IMT-79 Economic Environment of India

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Economic Environment of India :

8/29/2011 1 Economic Environment of India Prof. P.K. Brahma

India at a Glance:

8/29/2011 2 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 . 7 th largest country in geographical area. 2 nd 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. 2 nd fastest growing economy in the world. Ranks 10 th in GDP in nominal terms and 4rth in PPP terms.


8/29/2011 3 . Basic Economic Indicators: GDP :$1.704 trn.,10th/ $4.447 trn (June2011),3 rd . GDP Growth: 8-5% (2010-11) GDP per capita:$1,382(nomina:139 th; 2011 )/ $3,608 (PPP:128 th; 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)


8/29/2011 4 . 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) down from$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-

Areas of Concern:

8/29/2011 5 Areas of Concern High rate of Inflation( 10-12%) Extreme Poverty (37% , more than 300 million below poverty 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.

Concept of National Income:

8/29/2011 6 Concept of National Income GDP---Gross Domestic Product: aggregate measure of total value of final products ( goods & services). GNP---Gross National Product : GDP + External Factor Income. NNP---Net National Product : GNP – Depreciation. 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 at Constant Prices ) =Real national Income or National Income in real terms.

Methods of calculating National Income:

8/29/2011 7 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 adding only 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.


8/29/2011 8 . 3. The Expenditure Method GNP 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

Problems in Calculating National Income:

8/29/2011 9 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 and Growing Income Disparities


8/29/2011 10 . Circular Flow of Economy .

Concept of Micro and Macro Economics:

8/29/2011 11 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 far greater 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; started with bankruptcies of Lehman brothers and AIG. Impact of world recession on India- minimal but it slowed down economic growth, led to food inflation, unabated inflationary pressures , loss of exports and a mini-crisis.

Unit 1. The Concept of Business :

8/29/2011 12 Unit 1. The Concept of Business Definition Aristotle in his classic work ‘Politics’ said: the personality of a person is the product of hereditary, education and environment. Similarly, growth of Business depends on capital, Human and Technological resources as well as on Environment political, economic, social and cultural. How do we define Business and Environment?

Slide 13:

8/29/2011 13 A Varity of definitions of Business available. Most acceptable definition has been given by Peter Drucker – the objective of business is to create a customer. The customer is the master and to serve him well is the only purpose of business. Modern business aims at profits through service. In all the forms of business the common elements 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.

Slide 14:

8/29/2011 14 Metamorphosis of Business – E-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 shopping – dot coms. Revolution in business functioning -banks, insurance, Travels – worldwide connectivity. Infrastructure needed for E-commerce: internet connectivity, computer security & efficient delivery system.

Concept of Environment:

8/29/2011 15 Concept of Environment Environment refers to the sum total of all .factors- economic, political, social, cultural, legal and international- which enterprises and their management Business does not operate in a vacuum but in an are external to and beyond the control of individual business environment Local. National and international Market env and non-market environment influenced by economic and non-economic factors Micro factors and macro factors Static and Dynamic Various techniques of scanning business environment.

Components of Environment:

8/29/2011 16 Components of Environment The Micro Environment: Directly concerned with an individual business firm. 1.The Suppliers 2.The Customers 3. Labour 4.The Business Partners 5.The Competitors 6.The Regulatory Authorities

The Macro Environment:

8/29/2011 17 The Macro Environment 1.The Political Environment & the role of the Government- the Political and the Legal System 2.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 Environment –efficiency, productivity. 6.Natural Environment- natural resources, conditions 7.International Environment-globalization, competition.

Unit – 2 Economic Environment:

8/29/2011 18 Unit – 2 Economic Environment Perhaps, the most important role in Business Environment is played by the economic environment of the country. Economic Environment refers mainly to the Economic system a country has opted for, under which flow the Economic policies of the Government, the Planning Process, if any, the Industrial Policy and the Budgetary announcements. An economic system may be either capitalism, Socialism or Mixed Economy.

Slide 19:

8/29/2011 19 The Economic System has evolved over centuries 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 which governs the least’. Features of Capitalism are: (i) Competition and free trade (ii) Right to private property, (iii) Profit motive, and (iv) consumers’ sovereignty.

Slide 20:

8/29/2011 20 This means the means of production and distribution should be in private hands and government intervention in the economy should be the minimum. In today’s world (21 st Century), there is no pure form of Capitalism or Socialism. All Economies are Mixed Economies. Even communist China has become largely capitalistic with maximum liberalization and opening of south China to private enterprises. Therefore, all countries have become Mixed Economies. In Scandinavian countries, public expenditure constitutes more than 60% of GDP, in France 50%+ and even in USA, it is 30%+

Slide 21:

8/29/2011 21 Capitalism is a much maligned word. It is better to describe it as ‘Free Economy’. But in practice, no free economy can survive without adequate regulations. Therefore, all economies (practically all mixed) are regulated or controlled with a set of independent regulators.

Slide 22:

8/29/2011 22 Features of Socialism are: Government ownership of productive resources. Planning Redistribution of Income. Social welfare and 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 the government in the economy would be the maximum.

Slide 23:

8/29/2011 23 The mixed economy is a compromise between capitalism and Socialism, while the economy world be left to private initiatives and free play of economic forces, there would be substantial presence of the public sector and the economy would be subjected to government intervention whenever necessary. Mixed economy is also known as controlled economy, originating from Keynes’ theory of public investment and state intervention to fight the Great Depression.

Economic Planning in India- The Five- Year Plans:

8/29/2011 24 Economic Planning in India- The Five- Year Plans Economic Planning is viewed as an instrument of Social transformation and rapid economic development. Planning induces coordinated efforts for a steady and balanced growth in all sectors and all regions, which would not have been possible in a free-enterprise regime.


8/29/2011 25 . The Five- Year Plans 1 First Five-Year Plan, 1951–1956 2 Second Five-Year Plan, 1956–1961 3 Third Five-Year Plan, 1961–1966 4 Fourth Five-Year Plan, 1969–1974 5 Fifth Five-Year Plan, 1974–1979 6 Sixth Five-Year Plan, 1980–1985 7 Seventh Five-Year Plan, 1985–1990 8 Period between 1989–1991 9 Eighth Five-Year Plan, 1992–1997 10 Ninth Five Year Plan, 1997–2002 11 Tenth Five-Year Plan, 2002–2007 12 Eleventh Five-Year Plan, 2007–2012

Slide 26:

8/29/2011 26


8/29/2011 27 . 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 December 1951. The plan addressed, mainly, the agrarian sector, including investments in dams and irrigation. The agricultural sector was hit hardest by the partition of India and needed urgent attention.[3] The total planned budget of 206.8 billion (US$23.6 billion in the 1950 exchange rate ) was allocated to seven broad areas: irrigation and energy (27.2 percent), agriculture and community development (17.4 percent), transport and communications (24 percent), industry (8.4 percent), social services (16.64 percent), land rehabilitation (4.1 percent), and for other sectors and services (2.5 percent).[4] The most important feature of this phase was active role of state in all economic sectors. Such a role was justified at that time because immediately after independence, India was facing basic problems like- deficiency of capital and low capacity to save. 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 B hakra Dam and Hirakud Dam . The World Health Organization , with the Indian government, addressed children's health and reduced 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.


. 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 B hakra Dam and Hirakud Dam . The World Health Organization , with the Indian government, addressed children's health and reduced 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. 8/29/2011 28


8/29/2011 29 . Second Five-Year Plan, 1956–1961 This plan functioned on the basis of a nude model. The Mahalanobis model was propounded by Prasanta Chandra Mahalanobis in the year 1953. The second five-year plan focused on industry, especially heavy industry . Unlike the First plan, which focused mainly on agriculture, domestic production of industrial products was encouraged in the Second plan, particularly in the development of the public sector . The plan followed the Mahalanobis model , an economic development model developed by the Indian statistician Prasanta Chandra Mahalanobis in 1953. The plan attempted to determine the optimal allocation of investment between productive sectors in order to maximize long-run economic growth . It used the prevalent state of art techniques of operations research and optimization as well as the novel applications of statistical models developed at the Indian Statistical Institute. The plan assumed a closed economy in which the main trading activity would be centered on importing 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 north east. The Atomic Energy Commission was formed in 1958 with Homi J. Bhabha as the first chairman. The Tata Institute of Fundamental Research was established as a research institute. In 1957 a talent search and scholarship program was begun to find talented young students to train for work in nuclear power. The total amount allocated under the second five year plan in India was Rs. 4,800 crore . This amount was allocated among various sectors:


8/29/2011 30 . Third Five-Year Plan, 1961–1966 The third plan stressed on agriculture and improving production of rice, but the brief Sino-Indian War of 1962 exposed weaknesses in the economy and shifted the focus towards the Defence industry . In 1965-1966, India fought a war with Pakistan . The war led to inflation and the priority was shifted to . The construction of dams continued. Many cement and fertilizer plants were also built. Punjab began producing an abundance of wheat . Many primary schools were started in rural areas. In an effort to bring democracy to the grassroots level, Panchayat elections were started and the states were given more development responsibilities. State electricity boards and state secondary education boards were formed. States were made responsible for secondary and higher education . State road transportation corporations were formed and local road building became a state responsibility. The target growth rate of GDP(gross domestic product) was 4.5 percent. The achieved growth rate was 4.3 percent


8/29/2011 31 . Fourth Five-Year Plan, 1969–1974 At this time Indira Gandhi was the Prime Minister . The Indira Gandhi government nationalized 14 major Indian banks and the Green Revolution in India advanced agriculture. In addition, the situation in East Pakistan (now Bangladesh ) was becoming dire as the Indo-Pakistani War of 1971 and Bangladesh Liberation War took place. Funds earmarked for the industrial development had to be diverted for the war effort. India also performed the Smiling Buddha underground nuclear test in 1974, partially in response to the United States deployment of the Seventh Fleet in the Bay of Bengal . The fleet had been deployed to warn India against attacking West Pakistan and extending the war


8/29/2011 32 . Fifth Five-Year Plan, 1974–1979 Stress was laid on employment , poverty alleviation, and justice . The plan also focused on self-reliance in agricultural production and defence . In 1978 the newly elected Morarji Desai government rejected the plan. Electricity Supply Act was enacted in 1975, which enabled the Central Government to enter into power generation and transmission leaders. The Indian national highway system was introduced for the first time and many roads were widened to accommodate the increasing traffic . Tourism also expanded. Sixth Five-Year Plan, 1980–1985 The sixth plan also marked the beginning of economic liberalization . Price controls were eliminated and ration shops were closed. This led to an increase in food prices and an increase in the cost of living . This was the end of and Rajiv Gandhi was prime minister during this period. Family planning was also expanded in order to prevent overpopulation . 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 more rapidly than less prosperous areas, which continued to have a high birth rate .


8/29/2011 33 . Seventh Five-Year Plan, 1985–1990 The Seventh Plan marked the comeback of the Congress Party to power. The plan laid stress on improving the productivity level of industries by upgrading of technology. The main objectives of the 7th five year plans were to establish growth in areas of increasing economic productivity, production of food grains, and generating employment opportunities. As an outcome of the sixth five year plan, there had been steady growth in agriculture, control on rate of Inflation, and favourable balance of payments which had provided a strong base for the seventh five Year plan to build on the need for further economic growth. The 7th Plan had strived towards socialism 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 by the year 2000. The Plan expected a growth in labour force of 39 million people and employment was expected to grow at the rate of 4 percent per year. Some of the expected outcomes of the Seventh Five Year Plan India are given below: Seventh Five Year Plan India strove to bring about a self-sustained economy in the country with valuable contributions from voluntary agencies and the general populace.


8/29/2011 34 . Period between 1989–1991 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 in Foreign Exchange (Forex) reserves, left with reserves of only about US$1 billion. Thus, under pressure, the country took the risk of reforming the socialist economy. P.V. Narasimha Rao )was the twelfth Prime Minister of the Republic of India and head of Congress Party , and led one of the most important administrations in India's modern history overseeing a major economic transformation and several incidents affecting national security. At that time Dr. Manmohan Singh (currently, Prime Minister of India) launched India's free market reforms that brought the nearly bankrupt nation back from the edge. It was the beginning of privatization and liberalization in India.


8/29/2011 35 . Eighth Five-Year Plan, 1992–1997 Modernization of industries was a major highlight of the Eighth Plan. Under this plan, the gradual opening of the Indian economy was undertaken to correct the burgeoning deficit and foreign debt. Meanwhile India became a member of the World Trade Organization on 1 January 1995.This plan can be termed as Rao and Manmohan model of Economic development. The major objectives included, containing population growth, poverty reduction, employment generation, strengthening the infrastructure, Institutional building, tourism management, Human Resource development, 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. An average annual growth rate of 6.7% against the target 5.6% was achieved.


8/29/2011 36 . Ninth Five Year Plan, 1997–2002 Ninth Five Year Plan India runs through the period from 1997 to 2002 with the main aim of attaining objectives like speedy industrialization, human development, full-scale employment, poverty reduction, and self-reliance on domestic resources. Background of Ninth Five Year Plan India: Ninth Five Year Plan 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 per cent, a percentage point lower than the target GDP growth of 6.5 per cent.


8/29/2011 37 . Tenth Five-Year Plan, 2002–2007 Attain 8% GDP growth per year. Reduction of by 5 percentage points by 2007. Providing gainful and high-quality employment at least to the addition to the labour force;*All children in India in school by 2003; all children to complete 5 years of schooling by 2007. Reduction in gender gaps in literacy and wage rates by at least 50% by 2007;*Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2%;*Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002 to 2007

Eleventh Five-Year Plan (2007-11):

8/29/2011 38 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 per capita income by 2016-17 Increase agricultural GDP growth rate to 4% per year to ensure 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.


8/29/2011 39 . 2. Education Reduce dropout rates of children from elementary school from 52.2% in 2003-04 to 20% by 2011-12 Develop minimum standards of educational attainment in elementary school, and by regular testing monitor effectiveness 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 higher education from the present 10% to 15% by the end of the plan


8/29/2011 40 . 3. Health 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 that there are no slip-backs Reduce malnutrition among children of age group 0-3 to half its 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 to 950 by 2016-17 Ensure that at least 33 percent of the direct and indirect beneficiaries of all government schemes are women and girl children Ensure that all children enjoy a safe childhood, without any compulsion to work.


8/29/2011 41 . 5.Infrastructure Ensure electricity connection to all villages and BPL households by 2009 and round-the-clock power. Ensure all-weather road connection to all habitation with population 1000 and above (500 in hilly and tribal areas) by 2009, and ensure coverage of all significant habitation by 2015 Connect every village by telephone by November 2007 and provide broadband connectivity to all villages by 2012 Provide homestead sites to all by 2012 and step up the pace of house 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.

Slide 42:

8/29/2011 42 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 percent by 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.

Slide 43:

8/29/2011 43 Objectives of the 11the Five Year Plan (2007-11) Inclusive Growth: 27 Monitor able Targets which includes Poverty reduction Education -6%of GDP Employment Health care Income disparity. A GDP growth rate of 9% with an investment of 36,44,718 crore.(13.64% of GDP)

Slide 44:

8/29/2011 44 Industrial Policy Industrial Policy Resolution 1948 – industries categorized into (Heavy, Medium and Small scale)- 4 categories – role of the State/Public Sector and the Private 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 but regulated) Category –IV: Other industries (Private & cooperative) In addition, cottage & small given importance.

Slide 45:

8/29/2011 45 Ushered in Keynesian Mixed Economy Modifications made in 1956 : 1973 : 1977 : 1980 : Major relaxations, modernization, expansion & spread to backward areas. 1985 : Procedural changes – made by Rajiv Gandhi. 1986 : De-licensing, Revision of MRTP limits, exemptions from MRTP, Raising of limits-FE, automatic expansion etc.

Slide 46:

8/29/2011 46 New Industrial Policy 1991: Heralded Economic Liberalization in the country. Aimed at Globalization, Liberalization and Privatization. Introduced New Industrial Licensing Policy except for 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.

Slide 47:

8/29/2011 47 Effects New Industrial Policy : Rate of Growth: Flow of FDI: Foreign Exchange Reserve: Employment : Removal of Poverty Economic Disparities :Social Equality Inflation :

Slide 48:

8/29/2011 48 Unit 3 : New Economic Environment Liberating the Economy from the Licence Raj. New Export-Import Policy- Reduction in Customs Duties 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 Economy Without abandoning economic planning and the Planning Commission

Slide 49:

8/29/2011 49 Economic Liberalization or Economic Reforms, 1991 Three components, rather Aims: Liberalization Globalization Privatization/ Disinvestment. 1. Liberalization: Abolition of Licence Raj. Abolition of MRTP Act. (removal of 100 crore limit for Business Houses) Abolition of industrial Licensing except for 18 industries.

Slide 50:

8/29/2011 50 Allowing foreign equity up to 51 percent. 2. Globalization Integration of the economy to world economy. Reduction of trade barriers. Creation of an environment for free flow of capital Creation of an environment for free flow of technologies. Creation of environment for free movement of labour. Reduction of Import Duties-(Removal of import restriction)

Slide 51:

8/29/2011 51 Encouragement of foreign investment. Encouragement to foreign technology agreement. 3. Privatization (Dis-investment) Ownership measures. Organizational. Operational measures.

Slide 52:

8/29/2011 52 Objective of Liberalization, Globalization & Privatization To achieve a high rate of growth (GDP & Per Capita) To achieve full employment (creation of more employment opportunities) To achieve self-reliance. To reduce inequality of income and wealth. To reduce the number of people living below the poverty line. To develop a pattern of society based on equality and absence of exploitation.

Slide 53:

8/29/2011 53 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%

Slide 54:

8/29/2011 54 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: VRS – Staff strength reduced by 8% Disinvestment-Total disinvestment/Privatization of certain companies like BALCO

Partial disinvestment ranging from 5-20 per cent in selected 31 industries.:

8/29/2011 55 Partial disinvestment ranging from 5-20 per cent in selected 31 industries. Govt. sold shares valued at Rs.9793 crore during 1991 to 1994-95. The pace of privatization slowed down because of opposition 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

Slide 56:

8/29/2011 56 Unit 4 : Political Environment : The Political System Indian constitution : Basic features: Federal Structure – Union Govt. & State Govts . Sharing of powers – Distribution of powers between the union and the States – Union list, State List, Concurrent list. Democratic, Republic as against Monarchical or Presidential. Parliamentary system of Govt.- collective Responsibility of the Cabinet-responsible to parliament. Adult Franchise – Elections on the basis of universal Adult Franchise (all citizens, literate or illiterate, rich or poor, owners of properties or property less)

Slide 57:

8/29/2011 57 Separation of Powers – Legislature ,Executive and Judiciary (not like USA where there is complete separation) Independence of Judiciary (Supreme court and High courts) Bicameral Legislature – Parliament-Upper House (Rajya Sabha) and Lower House (Lok Sabha). Many states abolished Upper House and opted for unicameral Legislature (Vidhan Sabha) Fundamental Rights (cannot be taken away except some during Emergency) Directive Principles of State Policy (not mandatory but optional)

Slide 58:

8/29/2011 58 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.

Slide 59:

8/29/2011 59 Constitutional offices/officers: The Election Commission (now a 3- man commission) The Union Public Service Commission (multi- Member) The Chief Vigilance Commissioner (Single) The Comptroller & Auditor General of India (single) common both for the centre and the states. The CAG, according to B.R. Ambedkar, is perhaps the most important officer of the Constitution. Most important instrument for ensuring Public Accountability.

Slide 60:

8/29/2011 60 The Administrative System: Administrative System follows the Political system. Allocation of Business Rules govern the conduct of Got. Business by various Ministries/Departments headed by a Minister. The Cabinet is the highest decision making authority. There are various committees of the Cabinet-like cabinet committee for Political Affairs (CCPA), Economic Affairs (CCEA) etc. Administrative Powers flow from Cabinet to Cabinet Secretary-to Secretaries-to Additional Secretaries/Joint Secretaries-Deputy Secretaries and under Sectaries.

Slide 61:

8/29/2011 61 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.

Slide 62:

8/29/2011 62 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.

Slide 63:

8/29/2011 63 Importance of the Union Budget: The process of passing the Union Budget is the most important annual activity of the Parliament. The governance of the country would come to a stand-still if the Budget or Vote or Account is not passed by Parliament. The Budget Process consists of the following: (a) Pre-Budget “Economic Survey” is presented a week before the Budget. The Economic Survey indicates the progress and shortfalls in various sectors and gives an appreciation of the health of the Economy. It contains a wealth of information as regards economic indicators in post- independent India.

Slide 64:

8/29/2011 64 (b) The Railway Budget is presented by the Railway Minister two days before the main Budget. It may be remembered 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 (28 th or29 th ).The Budget bag contains the following documents: Finance Ministers Budget Speech. Budget at a Glance. The Finance Bill containing the Taxation and Revenue raising proposals (Finance Act when passed)

Slide 65:

8/29/2011 65 The Appropriation Bill containing the expenditure proposals and transfer of funds. (Appropriation Act when passed) Voting of Grants- Grant proposals on Budget lines.

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8/29/2011 66 The importance of the Union Budget: Policy statements on Liberalization, Globalization and Privatization Incentives and disincentives to Agriculture, Industry, Professionals, individuals, internal trade and international trade. Briefly, it indicates the economic policy to be followed by the Government and largely determines the economic environment of the country. Determines the extent of State intervention in the Economy-in controlling inflation, recession, stagflation, unemployment, poverty, illiteracy, disaster etc.

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8/29/2011 67 Unit 5 Legal Environment In a broader sense, the legal environment refers to the prevailing legal system or the system of justice prevailing in a country. Foreign investors always prefers to invest in a country where a well-developed independent legal system exists. That way, India which has an independent, western and developed judicial system offers great opportunities. In the narrower sense, it means the legal framework within which the industry has to operate. Industries in India are mainly governed by the following Acts/Guidelines.

Slide 68:

8/29/2011 68 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)

Slide 69:

8/29/2011 69 Objectives of Companies Act Ensuring a minimum standard of business integrity and conduct in promotion and management of companies. Full and fair disclosure of accounts and other information relating to affairs of the company. Effective participation and control by shareholders and protection of their rights. Enforcement of proper performance of duties by management. Powers of intervention and investigation into the affairs of the company in the event of mismanagement.

Slide 70:

8/29/2011 70 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.

Slide 71:

8/29/2011 71 EXIM Policy (5 years) Aim is to achieve a rapid growth rate in exports and increase India’s share in world trade. In conformity with WTO Agreements, removal of trade barriers. Removal of quantitative restrictions agricultural products except a few items like jute & onions. Incentives to the cottage Sector and the small industries, leather, Gems & Jewelry etc. Special Economic zones – (SEZ) Technology parks – (IT industries)

Slide 72:

8/29/2011 72 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 transparency – prevention of insider trading etc. separate accounts for brokers and clients. Merchant banking statutorily brought under SEBI. Private Mutual Funds.

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8/29/2011 73 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.

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8/29/2011 74 Unit 6. Performance of Industries – Sector wise Industries Public Sector Private Sector Joint Sector Cooperative Sector Small-scale Sector Cottage& Khadi Sector The Public Sector: History: Associated with the National Freedom Movement. Objectives : Lahore Resolution in 1929 and Karachi Resolution.

Slide 75:

8/29/2011 75 To Serve as an instrument of Social Transformation. To build the basic infrastructure and core industries for self- reliant growth. Rapid Economic Development- increase in GDP Increase in per capita income and reduce disparity in income. Create substantial employment opportunities and reduce unemployment Balanced Regional Development To achieve Socialistic pattern of Society by occupying the commanding heights of the economy.

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8/29/2011 76 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 infrastructure sector. Therefore, there was no alternative to Govt’s intervention and setting up of public sector companies in the core sector.

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8/29/2011 77 Some indicators Share of the public sector in the Net Domestic Product : C ompound rate of annual Growth Private Sector Public Sector 2.8 percent 6 percent Relative efficiency of investment Profits Private Public 11.40 4.70 (for every Rs 100 invested) Share of capital formation(%) 1 st&2nd Plan--------------------41% 3 rd Plan ------------------49% 4rth Plan -----------------42% 5 th Plan ------- -----------40% 6 th Plan ------------------47% 7 th Plan -------------------48% 8 th , 9 th , 10 th 11 th -------------NA

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8/29/2011 78 Very difficult to assess efficiency. PSUs are mostly in core and heavy sectors where returns are very low. Dholakia Formula: Total factor productivity criterion to judge the efficiency of public sector enterprises, that is, the contribution made by the enterprise to the country’s net national product in terms of rent, wages and salaries, interest and profit. According to this formula, for the decade 1967-68 to 1975-76, the overall efficiency of the public enterprises increased at the rate of 2.44 percentage points per annum as against private enterprises’ 0.59 percentage points per annum.

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8/29/2011 79 4. Employment: 10 percent in the organized Sector; 90 percent in the unorganized sector. PSUs 7% of the total organized Labour Force in the country (23.05 lakh in 1991). The private sector accounted for 3 percent of the organized labour force. PSUs model employers PSUs developed townships around the industries. 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.

Slide 80:

8/29/2011 80 Financial Performance: 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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8/29/2011 86 . Highlights of the CPSEs In FY09, 158 CPSEs posted net profit as compared with 160 in FY08. Subsequently, the loss-making companies increased in number from 53 in FY08 to 54 in FY09 The net worth of the public sector registered a growth of 12.6% from Rs 5,185.30 bn in FY08 to Rs 5,840.72 bn in FY09 The turnover of all the CPSEs grew by 15.4% from Rs 10,944.84 bn in FY08 to Rs 12,634.05 bn in FY09 The total investments of all CPSEs stood at Rs 5,289.51 bn in FY09 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 Rs 280.81 bn in FY08 During FY09, CPSEs’ foreign exchange earnings increased by 9.6% over the previous year.

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8/29/2011 87 Shortcomings Shortfall in targets Gross under utilization of capacities Over capitalization Non – professional 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.

Slide 88:

8/29/2011 88 Privatization :The Debate Two Schools of thought – one pro-public Sector and another pro-private Sector. Historical process – also a cycle like the Business cycle – nationalization-privatization – nationalization or Govt. intervention. Rationale The private enterprise is the engine of growth (World Bank) Management Gurus like Lord Parkinson advocates privatization because of :

Slide 89:

8/29/2011 89 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.

Slide 90:

8/29/2011 90 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, East Germany vs West Germany (divided by Berlin Wall).

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8/29/2011 91 Privatization – How? A number of methods have evolved : By outright sale of a public enterprise to the private entrepreneurs. By disinvestment of its share holdings-more than 50 percent or less than that. (Partial sale) By appointment of a strategic partner keeping the majority share but handing the management over to the strategic partners. By agreements for Public-Private Partnerships (Housing, Highways, Airports & Ports)-Joint ventures. BOT, BOOT (Toll Bridges, Road, Ports etc.)

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8/29/2011 92 Is privatization 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.

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8/29/2011 93 Current Scenario in India Privatization has not contributed towards reduction in poverty in the country -the number swelled – 87 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 and consumer durable sectors. The ordinary workers and lower level executives are exploited in the new situation No increase in employment in the corporate sector. Cases of gross mismanagement and collapse. Frauds and criminal conspiracies.

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8/29/2011 94 Unit 7 Corporate Social Responsibilities The responsibilities can be grouped into four: Responsibility towards the Shareholders Responsibility towards the employees. Responsibility towards the consumers or customers. Responsibility towards the Society in general and especially towards environment.

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8/29/2011 95 Responsibility to the Shareholders/owners Fair return to the investors. Fair and timely disclosure about the affairs of the company. Annual Accounts. Independent Auditing. Annual Report & AGM. Other up to date information. Participation of shareholders in decision making and affairs of the company

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8/29/2011 96 Responsibility to employees: Congenial and healthy working conditions. Safety. Fair wage. Fair workers benefits including retirement benefits. Worker’s welfare and Recreation. Responsibility towards customers: Ensuring quality and safety of products. Full disclosure of contents. Competitive and fair price.

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8/29/2011 97 Customer care ensuring customer satisfaction and redressal of customer grievances. ‘Customer is 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.

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8/29/2011 98 Social Audit 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 responsibilities to : Share holders Employees Environment Customers Society in general

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8/29/2011 99 It also recommends corrective measures which should be taken by the company to fulfill its obligations:

Slide 100:

8/29/2011 100 Acts & Laws 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 (a comprehensive Act) The Consumer Protection Act 1986

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8/29/2011 101 A Plethora of Acts & Laws exist to enforce corporate 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.

Slide 102:

8/29/2011 102 The Consumer Movement Consumer Protection Act, 1986 Right to Safety Right to be informed Right to choose. Right to be heard Right to be seek redressal 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 Redressal Mechanism)

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8/29/2011 103 Banking Ombudsman (Banking Sector) 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

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8/29/2011 104 Unit 8 Technological Environment History in India India has a long history of Science and Technological Development and Medicine. Indian Mathematics has been one of the greatest inventions in the world, if not the greatest. In the medieval period, there was a dark period from the 11 th to 17 th centuries when knowledge and scientific pursuits took a back seat. Science and Technology revived with the British bringing the benefits of Industrial Revolution.

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8/29/2011 105 After Independence: Scientific Policy Resolution (March4,1948) by Jawahar Lal Nehru. To foster, promote, cultivate and sustain both pure and applied research in Science and Technology to educate, train and utilize the pool of scientific and technological personnel for rapid progress across a variety of scientific frontiers. To create a scientific temper among the people across the country. To reach the benefits of science and technology to the common people. Develop Appropriate Technology (subsequent Policy).

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8/29/2011 106 Era of Institutional Building Along with the operation of the India Constitution, Nehru, a firm believer in Science & Technology, committed himself to building various Institutions of national importance in Science & Technology. Indian Council of Agricultural Research (Pusa Institute etc.) for Agriculture.-48 Insts Agricultural Universities. Indian Council for Industrial Research (CSIR – about 30 Institutes) IITs and RECs . Defence Research & Development Organization (DRDO about 30 Institutes) Atomic Energy Commission (AEC for Nuclear Science.)

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8/29/2011 107 Space Research Organization (ISRO for space) Department of Oceanography (for oceans) Forest Research Institute (FRI for Forest) The research organizations encompassed all aspects life and all sectors -foods, crops, fuel, dairy, animal husbandry, horticulture, water, air, drug and medicine, industries, physics, chemistry, Botany, forests, wild life, ocean, space, Nuclear Science etc. These Institutions and our scientific & Technological creations like the Bhakra Dam, Bhaba Research Centre, IITs etc. are the new temples of modern India (Nehru).

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8/29/2011 108 From 1950 to 1992 (Pre – Liberalization Period) Search for Appropriate Technology through Research. Striving for technological self-reliance indigenous and mixed. Technological collaboration with foreign Govts. Technology Transfer -Public and Private. Basically, it was Technology Management rather than genuine Technological Development. In the private industries, there was hardly any R&D divisions except in a few companies like the Tatas. In the Public Sector also, it had mainly been buy and transfer approach.

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8/29/2011 109 Post Liberalization Period 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.

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8/29/2011 110 With Opening up of the Economy, the Private Investors and Transnational Corporations have brought with them their own new technologies e.g. Auto Industry, Consumer Durables, Food Processing, Medical Industry, Telecom and Engineering industries. Globalization has, to a large extent, served to establish technological equilibrium throughout the World – Japan, Korea, China, Malaysia, Indonesia, Singapore and India.

Unit 9.The International Environment:

8/29/2011 111 Unit 9.The International 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

Slide 112:

8/29/2011 112 Globalization 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 borderless economy. Manufacturing no longer confined to state boundaries-setting up of manufacturing plants, sourcing of materials and components across the globe.

Slide 113:

8/29/2011 113 Out sourcing of labour and processes to places 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:

8/29/2011 114 Effects Of Globalization 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 Indian Manufacturers and up gradation of products to compete in the Global markets. Greater exports and larger reserve of FE & gold. Moving towards full convertibility of current & Capital Accounts.


8/29/2011 115 MNCs MNCs in all sectors – Consumer Durables, Telecom, Transport, Auto, Steel, Mines, Oil etc. MNCs account for one –fifth of the world’s 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 a rapid rate of growth.

Role of WTO:

8/29/2011 116 Role of WTO 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-based multi-lateral system-transparent and non-discriminatory. A significant principle is the Most Favoured Nation status for all members. WTO covers all Goods, Services and Intellectual Property Rights but does not include Labour. WTO Agreements heavily favour the developed nations

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8/29/2011 117 Problem Areas for India: 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:

8/29/2011 118 The IMF (Washington DC,1946.) All members of UN are members Fully autonomous organization affiliated to UN. Each country’s contribution is fixed in terms of Its quota which determines the borrowing and voting rights. 15 per cent of quota payable in gold or dollars, the rest in its own currency. Special Drawing Rights based on basket of currencies. 10. International Economic Institutions

Functions of IMF : Five Major functions:

8/29/2011 119 Serves as a short-term Credit Institution for countries facing Balance of Payments problems Provides a Mechanism for improving balance of payments-mainly structural changes. Provides a Machinery for international consultations—mainly Experts. Provides a reservoir of currencies enabling members to borrow each others’ currencies. Promotes orderly adjustment of exchange rates to promote exchange stability. Functions of IMF : Five Major functions

The World Bank, Washington DC.1946(Bretton Woods Twin Institution):

8/29/2011 120 The World Bank, Washington DC.1946(Bretton Woods 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 position –divided 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 when required to meet the Bank’s obligations.

Functions of the World Bank:

8/29/2011 121 Bank gives loans to governments or to private enterprises (with Govt. guarantee), the Central Bank and 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). Functions of the World Bank

World Bank established two subsidiaries: 1.IDA for Govts. & 2.IFC for private sector:

8/29/2011 122 World Bank established two subsidiaries: 1.IDA for Govts. & 2.IFC for private sector IDA provides soft loans ,almost in the nature of grants for various projects in developing countries(1-2% for 30 years). Bank organizes investment groups like “Aid India Consortium” consisting of developed countries who are willing to assist India in its development programmes.

11. India’s Financial System:

8/29/2011 123 11. India’s Financial System Four Sub-Sectors: 1.The Banking Sector---Regul. Authority –RBI. 2.The Insurance Sector-- ,, -IRDA. 3. Non-Banking Fin. Instns. ,, RBI –SEBI. 4.The Capital Market ,, -SEBI. The Banking Sector: 1.PSU Banks—State bank & Asso.---8 2.Other Nationalized Banks-------------19. 3.Private sector Banks----------- 81 .

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8/29/2011 124 4. Foreign Banks. 5. Regional Rural Banks (RRBs). 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. Bankers’ Bank. Reservoir of Foreign Exchange & Controller of foreign Exchange. Safeguards countries Gold Reserve. Growth with Stability.

Methods of Credit Control:

8/29/2011 125 Methods of Credit Control Bank Rate (RBI to Comm. Banks-3-10%) Cash Reserve Ratio (CRR—3-15%) 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 increase output-Agriculture & Manufacturing & increased supply .

Slide 126:

8/29/2011 126 Unit 12 Public Finance 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)

Slide 127:

8/29/2011 127 Distinction between Private Finance & Public Finance. Private Finance deals with the incomes and expenditures of individuals or entities for private benefits. Public Finance deals with the transactions of the Public Funds Managed by the State – Revenues collected from the citizens and Public Expenditure incurred for the maximum good of the citizens. In reality, there is hardly any difference between the corporate funds and Public Funds .Some of the Corporates are bigger than smaller Govts. The source of funds is the same –the citizens who contribute in the form of taxes to Govt. and shares to Corporates.

Slide 128:

8/29/2011 128 Some of the corporates are functioning in areas which were hitherto the domain of the Govt. Telecom, Power, Air transport, airports, ports, roads, health etc. The Budget The Annual Budget, the Fiscal Policy and the Monetary Policy are the main instruments of public Finance. The Budgetary and Fiscal Responsibility Act passed by the Parliament have restricted the union and the State Govts. from exceeding the limits of budgetary deficit and deficit financing and borrowings.

Slide 129:

8/29/2011 129 The Union Budget consists of the following documents: The Finance Minister’s speech Budget at a Glance The Finance Bill (Taxation Proposals – Finance Act) The Appropriation Bill (Expenditure Proposals Appropriation) Voting of Grants. Taxation Revenue is collected from: Taxes (Tax Revenue) Non-Taxes (Non-Tax Revenue)

Slide 130:

8/29/2011 130 Tax Revenue Direct Tax Indirect Tax Income Tax Customs Duties Corporation tax Excise Duties Gift tax Sales tax Capital Gains tax Vat Wealth Tax

Slide 131:

8/29/2011 131 Taxes can be Proportional, progressive or Regressive. 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

Slide 132:

8/29/2011 132 Added later Canon of simplicity . 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, wherever the gap between the revenue and the public expenditure committed to by the Government.

Slide 133:

8/29/2011 133 Budget Deficit and Deficit Financing Budget Deficit is the order of the day. 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:

8/29/2011 134 13.Balance of Payments Balance of Trade Difference between total Exports and total Imports of visible items—physical 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 :

8/29/2011 135 Accounts in Balance of Payments 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.

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