Rate (RBI to Comm. Banks-3-10%)

Cash Reserve Ratio (CRR3-15%) Statutory Liquidity Ratio (SLR-now 37.5%)

Interest Rates Policy (PLR + )

Selective Credit Controls (ceiling on lending;

minimum rate of interest etc.)Control of Inflation

Monetary Measures

Fiscal Measures

The best method to combat inflation is to increaseoutput-Agriculture & Manufacturing & increasedsupply .

Unit 12 Public Finance

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Govt. functions at four Levels:1.Central Level (Central Govt. Union Govt. or Govt.

of India)

2.State Level (State Governments like Govt. of Tamil

Nadu, Maharashtra, UP, Rajasthan, Assam etc 35)3.Local Level Local self Govts. (Mumbai, Delhi

Kolkata, Chennai Corporations Municipalities,

Panchayati Raj)

4.Public Sector Undertakings/Enterprises : ONGC,Indian Oil, NTPC, MTNL, SAIL, BHEL, HAL AAI, Air

India, etc. (all empires)

Distinction between Private Finance & PublicFinance.

P i Fi d l i h h i d

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Private Finance deals with the incomes andexpenditures of individuals or entities for private

benefits. Public Finance deals with the transactions of thePublic Funds Managed by the State Revenuescollected from the citizens and Public Expenditureincurred for the maximum good of the citizens. In reality, there is hardly any difference between thecorporate funds and Public Funds .Some of theCorporates are bigger than smaller Govts. The source offunds is the same the citizens who contribute in the

form of taxes to Govt. and shares to Corporates.

Some of the corporates are functioning in areaswhich were hitherto the domain of the Govt. Telecom,P Ai t t i t t d h lth t

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Power, Air transport, airports, ports, roads, health etc.

The Budget

The Annual Budget, the Fiscal Policy and theMonetary Policy are the main instruments of publicFinance. The Budgetary and Fiscal Responsibility Actpassed by the Parliament have restricted the union andthe State Govts. from exceeding the limits of budgetarydeficit and deficit financing and borrowings.

The Union Budget consists of the following

documents:

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documents:

1. The Finance Ministers speech

2. Budget at a Glance3. The Finance Bill (Taxation ProposalsFinance Act)

4. The Appropriation Bill (Expenditure Proposals

Appropriation)

5. Voting of Grants.

Taxation

Revenue is collected from:

Taxes (Tax Revenue)

Non-Taxes (Non-Tax Revenue)

Tax Revenue

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Direct Tax Indirect Tax

Income Tax Customs

Duties

Corporation tax

Excise DutiesGift tax Sales tax

Capital Gains tax Vat

Wealth Tax

Taxes can be Proportional, progressive or Regressive.

Non-Tax Revenues

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Non Tax Revenues

Interest from Loans given

Income from public properties, rent etc. Fines and Penalties

Receipts from PSUs

Miscellaneous receipts royalties, fees etc.

Canons of Taxation Canon of Equality

Canon of Certainty

Canon of convenience

Canon of Economy

Added later Canon of simplicity .

Canon of productivity

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Canon of productivity.

Canon of Elasticity.

Canon of Diversity.Objectives of taxation

To raise Revenue.

Reduction in equalities in wealth and income .

Price stability.

Accelerating economic Growth.

Whatever are the canons and objectives of Taxation,

in modern day world, taxation is resorted to, whereverthe gap between the revenue and the public expenditure

committed to by the Government.

Budget Deficit and Deficit Financing

Budget Deficit is the order of the day.

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g y

Primary deficit

Revenue deficit Fiscal deficit

Borrowings : Public Debt

Internal Borrowing (Internal Debt) External Borrowing (External Debt)

Limitations on Borrowings

Effects of Borrowing

13.Balance of Payments

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Balance of Trade

Difference between total Exports and total Imports ofvisible itemsphysical goods and articles.

Balance of Payments

Is a broader concept like the Balance Sheet.

It includes:

Visible Items (goods and materials)

Invisible Items (services, remittances, banking,

insurance)

Capital Transfers (capital receipts & payments)

Accounts in Balance of Payments

1 Current Account: It is a Statement of actual receipts

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1.Current Account: It is a Statement of actual receipts

and payments in the short run.

CA=(visible + invisible imports)-(visible + invisible

exports).

2.Capital Account: All international Capital transfers.

Movement of Gold

International Loans. International Investments.