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CONTENT

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1. Basic Concepts in Economy

The applied science of economics can be brokendown into A) Macro Economics which includes macroeconomic variables like GDP, employment, povertyinvestment and savings rate, Balance of Payments forexreserves etc. B”) Micro Economics which studies theoutput trends of individual industries, consumerbehavior, labour wage etc. C) Meso economics whichstudies intermediate level of organization of economicactivity like institutions, regulatory framework etc. Inwelfare economics, the focus is on the study of manand human welfare i.e., not just generations of wealthbut also its distribution. Keynesian economics of JohnMaynard Keynes (famous for his work - GeneralTheory of Employment, Interest and Money.of 1936)declares that state should intervene in the economicsystem when growth slows down. The state should thenincrease money supply in the economy (anexpansionary policy) to stimulate revival of growth.Neoliberal economics is part of Laissez Faireeconomics and advocates free markets and declares thathuman well being can be advanced by creating anenvironment which liberates individual entrepreneurialfreedoms and skills within an institutional frameworksupported by strong private property rights, freemarkets and free trade. Socialist economics calls forstate ownership of means of production to’achieveequality between individuals and groups. This can bedone via a centrally planned economy where privateownership is not allowed and economic activity is atthe command of the state.

The economy of any country/region is its capacityto produce goods/services. The purpose of economicdevelopment and growth is the well being of Mar),.’The production of goods/services and theirconsumption are basic economic activities. The factorsof production are land, labour (including theentrepreneur) and capital. Factor incomes refer to rentof land, wages of labour (including profits of theentrepreneur) and interest paid on capital. The cost ofproduction is the sum of the factor incomes. The activityof economic production, leads to output of goods/services whose value in monetary terms is income.

Some basic variables of an economic system are :

• Gross Domestic Product : The measure of thetotal flow of goods and services produced in acountry or region within the domestic territory,both by residents and non-citizens in a year. It isobtained by valuing outputs of ’goods andservices, at market prices and then aggregatingthem. InG.D.P., all intermediate products areexcluded and only goods used for finalconsumption or capital goods are included.

• Gross National Product: The Gross DomesticProduct plus income to domestic residents frominvestment abroad minus income earned byforeign investors in domestic market and sent out.That is, it is the production of goods by nationalsof a given country both resident as well as non-resident. (Like money earned abroad by Indianinvestors). G.N.P. is a measure of the nationalincome of a country. It may be noted that the valueof output of all units of production is not equal tonational income because the output also includesintermediate goods which are used to producegoods for final consumption. While GDP focuseson location of production, GNP focuses on whoproduces it. In an open economy where morenumber of its citizens carry out economic activityabroad compared to non-citizens working withinthat country, the GNP is larger than GDP.

(a) GNP by Income Method : It takes intoaccount all incomes (including wages, rents,profits etc.) which result from the productionof goods and services and hence excludesincomes like pensions.

(b) GNP by Output Method : It adds the valueof all outputs from mining, manufacturing,construction, transport and also output ofservices like public administration andbanking. It only takes into account the netvalue of output i.e., excludes the value ofraw materials. It also excludes the incomeearned from Indian investments abroad.

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(c) GMP by Expenditure Method : It adds upall expenditure on goods and services in ayear by its people. It takes into account onlyfinal expenditure i.e., excludes expenditureon intermediate goods. It excludesinvestment income from abroad.

Note : GNP by Income Method and GNP byOutput Method give GNP at Factor Cost while GNPby Expenditure method gives GNP at market prices.GDP at factor cost includes subsides but excludes thevalue of indirect taxes). While GDP at market priceincludes indirect taxes but excludes governmentsubsides.

• Gross National Product at Factor Cost : gnp atmarket prices minus all indirect taxes.

• Net National Product : This is Gross NationalProduct minus Depreciation. Depreciation is theamount of output ( usually denoted in monetaryterms i.e., amount’ of capital generated from theoutput) that is kept aside as investment to maintainthe productive capacity of the plant and machineryso that the productive capacity remains the same.Hence depreciation is not part of disposableincome. Depreciation :is also called .CapitalConsumption Allowance. Note : Net NationalProduct at factor cost is equal to Net NationalProduct at market prices minus net indirect taxes( Net indirect taxes is equal to total indirect taxesminus the value of subsidies)

• Per Capital Income : Net National Productdivided by total population of a country.

• National Income : Net National Product minusindirect taxes.

• Nominal National Income : This is nationalincome at prevailing market prices but not at pricesof the base year. Base year is any year with normaltrends of production i.e., an year with neitheroverproduction nor underproduction.

• Total Factor Productivity : This is.the output ofan economy from each unit of labour used. It isan index of productivity of all factors ofproduction.

• Economies of Scale : This is reduction in theaverage cost per unit of output as the size ofproduction goes up.

• Capital Output Ratio: This shows therelationship between the value of capital(including the value, of the factors of production)versus the value of output. It is a measure of theproductivity of the economy.

• Incremental Capital Output Ratio (ICOR) :This is a ratio of additional units of capitalrequired to raise the production by one unit. Itmeasures the efficiency of the production process.

Green GDP: This is. estimate of GDP afterconsidering the value of loss of ecosystem resourceslike forests, soil, water and also taking into accountthe value of loss of ecosystem services in the course ofproducing goods/services.

Real Vs Nominal GDP - Real GDP measureschange in output with respect to a reference .period.Nominal GDP measures change in output as well aschange in prices of goods/services compared to areference year.

Net Factor Income from Abroad (NFIA) : Thedifference between income from Indian citizens abroadand income of foreign citizens working in India.

Genuine Progress Indicator (GPI) : It is basedon concepts of green economics and welfare economicsand has been suggested as an alternative to GDP tomeasure economic growth.

GPT seeks to measure whether a country’seconomic growth has actually improved the well being.e. welfare of its people.

Gross National Happiness (GNH): A conceptadvocated by the former king of Bhutan Jigme SingyeWangchuk in 1972. The GNH is based on the argumentthat true development is one where material andspiritual development proceed simultaneously. GNHseeks to capture this development by measuring

• Equitable and sustainable socio-economicdevelopment

• Preservation and promotion of cultural values

• preservation of natural ecosystems and

• establishment of good governance.

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The PQLI (Physical Quality of Life Index):This was developed by Morris in the 1980 s. Theindicators used are life expectancy at age one, infantmortality and literacy. For each indicator, theperformance of individual countries is rated on a scaleof 1 to 100 where lower scores indicate a poorperformance and higher scores a good performance.For life expectancy, a value of 77 gets a score of 100and a value of 28 gets a score of one, for infant mortalitythe value of 9/1000 gets a score of 100 and a value of229 gets a score of one and for literacy rates, they aremeasured in percentages from 1 to 100 and thesepercentages are directly included in. the scale ofliteracy. Though a correlation between GDP/GNP andPQLI is not very close, yet countries with low GDPtend to have low PQLI scores.

Recession and Depression: According toeconomic theory, recession is a condition of contractionof GDP i.e. negative GDP growth for two successivequarters. Depression is a prolonged depression wherethe GDP contracts by at least 10%. According toKeynesian economics, a recession is due to aggregatefall in demand and hence Keynesian economics callsfor state spending on a v large scale to provide stimulusto revive the growth.

Classification of Economies

Economies in Transition : These are emergingeconomics Iifaj&India, which are characterized byrapid economic growth, transformation fromagricultural economies to industrial economies,increasing open market economy characterized byliberal two way movement of FDI, and increasingglobalization of their industries.

Least Developed Countries: The UN developedcriteria to define LDC’s in 1971 and there were 25LDC’s in 1971 rising to 48’now. As per the UN criteria,an LDC a) Is a low income country whose 3-yearaverage per capita Gross National Income is less than905 US dollars 2) is economically vulnerable and 3)has weak human development based on indicators ofnutrition, health, education and adult literacy. Only 3countries could lift themselves out of the LDC status -Botswana, Cape Verde and Maldives.

G.D.P. and Purchasing Power Parity (PPP): Aneconomy can be measured on the basis of GDP orPurchasing Power Parity (PPP). In the GDP measure,the domestic GDP is converted into GDP in US dollars.Purchasing Power Parity uses inter-country differencesin prices. It compares the ability of a local currency tobuy a fixed unit of goods in the domestic economy withthe ability of the US dollar to buy the same unit ofgoods in the U.S. economy. India ranks higher on thebasis of PPP rather than GDP.

Problems in G.D.P. : Only items entering intothe exchange economy are part of G.D.P. ^ Hence : 1)It does not include goods and services that are of asubsistence’ nature which do not enter the exchangeeconomy (for e.g., a farmer’s output for personalconsumption ). Hence G.D.P. understates economicposition of a Developing Country. 2) Does not includenon-monetary satisfactions. 3) G.D.P. makes nodistinction between socially productive / useful growthand undesirable growth. 4) G.D.P. growth maysometimes create a false sense of growth.

Human Development : A concept that assessesthe impact of economic growth and JJI developmentnot only in terms of the improvement in the materialwell being of the society but also in terms ofimprovement in human capabilities ( like literacy,health and longevity ) and also in terms of thequalitative impact of economic growth ( like the equityor lack of it in the distribution of benefits of economicdevelopment, and the impact of economic developmenton creating human capabilities in terms of knowledge,capacity to be healthy and the capacity to beproductive).

Human Development Index : A qualitative anda quantitative measure of economic development.Developed by UNDP in 1990, its three components are:Life Expectancy; GNP in US dollars ( or per capitaGNP in US dollars) and Literacy. India ranks as mediumin human development.

Gender Development Index ( GDI ) : it seeks toassess the opportunities available to women. Itmeasures the same three components oftheHDIbut afteradjusting for the inequalities between men and women.

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The GDI was included in the Human DevelopmentReport of 1995.

Capability Poverty Measure : It assesses the lackof capabilities in a society. It’s components are:• Percent of children under 5 years of age who are

underweight.

• Number of births unattended by.trained persons.

• Percent of women above 15 years of age who areilliterate.

Human Poverty Index : It was dveloped by theUNDP in 1997. It’s 3 indicators are longevity, decentstandard of living and knowledge. It assesses theseindicators by measuring :

• Percent of children under 5 years of age who areunderweight.

• Percent of population without access to safedrinking water and health services.

• Percent of adults who are illiterate.

• Percent of population dying before the age of 40years.

Indian economy is the 10th largest in terms ofnominal GDP and 4th largest by PPP. But on per capita

income basis, India economy ranks 140th based onnominal GDP per capita. India is the 19 th largestexporter and the 10th largest importer in the world in2011-12.

COMPOSITION OF GDP/ SECTORS OFINDIAN ECONOMY

The sectoral composition of any GDP is in termsof 1) The primary sector which includes agriculturalproper, forestry and fishery and, mining / quarrying. 2)The secondary sector which includes manufacturing,construction and, electricity, gas and water supply 3)Tertiary sector which includes services, trade/hotels/restaurants, finance, real estate and insurance, transport,storage and communication.

Sectoral Changes in the Indian Economy: As aresult of planned economic development, the sectoralcomposition of India’s GDP has undergone fundamentalchanges. Before India started economic planning, theprimary sector contributed the greatest to India’s GDPfollowed by the secondary sector and the tertiary sector.India today mimics a developed economy in terms ofthe sectoral composition of the GDP. Thistransformation is brought out in the following table

Year Agriculture Industry Tertiary Sector

1. 1950-51 53.1 16.6 30.3

2 1960-61 48.7 20.5 30.8

3 1970-71 42.3 24.0 33.8

4 1980-81 36.1 25.9 38

5 1990-91 29.6 27.7 42.7

6 2000-01 22.3 27.3 50.4

7 2010-11 14.5 27.8 57.7

These trends displayed bv India’s economy area result of the following factors: Planned economicdevelopment focused investment on manufacturing andcertain crucial areas of the tertiary sector like transportand communications, banking and insurance and alsoIndia’s foreign trade. In addition, the massive expansionof public administration and the defence sector alsocontributed to the growth of the tertiary sector.However, manufacturing could not become dominantin terms of its share in India’s GDP because of the trend

of Indian industry to become capital intensive. Increasein public investment, particularly in infrastructure,increase in the investment rate in the Indian economydue to high level of gross domestic savings. The liberalpolicies that were started in the sixth five year plan(1980-85) which’ involved policies on industry andtrade. The economic reforms that were initiated in1991-92 wjiich deeply liberalised policies on trade,industry and the services sector also are important.factors.

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Major Trends in Structural Transformation:

1. The growth rate of the Indian Economy decisivelybroke out of the Hindu Growth Rate era beginningin_the 6th.5 year plan. As the following tableshows, the GDP growth rate till the sixth 5-yearplan (1980-85 was the period of the 6th 5 year plan)was well below 5% but decisively crossed above5% growth in the 6th 5 year plan. The factors forthis are

(i) The capital stock added to the Indianeconomy, particularly in the industrialeconomy, due to sustained and focused planinvestment in the earlier plans began -to yieldreturns.

(ii) The expansion of industrial’aridinfrastructural activity accelerated thegrowth of the tertiary i.e. the services sectorof the economy.

(iii) The plans also focused on development ofphysical and social infrastructure much morebeginning in the 6th 5-year plan leading tofaster industrial and services sector growth.

(iv) The growth of public administration andtrade, transport and communicationsincreased the overall pace of economicgrowth.

2. Faster growth of the economy and per capitaincome in the period of economic reforms is animportantjeature in the structural transformationof the economy. The GDP growth averaged^576%per anum (pTaTJln the period 1991-2001 andbetween 2001-2011 it recorded a compoundaverage growth rate of 7.5% p.a. Within thisperiod of 2001-11, the fastest growth period was2003-04 to 2010-11 when the GDP grew by 8.5%p.a. on an average. In this period the per capita

income increased by nearly two-third. In fact, theper capita income recorded a 3-fold increase inthe 10 year period 2000 to 2010. This per capitaincome doubled between 1950-51 to 1991-92 i.e.almost took 40 years to double but it tripled overjust 10 years in the period of economic reform.The per capita income of India in 2011 was 1Q75dollars. The rapid growth of the Indian economyin the period after economic reforms were initiatedin 1991-92 is possibly due to

(i) dynamism of the private sector in economicactivity.

(ii) increasing integration of the Indian economyinto the global economy due to increased roleof India’s foreign trade and liberal receipt ofFDI by India.

(iii) The rapid growth of the tertiary sectorparticularly due to rapid growth ofcommunications, transport and financialservices.

(iv) Development of infrastructural sectors.

3. Increasing importance of foreign trade in theIndian economy. The period after economicreforms has improved the share of foreign tradein India’s GDP. For e.g., exports accounted for6.3% of India’s GDP in 1990-91 rising to 16% in2010-11. Similarly imports accounted for 8.5%of GDP in 1990-91 rising to 23.5% in 2010-11.This clearly demonstrates the growing importanceof the external economy of India.

4. Increasing share of direct tax revenues of the stateis also a significant feature of Indian economy’sstructural transformation. For e.g., direct taxrevenues of the state have increased by 15 timesin thel5 years before 2012.

Trends in GDP Growth Rate :

Years 1951-61 1961-71 1971-81 1981-91 1991-01 2001-11

GDP Growth Rate 3.9% 3.7% 3.2% 5.4% 5.6% 7.5%

Years 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

GDP Growth 6.7% 8.4% 8.4% 6.9 6.2% 5.0%

(in percent, at 2004-05 prices)

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Implications Of These Structural Changes :Though the share of agriculture has come down verysharply in India’s GDP, its share in the employment oflabour force has not come down proportionately. Theoccupational structure in Indian economy has thereforenot shown any significant change. This implies thatnumber of people in the agricultural sector areincreasingly sharing lesser and lesser national income.Manufacturing accounts for only one-tenth of all labourforce. Hence benefits of industrial development areaccruing to smaller number of people directly, thoughit has been contributing to the growth of the servicessector. The fastest growing areas among the servicessector are community / personal and social servicesfollowed by financial services. These do not contributemuch to the economy as capital creation. In addition,the services sector also does not account for much ofthe labour force. Hence less number of people havebegun to share more and more of the national income.

Negative Features in the StructuralTransformation: Though Indian economy hasdecisively moved into the high growth orbit, there aresome concerns in this transformation. These are briefly1. Increasing income inequality in India. According tosome estimates, income inequality doubled in the 20years between 1990-2010. This is possibly due to lesserand lesser share of a larger workforce employed inagricultural sector whose relative share in India’s GDPhas sharply come down in the recent decades. Inaddition, the share of the tertiary sector has increasedvery sharply in the recent decades but the workforceemployed in the services sector is not as large as in theagricultural sector. 2) There has not been a significantshift in the occupational structure of India’s workforceas the agriculture sector still accounts for around 52%of the workforce. Hence industrial sector has not beenable to create large employment opportunities thoughthe sector has registered an impressive growth in theperiod of economic reforms. 3) Though the overallvalue addition in the Indian economy has increasedsignificantly, there is inadequate value addition in manyindustrial sectors, in exports of India and also inagriculture.

SERVICES SECTOR

This constitutes the tertiary sector of theIndian.economy. The growing importance of servicessector is reflected in a series of facts. For e.g., servicesexports have been growing at 30% per anum (p.a.)while goods exports have been growing at around 20%to 25% p.a. The services sector has been helping in thegrowth of infrastructure as construction and real estatehave been growing at around 10% p.a. It is the rapidgrowth rate of the services sector which has beenresponsible for the high growth rate of the, Indianeconomy in the 10th and 11th 5-year plans. It has alsobeen contributing to growth of employment. For e.g.,according to the 61st National Sample Survey, for every10% increase in the value added in manufacturing,employment increases by 3.8%, while in the sub-sectorof trade, hotels and restaurants, of the services sector,the employment grows by 6%, and by 9.4% in the sub-sector of real estate, insurance and finance. It may benoted that the increasing importance of the’servicessector increases the resilience of the Indian economybecause of increasing diversification. Today theservices sector accounts for roughly 25% of theworkforce within which the biggest employer istransport, storage and communication followed byhotels and restaurants and community’, social andpersonal services.

The share of services in India’s foreign tradeincreased from 3.3% of GDP in 1990 to 9% of the GDPin 2011. In fact, IT and ITES exports account for onethird of India’s exports today. Within services,construction, housing, real estate have been growingat a faster pace. The growing importance of the servicessector in ‘the Indian economy has mixed implications.For e.g., it has been accelerating the growth rateincluding increasing contribution to exports. It alsoreflects diversification of the economy. It has also madean impact on poverty and unemployment. However, ithas worsened inegualities in distribution of wealthbecause it accounts for 25% of workforce but makesup 59%pf the GDP. The rapid growth of the sector alsoleads to misallocation of investible resources. Inaddition, some sectors of the services economy have ahigh COR compared to industry and hence investment

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is going into capital intensive sectors. In addition, afew sub-sectors in the services sector do not add muchto the capital stock of the economy.

Reasons for Growth of Service Sector: 11 rapidgrowth of India’s foreign trade 2) significant receiptsof FDI 3) high growth rate of manufacturing 4) rapidgrowth of the services sector. The lower contributionof industry was due to its lower share in the GDP.Services exports have been growing at the rate of 30%per annum against goods exports which have beengrowing at 25% per annum. The rapid growth of theservices sector is because of factors such as 1) rise inwages 2) rapid growth of sectors like IT/ITES andtelecom 3) large receipts of FDI 4) significant growthof India’s foreign trade 5) rapid growth ofmanufacturing has created demand for a large numberof services.

The Negative Implications of the GrowingImportance of the Service Sector: It is worseningincome inequalities as the sector accounts for around59% of the GDP but only 25% of the workforce. It alsoleads to faulty pattern of investment as more investmentflows into the services sector because of its rapidgrowth. Some sectors of the services sector like non-financial services have a high COR compared tomanufacturing hence leading to investment in capitalintensive sectors. In addition, unlike agriculture andmanufacturing, the service sector also does not add somuch to the capital stock of the economy

GDP AND OCCUPATIONAL STRUCTUREOF WORKFORCE : Though the share of agriculturein India’s GDP has come down very sharply fromaround 50% of India’s GDP in 1950-51 to around 14%today, there has not been any significant change in theoccupational structure of the workforce. Agriculturestill accounts for around 52% of India’s occupationalworkforce. Hence the occupational structure of thelabour force did not undergo a major shift along with ashift in the sectoral contributions to the GDP because :a) Inadequate “increase in agricultural productivitywhich could have created entrepreneurs from aprosperous agriculture, b) Development of capitalintensive industry, c) Inadequate rural industrialisationwhich could have absorbed workforce from the farm

sector, d) High rate of growth of labour force due.tohigh rate of growth of population. Note : The onlychange in the occupational structure within theagricultural sector was a decline in the proportion ofcultivators and a consequent increase in the proportionof agricultural labour.

CHARACTERISTICS OF THE INDIANECONOMY

The following are the characteristics of theIndian economy as a developing economy:

1. Low per capita income.

2. The occupational pattern is dominated by theagricultural sector. Agriculture accounts foraround 14% of GDP and 52% of the workforce.

3. High growth rate of population. Growth rate ofpopulation as per 2011 census is 1.64% p.a.

4. High incidence of unemployment andunderemployment. This is due to rapid growth ofpopulation, and hence the more rapid growth oflabour force than the growth rate of the economy.

5. Low rate of capital formation. Capital formationis indicated by the level of investment.

6. Inequality in the distribution of assets.

7. Poor quality of human capital. This is reflected in

(i) the high levels of illiteracy. Low levels ofliteracy are due to poverty and inadequateexpenditure of the state on education.

(ii) High levels of undernourishment andmalnourishment.

The demographic characteristics of under-development in India are :

(i) High infant mortality rates.

(ii) High growth rate of population.

(iii) Large percent of population in the age groupof 0-15.

(iv) Adverse sex ratio.

PRIMARY SECTOR-AGRICULTURE

Importance in the Indian Economy : Thefollowing bring out the importance of agriculture inthe Indian economy.

1. Contributes around 14% to the GDP.

2. Accounts for 52% of the labour force.

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3. Supplies bulk of the wage goods to the non-farmsector.

4. Meets requirement of industrial raw material.

5. Generates demand for industrial goods and helpsin industrial growth.

6. Has a low ICOR compared to other sectors.Agriculture in India witnessed rapid growth dueto the Green Revolution. The Green Revolutionwas introduced under an experimental project in1961 as Intensive Agriculture DevelopmentProgramme ( IADP).

Benefits Of Green Revolution : It led toexpansion of area under High Yielding Varieties (HYV)of seeds, expansion of irrigation, growth of fertiliser,agri-chemical industry and seed industry, growth ofbanking sector in rural areas to extend credit to thefarm sector and expansion of rural electrification.

Impact of Green Revolution: It led to self-reliance in India’s foodgrain output, increased the valueof agricultural sector, led to a sharp rise in theproductivity of the farm sector, helped the growth of arural entrepreneurial class who became industrialists,increased employment in agriculture and helped in thedecrease of seasonal unemployment in GreenRevolution regions. The crops which benefited due tothe Green Revolution are rice, wheat, bajra, maize,sugarcane and potato.

Trends and Crisis in Indian Agriculture :

The following table shows the trends inagricultural growth rate.

Year Growth Rate of Agriculture

1999- 2000 2.67%

2000- 2001 0.25%

2001-2002 6.25%

2002- 2003 7.24%

2003- 2004 9.66%

2004- 2005 0.05%

2005- 2006 5.14%

2006- 2007 4.16%

2007- 2008 5.8%

2008- 2009 (-) 0.15%

2009- 2010 0.44%

2010-2011 5.41%

2011-2012 6.2%

2012-2013 1.8%

Factors for Crisis in Agriculture :

1. Development of capacity and capital in India’sagriculture has been slow and has been adverselyaffected by a sharp fall in investment in the sector.Total investment in the sector has fallen from7.07% of the agro GDP in 1976-1980 to around6.69%’of agro GDP today. Declining investmenthas slowed down addition of capital stock toagriculture arid hence slowing down agriculturegrowth rate.

2. Inadequate development of livestock sector as itaccounts for only 32% of agro GDP.

3. Inadequate modernization which is reflected inlow chemical use like pesticide / fertilizer (fore.g., in India pesticide use is 0.33% kg per hectarewhile it is 15 Kg/ha in USA, UK and Canada)and also in the fact that only 49% of cultivatedland is irrigated. Around 350 million hectaremeters of rainwater flows wastefully into oceansfrom India’s landmass.

4. Inadequate availability of credit to agriculturalhouseholds.

5. There is grossly inadequate development of thebackward linkages like storage / warehousing,grading facilities, extension services.

6. Inadequate development of food processingindustry. This is reflected in the fact that only 11%of agro produce is processed (as of 2009).

7. The problem soils in agriculture have beenincreasing. This has sharply cut into the yields.

8. Area under food crops has bee- coming downsharply.

9. Average growth rate of GDP in agriculture andallied sectors hascoe down from 3,6% p.a. in 81-91 to 2.7% in 91-2001 and further declined toaround 2% per annum in the last decade.

10. The growth of agro output in the 8th Plan was4.7%. In the 9th plan, the growth of agriculturaloutput fell to 1.2% i.e., fell below the populationgrowth rate.

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The sharp fall is due to the sharp fall in the yieldgrowth rate ( from 2.6% p.a. in the 80’s to l:t p.a.in the 90’s). Low productivity is due to the smallsize of holdings. The small size of holdingsimpedes application of modern inputs and alsoadoption of scientific land, soil and watermanagement practices.

11. Land reforms, particularly consolidation ofholdings and distribution x of land to the landless,have failed. This is clearly seen in facts like

(i) Only 4.9 million acres were distributed in60 years of independence

(ii) Small size of holdings (holdings below 2 ha)make up 63% of all holdings. Failure of landreforms have impacted on security ofagricultural households and modernisationof the farm sector.

12. The share of agriculture in India’s GDP has comedown to around 14% in 2011-12 but it stillaccounts for nearly 52% of the occupationalworkforce. Hence poverty in agriculturalhouseholds has intensified.

Year Population Growth Food grain Growth

Rate (%) Rate (%)

1961-71 2.24 2.83

1971-81 2.33 1.8

1981-91 2.16 3.13

1991-2001 1.95 1.1

2001-2011 1.65 .1.03

Trends in Foodgrain Output

Year 2005-06 2006-07 2007-082008-09 2009-2010 2010-2011 2011-2012

Output 208.6 m.t. 217. 28 m.t. 230.78 m.t.234.47 m.t. 218.11 m.t. 244.78 m.t. 257.44 m.t.

(in million tonnes)(Advance estimates)

Pricing Policy : The Commission on AgricultureCosts and Prices ( CA.CP ) determines the support priceand procurement price for 25 crops. Minimum SupportPrice ( MSP) - is the price at which the government ofIndia buys grain from the farmers if. the market priceof the grain drops below the MSP. Procurement Price -is the price at which the government of India buys grain

from the farmers voluntarily to meet the requirementof buffer stocks and the public distribution system.

Employment Structure in Agriculture : Fullemployment in agriculture is 270 days (at the rate 8hours a day). Punjab and Haryana provide fullemployment in farm sector. Unemployment and under-employment in agricultural sector is highest in U.P.followed by Bihar, A.P., and Tamil Nadu.

Size of Agricultural Holdings :

• Marginal Holding : This includes holdings below1 3 hectare. This group covers 15% of allagricultural land.

• Small Holding : This includes holdings whichare between 1-4 hectares. This group covers 41%of the total agricultural land.

• Medium Holdings : This group includes holdingbetween 4-10 hectares. It accounts for 27% of thetotal agricultural area.

• Large Holdings : This group includes holdingswhich are 10 3 hectares and above. It accountsfor 17% of the total agricultural areci. Studies haveshown that the number of small and mediumholdings had increased and account for a majorpercentage of all holdings. The states with thelargest average size of holdings in the descendingorder are:

(i) Rajasthan

(ii) Maharashtra

(iii) Gujarat

(iv) M.P.

NAFED : This stands for National AgriculturalCooperative Marketing Federation of India Ltd. It 5the apex cooperative organisation at the national level.It deals in procurement, distribution and export / importof select agricultural commodities. It also promotesinter-state trade and export trade in farm produce.NAFED is the central nodal agency to undertake pricesupport operations for pulses and oilseeds.

Credit for Agriculture : The Primary AgriculturalCredit Societies (PACs ) provide short term and mediumterm loans to farmers. The average membership of avillage level PAC is around 14000. The LandDevelopment Banks. These provide long tem credit.

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The structure of LDB’s is, at the state level are theState Cooperative Agricultural Rural DevelopmentBanks ( SCARDBs) and at the lower level, the PrimaryCooperative Agricultural Rural Development Banks.The main function of the LDB’s is to grant loans onthe security of agricultural properties. The ruralbranches of commercial banks and the Regional RuralBanks provide both short term and long term loans tothe agricultural sector.. The National Bank forAgriculture and Rural Development (NABARD) is theapex institution at the national level for agriculturalcredit and provides refinance to all the agenciesmentioned above. In rural areas the cooperative creditstructure is as follows: 1. At the lowest level are thePrimary Agricultural Credit Societies ( PAC’s). Thesegive loans for short periods of time on soft terms. Since1970, the commercial banks are making funds availableto the PAC’s. 2. At the next level are the District CentralCooperative Banks. These are federations of PACs.Their main task is to fund PAC’s. .3. At the highestlevel are the State Cooperative Banks. They controlthe working of District Central Cooperative Banks andfinance them and also provide funds to PAC’s.

National Agriculture Insurance Scheme ( TheNew Crop Insurance Scheme) : A new agricultureinsurance scheme was launched in 1999. This replacedthe Comprehensive Crop Insurance Scheme launchedin 1985. The chief points about the new crop insurancescheme are :

1. It will provide insurance cover” to all crops - bothfood and cash crops.

2. Insurance cover is available to loanee as well asnon-loanee farmers. However, the insurancescheme is optional for non-loanee farmers butcompulsory for loanee farmers ( i.e., those whohave availed credit from banks).

3. No ceiling on insurance cover.

4. Insurance claims and financial liability on accountof premium subsidy to be shared equally betweenthe centre and the states.

5. The funds under the scheme to be equallycontributed by the centre and the states.

6. An Indian Agriculture Insurance Corporation hasbeen set up to manage the scheme.

7. It will be based on the area approach. That is, allthe farmers in an area affected by a calamity willbe entitled to insurance claims.

Weather Based Crop Insurance Scheme(WBCIS) : This was introduced in 2003 Kharif on’apilot basis in some states. The weather Based CropInsurance Scheme (WBCIS) aims to reduce thehardship of the insured farmers against the likelihoodof financial loss on account of anticipated crop lossdue to adverse weather conditions like drop intemperature, abnormally high temperature or humidity,high wind speeds etc. Weather based crop insurance isbuilt on the fact that adverse weather.conditions affectcrop production even when a cultivator has taken allthe care to ensure a good harvest. Payout structuresare developed to compensate cultivators to the extentof losses deemed to have been suffered by them (basedon correlation of crop yields and weather parameters).In India, WBCIS operates on the basis of the areaapproach, (i.e., for the purpose of compensation, areference unit area is deemed to be a homogenous unitof insurance). The reference unit area is notified bythe state government before the commencement of theseasonTThe sum insured is pre declared per unit hectareby the AIC at the beginning of the crop season (andcould be different for differentorops). Premium ratesdepend”on the expected loss which in turn depends onpatterns of weather parameters for a historical periodof 25-100 years in the context of ideal weatherrequirements of a crop. However, the premium ratesare limited for the cultivator, and the premium ratesbeyond the cap are shared by the centre and states on a50:50 basis. The scheme is open to loanee and non-loanee framers, tenant farmers and also share croppersIt is implemented by Agriculture Insurance Companyof India Limited (AIC).

The New Agricultural Policy : The NewAgricultural Policy announced in 2000 aims at a growthrate of 4% per annum,for the agricultural sector. Itsmajor objectives are:

1. A growth rate of 4% per annum for the agriculturalsector.

2. Efficient use of resources and conservat of of soil,water and biodiversity.

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3. Growth with equity i.e., growth which iswidespread across ‘eg c-s and farmers.

4. Agricultural exports to be promoted.

5. Agricultural growth to be sustainabletechnologically, environmentally andeconomically.

Objectives:

1. An agricultural grov.th case; an efficient use ofresources and widespread growth across regionsand farmers.

2. A demand driven growth.

3. A growth that is technologically, environmentallyand economically sustainable

4. Agricultural growth to.be 4% per anum.

Features:

1. Conjunctive use of surface and subsurface water.

2. Measures to be taken to reduce biotic pressure anland.

3. To control indiscriminate conversion ofagricultural land to non-agricultural use.

4. Unutilised wastelands to be put to agricultural useand afforestation.

5. Shift of government policy from support measuresto agriculture to a policy of asset formation inagriculture.

6. To restructure National Seeds Corporation andState Farms Corporation of India for efficientutilisation of investment and manpower.

7. Liberalisation of domestic agricultural market andall controls/regulations, to increase income offarmers. Restriction on movement of agriculturalproducts to be gradually removed.

8. Private sector participation in agriculture to beencouraged ( like contract farming/land leasingarrangements) for technology transfer anddeveloping markets for crops.

9. Promote private sector investment in agriculturelike agricultural R&D, marketing and post-harvestmanagement.

Criticisms:

1. Too many priorities simultaneously

2. Does not spell out strategies to reach the goalslike for e.g., the contribution of various inputs likeseeds, fertiliser, irrigation for attainment of thegrowth rate of 4% for the agriculture sector fromthe present 2% p.a., has’not been worked out.

3. The policy does not address the disturbing trendsthat have emerged in Indian agriculture ( likedecrease in size of holdings, fluctuation in priceof products, inadequacies in the extension system,inadequate credit and the fact that share of publicinvestment in agriculture has been coming down).

4. The risk factor in Indian agriculture ( the monsoonfactor for example) has not been taken intoaccount while setting the high growth rate.

National Policy on Farmers - 2007 : TheNational Commission on Farmers was set up under thchairmanship of M.S. Swaminathan in 2004. Itsubmitted its final report in 2006. The National Policyon Farmers was framed based on its recommendationin 2007. The main points are

1. Focus on human dimension i.e. the economic wellbeing Of farmers rather than just on productionand productivity. This will be the principaldeterminant of the policy on farmers

2. To promote asset reforms among farmers to ensurethat every man and woman in villages, particularlythe poor, either posses or have access to aproductive asset

3. To promote awareness and efficiency of water useby maximizing yield and income per unit of waterin all crop production programmes

4. To implement a drought code, a flood code and agood weather code in drought prone and floodprone areas and arid areas respectively tomaximize benefit from monsoon arid also beprepared for likely contingencies

5. use of modern technologies to enhanceproductivity per unit of land, water, particularlybio-tech, ICT and renewable energy technologyto launch an evergreen revolution.

6. A national agricultural bio-security system to beset up to organise a coordinated agricultural bio-security programme

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7. To promote use of good quality seeds includingdisease free planting material particularly to raisesmall farm productivity

8. To develop support services for women in farmslike creches, child care centers and provision ofnutrition

9. Credit counseling centers to be established in areaswith severe farmer indebtedness to enable themto come out of the debt trap

10. A comprehensive national social security schemefor farmers to be implemented to ensure livelihoodsecurity, to provide for insurance cover on accountof old age, illness etc

11. The minimum support price to be implementedeffectively to ensure remunerative prices for agroproduce

12. The market intervention scheme (a scheme ofDepartment of Agriculture and Cooperation whereon request by state governments, there isprocurement of horticultural and agriculturecommodities of a perishable nature which are riotcovered by the minimum support pricemechanisnn) to be. strengthened

13. Setting up farm schools to promote farmerlearning and strengthening farmer learning andstrengthening extension services, setting up ofGvan Choupals in villages, to use ICT for farmerservices and setting up community foodgrainbanks

13. To promote the establishment of a single nationalmarket by relaxing controls on inter-state andintra-state movement of agro-produce

14. expanding the grain basked of the PDS to includenutritious crops like bajra, jowar, ragi etc. and

15. setting up.a cabinet committee on food security.The policy to be implemented by the NationalCommission on Farmers set up in 2004.

The National Food Security Mission :This waslaunched by the Department of Agriculture andCooperation, Ministry of Agriculture. It will be acentrally sponsored programme to increase theproduction of rice, wheat and pulses by 10, 8 and 2million tonnes respectively over the existing levels by

the end of the 11th 5-year plan. This will be achievedthrough area expansion, increase in productivity,restoring soil fertility, creating employmentopportunities and enhancing farm level economy. Themission seeks to distribute quality seeds of HYV andhybrids, popularizing newly developed varieties,increase support for micronutrients and farmer training.The identified districts will enjoy flexibility to adoptany local area specific intervention as part of thestrategic Research and Extension Plan prepared for t|neidentified districts. Each district will get 2 crore in the11th plan for two or more crops identified in the missioni.e., from rice, wheat and pulses and 1 crore for anyone of the two crops. The total outlay in the 11th plan is4882 crore and it is being implemented in 312 districtsof 17 states.

HORTICULTURE : Horticulture covers a groupof crops such as vegetables / fruits, plantation crops,aromatic and medicinal plants. The horticulture sectorcontributes roughly 25% of agro- GDP from aroundonly 8% of the cultivated area. It provides nutritionaland livelihood security, helps in poverty alleviation ‘andemployment generation. India is 2nd in the world outputof fruits and vegetables. India is blessed with bothtropical and temperate climates which are well suitedfor horticulture and plantation crops. In addition, thesecrops,can be raised on marginal and degraded landswhich are unsuitable for other crops. The thrust inhorticulture development is expanding area, improvingproductivity, reducing cost of production, extendingmarketing support, developing cold chains andstrengthening credit and organizational support.

Importance :

1. Increases supply of nutritive foods like fruits /vegetables.

2. Improves rural economy by generatingemployment / income, particularly for the smalland marginal farmers.

3. Contributes to foreign exchange without muchliability on the import front.

Measures Taken : Horticultural Board set up inGurgoan in 1984 to promote the integrated developmentof horticulture industry. The National HorticultureMission seeks to facilitate the holistic development of

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horticulture by promoting latest technologies includingproviding good quality planting material , promotingorganic farming including development of post-harvesttechnology and management, marketing support anddeveloping processing facilities. The cluster approachunder the mission is to help in the establishment offood processing units for fruits and vegetables. Thegovernment has launched two centrally sponsoredprogrammes:

1. The Technology Mission for IntegratedDevelopment of Horticulture in Northeasternstates and Sikkim in 2001-02. This has beenextended to the Himalayan states of J & K,Himachal Pradesh and Uttarakhand in 2003-04.

2. The National Horticulture Mission was launchedin 2005-06 in the remaining states. In 2006-07,development of modern terminal markets has beenintroduced as a new component in the NationalHorticulture Mission.

The National Horticulture Board is implementingmany programmes to reduce post harvest losses. Acapital investment scheme called Gramin BhandaranYojana for construction and renovation of ruralgodowns is being implemented. The Vishesh KrishiUpaj Yojana has been launched to promote export offruits / vegetables and flowers besides minor forestproduce, and their value added products. Thisprovidesifor duty rebates. The 11th plan proposed toset up 30 mega food parks which will have state of arttechnology and supply chain for food processing unitslinked to them. These will be state owned.

National Horticultural Mission (NHM) : Thisaims at holistic development of horticulture by usinglatest technologies (including production / supply ofgood quality planting material through tissue culture,expansion of area with improved plants, rejuvenationof senile orchards, organic farming, integrated nutrientmanagement and development of post - harvestmanagement and marketing).

Vision 2015 for Food Processing Industry : Thiswas launched at 2005 to increase the level of foodprocessing of perishables from 6% to 20% and toincrease value addition of perishables from 20% to 35%by 2015. The vision also seeks to improve share of

India in global food trade from 1.6% to 3% and toincrease processing of fruits and vegetables to 15%.The 11th plan programmes for giving a thrust to foodprocessing industry include.

1. Mega Food Park Scheme with an outlay of 1575crore.

2. Modernization of Abattoirs with an outlay of 825crore.

3. Development of Integrated Cold Chain Faciltieswith an outlay of 210 crore.

Loan Waiver Scheme : This was a majorinitiative to reduce the distress of indebted farmers,particularly the small and marginal farmers. This wasannounced in 2007. Under the scheme, all loans owedby small and marginal farmers to Regional Rural Banks,scheduled commercial banks and agriculturecooperative credit societies upto 31-3-2007 andoverdue on 31-12-2007 were waived. The interest notpaid on investment loans and due on 31-12-2007. Werealso waived. For large farmers, a one time settlementfor loans overdue on 31-12-07 was offered if they paid75% of the overdue loan. For small farmers, the waiverwas for those holding upto 2 hectares, and where thecrop loan was not more than 1 lakh rupees as aninvestment loan. This benefitted 3.69 crore small andmarginal farmers and 1 crore other farmers.

Kisan Credit Card Scheme: This was introducedin 1998

:1999 to provide timely and flexible availability

of production credit to farmers. All categories offarmers including tenant farmers, share croppers andoral tenants are eligible for the card. Commercial banks,Regional Rural Banks (RRB) and cooperative banksimplement the scheme. The credit is repayable withinone year. The card includes a micro - insurance policyof 50,000 rupees providing for insurance Coverageupon death and disability upon payment of a premiumof Rs. 5 per year. The interest rate is 7% per anum.

Rashtriva Krishi Vikas Yoiana: This waslaunched in 2007 to provide incentives to the stateswhich’increase investment in agriculture. The 11th 5year plan allocated 25,000 crore to the scheme. It willbe a state plan scheme and the eligibility of a state underthe scheme would depend upon the additional amountallocated by the state over and above the base line

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percentage expenditure incurred on agriculture andallied sectors. The funds under the scheme are providedto the state as 100% grant by the centre. The RKVYaims at achieving 4% average annual growth inagricultural sector during the 11th 5-vear plan. Theobjectives of the scheme are

1. To provide incentives to states so that theyincrease public investment in agriculture andallied sectors.

2. To provide autonomy and flexibility to states inplanning / executing schemes, in agricultuVe /allied sectors.

3. To help states develop agricultural plans fordistricts and states based on agro-climaticconditions, availability of technology and naturalresources.

4. To ensure that local .needs and local crops alongwith local priorities are reflected in their plains.

5. To achieve the goal of reducing the yield gap inimportant crops.

6. To maximize returns to farmers.

RIDF : Rural Infrastructure Development Fund(RIDF) was set up in 1995-96 to provide loans to stategovernments and state owned corporations for projectsin minor / medium irrigation, soil conservation,watershed management and for projects in ruralphysical infrastructure (like roads, market yard,s).‘Investment projects in social infrastructure such asconstruction 6f health care centres, schools, drinkingwater projects are also.supported by RIDF. The RIDFis managed by NABARD. The RIDF is financed frommonies from banks to the extent of their shortfalls inpriority sector lending targets.

Trends in Farm Wages: During 2001-01 to 2006-07, real farm wages varied between 117 rupees per dayin 2001-02 to 111 rupees per day in 2006-07. But since2007- 08, real farm wage has been rising from a.low of111 rupees in 2006-07 to 154 rupees a day in 2011-12with an average annual growth rate of 6.8% per anum.This is because of high growth of agro GDP in the 11th

plan (Where the growth rate was 3.4% p.a. comparedto 2.4% per anum in the 10th plan), rising prices of agroproducts, increase in minimum support price of major

crops and the impact of Mahatma Gandhi NationalRural Employment Guarantee Programme.

Agriculture Produce and MarketingCommittee Act : The apmc Act in each state requiresall agricultural products to be sold only in governmentregulated markets like mandis. These markets imposesubstantial taxes on buyers in addition to commissionand fee taken by middlemen. The Act also makescontract farming illegal and companies cannot directlybuy from the farmers as they have to buy fromgovernment.regulated market. Though the main aim ofthe Act was to prevent exploitation of farmers byintermediaries, the controls under the Act have actedas disincentives to farmers, traders and industries.Hence the central government enacted a modelAgriculture Produce Marketing (Development andRegulation) Act-2003 which provides for directmarketing by farmers, contract farming and setting upof agricultural markets both in private and cooperativesectors. Many states have repealed their APMC Actsand are in the process of framing aws in accordancewith the model Act of the centre, as agriculture is astate list subject.

Mega Food Parks : These are to be set up underInfrastructure Development Scheme. Each park mustbenefit 6,000 farm products and at least 25,000 to30,000 farmers indirectly. These should generate40,000 jobs directly or indirectly. Each will be set upwith an investment .of 100 crore to leverage anadditional investment of 250 crores. Annual turnoverof each project should be 500 crore. Each park shouldhave 30-40 food processing industries. 15 such parksare already being set up and 15 more are to be set up.

Mahila Kisan Sashaktikaran Pariyojana(MKSP): it is a sub-component of the National RuralLivelihood Mission. The primary objective is toempower women in agriculture by making systematicinvestments to enhance their participation andproductivity and, create/sustain agriculture basedlivelihoods for rural women. The specific objectivesare

1. Enhance productive participation of women inagriculture.

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2. To create sustainable agricultural livelihoodopportunities for women in agriculture.

3. To improve skills/capabilities of women inagriculture to support farm and non-farmactivities.

4. To ensure food and nutrition security at thehousehold and the community level.

5. To enable women to have better access to inputsand services of government and other agencies.

6. To enhance managerial capacities of women inagriculture for better management of bio-diversity.

Strategy: The project implementing agency underMKSP is expected to follow the following strategy

1. Use of locally adopted, resource conservingknowledge-centric, farmer-led and environmentfriendly technologies.

2. Coprdinated action by communities andcommunity based institutions such as SHG,NGO’s, farmer groups

3. Inculcating community mobilization skills amongwomen in agriculture

4. To enhance skill base of women in agriculture tohelp them pursue their livelihoods on a sustainablebasis. The capacity building and skill upgradationto be through formal and vocational courses.

5. To strategise MKSP to target the poorest of thepoor women and most vulnerable women such as

SC/ST women, landless women and women ofprimitive tribal groups

6. Priority to be given to single woman headedhouseholds and women groups engaged inagriculture.

7. Participatory approach and bottom up planningwill constitute core values of the scheme.

Recent Budgets and Initiatives for Agriculture: In budget 2011-12, 400 crore was given to improverice agriculture in eastern states (Assam, West Bengal,Odisha, Bihar, Jharkhand, Chhattisgarh and EasternU.P.) under the Rashtriya Knshi Vikas Yojana. Around1200 crore was allocated for increasing production ofpulses, oil palm, vegetal the Tusters and millets. Anational programme to increase protein production withan outlay of 300 crore was also announced, The creditto agriculture was raised from 3.75 lakh crore in 2010-11 to 4.75 lakh crore. The outlay for RIDF was raisedfrom 16000 crore in 2010-11 to 18000 crore in 2011-12. In the budget 2012-13, the credit for agriculturehas been raised to 5.75 Takh core. It also introduced aprogramme of improved delivery of subsidy in 50districts on a pilot basis in which subsidy will be paidto farmer accounts. The outlay to support riceagriculture in the east was raised to 1000 crore. ANational Mission on Food Processing to,be launched.An Irrigation and a Water Finance Company to bestarted. The outlay for Mahila Kisan SashaktikaranPariyojana was raised to 3918 crore. Around 200 crorehas been set aside for agricultural research.

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2. National Income

• Father of Accounting of National Income is SimonKuznets.

• In 1868, the first attempt was made by Dada BhaiNaoroji. He in his book ‘Poverty and Un-British Rulein India’, estimated India per capita annual income at alevel of Rs. 20.

• Dr. V.K.R.V. Rao was made the first scientific estimateof National Income.

• After Independence, the Government of India appointedthe National Income Committee in August, 1949 underthe chairmanship of prof. P.C. Mahalanobis to compileauthoritative estimates of national income.

• The government established central statisticalorganization (CSO) which now regularly publishesnational income data.

• National income includes the contribution of threesectors of the economy.

1. Primary Sector: Agriculture, Forest, Fisheries,Mining.

2. Secondary Sector: Industry :

Manufacturing

ConstructionIndustry

3. Tertiary Sector: Trade, Transport,Communication, Banking, Insurance, Real estate,Community and Personal Services.

Concepts of National Income

• Gross National Product (GNP) : Gross National prod-uct refers to the money value of total output or produc-tion of final goods and services produced by the Na-tionals of a country during a given period of time, gen-erally a year.

• Net National Product (NNP) : NNP is obtained bysubtracting deprecing value from GNP.

NNP = GNP – Depreciation• National Income : National Income is calculated by

subtracting net indirect taxes from NNP at market prices.When NNP is obtained at factor cost, it is known asNational Income.

= NNPMP

– Indirect Taxes + Subsidy• Per Capita Income : Per capita income level is obtained

from dividing national income by the total populationof the country.

According to CSO per capita income has crossed Rs.50,000 level and reached Rs. 52835 per annum in 2010-11.

During 2010-11, country’s per capita income registered

17.9% growth.

• Foreign Exchange Reserves: Foreign exchangereserves of a country includes foreign currency. Assetsand interest bearing bonds held by it. In India it alsoincludes SDR and value of gold.

• Free Trade: It implies absence of any protective tariffsor trade barriers by any economy with respect to exportand import.

• Laissez – Faire: It is an economic doctrine whichemphasizes superiority of ‘free trade’ and ‘free marketsover state’s interference in economics affairs.

• Budget Deficit: When the expenditure of thegovernment exceeds the revenue, the balance betweenthe two is budget deficit.

• GDP (Gross Domestic Product) - Gross dometic productis the market value of all officially recognised final goodsand services produced with in a country in a year. Fatherof Accounting of National Income is Simon Kuznets.

• In 1868, the first attempt was made by Dada BhaiNaoroji. He in his book ‘Poverty and Un-British Rulein India’, estimated India per capita annual income at alevel of Rs. 20.

• Dr. V.K.R.V. Rao was made the first scientific estimateof National Income.

• After Independence, the Government of India appointedthe National Income Committee in August, 1949 underthe chairmanship of prof. P.C. Mahalanobis to compileauthoritative estimates of national income.

• The government established central statisticalorganization (CSO) which now regularly publishesnational income data.

• National income includes the contribution of threesectors of the economy.

1. Primary Sector: Agriculture, Forest, Fisheries,Mining.

2. Secondary Sector: Industry :

Manufacturing

ConstructionIndustry

3. Tertiary Sector: Trade, Transport,Communication, Banking, Insurance, Real estate,Community and Personal Services.

Concepts of National Income

• Gross National Product (GNP) : Gross Nationalproduct refers to the money value of total output orproduction of final goods and services produced by theNationals of a country during a given period of time,

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generally a year.

• Net National Product (NNP) : NNP is obtained bysubtracting deprecing value from GNP.

NNP = GNP – Depreciation• National Income : National Income is calculated by

subtracting net indirect taxes from NNP at market prices.When NNP is obtained at factor cost, it is known asNational Income.

= NNPMP

– Indirect Taxes + Subsidy• Per Capita Income : Per capita income level is obtained

from dividing national income by the total populationof the country.

According to CSO per capita income has crossed Rs.50,000 level and reached Rs. 52835 per annum in 2010-11.

During 2010-11, country’s per capita income registered17.9% growth.

• Foreign Exchange Reserves: Foreign exchangereserves of a country includes foreign currency. Assetsand interest bearing bonds held by it. In India it alsoincludes SDR and value of gold.

• Free Trade: It implies absence of any protective tariffsor trade barriers by any economy with respect to exportand import.

• Laissez – Faire: It is an economic doctrine whichemphasizes superiority of ‘free trade’ and ‘free marketsover state’s interference in economics affairs.

• Budget Deficit: When the expenditure of thegovernment exceeds the revenue, the balance betweenthe two is budget deficit.

• GDP (Gross Domestic Product) - Gross dometic productis the market value of all officially recognised final goods

and services produced with in a country in a year.

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3. Indicative Planning

Background : Indicative plannihg was adoptedby the 8th plan as a framework against the backdropof: slow capital formation, vibrant growth of the privatesector, persisting regional disparities and neglect ofrural economy, lack of technological progress, poorperformance of trade and the public sector, and finally,the positive impact of liberalisation efforts of theseventies and the eighties.

Indicative planning was conceptualised by Franceafter World War-II. Known as the Monet Plan, theindicative plan of France helped the Government toidentifgKhose sectors of the economy which neededdevelopment. In France, indicative planning iscomplWientary to the market - making up for itsweaknesses guiding it and ensuring that its operationsare compatible with the country’s social cohesion andeconomic growth.

Salient Features of Indicative Planning :

• It is a way to promote rapid and orderly economicgrowth without the coercion of the bureaucracy.It is a way to reconcile economic planning with adecentralized decision-making private enterprise.

• The two fundamental features of indicativeplanning are: providing a promotional stimulusby raising incentives to invest or to adoptproduction in new directions and, groupagreement about objectives of economic growthestablished through consultation between industryand the Government.

• Indicative planning pinpoints areas in whichadvance action should be taken to avoid seriousbottlenecks and also identify sunrise industries.

• In Indicative planning, attempts are made toinfluence the market forces by fiscal / monetarymeans and leaving the market forces to primarilydetermine the resource allocations.

• A core plan provides the economic vision andthere are several complementary plans on sectorsand regions which are linked to the core plan.

• The indicative plan will have clearly defined goalsfor each sector and the Government will beconcerned with only removing the bottlenecks,orienting, regularising and acceleratingdevelopment. There is clear prioritisation of goalsleading to reduction in production bottlenecks andhence making possible higher rates of growths.

• The emphasis will be to develop the core sectorthrough allocation of funds and ensuring growthof economy through policy packages, and givinggreater responsibility to states for the developmentof the social sector.

• The plan will provide a clear picture of effects ofchanges in Government policy on the entireeconomy. The implications of contemplatedchanges in Government policies are madeapparent. This leads to more rational decisionsand more coherent policies. This is of greatimportance since uncertainties about futuredemand tend to reduce investment and expansionin the private sector. Indicative planning will thusreduce such uncertainties and provides a climateconducive for higher investment and rapidexpansion.

• The Government will lay down parameters fordecision making instead of taking all the decisionsabout investment. That is, the Government guides,rather than directing/regulating the private sector.

Continued Relevance of Planning: Planning isrelevant in the context of

• Centre-State coordination in crucial areas ofdevelopment like infrastructure investment whichalso requires FDI and hence centre has to persuadestates to frame appropriate policies to invite FDIinto such areas

• The need-to direct investment to backward regionsby corporate sector and FDI

• To plan for environmental goals

• In the context of globalization, state has to plan’tocreate appropriate institutions, legal services and

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also provide information into private sector tosafeguard the interests of different sections of thesociety

• Planning is relevant for inter-sectoral balance ineconomic growth

• Planning by state is required for inclusive andequitable growth.

THE 12th 5-YEAR PLAN (2012-17)

The Draft Approach to the 12th 5-year plan wasapproved.by the NDC in January 2013. The theme ofthe Approach Paper is Faster, Sustainable and moreInclusive Growth. The key features of the 12th 5-yearplan are spelt out in 25 crore indicators, for rapid,sustainable and inclusive growth.

Economic Growth: The real GDP growth to be8.2% p.a. ‘which is to be achieved by a 9% growth inthe last 2 years of the plan. In the first year of the plan(2012-13) the growth is likely to be 6.7%. Theagricultural growth rate to be 4% p.a. andmanufacturing to grow at 10% p.a. Every state toachieve a higher average growth rate in the 12th plancomparable to the 11th plan.

Poverty and Employment: The poverty ratebased on Head Count Ratio of consumption to bereduced to 10% of the population by the end of theplan. Around 50 million new work opportunities to becreated in the non-farm sector. Around 50 millionpeople to be endowed with skills to meet the skill needsof the economy.

Education : The mean years of schooling to beraised to 7 years by end of 12th plan. 2 million newadditional seats to be created in higher educationaligned to the skill needs of the economy. To eliminategender and social gaps in school enrolment (i.e.between girls/boys, between SC’s / ST’s Muslims andthe rest of the population.

Health: To reduce Infant Mortality Rate to 25 /1000 and maternal mortality rate to 1/1000 live births.To raise child sex ratio to 950 by the end of the plan.To reduce Total Fertility Rate to 2.1 by end of the plan.To reduce under nutrition of children aged 0-3 years tohalf of the prevailing levels by the end of the plan.

Infrastructure: To increase investment ininfrastructure to 9% of the GDP by the end of the plan.To increase gross irrigated area from 90 million ha to103 million ha by the end of the plan. To provideelectricity to all villages and reduce AggregateTechnical and Commercial Losses in power sector to20% by end of the plan. To connect all villages with allweather roads by the end of the plan. To upgradenational and state highways to the minimum two-lanestandard by the end of the plan. To complete easternand western dedicated freight corridors by the end ofthe plan. Increase rural tele-density to 70% by the endof the plan. To ensure that 50% of rural population hasaccess to piped water supply and that 50% of grampanchayats achieve the Nirmal Gram status by the endof the plan.Environment arid Sustainabiiitv: To enhanceforestry by 1 million hectare each year, add 30,000 mwof renewable energy capacity, reduce emission intensityof GDP by 25 to 20% over 2005 levels by 2020, all bythe end of the 12th 5-year plan.

Service Delivery: To provide banking servicesto 90% of India’s households by end of 12th 5- yearplan. Major subsidies and welfare related beneficiarypayments to be shifted to direct cash transfer usingAadhar linked bank accounts.

The 12th 5-year plan proposes that”70% ofinvestment will be by the private sector. The plan outlayfor the centre will be 47, 69,841 crore (around 6.98%of GDP. It was 5.96% of GDP in 11th 5-year plan). Theoutlay for the states is put at 37,16,385 crore, comingto 5.44% of GDP (it was 5% of the GDP in 11th 5 yearplan). The investment rate to be 35% of the GDP in thelast year of the plan. The current account deficit to bekept at an average of 2.9% of the GDP for the entire12th 5-year plan. The private sector investment ininfrastructure to be 48% of the estimated 56.3 lakh crorefrom 38% in the 11th 5-year plan. Merchandise exportsare targeted to grow at 17% p.a. in the 12the 5- yearplan.

GROSS DOMESTIC SAVINGS IN

THE INDIAN ECONOMY

The savings rate of any economy influenceseconomic growth by affecting the investment rate and

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also the demand for goods/services. The factorsaffecting savings rate in the Indian economy are:

• Inflation - low levels of inflation promote savingsas the prices of goods/services are lower.

• Taxation levels - modest levels of direct andindirect taxes not only promote savings by keepingthe prices of goods/services lower, but also byleaving more money with the people in the formof savings after paying direct taxes.

• Economic growth rate - high levels of economicgrowth increase the per capita income and hencepromote savings.

• Financial sector policies - these refer to the interestrates and money supply factors. If the interest ratesare lo«r, they promote savings by high growth rateof economy due to high levels of investments.^Role of capital markets - if the capital marketsperform well on a sustained basis, they attractmore investment by the people and henceaccelerate the growth rate and hence increase theper capita incomes of the people.

Composition of Gross Domestic Savings in India:Gross Domestic Savings includes :

• Public Savings which are savings in governmentadministration, savings of public sectorenterprises and savings of statutory corporationsof the government (like Posts and Telegraphs).

• Private Savings-which are household savings andprivate corporate savings ( include savings ofcooperative societies).

Trends in Gross Domestic Savings in the PlanPeriod:

• IN 1950-51 tine savings rate was 10% of GDP.The savings rate of the economy rose to an alltime high of 36.85% of GDP in 2007-08, droppingto 32.3% in 2010-11.

• Much of the increase in savings is due to rise inprivate savings.

• The composition of household savings isincreasingly showing a shift towards financialsavings from savings in physical assets.

• In the recent times, the savings of PSE’s has begunto improve due to public sector reform.

• Government dissavings have increased due to highgrowth rate of non-developmentai expenditure bygovernment.

• The savings rate picked up sharply beginning inthe second half of 80’s due to relatively rap jeconomic growth, liberalisation of economy,growth of capital markets and improvement - thefinancial sector.

Trends In Public Savings : In the initial decadesof planning ( 1950-1977), public savings increased dueto greater tax effort. After 1977, public savings declinedcontinuously. The only component in public savingsthat has showed a positive trend is savings o f non-departmental enterprises and corporations of thegovernment. There has been huge’ dissavings ingovernment. The public savings were negative in theperiod 1998-2002. Public sector savings were minus2.04% in 2001-02 turned positive to 2% in 2005-06and reached a high of 5% of GDP in 2007-08. Thepublic savings dropped sharply to 1.7% of GDP in2010-11, hence contributing to overall drop in savingsrate of the economy. This was because of the excessgovernment spending on the stimulus package to boostthe-economy due to the financial crisis. Public savingsand corporate savings reached an all time high in 2007-08.

Trends in Private Savings : Household savingsmake up bulk of private savings. Household savings asa percent of GDP have remained at around 22% to 23%of GDP since 1999- 2000. The share of private savingsin gross domestic savings has always improved verysharply since 1950-51. There has been a decline in netfinancial savings of households from 10.6% of GDP n2007-08 to 10% in 2010-11, to 7.8% of GDP in 2011-12, the lowest in 11 years. The largest component ofhousehold savings is in the form of currency and bankdeposits. Household savings are increasingly beinginvested in financial rather than physical assets,.Savings by the private corporate sector have beenimproving in the post-reform period.

The following brings out the changes in thecomposition of the gross domestic savings in the periodof planned economic development. In 1950-51,household savings accounted for 69.7% of the gross

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domestic savings while private corporate savingsaccounted for 10.1% and public sector savings around20%. The share of household savings in gross domesticsavings has come down from 80% in 2002-03 to around60% in 2010-11. Most of the household savings are inthe form of bank deposits The share of householdsavings in capital markets has come down from a highof 9% of their total savings to less than 8% today.Around 50% of household savings are in the form ofbank deposits and around 32% of household savingsare in the form oUnsurance premiums and pensionamounts. Private corporate savings dropped from 9.4%of GDP i®007-08 to 7.9% in 2010-11. The high growthof per capita income at 7.2% per anum in 2002-03 to2007-08 compared to 3.7% p.a. in 1992-93 to 2002-03was an important factor in the high growth rate of

savings. The high savings rate was in turn creating thebasis of higher growth of the economy in this period.

A noticeable trend in Indians savings andinvestment rate is the sharp increase in the savings inthe investment rate but also a sharp increase in theinvestment rate. The following clearly brings out thesetrends.

Trends in Savings & Investment Rate : Theinvestment rate fell to below 30% of GDP in 2011-12,for the first time since 2004-05. The investment ratereached a high of 38% in 2007- 08 before dropping to35.1% in 2010-11. The rise of the investment rate closedthe savings - investment gap. In fact, the investmentrate exceeded the savings rate in all the years beginningin 2004-05 till 2010-11.

Year Savings (% of GDP) Investment Rate (% of GDP)

1999-00 24.8 25.9

2004-05 32.4 32.8

2005-06 33.4 34.7

2006-07 34.6 35.7

2007-08 36.8 38.1

2008-09 32.0 34.3

2009-10 33.8 36.6

2010-11 32.3 35.1

2011-12 30.8

It is clear from the above that the savings -investment gap has closed and the investment rate hasexceeded the savings rate. The sharp increase in savingsand investment rate in the Indian economy in the recenttimes is because of factors such as

1. Doubling of per capita income growth rate.

2. Good growth rate of the economy.

3 Large capital inflows into India in the form ofFDI and FII receipts.

4. A declining dependency ratio i.e. a fall in thepopulation of the old and also of those below theage of 15 years along with an increase in thenumber of workers.

5. Tax rates have come down hence increasinghousehold savings and private corporate savings

6. Good performance by the industrial sector withhigher profits.

Trends in Domestic Savings in 2011-12: Thedomestic savings rate of economy in 2011-12 was30.8% of the GDP. The decline in savings is due todrop in household financial savings from 10.4% in2010-11 to 8% in 2011-12, decline in private corporatesavings from 7.9% in 2010- 11 to 7.2% in 2011-12'anda further drop in public savings from 2.6% in 2010-11to 1.3% in 2011- 12.

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4. Banking Sector and Financial Sector Reforms

Differential Rate of Interest Scheme : This waslaunched in 1972. Under the scheme, all scheduledcommercial banks extend loans to select low incomegroups at 4% interest. The low income aroups who areeligible are, poor borrowers whose family income isnot more than 18000/ year in rural areas and 24000/year in non-rural areas. In rural areas, the eligibleborrowers should not have more than 2.5 acres ofunirrigated land or more than one acre of irrigated land.The borrowers are given 15000 as term loan andworking capital loan for productive purposes.

Bank Rate : This is the rate of interest chargedby RBI-eri loans given to scheduled commercial banks,usually the loans are for a longer period. Banks in Indiacan borrow 1% of their net demand and timelieposits(NDTL) by paying a little more interest rate than therepo rate. The SLR of the borrowing bank is reducedby 1%. Bank Rate in India also acts as a penal ratecharged on banks which fall short of their reserverequirements.

Scheduled Bank : These are commercial banksand are of two types - Scheduled and Non- scheduled.Scheduled Banks are the ones included in the 2nd

Schedule of .the Reserve Bank of India Act - 1934.The commercial banks which are eligible to be includedin the 2nd schedule are two satisfy 2 conditions. 1) Theyshould have a minimum paid up capital and reservesof at least 5 lakhs 2) They must satisfy the RBI thattheir affairs are not conducted in a manner detrimentalto”the depositors. The schedule banks enjoy certainbenefits like financial assistance from RBI, refinancefrorrTRBI etc. All scheduled banks have to maintainreserve requirements as laid down from time to timeby the RBI. The SBI and associates, the nationalizedbanks, foreign banks in India, private sector banks,cooperative banks and RRB’s are all scheduled banks.Non-scheduled banks are not included in the 2nd

schedule of RBI Act and dp not have to comply withthe conditions of the Act and do not enjoy the benefitsof Scheduled banks from the RBI.

Cooperative Banks: They are organized andmanaged on the principle of. self-help andcooperation.  % They operate on the basis of one votefor one member and no profit and no loss principle.These were the first government sponsored and

government subsidized financial institutions in India.They belong to the money_ market by offering shorttermjoans and -capital market by offering long termloans. Some cooperative banks are scheduled banks(like State CodperaTivS Banks and Urban CooperativeBanks while some are not). Cooperative banks performall commercial banking functions (like collection ofdeposits, supply of credit, remittance facilities etc) butunlike other commercial banks, provide limited bankingfunctions. These banks are subject to the reserverequirements prescribed by RBI (CRR and SLR) butthe reserve requirements are less than those for othercommercial banks. The main aim of cooperative banksis to provide cheaper credit to their members and theyare allowed to tap the money market to improve theirincome.

Urban Cooperative Banks: These are set upunder license from the RBI under the BankingRegulation Act - 1949. They should have paid up capitaland reserves of one lakh. These are considered to beurban arms of cooperative credit societies. Theirbanking functions, interest rate structure and area ofoperation are decided by the RBI while registration andmanagement is by state governments jnder respectiveacts of the state governments. The UCB’s are tomaintain both SLR and CRR. Till 1996, the UCB’s wereallowed to lend money only for non-agriculturalpurposes.

Commercial Banks and Development Banks:Commercial Banking as defined by Banking RegulationAct-1949 is a banking company is one which acceptsdeposits, for the purpose of investment Jending. Hencethe bank maintains deposit accounts, issues / payscheques’and collects cheques fzr bank’scustomers.Commercial banks are both banks andfinancial intermediaries. As financial -:ermediates theymoderate between depositors and borrowers. It is a bankbecause it provides all commercial, bank functionsopening and maintaining accounts, giving loans, buyingcorporate and go   ernment bonds. The assets ofcommercial banks are loans and bonds while liabilitiesare deposits. De. e.’opmental Banks in general are non-commercial banks whose objective is to provide longterm finance to remove non-developmental barriers likepoverty, lack of infrastructure etc. The opmental banks

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assist societal development by providing long termloans for infrastructure development of industries andagriculture. The first development bank that was setIndia was IFCI set up under the Industrial FinanceCorporatiorTAct -1948. However the distinctiondevelopmental banks and commercial banks hasreduced because of development of universal banking.The S.H. Khan Committee of RBI set up in 1997advocated universal banking in India functions -developmental and commercial, to be provided underone roof. The universal offer a wide range of financialservices like mutual funds, merchant’banking, retailloans, ance functions etc. ICICI was the first universalbank after the development bank ICICI merged withits subsidiary, ICICI Bank.

Merchant Banks: These are specialized financialinstitutions that deal with international finance, :ermloans and underwriting of public issues of companies.Merchant banks usually deal with other banks and largefinancial institutions.

Banking Ombudsman: The office was createdin 1995. The Banking Ombudsman is a senior officialappointed by RBI to redress customer complaintsagainst deficiency of service. Complaints can belaunched against banks for non-adherence to bankingcodes of Banking Code Standard Board of India(BCSBI). The BCSBI is an autonomous body createdby RBI to monitor how banks render services. Thecustomer can launch a complaint within one year ofthe event taking place and after receiving response fromthe bank, thecomplaint must be resolved with onemonth and if it is not resolved, the complaint can bemade to the Banking (Ombudsman. For credit cardrelated complaints, the Ombussman can award amaximum compensation of one lakh for mental agony.

Reserve Bank Of India: The RBI has its originsin the recommendations of the Hilton-YoungCommission of 1926 (the Royal Commission of IndianCurrency and Finance). The RBI Act was passed in1934 and became operational on 1st April 1935. TheRBI as a banker to the government was started with apaid up capital of 5 crore and a corporate. The entirecapital was owned by private shareholders as the BritishIndian government held shares of nominal value only.The central’office of RBI was originally in Kolkataand was shifted to Munibai in 1937. The RBI Act -1934 provided for appointment of the Governor and 2deputy governors by the central government. In 1949,the RBI was nationalized under RBI (Transfer of Public

Ownership) Act -1949. After this, the RBI is whollyowned by the government of India. It is made up of

• Central Board of Directors

• Committee of the Central Board

• Board for Financial Supervision

• Board for Payment and Settlement Systems

• Subcommittees of the Central Board.

• Local Boards.

The Central Board of Directors oversees the entirefunctioning / business of RBI.

It delegates functions to its committees / subcommittees. The Central Board of Directors is madeup one governor, 4 deputy governors, four non-officialdirectors (who are nominated by the union governmentand who represent the local boards of RBI located atDelhi, Chennai, Kolkata and Mumbai), 10 non officialdirectors nominated by the RBI and one Representativeof the Central Government. The Central Board ofDirectors holds a maximum of 6 meetings each year.The Board for Financial Supervision is chaired by theGovernf Oflt of the R’BI. Board for Payment andSettlement System was set’ up in 2005 as a committeeof the Central Board. It is chaired by Governor of RBIand all 4 deputy governors are members along wjthtwo non-official directors of the Central Board. TheBoard for Payment and Settlement Systems (BPSS) laysdown policies relating to regulation and supervisionof all types of payment / settlement systems besidessetting standards for them. Electronic, non-electronic,domestic and cross border payment and settlementsystems which affect the domestic transactions areregulated by the BPSS. Local Boards representing the4 regions of the country are in Mumbai, Kolkata, NewDelhi and Chennai. The Local Board members areappointed by the central government for 4 year termsand represent regional economic interests, interests ofcooperatives and indigenous banks. The sub-committees of the central board include those pnInspection and Audit, Staff, and Building. The focusof each sub­ committee is on specific areas ofoperations. RBI operates through 27 regional officesand 26 departments.

The RBI has training centres at

• RBI Staff College, Chennai

• College of Agricultural Banking, Pune

• Zonal Training Centres located at 4 regionalcentres to train non-executive staff

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• Indira Gandhi Institute of Deyelopment Research,Mumbai

• Institute of Development and Research in BankingTechnology - Hyderabad. The last three mentionedabove are RBI funded institutions.

Functions of RBI : Issue of Currency : Underthe RBI Act - 1934 RBI has the sole right to issue banknotesof all denominations. Till 1935, Controller of Indiamanaged the issue of currency. RBI issues notes of 5,10, 20, 50, 500 and 1000 though it can issue notes of5000 and 10,000 also. The RBI can issue coins up tothe denomination of 1000, under the Coinage Act -1906. The coins are minted by the government of Indiabut the distributionjs by the RBI. The issue Departmentof the RBI is in charge of all issues and the assets /liabilities of the department are separate from theBanking Department. The currency managementfunction is carried out by the Department of CurrencyMariagement whose central office is in Mumbai with19 other issue offices. The RBI authorizes selectbranches of banks to establish currency chests and coindepartments. The currency chests are storehouses wherebank notes and rupee coins are stored on behalf of theRBI. Deposits in the currency chests are treated asreserves with the RBI and are included in the CRR. TheSecurity Printing and Minting Corporation of India(SPMCIL) a wholly owned company of the governmentof Incfia, has presses for currency notes at Dewas (M^P.)and Nasik. Bharatiya Reserve BanleNote Mudran Pvt.Ltd fBRBNMPL) is’a wholly owned subsidiary of RBI

which has presses at Mys~ore ancT SaLboni (W.Bengal). The mints of SPMCIL are at Mumbai, Noida,Kolkata^and Hyderabad. RBI currently issues StarSeries notes of 10, 20, 50 and 100 denomination toreplace defective~printed notes. The star series havean additional character of a Star and the notes in thebundle are not in series. RBI as a Banker to theGovernment / Debt Manager to the Government: Asper the RBI Act- 1934, the central government entruststhe RBI with all its money, remittance exchange andbanking transactions in India and also manages thepublic debt of government of India. The centralgovernment deposits all its cash balances with the RBI.The central government is required to maintain aminimum cash balance with the RBI (which is currently10 crore on a daily basis and 100 crore on Fridays and100 crores at end of March and July). Earlier, RBI washandling the banking transactions of the individualministries of the central government but now the

ministries do this via public sector banks.. However, ifthe ministries nominate the RBI, it handles theirbanking functions. RBI as Bankers Bank - RBI acts asa bank for all banks in India. As per Banking RegulationAct-1949, all banks have to keep a portion of their netdemand and time deposits as cash reserves with theRBI and hence for this purpose banks have to maintainaccounts with RBI. This function of RBI (bankers bank)is delivered through Deposit Accounts Department ofRBI at regional offices. In addition, it is also a banker’sbank because scheduled banks can borrow from theRBI on the basis of eligible securities or any otherarrangement during a need or crisis and hence RBIworks as a lender of last resort to banks. RBI AndManagement of Exchange Rate. Before,rupeeconvertibility was introduced in India, RBI woulddetermine the exchange rate of the Indian currency withforeign currencies. However, this function has becomeless important after the rupee has been madeconvertible. Nevertheless, RBI intervenes in the forexmarket by buying and selling foreign exchange toinfluence the exchange rate. This function becomesprominent when there is high volatility the exchangerate of the rupee. Supervisory Role : RBI is the topfinancial regulator of India. It regulates the Indianbanking system including developmental financialinstitutions, non-banking finance companies, primarydealers, credit information companies and also selectsegments of the financial markets. These regulatorypowers of the RBI are sourced from the BankingRegulation Act - 1949 (for regulating banks) and RBIAct-1934 (for regulating other entities) and’CreditInformation Companies Act - 2005 (for creditinformation companies). RBI’s Responsibility ofMonetary and Credi this function of RBI is based onthe powers given.............. the RBI Act - 1934. RBI isresponsible for monetary stability and economic growthvia influencing monetary policy. RBI announces amonetary policy each year in April and also announces3 Quarterly Reviews in July, October and January.However, RBI at its discretion can announce policymeasures any time. RBI uses the following istrumentsin its monetary policy. It manages credit that promotesmaximum output and employment and also to impartprice stability (control inflation). This function is donethrough instruments like Bank Rate Policy (the rate atwhich R.B.I, lends to commercial banks); Open MarketOperations (which involves R.B.I, sellingand.purchasing government securities); Statutory

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Liquidity Ratio (SLR mch is the statutory minimumliquidity that commercial banks have to maintain) andCash Reserve Ratio (CRR by which commercial bankshave to maintain a statutory minimum cash reserveoftfielr net demand and time deposits on a fortnightlybasis.

Reserves of RBI: RBI is required to maintain’gold and forex reserves of 200 crore of which at east115 crore should be in gold. This is called minimumreserve system. RBI is the 10th largest order of goldreserves among central banks of the world after itpurchased 200 tonnes of gold from t-e IMF in 2010.

RBI and State Governments: RBI may act as abanker to state governments under an 2:-eement. ExceptJ & K andjlikkim, RBI acts as a banker to all states.However state governments :: not keep afixed^mTnimum reserve with RBI because theminimum reserve of a state with RBI :e:e”ds on thesize of the economy of a state. RBI has a Ways andMeans Advances (WMA) scheme to ~e.p states whichhave a temporary mismatch between receipts andpayments. The WMA are z .2" :o states for a period of90 days. If the state is taking WMA based on its 3 yearaverage of 2::revenue and capital expenditure it is calledNormal WMA. If the state government takes WMA bygiving its government securities, it is called specialWMA. If the state exceeds WMA limit, ca ed onoverdraft. A state can have an overdraTTfor a maximumof 36 working days in a liter. The states cannot borrowabove overdraft. The interest rate for WMA is linkedto the rate RBI also helps the states to manage theirdebt, design new loans, issue and retirement of oansetc.

THE FINANCIAL STABILITY ANDDEVELOPMENT COUNCIL

Proposed Functions :

• To engage in macro-prudential supervision of theeconomy

• Supervise the functioning of large financialconglomerates

• Look -into inter-regulatory coordination issues

• Focus an financial literacy and financial inclusion

• Look into issues relating to financial developmentperiodically.

The Council will be chaired by the finance minsterand will have a sub-committee chaired by the Governorof RBI, Experts have pointed°out that such a body will

deprive RBI of its independence / authority as thefinancial regulator. It is also argued that it will encroachon the powers of the regulatory institutions as the FSDCwill act as a super regulator. The first inter- regulatorydispute taken up by the FSDC was the issue betweenSEBI and NCDX (on the issue of NCDX starting astock exchange).

BASE RATE AS A SUBSTITUTE OF BENCHMARK PRIME LENDING RATE

The Bench mark prime lending rate (BPLR) wasthe maximum rate of interest chargeable by banks onloans upto 2 lakh and the minimum rate for loans abovethat. The base rate replaces BPLR. It is arrived at bytaking into account cost of funds, possible costs due toSLR / CRR requirements, administrative costs, profitsand cost of overheads. It would be applicable for allnew loans from July 1, 2010 and also loans that comeup for renewal. RBI will allow banks upto end of 2010to move over to it. Implications:

• Small borrowers will not subsidise largeborrowers because the difference between thehighest and lowest rate of interest will narrowdown.

• Any future changes in loan rate will be affectedby varying the base rate and hence rate hikes willbe uniformly passed to all borrowers.

• Base rate will include ail elements of lending ratesthat are common to all classes of borrowers andhence will make interest rates non-discriminatoryand transparent

• It will promote allocative efficiency of lendingincluding financial inclusion by making morecredit available to agriculturemand smallenterprises

• The freedom in loan pricing and transparency willreflect the relative efficiency of banks 6) It willserve as a benchmark for floating rates of interest.

Capital of Banks : Thisis categorized into Tier-1and Tier-II for the purpose of capital adequacy.

A) Tier-I Capital : This includes equity to setup the bank plus retained earnings. In India,Tier-I includes the owned funds of banksminus its investment in shares, debenturesbonds, loans and” advances

B) Tier-II Capital : This is made up ofpreferential shares, undisclosed reserves,revaluation reserves and subordinate debt.

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Undisclosed reserves refer to profits madeby a bank but has not been disclosed inretained profits. A revaluation reserve is anasset owned by a bank whose value hasincreased. Subordinate debt is junior tosenior debt in Tier-I but is senior to equity.

The Liquidity Adjustment Facility : This ismade up of the Repo Rate.and Reverse Repo Rate. Therepo rate is”the rate at which banks borrow from theRBI by pledging some recognized securities, usuallygovernment securities. The repo rate makes up theceiling of LAF. The reversj repo rate (which is the floorof LAF) is the rate at which RBI borrows from thebanks by transferring government securities. If RBIincreases the Repo Rate, it increases the interest rateat which banks borrow from the RBI and hence in turnthey have to raise their lending rates.- If the RBI raisesthe reverse repo rate (which today is linked to the reporate), it encourages banks to put their surplus moneyin the RBI and hence helps RBI in absorbing excessliquidity with the banks. When banks borrow at reporate, they pledge government securities in excess of.the SLR and hence their SLR remains unchanged. Thebanks can borrow up to ,0b of their net demand andtime liabilities under repo window. Normally banksmake us of the LAF to balance day to day mismatchesin liquidity.

Marginal Standing Facility: This was introducedin May 2011 as another window from which bankscan borrow overnight from RBI. Banks canborrow up to 1% of the NDTL by pledginggovernment securities from their SLR. Hence thereduced by 1% if the bank borrows one percentof its NDTL. The rate of interest is 1% above therepo rate. It is a penal rate because bank isborrowing by pledging a part of its SLR. As perthe RBI decision to introduce MSF, it has beendecided that MSF will be one percent above reporate and repo rate will be one percent abovereverse repo rate.

Open Market Operations (OMO) of the RBI:This refers to sale and purchase of governmentsecurities by the RBI. There are two types ofOMO.

1. Outright buying and selling of governmentsecurities to either inject money or to absorbmoney

2. Repo and reverse repo transactions.

Other Instruments to Control Money Supply:The other instruments to control money supply are BankRate, Cash Reserve Ratio, SLR and other select creditcontrols. CRR is the percent of NDTL of a bank thathas to be kept with the RBI in the form of cash onwhich the RBI does not offer any interest. The CRR isa percent of NDTL of banks on a fortnightly basis. TheSLR (Statutory Liquidity Ratio) is the percent of NDTLof a bank that have to be kept in designated liquid assistslike government securities, RBI approved securities,gold, current account balances withbther banks.lt maybejTOtedJhatjjnder the amended RBI Act - 1934 (asamended in 2006) the minimum and maximum limitsfor both CRR and SLR have been abolished. Both SLRand CRR are statutory reserves as part of fraction -reserve banking concept which is a universal practiceof banks. Select credit controls take the form of fixingthe quantity of bank deposits, directing the allocationof credit and so on. These are not used-in the liberalizedfinancial system in India though RB.Icould resort totheir use via priority sector lending norms.

Priority Sector Lending Norms: The prioritysector lending by banks is also called directed creditas it is the credit to be given to certain sectors identifiedby the government of India and directed by the RBI.The RBI sets the targets for different sectors’ to whichthe banks have to lend up to the targets. These sectorswithin priority sector would not otherwise have accessto credit from the formal financial system or wouldnot afford to pay the commercial rate of interest. Therate of interest charged by banks is less than thecommercial rate. The targets / sub targets for prioritysector lending are

1. For Indian Banks (both public and private) - 40%of total bank credit is to be given to priority sectorwhile for foreign banks in India it is 32% of theirtotal bank credit.

2. The total loans to agriculture to be 18% (of the40% of net bank credit) for Indian banks whileno sub- target is laid out for foreign banks in India

3. For small scale industry, the for banksjnIndia areto lend 10% of their net bank credit while there isno target for domestic Indian banks

4. Export credit for foreign banks to be 12% of theirtotal credit while there is no such sub-target fordomestic Indian banks.

5. Loans to weaker sectionsto be 10% of net bankcredit for domestic banks, while no such sub-target

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has been laid for foreigTTFanks in India. In 2012,the RBI declared that foreign banks with 20 ormore branches.will be brought under prioritysector lending norms over 5 years beginning on1st April 2013. However, foreign banks with lessthan 20 branches will have no subtargets underthe overall target of 32% for priority sectorlending.

New Priority Sector Norms: The NairCommittee recommendations on priority sectorlending, accepted by the government and RBI, are asfollows

1. Foreign banks with 20 or more branches to bebrought under priority sector lending (PSL) in 5years from 1st April, 2013. The overall prioritysector lending will remain at 32% (earlier onlyforeign banks with more 20 branches were tofollow PSL but now priority sector [ending (PSL)is applied to all foreign banks). Overall limit ofPSL is retained at 40% and agricultural loans willbe also given to SHG and Joint Liability Groups

3. Now loans up to crore for micro and smallenterprises will be part of priority sector

4. Loans to micro, small manufacturing units up to25 lakh will be part of PSL

5. Loans for housing above 10. lakhs in metros andabove 15 lakh in other cities are now under PSL

6. Loans to food and aqro processing uTifts are nowunder PSL

7. Educational loans including for vocational course,upto 10 lakh for studies in India and up to 20 lakhfor studies aboard, are now part of PSL

8. Loans for housing projects exclusively foreconomically weaker sections and low incomegroups”, with a ceiling of SJajdi, per house, ispart of PSL

9. loans to distressed farmers indebted to non-institutional lenders are now part of PSL

10. Loans to individuals for setting up off-grid (i.e.private) solar and other renewable energy systemsare now part of PSL.

11. Loans to prepay debt to non-institutional lenderswould now be part of PSL.

Regional Rural Banks (RRB’s): To increasecredit to weaker sections and farmers, the NarasimhamWorking Group - 1975 recommended RRBs. The RRB

Act-1976 paved the way for the establishment ofRRB’s. The RRB’s came into being with the formationof Prathama Grameen Bank in 1975. The RRB’s werespecifically supposed to take banking to unbanked ruralareas, mobTTiieTural savings and channelise thesavings into creating productive capacity in the ruralareas. The sponsors of the RRB’saccording to the 1975Act will be 50% of paid up capitalby the centre, 15%of paid up capital by the state government and 35% bythe sponsor barnr^hichwas” always to be a public sectorbank. The RRB’s were conceptualized as institutionsto lend only to weaker sections of rural society, chargelower interest rates, open branches in remote and ruralareas and keep a low cost profile. With 6 RRB’s in1975, the number rose to 196 by March 31, 1990.However, the RRB’s began to incur losses as clearlyindicated by their worsening credit deposit ratios (CDR)and rising NPA’s The Khusrau Committee -1989 calledfor merger of RRB’s with their sponsor bank. TheNarasimhalnrr Cbrnmittee-I of 1991 also called formerger of RRB’s with sponsor banks and alsorecommended that RRB’s should be allowed to engagein all types of banking business and should not be forcedto restrict their operations to target groups. Hence theRBI allowed the RRB’s to lend to non-target groupsbut not more than 40% of their fresh lending whichwas raised to 60% in 1994. Hence RRB’s began to lendto non-priority sector like home loans, consumer loans,goldToans etc. In 2005, the RRB were asked to maintaina CRAR of 5% and slowly align themselves to Basel-1standards. Guidelines have also ‘been issued so thatRRB’s function on the basis of a Development ActionPlan, drawn in consultation with sponsor banks andNABARD. The Government of India is recapitalisingthe RRB’s in a phased manner. In 2007",”thegovernment of India decided to recapitalize the RRB’sby 1857 crores, of which 928.5 crores will be borne bythe centre. Guidelines have been issued so that theRRB’s cannot make fresh recruitments till they turnaround. The government started consolidation andamalgamation of RRB’s in 2005 and hence their numbercame down to 82 from 196 in 2010. By November 2012,the nurnber of RRB’s reduced to 71 and the governmentwants to reduce them to 64 by March, 31, 2014 and 46eventually based on the 2nd amalgamation plan of 2011.The government wants each RRB to have at least 400branches. It may be noted thatTripura, Nagaland,Manipur, Mizoram, Arunachal Pradesh, Meghalaya andPuducherry have state level RRB’s. West Bengal

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legislative assembly in 2004 decided to have a statelevel RRB by 2004.

Lead Bank Scheme : The Gadgil Committee ofearly 1960’s suggested the concept of lead bank scheme.The Gadgil Committee recommended’an area basedapproach for credit deployment in rural areas. The F.S:Nariman Committee recommended the district as thebaslc unit for the area approach. Each district to beallotted to a particular bank (either public or privatesector) which would perforrrrtheTole of a Lead Bank.The” Lead Bank would be the leader of all the banksin the district (a consortium leader) which wouldcoordinate the efforts banks in the dTstrTcfin matterslike credit planning and branch expansion. The DistrictConsultative Committees were createdjn each districtto facilitate coordination of activities of all the banksand financial institutions in the districfon one hand,and the government departments on the other. The LeadBanlTwould prepare District Credit Plan which wouldbe the”basis to provide credit to identified target groupsin the district. However, the Lead Bank Scheme becameineffective due to lack of interest of commercial banksin the scheme”, due to lack of coordination betweendistrict planning authorities and banking institutionsoperating ih~the district on one hand, and betweenNABARD and the Lead Bank on the ot Tier side. In2009, the Usha Thorat (she was deputy governor ofRBI then) committee was set up to revitalize the LeadBank scheme. The committee recommended thecontinuation of the scheme and also suggested thatprivate banks should be given greater role in the LeadBank Scheme. Based on the Usha Thorat Committee’srecommendations, the RBI issued guidelines in 2010for the continuation of the scheme and for quarterlymeets of the District Consultative Committees.

Bancassuranee: When Banks sell insuranceproducts it is called Bancassurance.. It originated as abusiness model in France in the 1980s. It helps boththe banks and insurance companies because banks canuse their network of branches to reach many clientsand insurance companies can sell more insuranceprodifcts. In India, banks entering banacassurance haveto obtain a license from IRDA to work as a CompositeCorporate Agent of an insurance company or to have aReferral Arrangement with an insurance company.Banks in” India can undertake banacassruanc under theBanking Regulation Act-1949. Any scheduledcommercial bank is permitted to undertake insurancebusiness as an agent of an insurance company on the

basis’ of a fee but not by sharing the risk. Howeverbanks which have a minimum net worth of 500 croreand a CRAR of least 10% can enter intobanacassurance. If there is FDI in banacassurance, theforeign partneiican participate only up to,-26% of theequity and with approval of IRDA and FIPB. More thanone public sector bank or private sector bank may beallowed to participate in the equity of the insurancecompany as a joint venture but, this bank to form ajoint venture and hence share the risk of insurance, ithas to have a minimum net worth of 500 crore and aCRAR of at least 10%. All banks entering intobanacassurance require prior approval of RBI and haveto^be IRDA compliant. In January 2012, the IRDAallowed banks to tie up with different insurancecompanies in different.states unlike the earlierrestriction where a bank had to tie up with only onelife insurance company and only one general insurancecompany. The IRDA guidelines of 2012 have dividedthe country into geographic zones and have alsoallowed insurance companies to partner with differentbanks and NBFC’s in different states. The draft normsof IRDA have divided the country into 3 zones for thispurpose.

Banking Laws Amendment Bill-2012 : This waspassed by parliament in December 2012. The chiefprovisions of the bill are

1. Voting rights for shareholders raised from 10%to 26% in private banks while in public sectorbanks, it has been raised from 1% to 10%.

2. Banks will not be allowed to participate in futurestradi ng in commodity markets.

3. RBI can supersede boards of private banks.

4. Competition Commission of India to look intocompetitive practices in banking includingmergers and acquisitions in banking sector.

5. RBI to give new licenses for setting up privatebanks.

New Norms for Setting Up Private Banks: Thefollowing norms have been drafted for setting upprivate banks

1. The private banks will be set up under Company’sAct-1956 with a mjnjmum capital of 500 crore.

2. FDI up to 49% of paid up capital to’be allowed.3. The private banks to be registered with RBI as

NBFC.

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4. The private bank will not have aggregate exposureof more than 20% in any single company of itspromoter group and not more than 10% inpromoter group.

5. The promoter group to hold 40% of paid - upcapital of the private bank for 5 years from thedate of licensing. The shareholding of thepromoter group in excess of 40% to be broughtdown to 20% in 10 years and 15% in 12 yearsfrom date of licensing

6. It should have 25%.of its branches in unbranchedrural settlements

7. The promoter group should have a 10 year trackrecord of running sound business and should nothave more than 10% exposure to real estate.

8. The private banks to have CAR of 12%

BANKING SECTOR PRIOR

TO INDEPENDENCEAND NATIONALISATION :

1. Money lenders and indigenous banks constitutedthe core of the financial system prior tonationalisation, accounting for nearly 90% of thecredit in 1930.

2. Non-banking companies were also carrying outquasi-banking business.

3. There was no socially desired distribution ofcredit. The pattern of distribution of credit wasskewed in favour of industry, especially largeindustrial houses. Priority sectors like agriculture,small industries and expdrts were neglected.

4. The monetary arid credit situation was not underunified control.

5. There was limited scope of banking business.Commercial banks had not entered the rural sector.

6. Co-operative sector as a source of finance in therural areas hardly met 3% of the credit requirementof farmers and as a result, this class was subjectto exploitation by traditional money lenders.

In view of all this, the government moved over tothe concept of social control over the bankingsector.

1. R.B.I, was nationalised in January 1949.

2 Based upon the recommendations of the All-IndiaRural Credit Enquiry Committee, the ImperialBank was nationalised in 1955 and renamed asState Bank of India. The SBI was specifically

desired to contribute to rural credit and providefinance to small scale industries.

3. In 1959, eight major state associated banks wereconverted into subsidiaries of S.B.I. The StateBank of Saurashtra was merged with SBI in 2008.The State Bank of Indore was merged with SBI in2010. Now the associate banks of SBI are StateBank of Hyderabad, State Bank of Mysore, StateBank of Patiala, State Bank of Bikaner and Jaipurand State Bank of Travancore. The SBI ranks 60th

list of top 1000 banks in world in 2012. If theassociate banks are merged with SBI, it could bein the top 10 banks in the world.

NARASIMHAM COMMITTEE-IIRECOMMENDATIONS

The report was submitted April 1998. Therecommendations are :

1. Increase in capital adequacy ratio to 9% by 2000and to 10% by 2002 A.D. The R.B.I, should havepowers to raise capital adequacy for individualbanks.

2. Merger of strong banks with strong banks but notwith weak banks.

3. The minimum shareholding of Government inequity of nationalised banks and SBI to be broughtdown to 33%.

4. Government may consider conversion of publicsector banks into companies under the CompaniesAct.

5. Government guaranteed advances that have turnedinto bad debts should be treated as’NPA’s. Incomerecognition, asset classification and provisioningnorms should be applied to governmentguaranteed advances.

6. The associate banks of SBI should be constitutedlike nationalised banks with a chairman-cum-managing director and two wholetime directors.

7. The paid up capital for new private banks to beraised from 100 crore.

8. The minimum start-up capital for foreign banksshould be raised from 10 million dollars to 25million dollars. The foreign banks should beallowed to set up subsidiaries / joint ventures inIndia and should be treated on par with privatebanks.

9. An Asset Reconstruction Company should be setup. All non-recoverable NPA’s should be

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transferred to it and the company would issue NPAswap bonds to banks.

10. Weak banks to be confined to narrow banking.

NARROW BANKING : This was a conceptoutlined by Narasimham Committee-II. Narrowbanking is a concept applied to a weak bank (a weakbank as defined by Narasimhan Committee-II is onewhere total accumulated losses of the bank and netNPA’s have exceeded the net worth). Hence to restorethe weak bank to health, narrow banking is applied asa concept. Narrow banking requires banks to invest theirdeposits in-safe and liquid government securities.Banks which place their funds only in’short terrrfriskfree assets or banks whose demand deposits arematched by safe liquid assets are called narrow banks:— The concept of narrow banking for weak banks wasfirst recommended by Tarapore Committee.It,.recommended that incremental SLR for weak banksshould be raised to 100% and for banks which are veryweak, there should be a limit on advances / depositswith all their incremental resources being invested ingovernment securities.

BANK NATIONALISATION : 1969

OBJECTIVES :

1. Progressively meet and serve the needs ofdevelopment of the economy in conformity withthe national policies and objectives.

2. Secure the territorial and regional spread of thebanking system.

3. Secure faster mobilisation of financial savings.

4. Re-orient credit deployment in favour of smalland disadvantaged.

5. Eliminate pre-emption of bank credit by largeborrowers.

6. Remove the control of business houses on banks.

7. Professionalisation of bank managements.

8. Provide adequate training and reasonable termsof service of bank staff. Thus, the objective behindnationalisation in 1969 was to convert class andcommercial banking into mass and social banking.In pursuit of this, 14 major banks werenationalised in July 1969. In 1980, 6 more bankswere nationalised.

Impact of Nationalisation: Population perbranch was 82000 in rural areas and 33000 in Urbanareas in 1969. In 2007, the population per branchimproved to 1 branch per 17000 in rural areas and 1

branch per 13000 in urban areas. In 1969, only 17% ofthe bank branches were rural and in 2007, it rose to32%.- For public sector banks, the rural branches in2008 were 35% of their total branches.

1. The amount of advances of banks to varioussectors of the economy has increased.

2. The banking sector today meets most creditrequirements of the priority, sector.. Priority sectorlending today is between 33 to 40% while it wasonly 14.9% in 1969 on the eve of nationalisation.

3. Nationalisation of banks has played a key role inimproving the rate of savings in the country,enabling it to launch massive programmes ofdevelopment of industry and agriculture.

4. Spectacular ncreases have been recorded inaggregate deposits of banks in the post-nationalisation period.

5. The post-nationalisation period is also marked bya huge upsurge in several other bankingparameters in the country.

6. A number of region specific programmes havebeen evolved over the years with the help of thebanking sector to help the poorer sections of thesociety with gainful employment and assetcreation. Thus, to the extent of building upfinancial infrastructure, extensive coverage of thecountry with banking facilities, mobilisingresources and deploying credit to a wide spectrumof economic activities, the nationalisation of bankshas served the purpose very well and achievedthe objectives to an admirable extent.

PROBLEMS OF THE BANKING SECTOR :1. Priority Sector Lending : The priority sector

lending averaging between 35% to 40% of alllending by the banks has eaten into the vitals ofthe financial viability of banks. Prior to 1990, allpriority sector lending was below the marketprices of interest rates-i” The banks were askedto cross-subsidise these lendings from profits intheir other operations. In addition, the recoveriesare very poor in this sector. The problem wasfurther Compounded by the Loan Waiver Schemeby the Janata Dal Government in 1990. The otherproblem with priority sector lending is theadministrative and default costs associated withsuch lending. Finally, till the reforms were takenup, there were nearly 50 lending categories in the

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priority sector which have now been reduced to3.

2. Bank expansions were usually on considerationsother than commercial. A recent survey hasbrought out that thousands of rural and semi-urbanbranches are unviable

3. High growth of expenditure (establishment costsmostly) of the public sector banks.

4. Low profits of banks. The ratio of profit toworking capital is relatively less in India.

5. Faulty money supply and credit policies of theR.B.I, in the past. The two major instruments ofcontrolling credit by R.B.I, i.e., the S.L.R and theC.R.R. have added to the problems of commercialbanks. At certain points of time, the S.L.R. andthe C.R.R. accounted for nearly 63% of theliquidity of banks (net time and demand deposits)leaving little space for banks to diversify into non-traditional areas andfotherhigK yieldinginvestments. For e.g., the C.R.R. steadily went updue to the budget pressures of the Governmenton R.B.I. In addition, the repeated borrowing ofthe Government from nori^R.B.I. sources led toupward adjustment’ of .S.L.R. thereby forcing thebanks to inves^an Increasing proportion of theirresources on low yielding Government securities.

6. Poor state of Regional Rural Banks. The R.R.B.’swhich were started in 1975 are in a bad shape.

7. Inconsistent interest rate policy of nationalised/scheduled banks as a result of which alternativeslike Indira Vikas Patrika, PSU bonds and UTISchemes have been attracting more deposits.

8. The bank deposits as a proportion of householdsavings have also peen declining due to theincreasing share of the share and debenturemarket. In addition, the financial institutions otherthan banks have also been extending short termcredit which was the monopoly of commercialbanks.

9. Banks have also frequently flouted the consortiumlending guidelines.

10. State governments also flout R.B.I, guidelinesthereby affecting the banking sector. For e.g., theState Governments guarantee bonds ofGovernment undertakings carrying high interestrates (higher than government securities).;

11. Paucity of funds of developmental banks likeIDBI/ICICI because of public sector bonds tappingthe capital market while R.B.I, fixes the quota ofbonds that these development banks can issue.Inaddition, IDBI/EXIM Bank, NABARD are underthe control of the Banking Department of theFinance Ministry but not RBL,

12. There is no control by RBI on financial institutionslike insurance companies which are involved indirect lending. For e.g., the LIC lends 200-300crore per year to the corporate sector.

FINANCIAL SECTOR REFORMS : In 1991,a beginning of radical reforms in the banking sectorwas made with the setting up of the Committee onFinancial System (Narasimham Committee) whichmade certain far reaching recommendations tostrengthen the Indian’ banking industry. The report ofthe committee.which was submitted in November 1991has called for alignment of Indian banking with theinternational environment by adopting prudential normspertaining to capital adequacy, income recognition,provisioning, investing, forex management,transparency in financial reporting, disclosure etc. Thenext two years witnessed these norms being extendedto the banks in India. The various reforms undertakenare :

Prudential Norms :

1. Capital Adequacy Ratio : The level of capitaladequacy was prescribed in 1992 (April). AllIndian banks are expected to reach a 4% capitalto risk assets ratio (CRAR) by March 31, 1993and an 8% CRAR by March, 1996. Banks withoverseas branches should reach an 8% CRAR byMarch 31,1394. Foreign banks should reach the8% CRAR by March 31, 1993. (This simplymeans, for every Rs.100 lent, the banks have toprovide Rs.8 as capital adequacy).

2. Income Recognition : All commercial banksshould observe income recognition beginning withfinancial 19931 This means that banks wouldrecognise interest only when it is actually receive.

3. Asset Classification : Banks have to classifyadvances into 4 categories i.e., standard, sub-standard, doubtful and loss assets. Banks shouldthereafter make provisions to the fullest possibleextent for bad and doubtful assets before March31, 1994.

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Rationalising and Deregulation of InterestRates : Interest rates structure has been substantiallyrationalised and the number of lending categories havebeen reduced from 50 to 3 in the priority sector (loansup to 25,000 will have an interest of 12%, loans between25,000 to 2 lakhs will have a fixed interest rate of 15%and loans’over 2.lakhs will have a minimum interestrate of 15%).

• Minimum rate on loans has been sharply reduced.

• Permission to close loss making rural branchesof commercial banks in rural areas and semi- urbanareas with two branches.only.

• S.L.R. has been reduced from 38.5% to aneffective 25%.

• The Recovery of DeBts due to Banks andFinancial Institutions Act has been passed. Underthis act, Special Tribunals of Recovery are beingset up at 10 places (Delhi, Bombay, Madras,Calcutta) which will take up cases where the-debtamount to a consortium of banks/financialinstitutions is rupees 10 lakhs and above. Once acase comes up before a tribunal, it has to be settledwithin 6 months. The tribunals have been givenwide powers including arrest of promoters in caseof non­ compliance of its orders. It can also attachproperties mortgaged to financial institutions andbanks and appoint recovery offices for disposalof assets.

• Banking Companies (Acquisition and Transfer ofUndertakings) Act has been amended to facilitatebanks to raise their own capital from the market.

• The Government has decided to bring down itsequity in public sector banks to 51% (henceoffload 45%).

• 50 Regional Rural Banks are to be restructured.These 50 loss making R.R.B.’s will be mergedwith branches/subsidiaries of commercial banks.

• To protect the viability and financial health.of thebanking system, 5700 crore in the 1993-94 and5600 crore in the 1994-95 budget were providedby the Union to recapitalise the nationalised publicsector banks. The money will be available to onlythose public sector nationalised banks which enterinto a Moll with the R.B.I, in respect of certainnorms.

• A Board for Financial Supervision has been setup in the R.B.I.

Private Banks : In January 1993, the R.B.I, issuedguidelines for setting up of new private banks. In fact,there was no legal ban earlier in establishing the privatebanks but the R.B.I, did not give any license for thelast 24 years. The setting up of private banks followsthe Narsimham Committee report on financial sectorreforms in so far as it relates to introducing an elementof competition in the banking sector.

Objectives of Setting Up Private Banks :

• Introduce competitiveness, efficiency and providefinancial intermediation services to the society atlarge.

• Upgrade technology, make the banking system inIndia financially viable and introduce state-of-arttechnology / services in the banking sector.

• Improve quality of financial services, customersatisfaction and efficiency.

Guidelines for Private Banks - 1993 :

• Private banks will be registered as public limitedcompanies under the Companies Act - 1956. TheR.B.I, wiling rant license under BankingRegulation Act - 1949 on a case by case basis.The R.B.I, may include t|}

te’private banks in the

second schedule of the R.B.L Act - 1934 at theappropriate time. 3oth licensing and schedulingwill be at the discretion of the R.B.I.

• The new private banks “will have a minimum paidup capital of 100 crores. Their will be listed onthe stock exchanges and will be controlled bySEBI guidelines.

• The private banks will be governed by theprovisions of the R.B.I. Act - 1934, BankingRegulation Act - 1949 and other directives ofR.B.I, with respect to their management, liquidityrequirements and scope of their activities. Hencethe new private banks will not be free from R.B.I,controls/regulations.

• The new private banks will haveTo observe allthe prudential norms from their inception likecapital adequacy ratio, asset classification, incomerecognition and provisioning for bad / doubtfulassets.

• Preferably, the new private banks will have theirhead-quarters in centres where no head-quartersof any other bank is located. This to avoidconcentration of Tieid- quarters of banks inmetropolises.

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• The new private banks will not be allowed to setup their subsidiaries or mutual funds during theinitial 3 years.

• The banks should achieve priority sector lendingtargets. However, modifications may be made inpriority sector list / targets for these banks in theinitial 3 years. The new banks will, also berequired to open branches in rural / semi-urbanareas.

• The new private banks shall make use of moderninfrastructural facilities in office equipment,computer and telecommunication in order toprovide good customer service.

• The new private banks will be given licenses todeal.in foreign exchange if they desire.

Negotiable Instruments : The NegotiableInstruments Act - 1981 (amended in 1989 and 2002applies to entire territory of union including J & K.The Act has provision’s covering negotiableinstruments, suciv’as promissory notes, checks, drafts,bills of exchange, Negotiability means transfer of aninstrument from a person/entity to another. The transfershould be in good aith and restriction. Briefly,thesenegotiable instruments are

• Promissory Note : a paper where a personpromises to pay money in writing to a specificperson. The paper is tamped in accordance withthe Indian Stamp Act and revenue stamp is affixedon the promissory note signed by the promissory.Promissory notes are of two types - Demandpromissory note which has to be paid on demandand Usance Promissory Note where the moneyhas to be paid after a certain period of time.

• Bills of Exchange : This is an unconditionalorder.which is signed by the maker and directs acertain period to pay a certain some of money tothe bearer. The person who orders to pay is adrawer, the person who is directed to pay is adrawee and the person authorized to receive thepayment is the payee. A minor can be a drawerbut not a drawee. A bill drawn and paid in India isan inland bill. A bill riot drawn in India but ispayable in India to a person who is in India and isan Indian or foreigner is a foreign bill. A chequeis a bill of exchange where the drawee is the bank,the account holder is the drawer and th’e receiverof payment is payee.

• A demandjjraft is also a negotiable instrument andis an order to pay money by one office’ of a bankin another office of the same bank. Ajjemand draftcannot be paid to a bearer. It is similar to a bill ofexchange but not a cheque. Once-the payee getsthe demand draft, the payment cannot be stopped(unless ordered by a competent court). Thedifferences between a cheque and a demand draftare - a cheque can be made payable to a bearerbut not a demand draft, a demand draft can becleared in a specified branch of the issuer bankbut a cheqiie can be cleared in any bajik otherthan the issuer bank including the issuer bank, acheque may not be honored~butTa demanded’raft“is always honored. An issue party of the chequeis liable for the cheque and hence is not backedby a bank guarantee, but a demand draft is backedby a bank guarantee.

Cheque Truncation System (CTS) : This wasapproved by RBI in 2010 afterthe NegotiableInstrument Act was amended to include an electroniccheque as a cheque. The clearing of cheques by bankson the bass of electronic cheques is called chequetruncation. In cheque truncation, afte? a~cheque ispresented to the bank, an electronic image is generated”by the receiving bank and passed on to the drawee bankwithout physically sending the cheque to the draweebank. This improves operational efficiency, removesthe possibility of loss/damage of cheque in transit, fasterclearance of cheques and removes the geographiclimitations of the existing clearing system. The CTS-2010 is mentioned on the cheque leaves along withbank details and logo on the face of the cheque. Pleasesign above is written on the cheque and the voidpantograph i.e. a wave-like design where the accountnumber is printed is on the cheque. From January 1,2013, cheques which do not conform to CTS-2010would not be honored by the banks. .

The Sri Krishna Committee on Financial SectorLegislative Reforms Commission: The majorrecommendations are

• Key regulators like- IRDA, RBI, SEBI etc. to beunified into a single, Unified Financial Agency.

• A Financial Redres’sed Agency to be set up toredress consumer complaints against allcompanies with the financial sector.

• An Independent Debt Management Office to beset up

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• A Financial Sector Appellate Tribunal (FASI) tohear appeals against regulators to be set up

• A Resolution Corporation to be set up to addressinter-regulatory issues. The Sri KrishnaCommittee was set up in March 2011..

Libor : This stands for LondonJntejiBank offeredRate ofTnterest. It is used to calculate the costnf_fn£H5_ij in inter-bank borrowing for overnightloans to loans of 12 months. Each bank/financialinstitution sets its own Libor. The Euribor is equal toLibor in Euro. The Libor today is used for borrowingand securities contracts worth 300 trillion dollar loansand financial transactions. Barclays Bank and UBShave been recently fined for manipulating Libor to suittheir positions in December 2012.

Quantitative Easing: This .is an unconventionalform of use of monetary policy by central banks tostimulate the revival of economy when conventionalmonetary policy has become ineffective. In quantitativeeasing, a central bank buys financial assets fromcommercial banks (like their bonds) and other privateinstitutions hence injecting a pre-determined quantityof money into the economy via these commercial banks.Quantitative easing increases the excess reserves of thebanks and raises the prices of financial .assets that banksissue to the central bank. Usually central banks resortto quantitative easing”dtiring deflation as part of arecessionary trend or when there is low inflation dueto low demand.’ The Federal Reserve of US has beenresorting to quantitative easing since 2008 to lowerinterest rates in the economy. The first QE was launchedin 2008 under which the Federal Reserve boughtmortgage backed bonds and also Treasury bonds. Thesecond QE was launched in 2010 under which t”heFederal Reserve bought Treasury bills. The third QEwas launched in September 2012, under which theFederal Reserve would buy 45 billion dollar treasurybills and 40 billion dollar worth mortgage backedsecurities each month for the rest of the year.

Deposit Insurance and Credit GuaranteeCorporation (DICGO: This is a wholly ownedsubsidiary of RBI. All commercial banks, includingbranches of foreign banks in India, local area banks,and RRB’s are insured by DICGC. In addition, state,central and primary cooperative banks (or urbancooperative banks) are’also covered under depositinsurance of DICGCF. But PACS , are not covered byDICGC. The DICGC insures all deposit accounts -savings, fixed, current and recurring deposits

except_deposits of foreign governments, deposits ofcentral and state governments. The maximum amountper depositor insured is 1 lakhTncluding principal andinterest. The insurance cost is borne by the bank whichis insured by DICGC.Credit Default Swap(CDS): It isa contract which provides for insurarice_ag_ainstdefault ofj^ loan. For e.g., an investment firm (a bankor any investment company) buys a corporate bond orgovernment bond. This investment firm enters into acontract (called CDS) with another company, i.e., a 3rd

party by which it seeks to insure against the loan ith.ad given to the corporate or government against theirbonds. The third party is paid interest and or premiumby the investment firm (where the investmentTboughFthe CDSTrom the 3rd Party company). If thecorporate or government default on the loan, theinvestment firm gets the loan amount from the 3rd

company. Hence the investment firm is insured againstthe likelihood of default on the loan it had given inreturn for the bond it bought. The 3rd party company(usually a hedge fund) gams only the premium and orinterest if there, is default on the loan as it has to paythe loan amount to the investment firm. CDS has beenallowed by RBI in India “recently. RBI has laid downguidelines for CDS. For e.g., the company (Hedge fund)selling CDS should have enough capital and the buyersof the CDS cannot buy CDS for a value more than theloan they have given.

MONETARY AND CREDIT POLICY OF THERBI

This is a set of macro-economic tools used by theRBI to influence inflation, interest rates and credit rates.The traditional objectives of the monetary and creditpolicy are economingrowth, price stability and financialstability (i.e., exchange rate stability and interest ratestability). The related objectives are tobalance.investment and savings and generation ofemployment. The monetary and credit policy is calledexpansionary when the RBI uses the policy rates toincrease liquidity in the economy. This is usuallyresorted to in times of slower growth or a trend towardsrecession. An expansionary policy is to stimulategrowth and employment. A contractionary policy isusually to fight inflation. The tools ofThe monetaryand credit policy and A) Reserve Requirements - thesetake theTorrrTof CRR and SLR. Cash Reserve Ratio isthat percent of deposits that a. bank has to keep withthe RBI in the form of cash on which” there is nointerest. Under the’RBI Act 1934" and the Banking

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Regulation Act - 1949, the minimum and maximumCRR were 3% and 20%^respectively. This has-beendeleted by an amendment to both the Acts in 2006. Ifthe RBI raises the CRR, the banks have relatively lessmoney to lend and hence the money supply comes downrelatively. In addition, the interest rates also rise makingloans costly. The statutory liquidity ratio (SLR) is thatpercent of deposits of a bank / financial institution thathas to be kept in the form of approved securitiesapproved by the RBI (usually government securities)and also in the form of gold. The bank keeps SLRreserveswith itself. If the SLR is raised, the moneysupply coraes down and vice versa The minimum andmaximum SLR rates of 25% and 40% under the RBIAct”and Banking Resolution Act have been abolishgdin 2006. B) Liquidity Adjustment Facility (LAF) - Thisis made up of repo and reverse repo. Repo rate is therate at which the RBI lends to banks and hence banksget money from the RBI. If the repo rate is lowered,the cost of borrowing by the banks from the’RBI comesdown and hence banks are likely to borrow liberally.This is turn increase money supply. The inverse is trueif repo rates are raised. Reverse repo is the rate at whichRBI borrows from the banks. If the reverse repo rate ishigher, banks are likely to put their money with RBIwhich is turn can reduce the money supply C) SelectiveCredit Controls (SCC) :. These are direct orders of theRBI to banks directing them to give mote credit to somesectors or less credit to some others or orders specifyingthe detailed deployment of credit by banks and orderswhich regulate interest rates..When the RBI usesselective credit controls, the total quantum of creditremains the same (unlike in CRR or SLR changes) butthe available credit is rationed for differentsectors,’along with determination of interest rates,

The monetary and credit policy has the delicatetask of balancing. growth with inflation and maysometimes have to tilt in favour of either of the two.For e.g., when the economy is overheated with highgrowth and high wages leading to high demand,inflation may appear. The input prices go up and henceproduction costs also rise. Eventually the demand dropsdue to inflation and hence growth automatically slowsdown. As prices stabilize, growth picks up and seeksto achieve a higher base. In such times, RBI has totrade inflation for growth or vice-versa, but only in theshort term.

NPA’S OF BANKSWhat are NPA’s fNon Performing Assets of

Banksl : NPA is a loan asset of a bank financialinstitution where interest and / or principal installmentsare in arrears (in due) beyond 90 days. After prudentialnorms were extended to the banks and financialinstitutions by the Government based on therecommendations of the Narasimham Committeerecommendations, the NPA’s in India are sub-classifiedinto: Sub-standard NPA’s: Substandard NPA is a loa.nwhich is overdue in terms of principal and interest fora period of more than 90 days from the duejjaje. Asub-standard NPA becomes a doubtful NPA after 1 yearcalled Doubtful Asset-

1. It remains classified as a DA-1 till one_ year_andafter which it is classified as DA

2. It remains as DA-2 till 3 years after which it isclassified as DA

3. For agricultural loans, a loan by a bank isclassified as an NPA if interest and principalinstallment is not paid for 2 crop seasons fromthe due date, if it is a loan for a short durationcrop. However, if it is a long duration crop, theloan becomes on NPA if principal installment andinterest has not been paid for more than one cropseason fromtfie due date. For non-agriculturalloans, a loan becomes on NPA if principalinstallment and interest have not been paid formore than 90 days after the end of a quarter.

Trends in NPA’s: The NPA’s of Indian banks were23.2% of all loans in 1993 and came down to 2.2% in2011 (though the absolute value of NPA’s has gone up).On March 31, 2012, the NPA’s rose to 2.9% of all loansand further to 3.25% on June 30, 2012. The NPA’s ofIndian banks is set to rise because of increasing numberof corporate debt restructurings. Around 14% ofrestructured debt amount is said to have become NPAby March 31, 2012. Loans to agriculture and MSMEaccount for 36% of all NPA.

Causes For NPA’s :• Priority Sector Lending: Banks are mandated to

extend upto 40% of their total loans to the prioritysector (Ifke export promotion, SSI, sponsoredschemes of the Government like Prime Minister’sRozgar Yojana and other government sponsoredself-employment schemes). The NPA levels inpriority sector lending is high than the industrialsector. In addition, the recovery in case of

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sponsored programmes is only 15% of total loanextended to them.

• Fraudulent management practices of industrieslead to willful deliberate default of liabilities tofinancial institutions.

• Inability of banks to discriminate’between soundand fraudulent borrowers because of poor ratingskills.

• Banks also lend at higher rates to borrowers whohave a lower credit rating which may triggerdefault by the borrowers.

• The legal framework in India offers no mechanismfor immediate action against defaulters.

• The long drawn procedures of BIFR impedes loanrecovery.

• The provisioning method of classifying NPA’s(sub-standard, doubtful, loss) allows for phaseddisclosure of NPA’s by banks and does not takeinto account the entire impact of a likely defaultat one go. 8. Creation of Debt Recovery Tribunalshas made only a marginal impact.

Steps Taken To Bring Down NPA Levels:

• Prudential norms have been mandatorily imposedon banks in 1992 and 1993. [The prudential normsare : Capital adequacy ratio - this is 8% for allbanks / F.I.S. Capital adequacy of 8% simplymeans that for every 100 rupeeslent, the banksshould set aside 8 rupees frdm their profits ascapital adequacy; Income Recognition: All banksare to observe income recognition .from 1993 i.e.in accounting procedures banks should recogniseinterest only after it is actually paid within 180days period from due date. Asset Classification:Banks to classify loans into standard, sub-standard, doubtful and loss assets. Banks shouldprovide to the fullest possible extent to cover bad(loss) and doubtful assets from their profits].

• Rationalisation of nterest.rates in priority sectorlending. The number of lending categories underpriority sectq havfl been brought from 50 to 3 withrationalisation of interest rates.

• The Parliament passed the Recovery of Debts dueto Banks and FI’s Act in 1993. Under this Act,Debt Recovery Tribunals have been set up to takeup cases involving recovery ofToa’ns in excessof 10 lakhs. This is for speedy settlement of cases(within 6 months).

• To improve the financial health of public sectorbanks the union government injected around11,000 crore in two phases in 1993 and 1994.

• RBI has brought down SLR from around 38.5%to 25% now and CRR from 25% to around 10%now.

• Definite steps have been taken to bring down thelending rates of banks (like reduction of bank rateby RBI and permitting private sector banking toinfuse competition).

• Permission has been given to commercial banksto close loss-making rural branches in rural / semi-urban areas (which have a minimum two bankbranches).

• In the budget of 98-99, the Government hasdecided to reduce its equity in public sector banksto reduce interference and increasecompetitiveness and autonomy.

• Banking Companies Act has been amended topermit banks to raise resources from capitalmarkets.

• Interest rates on deposits have also beenderegulated in general.

NPA’s and Asset Reconstruction Companies:Banks can sell their NPA’s to Asset ReconstructionCompanies after the loan has remained an NPA for atleast 2 years. The purchasing bank or company paysfor the purchase in cash and will have to retain theNPA in its account for at least 15 months before it cansell it to some other company or bank. The purchasingbank classifies the NPA as a standard Asset for 90 daysafter the purchase.

Basel Norms : The Basel norms are a set of normsevolved by the Basel Committee on BankingSupervision based in Basel, Switzerland. These normsbasically are to protect the financial worth of banks/financial institutions and also represent a set of bestbusiness practices to be followed by banks. The Basel-I norms evolved in 1988 called upon banks worldwideto maintain a capital to risk adequacy rat To (CRAR)of 8% of the assets weighted to risks (CRAR is basicallyprovisioning by banks to deal with likely RPA’s). TheBasel-II norms were evolved later which noLaqly.raised the CRAR but also provided for certain a new,risk category in bank investment and lendinqoperations. For e.g., under Basel-I, all debts togovernment carried zero risk weightage and all debt tocorporate was given the same risk weightage of 100%

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without regard to the different risks associated withdifferent types of corporate. Basel - II however providesfor

1. Risk Classification into

a) credit risk .vhere principal and interest canbe defaulted

b) Market risk where bankd investments ingovernment securities or gold or otherapproved securities can undergo pricechanges and may cause erosion of theirinvestments.

c) operational risks which can be a loss of bankcapital due to internal processes like fraud,or risks to capital in course of bank processesbut which are not risks of the market or ofloans.

2. Under Basel-II banks are to get their risks ratedby external agencies.

3. Basel - II proposes a 3 - pillar concept tostrengthen banks which are

a) new standards for minimum capitalrequirement along with a clear methodologyto assign risk weightage to credit risk, marketrisk and operational risk

b) increased role for bank supervisors

c) defining in higher standards andrequirements for higher disclosures by bankson their capital adequacy, asset quality andother risk management practices

d) Higher capital norms in Tier-I and Tier-II ofbank capital (Tier-I capital of banks includespaid up capital / equity and retained profitswhile Tier-II capital includes preferentialshare equity capital plus subordinate debt).The Basel-I norms were begun to Ije adoptedin 1992 by Indian banks based on therecommendations of the NarasimhamCommittee-I under which a CRAR of 8%was prescribed but RBI mandated it at 9%.RBI also mandated a shift to Basel-II byIndian banks beginning in 2009.

Basel-Ill Norms: These were announced inSeptember 2010.

1. Tier-I capital of banks to be raised to 4.8% (fromearlier 2%) beginning in January 20.13.

2. 2.5% of deposits of banks deposits to bemaintained as a capital conservation buffer by

2019.

3. Capital reserveslaqainsTjlsky assets’ raised from5% to 7%. The Indian banks (public and privatemay have to set aside 6 lakh crore to meet Basel-Ill norms. However; the time period is relativelylong i.e., 2013 and 2019, hence trie Indian bankshave welcomed it

Takeout Financing: This is a system of helpingbanks to lend to infrastructure projects where the loansare of a large size and for long durations. Banks inIndia cannot exceed exposure limits (the limit for abank to lend/invest in a given category like loans toinfrastructure projects or investment by a bank in equityshares in the capital markets. The exposure limit is setby RBI for banks). In takeout financing, a financialinstitution takes over the loan of a bank (given toinfrastructure projects) Tpart or ijfvvhole on a pre-determined, fcaslsTafter a” certain period of time. Thebanks remove these loans from their account books andalso get money to lend afresh to other infrastructureprojects. Takeout financing therefore helps banks tomake available long duration/large debts toinfrastructure projects, to deal with asset liabilitymismatches and also to deal with exposure limit issues.The Indian Infrastructure Finance Company Ltd(IIFCL) set up in 1956 has been designated as a takeoutfinancing institution in India in 2010. FinancialInclusion and Microfinance.

Bank Recapitalization : The 2010-11 budgetprovided 15000 crore for bank recapitalization. Another6000 crore was provided in December 2010 forrecapitalization of 10’PSU banks. The uniongovernment also decided to raise the equity capital ofSBI by 7900 crore. SBI to issue preferential shares tothe central government including the premium. InOctober 2011, Moody’s Rating had downgraded SBI’scredit rating as it did not have CRAR of 8% of its tier-I capital. The government also decided to recapitalizePunjab National Bank by .1285 crore for which PNBwould issue preferential shares with premium to thecentral government. The Budget 2012-13 provided15888 crore for recapitalization of public sector banks,NABARD and RRB’s. In the next five years beginingin fiscal 2012-13, PSU banks would require 1.5 lakhcrore as additional equity and a non-equity capital of2.60 lakh crore to comply with Basel-Ill norms.

Recent Trends in Banking : The banking sectorin India has improved in terms of many parameters.

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For e.g., the return on assets improved form 0.87% in2000 to 1% in 2009. The world average is between0.25 to 1.25%. The ratio of bank deposits to GDP was44% in 2000 improving sharply to 74% in 2009. Thenet NPA ‘s of net advances in 1997-98 for Indian bankswas 9% which has sharply come down to 1% in 2007-08. The cost to income ratio of the banks has comedown from 61.22% in 2001 to 48.9% in 2007-08.

COMMERCIAL PAPER

INDRODUCTION

Commercial paper is a borrowing instrument thatbanks and other financial companies .make use of tofinance short-term investments. Usually banks and largecorporations use CP to manage working capital or topurchase inventory. CP is an instrument to raise capitalfor a short time period, which is usually less than ayear. It is a discounted instrument having a face valueand a maturity value. The purchaser of a commercialpaper buys it at the discounted rate which is equal tothe maturity rate minus the interest CP carries. Thesecommercial papers have a rating that is indicative oftheir safety and security and reflects the confidence ofthe investors in these instruments.

In India, companies having a net worth of at leastfour crores are allowed to raise capital by issuing thesecommercial papers.

DIFFERENCE BETWEEN COMMERCIALPAPER AND COMMERCIAL BILL:

• Commercial paper and commercial bill are bothfinancial instruments used by banks.

• Commercial paper is used by banks to raisefinances for a short time period. The buyer getsCP at a discounted rate, while he gets face valueon maturity While commercial bill is aninstrument that helps companies to get advancepayment for the invoices they raise after makingsales to their customers.

• Commercial paper is used by banks to meet theirshort-term obligations, while commercial billshelp companies to get money in advance, for salesthey make.

CREDIT RATIONING

Credit rationing refers to the situation wherelenders limit the supply of additional credit toborrowers who demand funds, even if the latter arewilling to pay higher interest rates. It is an example ofmarket imperfection, or market failure, as the price

mechanism fails to bring about equilibrium in themarket. It should not be confused with cases wherecredit is simply “too expensive” for some borrowers,that is, situations where the interest rate is deemed toohigh. On the contrary, the borrower would like toacquire the funds at the current rates, and theimperfection refers to the absence of equilibrium inspite of willing borrowers. In other words, at theprevailing market interest rate, demand exceeds supply,but lenders are not willing to either loan more funds,or raise the interest rate charged, as they are alreadymaximisirjg profits.

Two main types of credit rationing can usually bedistinguished.

• “Redlining” refers to the situation where somespecific group of borrowers, who share anidentifiable trait, cannot obtain credit with a givensupply of loanable funds, but could if the supplywere increased. More importantly, they would notbe able to get loans even if they were willing topay higher interest rates.

• “Pure Credit Rationing” refers to the situationwhere, within an observationally indistinguishablegroup, some obtain credit, while others do not,and will not receive credit even if they are willingto pay a higher interest rate.

• A third and less interesting type is disequilibriumcredit rationing, which is a temporary feature ofthe market, due to some friction preventingclearing.

CRR (CASH RESERVE RATIO

DEFINITION:

Cash reserve Ratio (CRR) is the amount of fundsthat the banks have to keep with RBI. If RBI decides toincrease the percent of this, the available amount withthe banks comes down. RBI is using this method(increase of CRR rate), to drain out the excessive moneyfrom the banks.

CRR AS A TOOL OF CREDIT CONTROL:

CRR was introduced in 1950 primarily as ameasure to ensure safety and liquidity of bank deposits,however over the years it ha^become an important andeffective tool for directly regulating the lendingcapacity of banks and controlling the money supply inthe economy. When the RBI feels that the money supplyis increasing and causing an upward pressure oninflation, the RBI has the option of increasing the CRRthereby reducing the deposits available with banks to

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make loans and hence reducing the money supply andinflation.

PENALTY ON DEFAULTING OF CRR BY ANYSCHEDULED BANK:

The RBI has the authority to impose penal interestrates on the banks in respect of their shortfalls in theprescribed CRR. According to Master Circular onmaintenance of statutory reserves updated up to June2008, in case of default in maintenance of CRRrequirement on daily basis, which is presently 70% ofthe total CRR requirement, penal interest will berecovered at the rate of three 3% per annum above thebank rate on the amount by which the amount actuallymaintained falls short of the prescribed minimum onthat day. If shortfall continues on the next succeedingdays, penal interest will be recovered at a rate of 5%per annum above the bank rate. In fact if the defaultcontinues on a regular then RBI can even cancel thebank’s licence or force it to merge with a larger bank.CTS (CHEQUE TRUNCATION SYSTEM) 2010

CONCEPT:

• Truncation is the process of stopping the flow ofthe physical cheque issued by a drawer to thedrawee branch.CONTEMPORARY ECONOMY

• The physical instrument will be truncated at somepoint en-route to the drawee branch and anelectronic image of the cheque would be sent tothe drawee branch along with the relevantinformation like the MICR fields, date ofPresentation, presenting banks etc.

• Thus with the implementation of chequetruncation, the need to move the physicalinstruments across branches would not berequired, except in exceptional circumstances.

• This would effectively reduce the time requiredfor payment of cheques, the associated cost oftransit and delay in processing, etc., thus speedingup the process of colledtion or realization of thecheques.

REASONS FOR INTRODUCTION IN INDIA:

• speeds up collection of cheques and

• therefore enhances customer service,

• reduces the scope for clearing related frauds,

• minimizes cost of collection of cheques,

• reduces reconciliation problems,

• Eliminates logistics problems etc.

With the other major product offering in the formof RTGS Real Time Gross Settlement, the ReserveBank created the capability to enable inter-bankpayments online real time and facilitate corporatecustomer payments.

The other product, National Electronic Funds Transfer,is an electronic credit transfer system. However, to wishaway cheques is simply not possible and that is thereason why the Reserve Bank of India, decided to focuson improving the efficiency of the Cheque ClearingCycle. Cheque Truncation is the alternative.

Moreover contrary to perceptions, ChequeTruncation is a more secure system than the currentexchange of physical documents in which the chequemoves from one point to another, thus, not only creatingdelays but inconvenience to the customer in case theinstrument is lost in transit or manipulated during theclearing cycle.

UNIQUENESS OF THE CHEQUE IMPARTEDTO THE IMAGE:

• The images captured at the presenting bank levelwould be transmitted to the Clearing House andthen to the drawee branches with digital signaturesof the presenting bank.

• Thus each image would carry the digital signature,apart from the physical endorsement of thepresenting bank, in a prescribed manner.

• In order to ensure only images of requisite qualityreach the drawee branches, there will be a qualitycheck process at the level of the Capture Systemsand the Clearing House Interface. This wouldensure only images of requisite quality securedwith the digital signatures of the presenting banksreach the drawee branches.

PATICIPANTS :The criteria for banks participating in the Chequetruncation system are:

• Membership of the clearing house in the NCR (AsCTS is still live only in NCR - New Delhi.

• Membership of the Indian Financial Network(INFINET)

PARTICIPATION OF NON-INFINET MEMBERBANKS IN THE CTS:

• In respect of banks who are not members of theINFINET, the following alternatives are available:

• They may become the sub-members of the directmembers or such banks may use the infrastructure

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of the other banks having INFINET membershipwithout being the INFINET members themselvesand there clearing settlement can be done eitherdirectly or through the member through whomthey are participating.

SUMMARY OF BENEFITS:

a) Faster clearing cycle;

b) Better reconciliation/verification process

c) Better Customer Service EnhancedCustomer Window

d) T+0 for Local Clearing and T + 1 for inter-city clearing.

e) Elimination of Float Incentive to shift toCredit Push payments.

f) The jurisdiction of Clearing House can beextended to the entire country. NoGeographical Dependence.

g) Operational Efficiency will benefit thebottom lines of banks Local Clearing activityis a high cost no revenue activity.

h) Minimises Transaction Costs.

i) Reduces operational risk by securing thetransmission route.

Cheque Truncation System (CTS) in India, waslaunched as a Pilot Project in NCR-New Delhi, inFebruary 2008. The next step for Cheque TruncationSystem (CTS) is Chennai.

However, before CTS is introduced in Chennai,Reserve Bank of India, DPSS has laid down the RoadMap for CTS - 2010 i.e Standardization (Consistency,Equality) and Enhancement (Enrichment).

DOORSTEP BANKING FOR POOR

FINO introduces Doorstep banking for poor.Financial Inclusion Network and Operations (FINO)operates through a network of 20,000 field force —also called Bandhu (friend in Hindi). This field forceserves as a doorstep bank and electronic teller machinesin areas where banks are yet to reach or have any ATM.FINO works with 24 banks, several of the stategovernment bodies and insurance firms like LIC, ICICIPrudential and ICICI Lombard. Each of the bandhus isequipped with handheld biometric devices that haveGPRS connectivity. Every time a customer is enrolled,she is provided with a smart card. For any futurebanking activity like depositing, checking balance orwithdrawals, they are done through the system.

Financial Inclusion Network and Operations(FINO), based in the financial capital of India, is anintegrated technology platform and delivery channel,enabling sourcing and servicing micro customers on alarge scale.

The company is also foraying into mobile paymentsegment. The services called m-Rupya will soon betested on a pilot basis with 20,000 customers. Thisservice will be launched by the end of the nextquarter.The company has developed the softwareplatform for its mobile payment service through its in-house research and development team. The companyplans to offer this service to its 36 million customersin India. At a time when the micro-finance industryhas been shrouded in controversy, FINO has beensuccessful in showing an alternative mode of achievingfinancial inclusion. FINO was formed by ICICI Bank.The idea was to create a technology firm that couldprovide solution catering to the financial inclusionspace.

E-GOLD

CONCEPT:

e-gold is a digital gold currency operated by Gold& Silver Reserve Inc. under e-gold Ltd., and allowedthe instant transfer of gold ownership between usersuntil 2009 when transfers were suspended due to legalissues, e-gold Ltd. is incorporated in Nevis, Saint Kittsand Nevis but the operations were conducted fromFlorida, USA. e-gold was founded in 1996 by Dr.Douglas Jackson and Barry K. Downey.

IN INDIA:

The National Spot Exchange Limited (NSEL) hasintroduced E-series products in commodities. To startwith, they have launched E-Gold and E-Silver. Lateron, they also plan to cover few other metals and alsosome agricultural commodities in the same series.Trading in E-Gold has been on since 17th March 2010.E-Gold units can be bought and sold through theexchange (NSEL) just like shares. Here one unit of e-gold is equal to 1 gram of gold.

REQUIREMENTS FOR E-GOLD:To buy E-Gold units, the individual needs to open

a demat account (beneficiary account) with one of theimpaneled Depository Participants (DP). Retailindividual can place buy and sell orders for e-gold unitswith their broker through phone or through the internet(broker’s website). Investing in E-Gold or other metalsopens up one more asset class for retail individuals to

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diversify their investment portfolio. It provides a meansto buy, accumulate and sell E-Gold as well as to convertthe same into physical gold.

FIDUCIARY ISSUE

The fiduciary issue is the part of the issue of notesand coins that is not backed by gold. In the past banknotes were issued and were backed by gold. You couldalways redeem your notes and have gold back inexchange. However, the system quickly developed sothat the value of notes issued exceeded the amount ofgold. That part of the note issue in excess of the amountof gold was the fiduciary issue. In other words theamount of money issued on trust. Today the whole noteissue is fiduciary.

92. FINANCIAL STABILITY REPORT(DECEMBER 2011)

INTRODUCTION:

The Reserve Bank of India presented its half-yearly assessment of the health of India’s financialsector in its Financial Stability Report (FSR). The FSRembodies the Reserve Bank’s continuing endeavour tocommunicate its assessment of the incipient risks tofinancial sector stability. The FSR was first released inMarch 2010, followed by December 2010 and June2011.

The FSR holistically assesses soft spots in India’sfinancial sector from a systemic perspective. It outlinesthe key risks arising from macroeconomic environment,financial markets and institutions and regulatory andother infrastructure. It also seeks to assess the positionin respect of continuing vulnerabilities even as newones are emerging.

There are two distinguishing features of this FSRvis-a-vis the earlier ones. It represents the collectiveviews of the Sub-Committee of the Financial Stabilityand Development Council (FSDC) on

risks to systemic stability and hence is a moreholistic assessment of financial stability. The FSR alsoshowcases the Reserve Bank’s endeavour to constantlyupgrade its tools to identify and measure systemic riskthrough a new chapter describing them. In addition,stability maps and indicators have been designed forevery segment to present a bird’s eye view of theassessment of risks and their evolution in varioussegments over the previous period.

HIGHLIGHTS:

• FSR for December 2011 shows that the domesticfinancial system remains robust.

• This was attested by the confidence reposed bythe respondents of the Systemic Risk Survey inthe financial system:

• Over half the respondents were ‘confident’or ‘very confident’ about the stability of theIndian financial system.

• Respondents identified risks arising fromasset quality as the biggest concern, followedby market volatility and global risks.

• A series of macrofinancial stress tests, whichassess the resilience of the banking system toadverse macroeconomic developments found thatbanks’ capital adequacy remains above regulatoryrequirements even under severe stress scenarios.

• The Financial Stability Map and Indicator -quantitative tools designed to measure movementsin risk dimensions affecting the entire financialsystem - however, point to some heightening ofrisks.

FINANCIAL STABILITY REPORT (JUNE 2011)

• The Reserve Bank of India (RBI) released its thirdFinancial Stability Report (FSR) on 14 June 2011.The report reflected RBI’s continuing endeavourto communicate its assessment of the incipientrisks to financial sector stability. It stated that theIndian financial system remains stable in the faceof some fragilities being observed in the globalmacro-financial environment.

• According to the FSR, the uncertainties in globalenvironment with persistently high energy andcommodity prices contributed to a slightmoderation in India’s growth momentum as well.The macro-economic fundamentals for Indiacontinue to stay strong despite the prevailinginflationary pressures and concerns on fiscalfronts.

• The FSR focussed on risks to the system arisingout of interplay of the disparate elements of thefinancial sector infrastructure namely- themacroeconomic setting, policies markets andinstitutions.

• The report pointed out that economies around theworld slowed down even as the risks from globalimbalances and sovereign debt crises remained.

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India’s growth momentum too slackened mainlydue to the uncertainties in the global environmentcharacterised by high energy and commodityprices.

FSR FINDINGS:

1. The banking sector in India by far the mostdominant portion of the Indian financial sectorcontinues to be stable and

2. The domestic financial markets have remainedstress free recently. However, a few caveats arein order.

The report however did not mention that thoseIndian firms are relying increasingly on external sourcesof finance, mostly euro-commercial borrowings. Thereliance resulted in currency mismatches. The well-known problem in the derivatives segment in whichuninformed companies sold unhedged products has haddisastrous consequences. The aggressive selling of anessentially speculative product cost the banks dear.

FSR does mention though the other great riskarising out of an unbridled access to foreign currencyborrowings by Indian companies. Many of them whoissued foreign currency convertible bonds (FCCB) mayface refunding risks at the time of conversion by March2013. The conversion price of these FCCBs is said tobe substantially higher than the prevailing market priceand the differential is unlikely to narrow.

Banks had aggressively expanded their creditportfolio to accommodate their borrowers. In theprocess they came to rely on high cost funds such asthose mobilised through certificates of deposits (CDs).Resource mobilisation on those terms is generally forshorter periods and hence contributes to the risk ofasset-liability mismatch.

Incremental credit, the FSR pointed out tended toconcentrate on a few sectors such as retail lending(including home loans), commercial real estate andinfrastructure. Although, the banks are not over-exposed to these sectors, the fact remains that lendingto some of these sectors has become a fashion evenamong public sector banks.SECTION

The FSR is a mine of credible, well researchedinformation that are of immense benefit to manysections.

ABOUT FINANCIAL STABILITY REPORT:

The Financial Stability Report is published twicea year under the guidance of the interim Financial

Policy Committee. The report includes Committee’sassessment of the outlook for the stability and resilienceof the financial sector at the time of preparation of theReport, and the policy actions it advises to reduce andmitigate risks to stability.

HOT MONEY

CONCEPT:

• “Hot money” refers to funds that are controlledby investors who actively seek short-term returns.These investors scan the market for short-term,high interest rate investment opportunities. Atypical short-term investment opportunity thatattracts “hot money” is the certificate of deposit(CD).

• Banks usually attract “hot money” by offeringrelatively short-term certificates of deposit thathave above-average interest rates. As soon as theinstitution reduces interest rates or anotherinstitution offers higher rates, investors with “hotmoney” withdraw their funds and move them toanother institution with higher rates.

• The “hot money” concept is not reserved solelyfor banks. Investors can move their funds todifferent countries to take advantage of favorableinterest rates.

• “Hot money” can have economic and financialrepercussions on countries and banks, however.When money is injected into a country, theexchange rate for the country gaining the moneystrengthens, while the exchange rate for thecountry losing the money weakens. If money iswithdrawn on short notice, the banking institutionwill experience a shortage of funds.

INFRASTRUCTURE DEBT FUND• Four banking and financial services giants —

ICICI Group, Life Insurance Corporation, CiticorpFinance India and Bank of Baroda —joined handsto launch India’s first infrastructure debt fund(IDF) to be structured as a non-banking financecompany (NBFC).

• The Memorandum of Understanding for settingup this IDF was signed in the presence of theFinance Minister, Mr Pranab Mukherjee, and thePlanning Commission Deputy Chairman, MrMontek Singh Ahluwalia, in New Delhi.

• This company will have an initial equity sharecapital (tier-l) of ?300*rore. Taking into account

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the tier-ll capital and the ability to borrow, it canset up a fund of about $2 billion, Ms ChandaKochhar, Managing Director, ICICI Bank, saidhere after the MoU signing event.

• As for the equity contribution, ICICI Group willtake 31% stake, Bank of Baroda 30 %, CiticorpFinance India 29 % and LIC 10 %.

• While ICICI Bank will take a stake of 30 %, anICICI Group entity will take the other 1 %.Citicorp Finance India is a wholly-owned entityof Citigroup.

• The funds will be invested in public-privateprojects in ports, railways, roads, highways andother such infrastructure projects, which havealready commenced commercial production.Implementation risk will hardly be there and thatwill be the investment profile of this fund.

• The IDF managers would not only have expertisein infrastructure finance, but also the ability toaccess domestic and global funds.

• It will attract participation from entities that haveso far not participated in the infrastructuredevelopment of India — long-term insurance andpension funds domestically and globally and manyother global funds, including sovereign wealthfunds. There is also scope to attract foreigninstitutional investors in the debt part of the fund.

LIQUIDITY

This refers to how easily securities can be boughtor sold in the market. A security is liquid when thereare enough units outstanding for large transactions tooccur without a substantial change in price. Liquidityis one of the most important characteristics of a goodmarket. Liquidity also refers to how easily investorscan convert their securities into cash and to acorporation’s cash position, which is how much thevalue of the corporation’s current assets exceeds currentliabilities.

NATIONAL SMALL SAVING FUND

CONCEPT:

Small Saving schemes have been always animportant source of household savings in India. Smallsavings instruments can be classified under three heads.These are:

(i) postal deposits [comprising savings account,recurring deposits, time deposits of varying

maturities and monthly incomescheme(MIS)];

(ii) savings certificates [(National Small SavingsCertificate VIII (NSC) and Kisan Vikas Patra(KVP)]; and

(iii) social security schemes [(public providentfund (PPF) and Senior Citizens’ SavingsScheme(SCSS)].

A “National Small Savings Fund” (NSSF) in thePublic Account of India has been established with effectfrom 1.4.1999. A new sub sector has been introducedcalled “National Small Savings Fund” in the list ofMajor and Minor Heads of Government Accounts. Allsmall savings collections are credited to this Fund.Similarly, all withdrawals under small savings schemesby the depositors are made out of the accumulations inthis Fund. The balance in the Fund is invested in Centraland State Government Securities. The investmentpattern is as per norms decided from time to time bythe Government of India.SECTION

The Fund is administered by the Government ofIndia, Ministry of Finance (Department of EconomicAffairs) under National Small Savings Fund (Custodyand Investment) Rules, 2001, framed by the Presidentunder Article 283(1) of the Constitution. The objectiveof NSSF is to de-link small savings transactions fromthe Consolidated Fund of India and ensure theiroperation in a transparent and self-sustaining manner.Since NSSF operates in the public account, itstransactions do not impact the fiscal deficit of theCentre directly. As an instrument in the public account,the balances under NSSF are direct liabilities andconstitute a part of the outstanding liabilities of theCentre. The NSSF flows affect the cash position of theCentral Government.

OPERATION:All deposits under small savings schemes are

credited to NSSF and all withdrawals by the depositorsare made out of accumulations in the Fund. Thecollections under the small saving schemes net of thewithdrawals are the sources of funds for the NSSF.NSSF invests the net collections of small savings inthe special State Government securities (SSGS) as perthe sharing formula decided by the Government ofIndia. The remaining amount is invested in specialCentral Government securities (SCGS) with the sameterms as that for the States. These securities are issuedfor a period of 25 years, including a moratorium of

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five years on the principal amount. The specialsecurities carry a rate of interest fixed by Gol fromtime to time. The rate of interest has remainedunchanged at 9.5 % per annum since April 1, 2003.The NSSF is also permitted to invest in securities issuedby IIFCL.

The income of NSSF comprises of the interestreceipts on the investments in Central, StateGovernment and other securities. While the interest rateon the investments on the Central and State share ofnet small saving collection is as per the rates fixed fromtime to time, the interest rate on the reinvestment ofredeemed amounts are at market rate for 20 yearGovernment Securities. The expenditure of NSSFcomprises interest payments to the subscribers of SmallSavings and PPF Schemes and the cost of operatingthe schemes, also called management cost.

PLASTIC NOTESINTRODUCTION:

Polymer banknotes were developed by theReserve Bank of Australia (RBA), CommonwealthScientific and Industrial Research Organisation(CSIRO) and The University of Melbourne and werefirst issued as currency in Australia in 1988. Thesebanknotes are made from the polymerbiaxially-oriented polypropylene (BOPP) which greatly enhancesdurability of the banknotes. Polymer banknotes alsoincorporate mainy security features not available topaper banknotes, making counterfeiting much moredifficul t.

Trading as Securency, the RBA together withInnovia Films market BOPP as Guardian’ for countrieswith their own banknote printing facilities. NotePrinting Australia (a subsidiary of the RBA) printscommemorative banknotes and banknotes forcirculation and has done so for 20 countries.

PLASTIC NOTES IN INDIA:• The RBI is in the process of starting a pilot project

for issue of plastic currency notes, wherein plasticnotes of ?10 denomination would be distributedthrough the central bank’s five regional offices.The proposed shift to plastic currency notes,instead of the normal paper notes, is primarilyaimed at checking the high cost associated withprinting of paper currency, as they need earlyreplacement due to soiling and mutilation.Besides studying the potential cost savingsthrough plastic notes, the pilot project will alsolook into the environmental impact of theproposed plastic notes.At a time when the government is trying to balancethe twin challenges posed by climate change andachieving economic growth, the Survey called forsteps to ensure that green growth strategies do notresult in slow growth.Terming cost and longevity as important forcurrency management, it needs to be pointed thatIndia was the second largest producer andconsumer of currency in the world after China.Producing such a large amount of currency wasexpensive and one option to cut the costs wasreplacement of paper currency with plastic notes.Some of the countries to have moved to plasticcurrency notes include Singapore and Australia.In April, 2010 the RBI floated a tender seekingsupply of one billion plastic notes of ?10denomination. Later in August, the central banksaid in its annual report for 2009-10 that it wasexploring methods to increase the life of currencynotes, especially those of lower denomination,which have a much shorter life.

PRIORITY SECTOR LENDING

TARGETS UNDER PRIORITY SECTOR LENDING:

The targets and sub-targets set under priority sector lending for domestic and foreign banks operating inIndia are furnished below:

Domestic banks (both public Foreign banks operating in India

sector and private sector banks)

Total Priority Sector advances 40 percent of NBC 32 percent of NBC

Total agricultural advances 18 percent of NBC No target

SSI advances No target 10 percent of NBC

Export credit Export credit does not form 12 percent of NBC

part of priority sector

Advances to weaker sections 10 percent of NBC No target

{note: NBC denotes net bank credit}

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COMPOSITION OF NET BANK CREDIT:

The net bank credit should tally with the figurereported in the fortnightly return submitted undersection 42(2) of the Reserve Bank of India Act, 1934.However, outstanding deposits under the FCNR(B) andNRNR Schemes are excluded from net bank credit forcomputation of priority sector lending target/ sub-targets.

PRIORITY SECTOR:

Broadly, the priority sector comprises thefollowing:

(i) Agriculture

(ii) Small scale industries (including setting upof industrial estates)

(iii) Small road and water transport operators(owning upto 10 vehicles).

(iv) Small business (Original cost of equipmentused for business not to exceed ?20 lakh)

(v) Retail trade (advances to private retail tradersupto ?10 lakh)

(vi) Professional and self-employed persons(borrowing limit not exceeding ` 10 lakh ofwhich not more than ` 2 lakh for workingcapital; in the case of qualified medicalpractitioners setting up practice in ruralareas, the limits are ` 15 lakh and lakhrespectively and purchase of one motorvehicle within these limits can be includedunder priority sector)

(vii) State sponsored organisations for ScheduledCastes/Scheduled Tribes

(viii)Education (educational loans granted toindividuals by banks)

(ix) Housing [both direct and indirect - loans uptolakhs (direct loans upto ?10 lakh in urbaametropolitan areas), Loans upto lakh and ̂ 2lakh for repairing of houses in rural/ semi-urbar and urban areas respectively].

(x) Consumption loans (under the consumptioncredit scheme for weaker sections)

(xi) Micro-credit provided by banks eitherdirectly or through any intermediaty; Loansto self help groups(SHGs) / NonGovernmental Organisations (NGOs) foronlending to SHGs

(xii) Loans to the software industry (having creditlimit not exceeding crore from the bankingsystem)

(xiii)Loans to specified industries in the food andagro-processing sector having investment inplant and machinery up to crore.

(xiv)Investment by banks in venture capital(venture capital funds/ companies registeredwith SEBI)

TYPE OF INVESTMENTS MADE BY BANKSARE RECKONED UNDER PRIORITY SECTOR:

• Investments made by the banks in special bondsissued by the specified institutions could bereckoned as part of priority sector advances,subject to the following conditions:

• State Financial Corporations (SFCs)/StateIndustrial Development Corporations (SIDCs)

• Subscription to bonds exclusively floated by SFCs& SIDCs for financing SSI units will be eligiblefor inclusion under priority sector as indirectfinance to SSI.

• Rural Electrification Corporation (REC)

• Subscription to special bonds issued by RECexclusively for financing pump-set energisationprogramme in rural and semi-urban areas and theSystem Improvement Programme underitsCONTEMPORARY ECONOMY SpecialProjects Agriculture (SI-SPA) will be eligible forinclusion under priority sector lending as indirectfinance to agriculture.

• NABARD

• Subscription to bonds issued by NABARD withthe objective of financing exclusively agriculture/allied activities and the non-farm sector will beeligible for inclusion under the priority sector asindirect finance to agriculture/ SSI, as the casemay be.

• Small Industries Development Bank of India(SIDBI)

• Subscriptions to bonds exclusively floated bySIDBI for financing of SSI units will be eligiblefor inclusion under priority sector as indirectfinance to SSIs.

• The National Small Industries Corporation Ltd.(NSIC)

• Subscription to bonds issued by NSIC exclusivelyfor financing of SSI units will be eligible for

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inclusion under priority sector as indirect financeto SSIs.

• National Housing Bank (NHB)

• Subscription to bonds issued by NHB exclusivelyfor financing of housing, irrespective of the loansize per dwelling unit, will be eligible for inclusionunder priority sector advances as indirect housingfinance.

• Housing & Urban Development Corporation(HUDCO)

• Subscription to bonds issued by HUDCOexclusively for financing of housing, irrespectiveof the loan size per dwelling unit, will be eligiblefor inclusion under priority sector advances asindirect housing finance.

• Investment in special bonds issued by HUDCOfor on-lending to artisans, handloom weavers, etc.under tiny sector will be classified as indirectlending to SSI (Tiny) sector.

WEAKER SECTIONS WITHIN THEPRIORITY SECTOR:

• Small and marginal farmers with land holding of5 acres and less and landless labourers, tenantfarmers and share croppers.

• Artisans, village and cottage industries whereindividual credit limits do not exceed 50,000/-

• Beneficiaries of Swarnjayanti Gram SwarojgarYojana (SGSY)

• Scheduled Castes and Scheduled Tribes

• Beneficiaries of Differential Rate of Interest (DRI)scheme

• Beneficiaries under Swarna Jayanti ShahariRojgar Yojana (SJSRY)

• Beneficiaries under the Scheme for Liberation andRehabilitation of Scavangers (SLRS).

• Self Help Groups (SHGs)

ACTION TAKEN IN THE CASE OF NON-ACHIEVEMENT OF PRIORITY SECTORLENDING TARGET BY A BANK:

Domestic scheduled commercial banks havingshortfall in lending to priority sector / agriculture areallocated amounts for contribution to the RuralInfrastructure Development Fund (RIDF) establishedin NABARD. Details regarding operationalisation ofthe RIDF such as the amounts to be deposited by banks,interest rates on deposits, period of deposits etc., are

decided every year after announcement in the UnionBudget about setting up of RIDF.

In the case of foreign banks operating in Indiawhich fail to achieve the priority sector lending targetor sub-targets, an amount equivalent to the shortfall isrequired to be deposited with SIDBI for one year at theinterest rate of 8 percent per annum.

TIME LIMIT FOR DISPOSAL OF LOANAPPLICATIONS:

All loan applications upto a credit limit of^25,000/- should be disposed of within a fortnight andthose for over ?25,000/- within 8 to 9 weeks

RATE OF INTEREST FOR LOANS UNDERPRIORITY SECTOR:

As per the current interest rate policy, in the caseof loans upto lakh, the interest rate should not exceedthe prime lending rate (PLR) of the bank, while in thecase of loans above ?2 lakh banks are free to determinethe interest rate.

MONITORING OF PRIORITY SECTORLENDING BY THE RESERVE BANK:

Priority sector lending by commercial banks ismonitored by Reserve Bank of India through periodicalReturns received from them. Performance of banks isalso reviewed in the various form set up under the LeadBank Scheme (at State, District and Block Levels).

RATINGS OF THE INDIAN BANKS

THE United States-based ratings agency Moody’srecently revised Syndicate Bank’s local currencydeposit ratings and all its debt ratings to negative fromstable. In justification, the Moody’s Investors Servicecryptically noted that “the revision in the rating outlookfactors in the increasingly challenging operatingenvironment for Indian banks. As Syndicate Bank hasa weaker franchise than other Indian banks, its ratingis more vulnerable to potential deterioration in financialstrength in the current environment.”

That the country’s macroeconomic milieu, amidthe slowdown of the economy, is none too encouragingis evident from the Reserve Bank of India’s (RBI) half-yearly Financial Stability Report (FSR) released in thelast week of 2011. The RBI noted tersely that allcomponents of domestic demand (private andgovernment, consumption and investment) haddecelerated and cautioned that if gross domestic product(GDP) growth slowed down, there could be some“downstream impact on asset quality”. This could be

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construed rather elliptically to mean that borrowers maybalk at repayment citing general infirmities attendantupon a slowing economy. The year-on-year growth rateof non- performing assets (NPAs) at 30.5% as at end-September 2011 has outrun the credit growth of 19.2%.In fact, the latest update showing a credit offtake of17% for the period ending January 6,2012, against thecorresponding period in 2011, means that 13 policyrate hikes have wrought a deleterious impact on growthand investment.

The apex bank also did not desist from statingthat additional capital would need to be raised owingto the compulsions of implementation of Basel III, evenas higher provisioning requirements (due to higherslippages) and increased interest expenses alreadyimpacted on the profitability of the banking sector. Keysectors that led the trend of rising NPAs include thepriority sector, retail, real estate and infrastructure. Thegross NPA ratio rose from 2.3% to 2.8% between Marchand September 2011. This includes lump of loansextended to a spate of troubled sectors ranging fromtelecom and airlines to power, which have remainedcaught in either scams or policy inertia for far too long.

The bugle of caution was sounded out whenMoody’s revised its outlook for India’s bankingindustry from stable to negative, citing concerns oframpant inflation, monetary tightening and rapidlyescalating interest rates. This downward revision aroseout of an increasingly challenging operatingenvironment for the banking system that is bound toexert adverse pressures on the system in terms of assetquality, capitalisation and profitability. With thecountry’s money market remaining stringent on theback of rising interest costs, Moody’s foresaw thatIndian banks’ asset quality might get worse over thenext 12-18 months even as it reckoned that bank loangrowth would plunge from 21 % in 2011 to a range of16-18 % in 2012 and 2013. Moody’s expected theprofitability plank of the banks to weaken owing tolower interest margins as deposit rates are repriced,thanks to the liberalisation on savings deposit rates bythe central bank in October last.

It is not that Moody’s has suddenly woken up tothe worsening operating milieu of Indian banks to issuea raft of revisions on the ratings. It began the downgradewith the rating on the State Bank of India’s (SBI)financial strength on October 4, 2011. This was assailedby critics as they saw little substance in such ratingsby global agencies that had not clothed themselves with

any glory, having miserably failed to detect the globalfinancial meltdown of 2008 when so many fancyfinancial instruments played havoc with the financialinstitutions in major economies of the West.

Despite such criticism of patent lapses in theirown backyard, Moody’s revision on the SBI, inretrospect, did not appear to be an unduly false alarm.The subsequent publication of the SBI results showedthat the bank’s gross NPA grew by 2 % between Juneand September 2011, against 19 % in the case of otherpublic sector banks. There was also a spurt in non-performing loans aggregating to 4.19 % of the totaladvances, with loans amounting to ?8,000 croreslipping from the standard category (asset on whichthere is no default) to the substandard category (markedby defaults). What is causing flutters is that the SBI’score capital, or Tier-I capital (in terms of capitaladequacy norms as set by the central bankers’ centralbank, the Basel-based Bank for InternationalSettlements), had slipped to 7.4 % in the quarter endingSeptember 2011 against the mandated 8 %.

Though the domestic banking industry has notbeen jolted because of the constant revisions byoverseas ratings agencies on Indian banking, the factremains that the economic slowdown and the lack ofappetite for investment either to start a new one orexpand the existing ones mainly due to the prohibitivelyhigh cost of credit by financial institutions might poseproblems in terms of asset quality and risk-taking spursby the banks in particular. Industry analysts too contendthat given the sort of stickiness of the system as a wholedue to assets and liabilities mismatch, concerns overthe quality of loans and the general economicslowdown, the banking industry will be on a slidingboard if it does not get its act together.

The year 2011 proved to be a year of hardships interms of persistent inflation and a year when the Sensexfell by 25 %. The rupee declined by a staggering 16 %,rendering it the worst performing major Asian currency,besides making import-dependent energy costexpensive and pushing the price of other importedessential inputs. It is small wonder then that theinvestors, particularly institutional investors fromabroad, were actively pulling their funds from India.Net outflows were $380 million in 2011, after rising toa hefty $29 billion in 2010.

Given the reality that the economy’s return to aconsistently high growth path would take a couple of

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years, the banking industry has a greater responsibilityin the recovery process of the real sectors of theeconomy in keeping the credit spigot ajar. But it isprecisely when the need for greater capital infusion isimperative that the banks have been directed by theauthorities to go for financial inclusion for lending tomany welfare programmes.

Against this development, the RBI has releaseddraft guidelines on the proposed implementation ofglobal norms of capital adequacy (Basel-Ill), requiringbanks to go in for capital infusion during the next fiveyears. How far the domestic banking industry will beable to meet the challenges of taking a proactive partin the recovery to high growth while simultaneouslybeefing up its capital base to meet the internationalnorms of capital adequacy ratio will determine not onlyits fortunes but also its ability to survive and thrive.

The moot issue is whether the government shouldallow public sector banks the requisite operationalautonomy to meet both ends.

RBI’S NEW BANK LICENSING NORMSThe Reserve Bank of India released the Draft

Guidelines for “Licensing of New Banks in the PrivateSector”.KEY FEATURES OF THE DRAFT GUIDELINES:

i. Eligible promoters: Entities / groups in theprivate sector, owned and controlled by residents,with diversified ownership, sound credentials andintegrity and having successful track record of atleast 10 years will be eligible to promote banks.Entities / groups having significant (10 % or more)income or assets or both from real estateconstruction and / or broking activitiesindividually or taken together in the last threeyears will not be eligible.

ii. Corporate structure: New banks will be set uponly through a wholly owned Non-OperativeHolding Company (NOHC) to be registered withthe Reserve Bank as a non-banking financecompany (NBFC) which will hold the bank as wellas all the other financial companies in thepromoter group.

iii. Minimum capital requirement: Minimumcapital requirement will be ‘ 500 crore. Subjectto this, actual capital to be brought in will dependon the business plan of the promoters. NOHC shallhold minimum 40 % of the paid-up capital of thebank for a period of five years from the date of

licensing of the bank. Shareholding by NOHC inexcess of 40 % shall be brought down to 20 %within 10 years and to 15 % within 12 years fromthe date of licensing of the bank.

iv. Foreign shareholding: The aggregate non-resident shareholding in the new bank shall notexceed 49 % for the first 5 years after which itwill be as per the extant policy.

v. Corporate governance: At least 50 % of thedirectors of the NOHC should be independentdirectors. The corporate structure should be suchthat it does not impede effective supervision ofthe bank and the NOHC on a consolidated basisby the Reserve Bank.

vi. Business model: Should be realistic and viableand should address how the bank proposes toachieve financial inclusion.CONTEMPORARYECONOMY

vii. Other conditions:

• The exposure of bank to any entity in thepromoter group shall not exceed 10 % andthe aggregate exposure to all the entities inthe group shall not exceed 20 % of the paid-up capital and reserves of the bank.

• The bank shall get its shares listed on thestock exchanges within two years oflicensing.

• The bank shall open at least 25 % of itsbranches in unbanked rural centres(population upto 9,999 as per 2001 census)

• Existing NBFCs, if considered eligible, maybe permitted to either promote a new bankor convert themselves into banks.

• In respect of promoter groups having 40 %or more assets / income from non-financialbusiness, certain additional requirementshave been stipulated.

REVOLVING CREDIT

CONCEPT:

Revolving credit is a type of credit that does nothave a fixed number of payments, in contrast toinstallment credit. Examples of revolving credits usedby consumers include credit cards. Corporate revolvingcredit facilities are typically used to provide liquidityfor a company’s day-to-day operations. They were firstintroduced by the Strawbridge and Clothier DepartmentStore.

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CHARACTERSTICS:• The borrower may use or withdraw funds up to a

pre-approved credit limit.• The amount of available credit decreases and

increases as funds are borrowed and then repaid.• The credit may be used repeatedly.• The borrower makes payments based only on the

amount they’ve actually used or withdrawn, plusinterest.

• The borrower may repay over time (subject to anyminimum payment requirement), or in full at anytime.

• In some cases, the borrower is required to pay afee to the lender for any money that is undrawnon the revolver; this is especially true of corporatebank loan revolving credit facilities.

RUPAYNational Payments Corporation of India-a Reserve

Bank of India initiative-is set to replay the ATMrevolution in the cards business with the launch ofRuPay debit cards, which undercut Visa and Mastercardon processing fees on transactions.

Four large public sector banks State Bank of India,Bank of Baroda, Bank of India and Union Bank of Indialaunched the first set of RuPay cards in India. TheRuPay card is meant to be on the lines of China UnionPay-a Chinese government promoted payments andsettlement platform for card transactions that broke theVisa-Mastercard stranglehold.

This project had been conceived by Indian BanksAssociation and had the approval of Reserve Bank ofIndia. The objectives to be fulfilled are:1. Reduce overall transaction cost for the banks in

India by introducing competition to internationalcard schemes.

2. Develop products appropriate for the countryparticularly for financial inclusion.

3. Provide card payment service option to manybanks who are currently not eligible for cardissuance under the eligibility criteria ofinternational card schemes.

4. Build environment whereby payment informationof the country remains within the country

5. Shift Personal Consumption Expenditure (PCE)from cash to electronic payments in a growingeconomy with a population of 1.2 billionNPCI will soon provide a full range of card

payment services including the RuPay ATM, RuPayMicroATM, Debit, Prepaid and Credit Cards which will

be accepted in India and abroad, across variouschannels like POS, internet, IVR and mobile etc. Initialfocus of NPCI would be to approach those banks whohave not been issuing any payment card at all. RegionalRural Banks and urban co-operative banks are ideal.

RuPay is a coinage which indicates comingtogether of ‘Rupee’ and ‘Payment’ to announce thelaunch of a new world-class retail payment system inIndia. The new system is simple to use, affordable,state-of- the -art and easily accessible even in theremotest corner of India round-the-clock.

The RuPay Visual Identity is a modern anddynamic unit. The orange and green arrows indicate anation on the move and a service that matches its pace.The Indian colors connote that it’s deeply rooted inIndia. The color blue stands for tranquility and peacewhich is precisely the sense that people must get fromthe brand ‘RuPay’. The bold and unique typeface grantssolidity to the whole unit and symbolizes a stable entity.

SLR (STATUTORY LIQUIDITY RATIO)Statutory Liquidity Ratio is the amount of liquid

assets, such as cash, precious metals or other short-term securities, that a financial institution mustmaintain in its reserves. The statutory liquidity ratio isa term most commonly used in India.

Statutory Liquidity Ratio refers to the amount thatthe commercial banks require to maintain in the formof cash, or gold or govt, approved securities beforeproviding credit to the customers. Statutory LiquidityRatio is determined and maintained by the ReserveBank of India in order to control the expansion of bankcredit.SUBSIDAIRY ROUTE FOR FOREIN BANKS IN

INDIAKEY POINTS:

Six. years after laying down the road map forforeign banks in India, the country’s central bank is setto allow them a bigger role in the world’s second fastestgrowing major economy. The Reserve Bank of India isin favour of foreign banks taking the subsidiary model— which has clear advantages over the branch modeldespite certain downside risks — while setting up theiroperations in India. As no foreign bank has approachedthe RBI for setting up a subsidiary under the existingpolicy, there may be a need to incentivise subsidiaryform foreign banks by liberalising the branch expansionpolicy.

All new overseas entrants in the Indian bankingspace will have to locally incorporate themselves, and

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existing players, particularly the systemically importantones, will be encouraged to go in for local incorporationand act as subsidiaries of foreign parents , as mentionedby RBI.

Systemically important banks are those whoseassets become 0.25% of the total assets of allcommercial banks as on 31 March, as stated by RBI.Going by this definition, 8 foreign banks, includingCitibank NA, HSBC Holdings Pic and StandardChartered Bank fall under this category.

As an incentive to set up wholly ownedsubsidiaries, RBI may allow them to raise rupeeresources in the form of non-equity capital, adding thatit will extend a “less restrictive branch expansionpolicy” to foreign players by allowing them to operatein semi-urban areas.

Noting that it may not be possible to mandateconversion of existing players into subsidiaries, theregulatory expectation would be that those foreignbanks which meet the conditions and thresholdsmandated for subsidiary presence for new entrantswould opt for converting their branches into whollyowned subsidiaries.

On capital adequacy for new players, subsidiariesof foreign banks will be treated at par with new privatesector banks and shall maintain a minimum capitaladequacy of 10% of their risk- weighted assets.

Once the policy is in place, will be more liberalin its branch licensing policy, but it is difficult to award“full national treatment” to foreign banks because thiscould lead to unintended consequences for the bankingsector.

They will then be treated virtually on par withtheir domestic peers in terms of branch expansionregarding which the banking regulator has all alongbeen following a restrictive policy.

Currently, there are 34 foreign banks in India andcollectively they have at least 310 branches, 0.43% ofthe 71,998-strong branch network across the nation.

Under the WTO agreement, RBI needs to give 12new branch licences to foreign banks every year,including those given to new entrants and existingplayers, but the Indian regulator has all along beenallowing foreign banks to open more branches, goingbeyond its commitment, but not as many as the foreignbanks want.

TEASER HOME LOAN SCHEMETEASER LOAN:

An adjustable-rate mortgage loan in which theborrower pays a very low initial interest rate, whichincreases after a few years. Teaser loans try to enticeborrowers by offering an artificially low rate and smalldown payments, claiming that borrowers should be ableto refinance before the increases occur.

Teaser loans are considered an aspect of subprimelending, as they are usually offered to low- incomehome buyers. Unfortunately, when these borrowers tryto refinance the loan before the rate increases, mostwill not qualify for standard mortgages. This leavesborrowers with increased monthly payments, whichmany cannot afford. This method of loaning isconsidered risky, as default rates are high.IN INDIA:

Mortgage Company LIC Housing Finance hasjoined the teaser home loan group by introducing ‘NewAdvantage 5’, under which the interest rate for homeloans would remain fixed for the first five years. NewAdvantage 5 is offered at fixed interest rates for thefirst five years and thereafter at floating rate

The scheme was available till December 31 2011,with a condition that the first disbursement should beavailed by the customer on or before January 15, 2012.LIC Housing Finance is the third lender to offer such ascheme. Earlier HDFC and ICICI had launched such aproduct in the market.

According to reports LIC Housing Finance hassaid that loans amounting to up to ?30 lakh will have afixed interest rate of 11.15 % for a five-year period.The loans ranging from ?30 lakh to ?75 lakh will havefixed interest rates of 11.40 % and ?75-150 lakh loanswill attract 11.65 % for a five-year period.

TOTAL BANKING STATEKerala has been declared as the first ‘total banking

state’ in India, successfully completing the campaignfor total financial inclusion plan (FIP) ensuring bankingfacility to all families.

The declaration was made as every household inall the 14 districts in the state having at least one bankaccount and the facility for need-based credit.

This campaign started 4 years back when Palakkaddistrict had achieved the status of Total Banking district.The banks which participated under this Total FinancialInclusion Campaign have been rewarded withcertificate from Kerala Government.

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5. Basic Concepts of A Company and Capital Makets

A company is a, legal person. The Companies Act- 1956 provides for 3 types of companies - unlimited,compart Timited by a guarantee and a company limitedby shares. In an unlimited company, there is no limiton the liability of its members i.e. if the company sufferslosses and the assets of the compffrry are notenougFTto”payiJrf1ts debts, the private property of itsmembers is used to pay the debts / claims of creditors.In India, there are no. unlimited companies instead,there are proprietary businesses. In a company limitedby a guarantee, the liability is limited by the guaranteegiven by itTnThe event of payment of liabilities. In acompany limited by shares, the liability of the membersis limited tcTt’he extent of nominal value of sharesheld by each of the members. But if a member hasalready paid the full amount of his shares, he is notliable to pay any more amount., But if a member haspaid only part of the amount, he can be forced to paythe remaining amount during the existence of thecompany as well as in the course of liquidation o.f thecompany. A company limited by shares is of twovarieties

1. Private Limited Company - This is a companywitFTa-minimum-paid up.share capital of one lakh(or higher capital as required by the CompaniesAct -1956). It is a closely held company with theminimum members being 2 and maximummembers being 50. It has at least two directors. Itrestricts shareholding among its members. Thiscompany cannot offer it shares to the public andalso cannqLaccept deposits from people exceptits members, directors and relatives. There is noobligation for a private limited company to holdmeetings statutorily and there is no restriction onmanagerial remuneration i.e. the directors canreceive any remuneration as decidec by theCompany.

2. A Public Limited Company this is one which hasminimum paid-up capital of 5 lakhs and is to haveminimum number of 7 members. There is no limiton the maximum number of members and also ontransfer of its shares. A public limited companyhas to hold board of directors meeting statutorilyand the minimum quorum for the meeting 2members. The remuneration of directors of this

company cann0t exceed more than 11% of its netprofits. A public limited company can be listed orunlisted i.e. listed company is listed with thestocffexchanges and unlisted company is not listedon the stock exchanges.

Funding of Companies: The total capital of acompany is always called share capital. The shareof investors and promoters is maintained in asingle consolidated capital account called thes”are capital account. The share capital isassociated with the following terms.

1. Authorized Capital : This is called registered ornominal capital and is the maximum capital thatthe company raise in its life of existencer

2. Issued Capital : This is a part of the AuthorizedCapital which is offered to the public in a publicissue of shares

3. Subscribed Capital : It’is part of issued capitalwhich has been bought by people in a public offerof shares. The shares’bought by the people arecalled outstanding shares,’ while the shares offeredby the company.but not bought by the people butby the company are called treasury shares.

4. Called up Capital : This is that part of subscribedcapital which the company has actually calledupon the shareholders to pay. Hence called upcapital includes the amount paid by theshareholder from time to time on allotment ofshares. The remaining rat of the subscribed capitalnot yet called upon is called as uncalled capital.

5. Paid-up Capital : The called up capital may notbe fully paid as shareholders may pay only pa rtof amount required to be paid. Hence paid-upcapital is part of called - up capital which isactually paid by shareholders. The remaining partof the called-up capital which is still to be paidby shareholders is called Calls in Arrears.

6. Reserve Capital : The share capital subscribed(bought) by. the people as mentioned earlier iscalled subscribed capital. However, if thecompany has not called upon the shareholders.The been allotted the shares to pay, this part ofsubscribed capital is called uncalled capital. Thecompany in a special resolution can convert a part

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of the uncalled capital into reserve capital (vihichmay not be called up except during winding up ofthe company). Reserve Capital is kept reservedfor the creditors in case of winding up of thecompany.

7. Cbpital Reserves : These are created from capitalprofits of the company. Capital profits are notearned profits but may accrue to the companybecause of sale of fixed assets, revaluation of fixedassets, premiums called by company on shares anddebentures, profits on redemption of debenturesand profit earned by the company prior toincorporation. Capital reserves cannot beused fordistribution of dividends.

INVESTMENT UNITS OF A COMPANY :Shares are units of total capital of a company and veatedas goods under the Sale of Goods Act 1930. Hencethey are movable property.

1. Equity Shares : Also called ordinary shares,represent units of total-capital of a company.These carry voting rights. All shares which arenot preferential .shares are called equity shares.

2. Preferential Shares : These do not carry votingrights and get dividend at a fixed rate. These arenot traded in stock exchanges. These havea higherright to paymentof capital on winding up of thecompany. In addition, the preference shares maycarry some more more rights sucn as right toparticipate in excess profits or the right to receivea premium when the company redeems thepreferential shares. In general, preference sharesare generally issued by companies to institutionsinstead of retail investors. The preference sharesare not liquid assets because they are not tradedin stock exchanges. After a fixed period,preference sell their shares back to the company,unlTke qrdinary~shares which can only be soldback to the company if it announces a buyback.

3. Debentures : It is a debt instrument given by abuyer to a company. Debentures by definition,represent corporate debt instruments. Thedebenture instrument acknowledges the loan, thenterest payable, repayment of principal amounfbythe company and also gives charge on the assetsof a company. Normally, debentures are securedand issued against the assets of a company.

The chief types of debentures are

(i) Naked Debentures : These are not issuedagainst security of assets of company. Hencewhen the company is wound up, nakedde.benture holders are.treated as unsecuredcreditors.

(ii) Secured Debentures : These are issuedagainst the security of assets of the company.Hence the holder of this debenture has rightto recover outstanding loan and interest. Thesecured debentures are issued by thecompany under an agreement deed called theMortgage Deed which is registered with theRegistrar of Companies.

(iii) Redeemable Debentures are taken back(redeemed) by the company after a specifieddate by repaying the debenture amount

(iv) Irredeemable Debentures : The’re is. nofixed date after which the company buysback the debenture and the holder of the,debenture cannot demand repayment fromthe company as long as it is a mpningcompany

(v) Convertible Debentures : These canbeTconverted into equity shares, either fullyor partly after a specified time.

(vi) Non-convertible Debentures : The holdersof these debentures do not have the right toconvert them into equity shares.

(vii) Bearer Debentures : These are like bearercheques and can be freely transferred andthe interest is given on producing couponsattached to them.

(viii) Registered Debentures : These can betransferred only bytransfer deed. The interestis paid only to those whose name appears inthe register. Debentures unlike equity shares,do not have voting rights and are in general,are secured, unlike equity shares.

4. Bonds : These are debt instruments which can beissued by companies, financial institutions,municipal bodies and governments. Normally,they’are not issued against the security of assetsof the body issuing it. In Indian Securities .Market,the term bond is. used for debt instruments issuedby the central and state governments and publicsector organizations while debenture is used forinstruments issued by private corporate sector.

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Differential Voting Rights Shares: Differential-Voting Rights (DVR) shares were introduced by anamendment to the Companies Act - 1956. A DVR islike an ordinary equity share but has fewer voting rightsfor the shareholder. The objective of DVR is to preventhostile takeover~and dilution of voting rights. It alsohelps strategic investors who’ do not want to controlbut are looking at reasonably big investments in acompany Companies also issue DVR shares to fundnew large projects because even a big issue does notcreate the possibility of a takeover.

Bonus Shares : When profit making companiesdesire to convert their profit into share capital, theymay issue bonus shares. Bonus can be of two types -

1. Making partly paid shares into fully paid bydeclaring bonus without requiring shareholdersto pay for the same

2. Issue of fully paid equity shares as bonus,sharesto existing shareholders.

Rights Issue: A company can issue additionalshares by passing on ordinary resolution at its GeneralMeeting; However such additional shares must be firstoffered to existing equity shareholders in proportionto the shares already held by them. Such additionalshares are called Rights Shares. These are part ofAuthorized Capital. Rights sharescan be issued twoyears after formation of a company or one year afterfirst allotment of shares.

Limited Liability Partnership (According toLLP Act-2008) : An LLP is a corporate body and is aleqail entity separate from its partners. The corporatebody has the power to acquire, own and disposemoveable / immoveable property. The body will haveperpetual Succession eveji if the partners change. Thepartners of an LLP can be an individual or a bodycorporate, the LLP should have at least 2 partners andthere is no Ijmjt on the maximum number of partners.The LLP would be liable to the full extent of its assets.The liability of partners would be limited to agreecontributions to the LLP. No partner would” be liablefor independent / unauthorized actions of other partners.Of the minimum two partners of an LLP, one shouldbe necessarily be a resident Indian. The advantages ofan LLP are, it is a flexible form of a business companysuitable for professionals, small enterprises and forinvestment, firms like venture capital funds. The limitedliability of the partners makes it an attractive from of acorporate structure. The LLP in India as per the finance

act 2009 enjoys tax advantages like a lower rate ofcorporate tax,” exemption from MAT and dividendstribution tax. The partners are not personally liablebut liability arises out of acts of omission or . ong doing.A partner for more than 6 months is personally liablefor the liabilities of the company. One of the twopartners has to be a resident Indian. The share of thepartners is tax free. Under the LLP Act - 2008, foreigncompanies and individuals can set up LLP.

Concepts in Capital Markets : A stock exchangeis an institution for the purpose of trading - shares andother financial instruments like derivatives. The firstmodern stock exchange was the Amsterdam StockExchange set up in 1602 when the Dutch East IndiaCompany sold its shares first. A stock broker is anintermediary who buys / sells capital marketinstruments on behalf of nvestors for a fee and alsoarranges the transfer of stock from a seller to a buyer.In India, stock exchanges are defined by the SecuritiesContract (Regulation) Act-1955. According to this Act,any oody of individuals, incorporated or not, constitutedfor the purpose of assisting and controlling the tradingin shares and securities, is called a stock exchange.The stock exchange may be a regional stock exchangewhose area of operation is specified at the time of itsrecognition, or a national stock exchange (like NSE)which are permitted to have nationwide trading.,A’stockmarket is owned : . the brokers. The broker membersare owners and also traders on the exchange and alsomanage the exchange. In a mutual stock exchange thethree functions of ovi/nership, management and tradingare concentrated in a single group. In a demutualisedstock exchange, the three functions are separated. Stockexchanges play an important role in a modern industrialeconomy because

1. they provide mechanisms for companies tomobilize money from the people

2. provide an opportunity for people to save andinvest their savings

3. they provide for efficient functioning for thecorporate orm of organization

4. they compel the listed companies to work withdiscipline and for profitability

5. they are major instruments to attract foreigninvestment. The following are some terms incapital markets:

a) Market Capitalization of a Company: Thecurrent price per share of that company

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multiplied by total number of shares of thatcompany.

b) P/E Ratio : Price earnings ratio or P/E ratiois the latest closing price of a share of acompany divided by the earnings per share.A high P/E ratio reflects high expectation ofa company’s performance.

c) Earnings per share (EPS) : This is theportion of .a company’s profit assigned toeach of the outstanding shares of the commonshare capital. The net earnings of thecompany divided by the number ofoutstanding shares of the common stockgives the EPS.

d) Market Depth: The ability of the capitampact on market price of shares is calledcaprtaTmarket is capable of handling large’adverse impact on market price of shares.market to handle trade volumes in terms ofits

e) Market Breadth : The proportion of overallmarket (i.e., the companies), participating nthe lower and higher performances of themarket. The greater the marketthe more the participating companies.

f) Dividend Yield : The dividend got by a shareof a given company versus the share price.gher the dividend yield, higher the profits ofthe company.

g) Bears : These are investors who expect thevalue of shares and securities in the capitalmarket to fall and wait to invest till they fall.

h) Bulls: These are investors who are optimisticof the increase in the-overall value of shares:n the capital markets and hence continue toinvest.

i) Bear Market : A prolonged period withinwhich the market prices of shares / securitiesin the capital market fall. This indicates pooreconomic performances, low investorsentiment and possibly a recessionary phase.

j) Buii Market : A sustained period of risingprices of shares / securities in capitalmarkets, representing good economicperformances, investor optimism of vibrantgains from capital markets.

k) Blue Chip Company : A company that hasa long track record of good performance,regular payment of dividends and whoseshares and other securities are liquid!.e.,always in demand. The shares of suchcompanies are called Blue Chip.

I) Insider Trading : An insider is an officer,director-or holder of a given percent of sharesof a company who has confidential priceinfluencing informaTion and purchases orsells shares to make short term profits.

Qualified Institutional Placements: It is placingof share capita by a company at a fixed price with abuyer and henpe is a method of raising money bycompanies. According to SEBI guidelines, onlycompanies listed on stock exchanges with nationwidequoting of their shares in terminals of BSE and NSEcan resort to QI.P’s. The buyers of shares through QIP’scan be venture funds, mutual funds, FII’s providentfunds and pension funds. QIP’s are issued at price whichis the average price of theshare^riceoyer the immediatepreceding two weeks. Investors related to promotersof the issuing company cannot subscribe to a QIP. Ifthe issuing company seeks to raise to capital up to 250crore or less, then there should be to at least 2 biddersand no single bidder can there should be at least 5bidders. If a buying company or buyer acquires at least5% of the share capital of the company issuing a QIP,the buyer has to disclose this to the issuing companyunder the guidelines of the takeover code. The buyercan convert the share capital acquired through a QIP toequity share in a period of 60 months. No companycan issue in a single year more than 5 times its networth. The QIP’s have come popular in India due tothe depressed capital markets and also due to theinability of banks to lend liberally to the cooperates inthe prevailing economic uncertainty in addition, theQIP’s offer a long period of 60 months for conversionis not equity shares and hence assure less volatility invaluation of the issuing or follow on public offers.Unlike a GDR, the company need not convert accountsto International Financial Reporting standards. QIP’sare cheap compared to listing fee of GDR’s.

Initial Public Offering (IPO) : When anujiNsted^cornpanylists and makes a fresh issue of itssecurities or anjpffer of its existing securities or bothfor the first time to the public, it is called an IPO. Whena company comes out with an IPO, it decides the issueprice in constitution with the merchant banker ejpr|ce

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may be fixed by the company and a lead merchant bank,which is called the fixed price or the price may be fixedvia book building. In book building, the merchant bankand the company fix the ceiling price and floor price,the investors are invited to make the bids between thefloor and ceiling price or at these floor and ceilingprices’. The offer price is determined after the bidclosing date.

Follow on Public Offer (FPO): It is also calleda further issue. An already listed company either makesa fresh issue to the public or an offer of sale to thepublic through an offer document.

Draft Offer Document: After a company seekingto float a public issue discloses information inaccordance with SEBI guidelines in a prospectus, italso comes out with a Draft Offer Document. Thiscontains all relevant information to investors about thecompany and should be filed with SEBI at least 30 daysprior to the reqistratiorupf the Red Herring Prospectus.SEBI may specify changes in this Draft offerDocument. The draft offer document is put on’SEBIwebsite for public comments for a period of 21 daysfrom the date of filling of the document

Red Herring Prospectus : A company making apublic issue has to file a Draft Red HerringProspectus with SEBI, through an eligiblemerchant banker prior to filling the prospectuswith the Registrar of Companies. The prospectusgives information to potential investors before theselling price has been set. The prospectus is socalled because of a statement printed on itprintedJn red, declaring that the issue had not yetbeen approved by SEBI. The Red Herringprospectus is revised be forest he final version isissued.

Stock Market Index (like the BSE or NSE) :An index is calculated with reference to a base periodand a base index value. The initial market value of abase year is the base index ajue. For e.g., if the totalmarket capitalization of all shares of a stock exchangeis 1000 crore and if the current market capitalization is1100 crore, then the index is up 110 points (1100/ 1000multiplied by 100, where 100 is the base index value).Some of the famous stock market indices are

1. New York Stock Exchange (NYSE) Index : Thisis made up of the 32 most traded stocks. TheNYSE is made up of Dow Jo’nes Industrial Index(DJIA), the Dow Jones Transport Average (DJTA)and the Dow Jones Utility Average (DJUA).

2. NASDAQ : (National Association of SecuritiesDealers Automated Quotation System). An indexof US capital markets, which is an electronicexchange that provTcTes’ price quotes online inan electronic form. It is the first digitized stockmarket m the_world and many of the stocks tradedvia NASDIAQ are technology company stocks.

3. Standard and Poor : 500 Index is made up of500 listed companies of USA and is much morerepresentative of the US corporate sector.

4. The FTSE : 100 is made up of the 100 most highlycapitalized companies listed on the London StockExchange. The Index is also called Footsie and ismaintained by the FTSA Group, an independentcompany and a joint venture of the FinancialTimes and the London Stock Exchange. The othersare CAC-40 of France, DAX of Germany,’H’angSeng of Hong Kong, Kospj of South Korea, theStraits Times Index of Singapore, the Bovespa ofBrazil, the Nikkei - 225 of Japan, the RTS Index -50 of Russia, the SSE (Shenzen) Composite Indexof China, the Shanghai Stock Exchange (SSE)Composite - China, the NSE - 50 and BSE - 30 ofIndia

The Bombay Stock Exchange : It is the oldeststock exchangeof Asia set up in 1875. The BSEaccounts for the 5th largest stocks traded in world stockexchanges. It regained the number one rank in thenumber of companies listed in October 2012. TheBSE’s sensex-30 was introduced in January, 1986 andis made up of 30 most capitalized stocks of 30companies of India. For a company to be listed withinsensex-30, its shares should be regularly traded, andthe company should be in the top 75 in terms of marketcapitalization. BSE includes automatic online tradingsystem called BOLT that offers online trading in equity,debt and derivativeTi^trumeritsTln 2005, BSE becamea corporate body. Greenhex is made up of 20 companieslisted on BSE-100 which meet energy efficiency normsand Was introduced in February 2012. Carbonex is anew index of BSE-100 which monitors the 100companies covered by BSE 100 in terms of theircommitment to GHG emissions recjctions and wasintroduced in 2012,

National Stock Exchange (NSE): It wasrecommended by the Pherwani Committee of 1931 andthe union,government authorized its establishment byIDBI in 1992. iTwas incorporated eading financial

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institutions in 1992, recognized as a stock exchangein. 1993 and commenced cperations in 1994. It is thethird largest stock exchange by trade in the world andis located in Mumbai.

Interconnected Stock Exchange of India (ISE):it is promoted by the regional stock cranges as a nationallevel stock exchange

Indonext: It is an index promoted by BSE,Federation of Stock Exchanges and 18 regional stockexchanges. It is to bring attention and liquidity to stocksthat are listed on regional stock exchanges.

Tie Over The Counter Exchange of India(OTCEI): It is an incorporated company underthe Companies Act-1956 as a public limitedcompany. It allows listing of small and mediumcompanies and and has been promoted by the UnitTrust of India, IDBI, Bank of India, IIFCL and isa recognized stock exchange.

Derivatives: These are contracts in the nature offinancial instruments whose value is based op anunderlying asset like equity shares, index, forex, goldor any other commodity. The derivatives can beForwards, Futures, Options or Warrants.

1. Futures Market : A futures contract is betweentwo parties to exchange a specified asset (of agiven quantity / quality) for a price agreed todaywhich is called the strike price or futures price.These contracts are traded on a futures exchange.The party agreeing to buy is said to be long andthe party agreeing to sell is said to be short. Thefutures exchanges requires both the parties to putup an initial amount of cash called the margin.Since the futures price changes daily, thedifference between the agreed price in the contractand the daily futures price is also settled daily.The futures exchanges withdrew money from oneparty’s margin money and puts it in the others.On the delivery date, the amount exchanged isnot the agreed price agreed in the contract but theprice on the delivery date. A Forward Contract islike a futures contract but is not traded viaexchanges.

2. Options Contract : An options contract is avariety of futures contract which gives the rightbut not the obligatiomto buy or sell the underlyingasset on a specified date. The buyer of an optionpays the premium and buys the right to exercisehis option, the seller of an option is the one who

receives the options premium and is thereforeobliged to sell or buy the asset if the buyerexercises it. Options premium is the amount ofmoney paid acquiring the right to buy or sell. It isa price paid by the option buyer to the’ optionseller for acquiring the right to buy or sell. Thesehave to be paid where entering into the contract.Investors can take the role of options seller orbuyer. Options are of two types A) Calls - Thisgives the buyer the right but not the obligation tobuy the underlying asset at the given price beforeor on the specified date B) Puts : This gives thebuyer the right but not the obligation to sell theunderlying asset at a given price on or before thespecified date. The options traded generally havelives up to one year and are settled on a monthlybasis.

3. Warrants : These are longer dated options.

Example of Options Trading : The followinggives an example of options contract. A person Xbelieves that the share price of a company A is likelyto fall from its present price of 700 Rs. per share. Thisperson X can now buy a put option of acquiring theright to sell the share at 690 rupees. An options contracthas a minimum number of shares as the underlyingasset. For example, if the person X buys a put optionof 100 shares and if as expected if the share price ofcompany A falls to 675 rupees, then he makes a profitof 15 rupees per share because he has already acquiredthe right to sell it at 690 though the current price is 675rupees. An option buyer acquires a right while theoption seller takes on an obligation. Itjsthebuyer’sprivilege to exercise the right and the seller has to honorit.

A call option can also be stild. If one sells a calloption, he acquires an obligation to deliver theunderlying asset. If one sells a put option, he acquiresan obligation to buy the underlying asset. Optionpremium is the money paid as consideration by theoption buyer to the option seller (also called The optiorwriterpThis,premium is kept by the seller regardlessof whether the right acquired in the options contractis’exercised or not by the buyer of the option. Theoptions contracts are bought and sold through the stockexchange where the buyers and sellers do not deal witheach other personaliy. The sellers (or writers) of putand call options are the ones who are taking the riskand hence pay some amount to the stock exchange

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called margin money. But the buyers of cail and putoptions only pay the options premium.

Role of Futures Market in an Economy : Thefutures market helps in price discovery of tradedentitles. In addition, it also helps in hedging price risk.The hedger has an interest in the underlying asset andis trying to protect himself from risk of price changesby entering into a futures contract. However, the futuresmarket also has participation of speculators who onlyseek to make a profit but have no interest in selling orbuying the under lying asset.

Commodity Futures in India : The firstorganized futures market was established in 1875 asBombay Cotton Trade in cotton. The futures market incommodities grew rapidly between the First and theSecond World Wars. However in mid-1960’s,commodities futures trading was banned in mostcommodities in India, except a few like pepper, turmericetc. Today, once again, India has a growing commodityfutures market in many commodities. The national levelcommodity exchanges are NCDEX (NationalCommodity and Derivatives Exchange) MCX (theMulti Commodity Exchange), The National Multi-Commodity Exchange, the Indian CommodityExchangee ltd. (ICX) and Ace .atives and CommodityExchange.

The Forward Markets Commission (PMC) :This was set up in 1953 under Forward Ccrrracts(Regulation) Act - 1952. The FMC is the chief regulatorof forwards and futures markets in India. The FMC isheadquartered in Mumbai and functions under theMinistry of Consumer Affairs. I: consists of 2 to 4members, nominated by the union government. TheFMC allows commodity :rac ng in 21 exchangesincluding 5 national exchanges. The FMC’s functionsare

1. To advise the central government on matters ofgranting recognition / withdrawing -recognitionto / from any association in any matter arising outof the administration of the Forward Contracts Act- 1952.

2. To keep vigil over forward markets and takenecessary action whenever required as a regulator

3. To collect / publish information regarding tradingconditions of goods and also periodical reportson orking of forward markets in India 4) To inspectaccounts of recognized association whenevernecessary.

The National Board of Trade: This was set upin 1999 and is a regional commodity exchange. I: 5one of the fastest growing commodity exchanges andfunctions under the FMC.

Currency Futures in India: This was allowedin India in 2008. A currency future is a future contractto exchange one currency with another at a specifieddate at a price fixed no. The trade unit of each contractis a certain amount of the other currency. In India^currency futures are permitted only in rupee and USdollar. The size of the contract is at least 10 0 0. d o 11a rs and is” op en only to “persons resident in India.The Multi Commodity Exchange - SX (McX - SX) isthe premier exchange for currency futures in India.

The Securities and Exchange Board of India:It was set up in 1988 and was given a statutory statusin 1992 following SEBI’ Act -1992. The powers ofSEBI were enhanced In 2002 which raised the strengthof the SEBI Boardjrom to 6 to 9 and to give enhancedpowers of search and seizure. The SEBI Board of 9includes 2 government nominees and one nominee ofRBI. The Board has power to impose penalties, passcease and desist orders, suspend registration of a brokerand also file criminal prosecution in a court of, law.The functions of SEBI are

1. protect nterests of investors in securities

2. regulate the working of stock brokers, merchantbankers and give approval for mutual funds andalso register FII. SEBI also enforces corporatedisclosures, registers / regulates venturevcapitalfunds, enforces code of conduct for all creditrating agencies in India.

National Securities Depository Ltd: This hasbeen set up under the Depositories Act - 1996. TheNSDL, holds securities of depository accounts and alsooffers facilities like dematerialization Convertingphysical shares into electronic shares) rematerializationetc. It has been promoted by IDBI, UTI and NSE.

The Depositories Act - 1996 : It provides forestablishment of depositories in securities with the aimof free transferability of securities with speed andaccuracy. It provides for

1. making securities of all public limited companiesfreely transferable (subject to some exceptions).

2. Dematerializing securities in depository mode

3. Maintenance of ownership records in a book entryform.

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4. Transfer of ownership of securities electronically.A depository is like a bank where securities anelectronic form are maintained. The depositorshold the securities of account holders in a cemataccount. A depository participant is an agent toprovide depository services. The depositoryparticipant is appointed by the depository and asper SEBI regulations, banks, financial institutionsand SEBI registered trading members can becomedepository participants.

Securities Contracts (Regulation) Act-1956:This act provides for direct/indirect control of ailaspects of securities trading and running of stockexchanges. It aims to prevent undesirable r-ansactionsin securities. It gives the central government regulatoryjurisdiction of

a) stock exchanges through a process ofrecognition and continued supervision

b) Contracts in securities and

c) listing of securities in stock exchanges.

A stock exchange complies with conditionsprescribed by the central government through the stockexchanges determine their own listing regulations.

The Takeover Code: It is a set of rules of SEBIwhich determine whether or not acquisition of sharesof a company amounts to a takeover attempt. The aimof the takeover code is to ensure that the acquirer givesan opportunity to invesjors in a company to exit if theyfeel that a change in the management control,of acompany is not in the best interests of the company.The takeover code is part of SEBI rules, first formulatedin 1994. An acquirer is any person who directly orindirectly agrees to acquire by himself or throughPersons Acting in Concert (PAC) with him, the sharesor voting rights or control over a target company.Persons Acting in Concert (PAC) refers to persons whowith a common purpose of acquisition of shares orvoting rights or control over a target company. The PACcan be a company, its holding company, subsidiarycompany under the same management group, orimmediate relatives of promoters, members of thepromoter group. Control includes the. right to appointmajority of directors or to control the management orpolicy decisions. Under the new Takeover- Regulations2011, if acquirer acquires a shareholding of 25% of alisted firm, he has to make a public offer (the earlierthreshold for a public offer was 15%). The public offer

should be acquisition of an additional 26% ofshareholding (earlier it was 20%).

Creeping Acquisition norms have also beenchanged. For e.g. when an acquirer holding 25% ormore shares but less than 75% of the shares will haveto mandatorily make a public offer if he acquires morethan 5% of voting rights. According to the newguidelines the offer price of the acquirer to buyadditional shares will be the higher of the following

1. highest negotiated price per share of the targetcompany for any acquisition under the agreementattracting the public announcement of an openoffer

2. the volume weighted average price paid orpayable for acquisitions whether by the acquireror any Person Acting in Concert with him, during52 immediate preceding weeks before the’date ofpublic announcement

3. the highest price paid or payable for anyacquisition., whether by the acquirer or by anyPerson Acting in Concert with him, during 26immediate preceding weeks before the date ofpublic announcement. The Takeover Code alsoallows existing acquirers holding more than 25stake in the company, to make a voluntary offerof acqujring an additional minimum 10% of thetotal shares of the target co’mpany but, the post-offer shareholding of this acquirer should notexceed 75% of total shareholding and also only ifhe has not acquired shares of the target companyin the previous 52 weeks without attracting anopen offer.

Buyback of Shares: This is allowed underthe Companies Act-1956. Under the Act, a companycan buy back its own shares, other specified securitiesfrom its free reserves, from the money of its securitiespremium account’ or from monies raised through aprevious buyback. The buy back should not be for morethan 25% of the paid up capital and free reserves. “Aspecial resolution of the company is required toauthorize buyback and the company shoulddiscJoses’the purpose of buyback. Companies areallowed two buybacks each year. After the ‘.buyback,the company should have a 2:1. debt equity ratio. Thecompany which has come’ out” with a buyback cannotreissue shares for another 24 months. A company canbuyback its share from the existing shareholdersthrough a tender offer, through reverse book building

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or through a stock exchange and from odd lot holders.A company can buyback its \shares without shareholderresolution to the extent of 10% of its paid up capitaland reserves. However, if a company tends to buybashares to the extent of 25% of paid up capital andreserves, it has to be approved by a shareholderresolution. In the tender offer method, the companysends a tender offer form to the shareholder. Accordingto SEBI guidelines, at least 5% of the shares thecompany buys back shall be bought back from smallshareholders whose shareholding has a maximummarket value of 2 lakh rupees.

Mutual Funds: A mutual fund operates as aFinancial intermediary. It sells units to people andinvests these sums in market securities includinggovernment securities. It provides an opportunity toan ordinary investor to invest in good securities alongwith expert selection and professional monitoring ofinvestment. The other benefits to investors are

1. red uced risk by diversification of portfolio (orinstruments of investment).

2. provide expert investment advice which ordinaryinvestors lack

3. low commissions of mutual funds

4. encashing units whenever required if it is an openeended scheme.

An open ended mutual, fund issues its shares(units of investment) at all times and the investors canwithdraw from it by encashing the units any time. Theprice of the unit is based on the Next Asset Value (themarket worth of a unit calculated on the basis of variousassets in which the fund has invested minus theexpense). A closed ended., mutual fund issues its unitsas an IPO (which is usually called a New Fund offering)These are traded on exchanges and price of units ofthe fund are determines not by NAV but by investordemand.. The shares are not redeemable until the fundis liquidated. The’mutuaT fund has a 3 fold structure -a sponsor, a trust and an asset management company.An AMC is hired by the sponsor to invest in accordancewith the objectives of the fund. The sponsor requiresthe approval of the SEBI. The fund is managed by aBoard of Trustees in whose favour a trust deed isexecuted by the sponsor. The’AMC actually managesthe funds.

India's Mutual Fund industry started with UTI’sAct-1964. US-64 under the utl Act-1964. US-64was the a’gest mutual fund with crores of

investors. In 1985, the UTI Act was amended toallow UTI to invest in assets such as term loansand real estate in addition to capital marketsecurities. In 2003 UTI was broken down into 4new companies

1. UTI Infrastructure Service to manage propertiesof UTI across the country

2. UTI Pension and Portfolio Management Serviceswhich is its mutual fund

3. UTI Distribution Company - which distributes-financial services/products of UTI

4. UTI Asset Reconstruction Company whosefunction is for recovery of sticky assets.

Index Fund: It is a mutual fund which invests inall the securities of an index (like the securities ofsensex-30). Hence it does not produce better resultsthan the index it invests in, The main benefit is greaterdiversification at lower costs and is also much less riskythan a normal mutual uund. Index funds have lowexpense ratios compared to mutual funds and henceprovide superior eturns in the long term.

Venture Capital Funds: These are investmentcompanies which provide equity support to P’ojectsbeing launched by first generation entrepreneurs whoare setting up enterprises with commercially untestedbut sophisticated technology, Venture funds invest in acompany before the company goes for a~public issueof share. The period of investment is medium to longterm and -eturns are in the form of capital appreciationof the company funded.

Sweat Equity : These are equity shares issued ata discount to market price or for a consideration etherthan cash to a person for providing know how or anintellectual property right. These are usually used asinstruments of entrepreneurship building. UnderCompanies Act - 1956, only when 75% ofsharesholders in an Annual General Body Meet supporta special resolution, the company can issue sweatequity.

Corporate Governance : Corporate Governancerefers to a set of norms to be following by managemntsof corportates to secure objectives such as

1. Fair treatement of shareholders

2. Prevent insider abuse so that corporate resourcesare not squandered

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3. Safeguared the interests of shareholders,particulary minority sharesholders and of thegeneral society at large.

The SEBI under clause 49 provides for corporategovernance norms. For all companies which are listed,if the chairman is not an excecutive director, one thirdof the board of directors of the company should beindependent. should be independent. The SarbanesOxley Act of US isa the model for the corporategovernance clause of SEBI.

Employees Stock Options (ESOP) " This isgiven by companies to their employees as an incentife.The ESOP confers on the holders the right to buy theshares of that company, but not an employee canexercise his right to buy. Normally the specified periodis between 1 to 9 years. If the holder of the ESOPresigns, the ESOP rights are lost if they are due afterthe date of resignation. ESOPS are given to retain talentby a company.

Anchor Investor: Under the SEBI guidelines,anchor investors are individuals who have bid for atleast 10 crore worth of shares in a public issue. Suchanchor investor can be allotted around 30% of theportion reserved for qualified institutional investors.The anchor investor cannot be a promoter under theSEBI guidelines.

Bimal Jalan Recommendations for StockExchange Demutualization: The majorrecommendation are

1. stock exchanges should be for reasonable profit

2. Demutualised stock exchanges shouldn’t list theirshares on themselves

3. Equity shareholding of brokers to be maximum5%

4. Public financial institutions and bankingcompanies with at least 1000 crore net worth toinvest up to 24% in stock exchanges

5. The solar of top management of a demutualisedstock exchange to be fixed.

Performance of NSE and BSE: The NSE andBSE accounted for 99.8% of cash turnover of allrecognized stock exchanges in 2011-12. The turnoverin the cash segment of all stock exchanges fell by 25%in 2011-12. For NSE and BSE, the turnover in the cashsegment fell by 21.4% and 39.6% respectively. Thecash turnover of NSE in 2011-12 was 28.10 lakh croreand of BSE was 6.67 lakh crore. The marketcapitalization of NSE and BSE fell by 9% and 9.1% in2011-12 respectively compared to 2010-11.

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6. Industrial Sector

Industrial Policies : The need for an industrialpolicy in independent India was in the context of

1. To correct the lopsided industrial development inthe colonial period.

2. Lay down the desired pattern of industrialinvestment.

3. Determine the pattern of industrial developmentover space and time.

4. To reduce inequalities among people and regions.Hence in light of the above factors, thegovernment of India formulated the IndustrialPolicy Resolution in 1948. The chief objectivesof the Industrial Policy Resolution (IPR) - 1948

(i) To lay the basis for a mixed economy.

(ii) To enable the state to assume theresponsibility of industrial development inaccordance with nationally determined goals.

(iii) The policy divided industries into 4categories.

CATEGORY A : Industries under this categoryto be a state monopoly (like Atomic Energy, Railwaysetc.)

CATEGORY B : This included the mixedindustrial sector. The state to set up new capacity i theindustries under this group while existing capacity ofthe private enterprise would be allowed for 10 years.

CATEGORY C : Industries under this categoryto be in the private sector but subject to closegovernmental control. The state may also set upcapacity in this category.

CATEGORY D : Industries under this to be leftto private enterprise subject only to generalgovernmental control,

The Industries (Development and Regulation)Act-1951 was enacted tb give effect to the IndustrialPolicy Resolution- 1948. It provided for licensing fornew industries and also for expansion of existingcapacity ( no license would be required for units withless than 100 workers and where investment was lessthan 10 lakhs). It empowered the government to

prescribe prices, volume of output and distribution ofoutput. It also empowered the government to take overthe management of private industry if it failed to act.in accordance with the guidelines laid down in the IPR-1948 and the Industries Act-1951. The act also providedfor intervention by the government to investigateindustrial activity.

The Industrial Policy Resolution -1956 : Thiswas to give effect to the goal of establishing a socialistpattern of society. This was based on the Mahalonobisstrategy of development. The classification of industrieswas more clear and the coverage of indu’st^es: wasmore broader in terms of the role of the State. UnderIPR-1956, more industrial groups were’ brought underpublic sector and industrial licensing was mademandatory. The IPR-1956 grouped,, industries intothree schedules.

Schedule A : Included 17 Groups of industries.These will be the monopoly of the State.

Schedule B : Included 12 Groups of industries.Capacity in these would be increasingly set up by theState but private sector would be allowed at thediscretion of the State. The schedule B industries wereto be developed by the states. However, in-schedule Bindustries, the private sector was expected tosupplement the efforts of the state governments. Hence,schedule B industries will not be monopolies of stategovernments.

Schedule C: Included all other industries. Thesewere to be developed by the private enterprise subjectto control by the government under economiclegislations like the IDRA- 1951. Schedule C industrieswill also be subject to licensing under IDR Act -1951.

Review of Industrial Development under IPR-1956 : The government set up the Hazari Committeein 1966 to review the working of industrial licensing.The committee submitted its report in 1967. TheSubimal Dutt Committee was also set up in 1967. Thiswas the Industrial Licensing PoHcy Inquiry Committee.It submitted the report in 1969. Both these committeesconcluded that the licensing authorities ignored the

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objectives of industrial licensing. The Dutt Committeerecommended the concept of the joint sector. It alsorecommended identification of core industries. Fromthese, those in Schedule A should be reserved for theState.

Liberalisation of Industrial Licensing : Basedon the findings of the Hazari and Dutt committeeReports, liberalisation of industrial licensing wasinitiated. This .took the form of series of IndustrialPolicy Statements. These were :

(i) Industrial Licensing Policy 1970(Industrial Policy Statement-1970) : It identified 8core industries. Of these, those in Schedule-A shouldbe reserved for public sector and in others, privateenterprise should be allowed. The industries weredivided into 4 sectors -

1. core sector - Which included critical and strategicindustries such as steel, coal, cement, atomicenergy, clear minerals etc. The core sector unitswere to have investment in fixed assets of at least5 core.

2. The Middle Sector or Medium Sector : This wouldbe include units with an investment of oe:.veen 1crore to 5 crore in fixed assets.

3. Non-core sector : This was also called the jointsector a”d would include some core industrieswith an investment of 5 crore

4. Delicensed sector : These would include industrieswhich do not require a license. It also identifiedindustries for the joint sector, heavy industrialsector and medium industrial sector.

(ii) Industrial Licensing Policv-1973(Industrial Policy Statement-1973) : It identifiedindustries for development in the Joint Sector and alsoidentified the priority industries. This defined coreindustries as basic industries or infrastructure industrieswhich would fefe also is? developed by privateenterprise (subject to licensing) and with an investmentof at least 20 crore. The Joint Sector as an instrumentof public private partnership was also visualized. Thecore industries identified for the private sector includediron and steel, crude oil exploration, Oil refining,cement, coal, and electricity. The 1973 licensing policy

also provided for entry of multinational companies intoIndia on a limited basis.

(iii) Industrial Licensing Policv-1975(Industrial Policy Statement-1975) : This was a majorstep in delicensing of a large number of industries. Thispermitted unlimited expansion beyond licensedcapacity and delicensed 21 groups of. industries.

(iv) Industrial Licensing Policv-1977(Industrial Policy Statement-1977) : it expanded thelist of industries for the small scale sector. It alsoproposed the establishment of District IndustriesCentres ( DIG) to help the Small Scale Sector (SSI). Italso introduced the Tiny Sector TTTTs” prohibitedforeign investment in non-priority industries. Thepolicy expanded: the number of items reserved for theSSI from 180 to more than 500. It defined tiny units asthose which would have investment in fixed assets ofnot more than one lakh and would be set up in villagesand towns with up to or less than 50,000 population asper the 1971 census. It also declared that foreigncompanies that reduced foreign equity to 40% of totalpaid up capital would be treated on par with Indiancompanies.

(v) Industrial Licensing Policv-1980(Industrial Policy Statement-1980) : This providedfor regularisation of excess capacity particularly forFERA/MRTP companies. It also sought to promoteexport oriented units. This exempted some keyindustries from the provisions of MRTP Act.

(vi) Industrial Licensing Policy-1985(Industrial Policy Statement-1985): This aimed toencourage the growth of large industries. It raised thelimits on investment infixed assets for the purpose ofthe MRTP Act. It also introduced Broadbandinq as adevice to liberalise industrial licensing. Broadbandingcovered machine tools, paper, automobile and otherindustries.

(v) Inindustrial Licensing Policy -1988(Industrial Policy Statement-1988) : This was anothermajor step towards delicensing Indian industry. Non-MRTP and Non-FERA companies were exempted fromlicensing if they set up capacity in industrially backwardareas. It also proposed the establishment of GrowthCentres. Non-FERA and Non-MRTP companies were

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exempted from licensing if they set up industries withfixed investment of not more than 50 crore in backwardareas.

Industrial Policy Resolution -1991 : Thisrepresents a new economic philosophy with emphasison competitiveness of Indian industry, growth of largeenterprises, accelerating the rate of industrialInvestment and the development of an export orientedIndian industry. The chief features of IPR-1991 are :1) Abolished industrial licensing except for fewindustrial groups, ( Note : Today licensing is requiredfor 6 industrial groups. These are : i) distillation /brewing of alcoholic drinks, ii) manufacture of cigar/cigarette, tobacco substitutes, iii) electronic, aerospaceand defence equipment, iv) Industrial explosives anddetonating elements, v) Hazardous chemicals, vi) drugsand pharmaceutical products) 2) Dereserved 9industrial groups from the 17 reserved for the publicsector (Note : Today, 3 industries are reserved for thepublic sector. These are : i) Atomic energy, ii) Nuclearmaterials/substances specified by the department ofatomic energy, iii) Rail transport). 3) It opened Indianindustry to Foreign Direct Investment (FDI). 4) TheIPR-1991 declared that Foreign Exchange andRegulation Act (FERA) would be amended to attractFDI. 5) It places responsibility of industrialdevelopment on the private enterprise.

SMALL SCALE INDUSTRY

The Small Scale Sector (SSI) Includes : 1)Ancillary Units : These are industres which sell atleast 50% of their output to other industrial units. Theceiling on investment infixed assets is one crore. 2)TinyUnits : Defined by Industrial Licensing Policy of 1977.The investment ceiling in fixed assets is 25 lakhs. 3)Small! -Scale Units ; These are units with a ceiling oninvestment in fixed assets being not more than onecrore. Based on the Abid Hussain Committee’srecommendations, the investment ceiling in fixed assetswas increased to 3 crore for small scale units. However,it has been reduced later to one crore. 4) Small ScaleService Business Enterprises: Are those with amaximum investment of 10 lakh. These produceindustrial services for industry.

THE IMPORTANCE OF THE MEDIUMSMALL AND MICRO ENTERPRISES (MSME):The MSME account for 40% of India’s exports, 45%of India’s manufacture output and provide directemployment to 70 million people. The MSME alsocontribute to more than 90% of India’s non-traditionalexports. India today has around 3.11 crore units in theMSME. These account for 95% of all enterprises. Theireconomic significance is in terms of

1. Have low ICOR compared to big medium industry.

2. Add value to the agricultural output.

3. Are labour intensive

4. Help in rural industrialisation.

5. Have low import intensity

6. Are labour intensive and capital saving (India islabour surplus and has inadequate capital). Forexample, SSI create more.employment per unitof investment (15 times more than the employmentgenerated by medium and big industry).

7. SSI tap hidden resources, idle rural savings andalso rural enterpreneurial ability.

8. They reduce income inequalities and reduceregional imbalances.

9. They also help in preservation of inherited skillsbecause they manufacture non-traditional items(for e.g. 90% of exports of SSI are made up ofnon-traditional items).

Problems:

1. 96% of units in SSI have fixed assets less than 5lakh but account for 60% of output of the SSIsector. (These do not enjoy economies of scaleand have obsolete technology and productionprocess). Only 4% of units of SSI with Investmentin plant and machinery above 5 lakh account for40% of output from the small scale sector.

2. Though the definition of SSI is on the basis ofinvestment in fixed assets according to theIndustries Development and -Regulation Act -1951 (the earlier definition of SSI on the basis ofinvestment and employment criteria was modifiedto exclude employment criteria), still the SSI comeunder the purview of the Factory Act - 1948 forlabour purposes. This leads to harassment by

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labour inspectors. Many units within the tinysector (which is part of SSI) with an investmentof- 2 - 3 lakhs in fixed assets and with 10-12workers are subject to Factories Act and otherlabour laws, hence leading to harassment byinspectors.

3. Encroachment by big industry is another seriousproblem. The medium and big industry haveentered the SSI on one pretext or the other toproduce the items reserved for the SSI and to availconcessional credit by banks.

Measures for the Promotion of SSI in India :

l. The Small Industries DevelopmentOrganisation (SIDO) was set up in 1954 toformulate, co-ordinate and monitor programmesand policies for the promotion and developmentof SSI in India.

2. Reservation of items for SSI : The governmenthas reserved around 836 items to be manufacturedand produced by the SSI. Encroachment bymedium/large industries on these reserved itemsis penalised. This policy of reservation isunder’constant review and hence items may beadded or deleted from the reserved list. To reviewthe reservation policy, the government hasconstituted an “Advisory Committee onReservation” in 1951. The items reserved for theproduction by the SSI however can be producedby the large and medium sectors only if they export75% of their production.

3. Marketing Assistance : The “National SmallIndustries Corporation” has been set up in 1955which helps the SSI in obtaining greater share ofgovernment and defense purchases, In fact, thegovernment is the single largest purchaser fromSSI The “Small Industries DevelopmentOrganisation” (SIDO) provides indirect supportto the marketing efforts of the SSI by preparing“Area Survey Reports”, Industry Prospect Sheets:for their guidance.

4. Financial Assistance :

(a) The National Small Industries Corporation(NSIC) at the national level and itscounterparts at the state level supply

machinery to the SSI on a hire-purchasebasis.

(b) Financial Institutions like IDBI (IndustrialDevelopment Bank of India), NABARD,ICICI (Industrial Credit and InvestmentCorporation of India) provide refinance tobanks (i.e. reimburse the amount given to SSIby other banks) for financing the SSI.

(c) The Small Industries Development Fundwithin the IDBI has been set up in 1986 witha paid up capital of 2500 crores. The fundcaters to finance the expansion/diversification programmes of SSI.

(d) The “National Equity Fund” has been set upin the IDBI to provide equity support to smallscale enterpreneurs for setting up newprojects and also for rehabilitation ofpotentially sick units, e) The “SmallIndustries Development Bank of India” wasset up in 1989. It is an apex bank (whichbecame operational in April, 1990) to caterto financing, development and promoting theSSI. It has an authorised capital of 250chores, and is a subsidiary of IDBI.

5. Technological Assistance :

(a) Items of machinery/ equipment for the SSIand the VSI (village and small industries)are put -in the “Open General License”(OGL). (Items in the OGL do not require animport license i.e., they can be freelyimported).

(b) SSI enterpreneurs are entitled to importmachinery/equipment upto 3 lakhs for settingup capacity.

(c) The “District Industries Centres” (DIC)assist the SSI with respect to informationabout technology.

(d) The National Equity Fund, SIDO help theSSI in technological modernisation.

(e) In 1990 - 91 budget “Tool Rooms””Processand Product Development Centres” havebeen under SIDO for the technologicalupgradation and modernisation of SSI.

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(f) Again in the 1990 budget, a “Department ofSmall Scale, Agro and Rural Industries” atNew Delhi has been set up to harnessinnovtive technology for achieving valueaddition to agricultural/horticultural produceand also raise the level of rural technologyin village industries.

(g) In 1992, a Small-Scale Industrial Policy wasannounced which assured timely and properfinance for growth, technologicalupgradation, removal of labour irritants andending the inspector raj.

Other Problems of the Small Scale Sector :

1. Lack of assured supply of credit/inadequatefinancial assistance.

2. Inadequate supply of raw material : The SSI arestarved for assured supply of raw material becausethe medium and large sectors get most of the rawmaterial since they have adequate resources attheir disposal to buy up huge quantities of rawmaterial.

3. Encroachment by big/medium industry : On anaverage, 95% of the SSI have assets worth lessthan 5 lakhs i.e., units having assets more than 5lakhs each are usually controlled/owned by big/medium industrial houses.

4. Poor R&D : Small sector has practically no R &D. Though ICICI lends money for R & D and alsoprovides expertise, its schemes attract few takers.The IDBI has provision to fund only commontesting facilities for the small sector. Thegovernment should therefore step up investmentin R & D for SSI.

5. Inadequate development of rural markets : Thetotal size of the rural market for packaged goodsis huge, in which the share of SSI is very low.The factors impeding the growth of rural marketsinclude widespread dispersal of villages,inadequate road network in rural areas frailcommunications, low purchasing power, scantmarketing research and inadequate number ofretail outlets. Hence there rs no adequate demandfor the goods produced by SSI.

6. Cumbersome procedure: The procedures are stillcumbersome and the inspector raj is far fromeliminated. A large number of inspectors fromvarious organizations still keep coming to SSIunits on some pretext or the other thus slowingdown the production process.

7. Inadequate utilisation of installed capacity : Mostof the units do not use their installed capacity tothe fullest. This is owing to the reason that theybelieve that there is no market if they produce themaximum possible by them.

8. Lack of proper counselling facilities : The smallindustrialist starts his unit without full informationregarding the viability of the unit A. AS a resultsome units fall sick.

9. Delayed sanctioning of loans : Though creditfacilities exist, a lot of time is lost in sanctioningloans due to the cumbersome procedures.

10. Frequent changes irf fiscal levies : Small scaleenterpreneurs are subject to varying tax structureswhich retards their progress.

11. High rate of interest : SSI pay a high rate of intereston borrowings which the industrialist can ill-afford. Apart from this, banking institutions alsocollect service charges, commission fordiscounting bills, handling charges etc.

12. Infrastructural problems : Frequent breakdown orshortage of power is a major impediment thateffects the health of the unit.

13. Lack of effective marketing back-up : Because ofpoor managerial skills and sub-standard qualityof goods the SSI find it difficult to market theiroutput.

14. SSI is catering to elite sections of the society :Contrary to the objectives of producing wagegoods and goods of mass consumption, theproducts of SSI are catering to the elite sectionsof the society and hence are not fulfilling theirrole in harmony with the objectives.

Suggestions :

1. Simplification of procedures

2. Implementation of the single window system.

3. Development of marketing surveys and outlets

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4. Sanctioning of loans within a stipulated time.

5. Introduction of a single tax like VAT.

6. Modernization of the plant.

7. Provision of Infrastructure

Reforms for the SSI:

1. The Abid Hussain Committee was set up in 1997and it suggested many reforms.

2. Based on the Abid Hussain Committee’srecommendations, the government has starteddereserving items reserved for the SSI. In the1997-98 budget, for the first time 14 items weredereserved. Based on the same committee’srecommendations, the distinction between export- oriented and non-export oriented SSI has beenabolished, the investment ceiling on fixed assetsof SSI have been raised and norms for loans bybanks to SSI have been laid down.

3. Big ncustry can participate in the equity of SSIupto 49% of the total equity.

4. FDI is allowed upto 24% of the equity of SSI.

5. Export obligation of big industry producing itemsreserved for SSI -as been brought down from 75%to 50% of total output.

6. Small and Medium Enterprises Fund nas been setup under SIDBI and is operational sinceApril,2004. 7) The S.P. Gupta Study Group onDevelopment of Small Enterprises was set :up in1999. It gave a 3-fold definition of tiny, small andmedium enterprises. Tiny units are to be definedas those with investment not exceeding 10 lakhsin plant and.machinery. Small units are those withinvestment on plant and machinery being between10 lakhs to one crore. Medium units are those with.investments on plant and machinery between onecrore to ten crore. For the first time the StudyGroup defined the investment ceiling for plant andmachinery for medium units. 8) In 1997, the RBIset up the S.L. Kapoor Committee to makerecommendations on the problems of untimely andinadequate credit to the small scale sector.

Small and Medium Enterprises Development(SMED) Act, 2006: The salient features of the Small

and Medium Enterprises Development (SMED) Act,2006 are :

1. Enterprises are classified into manufacturingenterprises and service enterprises.

2. Both have been further sub-classified into micro,medium and small based on their investment inplant and machinery, if it is manufacturing, andbased on equipment, if it is a service enterprise.

3. Manufacturing enterprises are:

(a) Micro enterprises with an investment of upto25 lakh rupees

(b) Small enterprises with an investment ofbetween 25 lakh and 5 crores

(c) Medium enterprises with an investmentabove 5 crore and upto 10 crores.

4. Service enterprises are :

(a) Micro enterprises with an investment upto10 lakh

(b) Small enterprises with an investmentbetween 10 iakh and 2 crores.

(c) Medium enterprises with an investmentbetween 2 crores and 5 crores. The Actprovides for a consultative body at thenational’level with representation to allstakeholders, an Advisory Committee toassist the Central and state governments.

The Act also provides for:

(a) Specific funds for the promotion ofcompetitiveness of these enterprises.

(b) Progressive credit policies.

(c) Preference in government purchases fromthem.

(d) Address the problem of delayed paymentsto these enterprises by big industry.

(e) Simpler procedures for closure of theseenterprises.

Abid Hussain Committees Recommendationson SSI: The Abid Hussain Expert Committee on SmallEnterprises has made the following recommendations.

1. Scrap reservation policy for SSI (836 items arereserved for production of SSI. Medium and big

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industry can enter into these areas only if theyundertake to export 75% of output).

2. Scrap 24% limit on foreign equity participationin units producing these items.

3. Raise investment limits in plant and machineryfor tiny sector to 25 lakhs (now 5 lakhs).

4. Tax concessions to existing units producingreserved items for a 5 year transition period.

5. Government to provide 2500 crore as financialassistance to SSI in a five year transition period.

6. Pending scrapping of reservation policy, theexport obligation of non-SSI unis producing itemsreserved for SSI to be brought down from 75% to50%.

7. Public and private partnership for setting upsupport systems for SSI.

8. Redirect SSI to backward regions based on thecluster approach.

Credit Guarantee Fund Scheme for Micro, Smalland Medium Enterprises : It was launched in 2000by the SIDBI and Ministry of Micro Small and MediumEnterprises. The government of India and SIDBIcontribute to the corpus of the fund in the ratio of 4:1.The corpus of the Fund was raised to 2500 crore byend of the 11th plan. The eligible institutions to lendare scheduled commercial banks, select RRB’s,National Small Industries Corporation Limited (NSIC),and SIDBI. The credit facilities are given to new andexisting units for both term loans and working capitalupto 1 crore per borrowing unit, without any collateral.If the credit is more than 50 lakhs, the Trust willguarantee credit up to 50 lakh only. The credit shouldbe availed by the borrowing unit from a single lendinginstitution. The guarantee cover by the Trust will beup to 75% of sanctioned credit amount but guaranteecover is upto 80% for micro enterprises for loans upto5 lakh, micro and small enterprises owned by womenand for loans in the North East Region.

Nationai Manufacturing CompetitivenessProgramme : This was launched in 2005 with theobjective to support the small and medium enterprisesto help them become competitive. The components ofthe programme have been worked out by the National

Manufacturing Competitiveness Council (NMCC).This began to be implemented in 2006-07 financialyear. The 5- year programme of NationalManufacturing Competitiveness to be executed in apublic private partnership mode, includes marketingsupport to SME’s, support for entrepreneurial /managerial development of SME’s through incubatorapproach, building awareness on intellectual propertyrights, setting up of mini tool rooms by ministry ofMSME, training in quality management, support fordesign expertise, technology and’quality upgradationsupport etc. These schemes were to be implemented inthe 11th 5 year plan.

India Opportunities Venture Fund: This wasannounced in budget 2012-13. This will be withinSIDBI with a fund size of 5000 crore. This fund is toenhance availability of equity capital to MSME.

National Eguitv Fund Scheme: This providesloans to MSME for projects upto 50' lakh. Theconcessional loan for such projects is 25% of the projectcost subject to a maximum of 10 lakhs per project. TheNEF loans are at 5% interest.

Credit Linked Capital Subsidy Scheme: Thisis to facilitate technological upgradation of MSME.The scheme provides for 15% subsidy an capitalexpenditure on induction of proven technologies. Underthe scheme the maximum loan is 1 crore of which 15lakhs is subsidy given. Term Loans sanctioned underCLCSS are only eligible for subsidy.

Other Initiatives for MSME: Two SMEExchanges have been set up in Mumbai in 2011 toenable these enterprises to have greater access tofinance. The government also approved a policy underwhich ministries and central PSE’s are required to makea minimum of 20% of their annual purchase from microand small enterprises. 4% of this purchase will be fromMSE’s owned by SC and ST entrepreneurs.THE INDEX OF INDUSTRIAL PRODUCTION

Any index like the IIP or the wholesale price indexis a composite or a summary indicator whose absolutenumbers are free from units of measurement. The 1st

IIP of India had a base year of 1937. The CentralStatistical Organization started Compiling IIP with thebase year as 1946. The IIP measures growth of a basket

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of industrial goods which are most important to theindustrial economy of India. The basket does notinclude all industrial groups because data of output maynot be consistently available and / or because thecontribution of some industrial groups is not significantto the overall industrial economy of India. The currentIIP includes 682 items in its basket clubbed into 399item groups (manufacturing includes 397 item groups,mining and quarrying include one item group andelectric power production, one item group). Of the 682items, 620 belong to manufacturing, 61 belong tomining and quarrying and one to electric powerproduction. The items are also clubbed into use basedgroups i.e., basic goods, intermediate goods, consumergoods. All groups of the basket that the IIP includesare assigned weights which refer to the gross valueadded by that activity. The pfresent IIP is based on2004-05 as base year in which manufacturing has aweight of 75.53%, mining / quarrying a weignt or14.16% and electricity production a weight of 10.32%.In use based classification, basic goods have a weightof 45.68%, capital goods a weight of 8.9%, intermediategoods a weight of 15.7% and consumer goods aweight.of 29.8%. The IIP includes 8 core industrieswith a combined weight of 37.9%.

New Electronics Policy and Electronic Industry:The chief features of the Electronic HardwareManufacturing Policy 2012-17 are 1. Under ElectronicManufacturing and Modified Special Incentive Scheme(M-ships) promoters setting up electronicManufacturing clusters which offer basic infrastructureto enable concentration of units producing componentssub-assembly, other products in the value chain willget 50% of the project cost with a ceiling of 50 crorefor every 100 acres and for a maximum of 200 suchplusters. For units”TrTSEZ, a 20% subsidy on capitalexpenditure will be given.’Fortirownfield clusters, 7B%of project cost will be given subject to a ceiling of 50crore. For units outside SEZ, a subsidy of 25% of theproject cost will be given if they manufacture any oneof the 29 identified product categories, without anyceiling on project cost. For non-SEZ units, there willbe refund of counter-vailing duty and excise duty paidon capital equipment. There will be an ElectronicDevelopment Fund with a corpus of 10,000 crore which

will be for promoting electronic hardwaremanufacturing. This fund will’also finance many otherfunds under it to identify deserving R&D projects. TheElectronic Development Fund will have 25 to 100%equity exposure in these other funds.

India’s electronics production by March 31 2012was 70 billion USD and is expected to grow to 400billion USD by 2020. The 30,000 crore policy will bedistributed across

(i) 10,000 crore for EDF

(ii) 10,000 crore as financial support fordevelopment of electronic manufacturingclusters.

(iii) 10,000 crore for financial support to largeunits.

INDUSTRIAL SICKNESS

Definition of Industrial Sickness : The SickIndustrial Companies Act - 1985 defines industrialsickness. According to the SICA - 1985, a medium andlarge company- (i.e., a non-SSI Company) is deemedto be sick if:

1. It has been registered for not less than 7 years.

2. If at the end of any financial year it hasaccumulated cash losses equal to or exceeding itsentire net worth.

3. Has also suffered cash losses in the currentfinancial year.

4. Has. suffered cash losses in the immediatepreceding financial year.

This definition excluded government companies(PSE’s), shipping companies, small scale and ancillaryunits. In 1989, the small scale sector wasTjTougfit unaethe purview of SICA. A sick small scale Unit is onewhich, at the end of any financial -year,has’accumulatedTosses equal to or exceeding 50% ofits peak rie’t worth. A potentially sick unit is one whoseaccumulate cash losses have eroded 50% of the networth. Weak Units are defined by. the Sick IndustriesCompanies Act - 1985 as units where 50% of net worthhas been eroded.

That is, any unit which has accumulated losseswhich are equal to or exceeding 50% of its peak networth in the immediately preceding five accounting

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years and which has also suffered cash losses in theimmediate preceding financial year, is a weak unit. TheBoaxd of Lndustriaj and Financial Reconstruction (BIFR) was set up under SICA in 1987. BIFR has thepower to make inquiries” to determine whether acompany is sick or otherwise. In 1991, the scope ofBIFR was extended to cover sick PSE’s. In 1994, SICAwas amended to permit BIFR to investigate potentiallysick units. To deal with sickness, the IndustrialReconstruction Corporation on and was changed toIndustrial Reconstruction’Bank of India. In 1993, thegovernment appointecfthe Goswami Committee toexamine industrial sickness.

In 1992, the Government of India under a cabinetdecision set up the National Renewal Fund (NRH witha corpus of 2500 crore. The fund is to meet the needsof industrial restructuring in India. In 1994, the NRFhas been extended to cover companies in the privatesector. In 1995, the NRF has been extended to coverworkers of state public sector enterprises Note : TheNRF has been scrapped,in 2000).

Changed Definition of Sickness for MSME : inNovember 2012, the norms for sickness for Micro,Small and Medium enterprises have been revised.According to the new definition, any ‘ %1SME isdeemed to be sick if the loan and interest payable bythe enterprise is overdue for 3 months or more (earlierit was 6 months or more). In addition the unit need notbe in commercial producflorvfor at least 2 years to bedeclared sick. The revised norms are to be implementedfrom lst April 2013.

SARFAESI ACT : The Securitization of Assets,Reconstruction of Financial Assets and Enforcementof Security Interest Act or simply the SARFAESI Act -2002, which came into force in 2003, provides for threemethods of recovery - securitizing the asset, assetreconstruction and enforcement of The provisions ofthe Act are not applicable when the due outstanding tothe bank is less than 20% of the principal and interest.According to the Sick Industries Companies (Repeal)Act -2003, the NationaLCompany Law TribunalwilMnvestigate sick units, not the BIFR. Under the Act

1. Banks to acquire assets under a decree from atribunal without intervention of courts.

2. Civil courts have no jurisdiction over the Act.

3. A bank having 75% of dues owned by borrowerscan seek repayment within 60 days.

4. In case of failure to repay, bank can take over thecompany and its management.

5. Bank can sell assets of defaulters.

6. Defaulters can appeal to Debt Recovery Tribunalsagainst banks which have seized assets.

PUBLIC SECTOR ENTERPRISES

The public sector enterprises were set up underthe Industrial Policy Resolution-1956. The IPR-1956provided for the expansion of the public sector in orderthat it would occupy the commanding heights in themixed economy visualised for India. In fact, the publicsector was to be the major instrument to achieve asocialistic pattern of society. The IPR-1956 thereforedivided the industries into three categories :

1. Schedule A : This had 17 groups of industrieswhose development would be the exclusiveresponsibility of the state. The reserved categoryof industries include defence industries, heavyindustries, minerals, transport andcommunication, and power.

2. Schedule B : This had 12 groups of industries.The state would increasingly establish new unitsin these groups but private sector participationwould not be denied and private sector couldexpand the existing units. The group includesaluminium and other non-ferrous metals notincluded in Schedule-A, machine tools, ferroyalloys, tool steels, basic chemicals andintermediates, anti-biotics and other essentialdrugs, fertilisers, synthetic rubber, road and seatransport.

3. Schedule C : This contains residual industrieswhose future development’was left to the inititiveand enterprise of the private sector.

The Objectives of the Public Sector : The broadobjective was that the public sector would be theinstrument for implementing the socio-economicpolicies of the government to achieve a socialisticpattern of society and lead to a welfare state. Thespecific objectives are :

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1. To develop infrastructure for industrialisation ofthe country.

2. To remove regional imbalances in development.

3. To promote self-reliance.

4. To control basic and strategic sectors of theeconomy.

5. To prevent concentration of economic power andestablish an industrial democracy.

6. To prevent domination by foreign capital.

7. To generate employment and be a modelemployer.

8. To provide essential consumer goods at reasonableprices.

As a result of the conscious policy of expandingthe public sector, it came to function in the key areasof industries such as coal, steel, minerals/metals, heavyequipment, power etc. The public sector also came tooperate in the fields of foreign trade, shipping,tansportation, construction, tourism, development ofsmall scale industries etc. In addition, it came to occupykey position in crude oil, basic metals, fertilisers,electrical equipment. The public sector in India on theeve of economic reforms in 1991 accounted for 70percent of the paid-up capital of the corporate sectorin industry trade, agriculture and services. From only5 enterprises in 1951 with a total investment of just 29crores, the number rose to over 249 enterprises today.Practically, one can find the public sector in almostevery area of economic activity. India today has 249PSE’s of the centre of which 217 are operational and158 are profit making. There are around 55 centralPSE’s which are listed in India’s capital markets.

Profile of Public Sector : The top sectors inCentral government PSEs in terms of investme-: are:Enterprises producing goods got around 61.1% ofinvestment by the State. Within, this most investmentwent to power, petroleum, coal /lignite and fertilizer.Enterprises producing services received roughly 37%of the investment. Within this most of the investmentwent to Financ a Services. The top enterprises of thecentral government on the basis of gross turnover areIndian Oil Corporation, Hindustan PetroleumCorporation Ltd., Food Corporation of India, Bharat

Petroleum Corporation Ltd. In terms of gross profit ofPSE’s, the petroleum companies yielded the highestfollowed by telecom, power and financial services.

Achievements : The contribution of the publicenterprises to the economy, notwithstanding theirproblems, has been impressive.

1. It has been accounting for the major portion ofthe output of basic metals including steel, fuel,fertiliser and electric equipment.

2. Developed the services sector such as shipping,transporation, construction, consultancy, tourisnforeign trade, insurance and banking.

3. It lead to the growth of a vibrant private sector byproviding infrastructure and by creating a market,has made significant contributions in the publicsector R&D through 40 national labs, especiallyin space, atomic energy and defence.

4. On an average, it has contributed about 24% ofthe G.N.P.

5. It has been making substantial contributions tothe government exchequer through payment ofdividends, corporate tax, excise/customs dutiesand other levies.

6. Undoubtedly the public sector has contributed toreduction in regional imbalances and creation oflarge employment opportunities in the past.

7. It has indirectly helped in the growth of small andancillary industries.

8. Public sector intervention led to country becomingself-sufficient in foodgrain requirement of thecountry. The public sector, in a nutshell,transformed the colonial underdevelopedeconomy into a developing economy.

The problems and hence the compulsion toreform the public sector enterprises:

1. Poor return on investments : The public sector interms of overall profitability, has a poor record.

2. Public sector has not been able to generate internalresources and has been increasingly dependingupon the budgetary support of the ‘government,which has been at the cost of other developmentalprojects.

3. The PSUs are overstaffed

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4. The PSUs have become inefficient in terms ofproduction/productivity and hence theiroperations have become-high cost. They have thusled to a high cost structure of the economy becausethey supply basic/critical inputs to other sectorsat high prices.

5. Mounting sickness 6. The rate of saving of thenation contributed by the public sector is as lowas 8%.

The Underlying Causes for the Problems:

1. Over-expansion of the Public Sector : Over theyears, the public sector had extended its operationsto sectors which have been traditionally for theprivate sector i.e., the non-infrastructure areas.Deviations like HMT, a machine tool unit,producing watches and bulbs and other suchpublic enterprise unrelated to the welfare,of thepeople led to all kinds of distortions. For e.g., itled to rnisallocation of resources. Beinghandicapped in several ways relative to the privatesector (management style, pricing, political andbureaucratic interference, etc.) it could notfunction as a truly corporate business entity inthese areas. This led to losses, requiring budgetarysupport. The resources of the government werenow being spread over vast areas and without anyjustification. In simpler terms, had not the publicsector entered into non-infrastructure areas, thegovernment would have been left with largerresources which could have been more gainfullydeployed in meeting requirements of otherdevelopmental projects and also for meeting theinvestment requirements of on-going projects andfor public enterprises in the core sector, to meettheir technological upgradation/ modernisation/expansion plans. In fact, many long and mediumterm inyestment plans of the public enterpriseswere turned down by the planning commissionon grounds of paucity of resources. The net resultwas : cost and time overruns of many on-goingprojects, corporate needs of profit makingcompanies, especially in terms of investment, notmet (profit making companies like BEL, BHEL,BEML, SAIL etc.), led to sub-critical investment

in new projects planned - a major reason forsickness both in the private sector and publicsector being the low paid-up capital i.e., undercapitalization and, rnisallocation of resources intonon-priority areas.

2. No linkage between National plan andCorporate Plans of Public Sector : Theresources of the public sector units including theirdepreciation provisions, are considered as nationalresources (by the Union Finance Ministry and thePlanning Commission) available for plans. Thisled to neglect of maintenance norms and alsoneeds for modernisation of many publicenterprises. In fact, the long term corporate plansof even healthy public enterprises were neglectedby the Planning Commission (the basic reasonagain being the unmanageable expansion of thepublic sector) hence no linkages existed betweennational plans and corporate plans of publicenterprises.

3. Lack of Autonomy : At present, right from theappointment of chief executives and thenomination of directors to minutest details likerules on T.A., L.T.C., medical benefits, house rentetc., the government controls everything, leadingto lack of freedom in unit management. Bureauof Public Enterprises guidelines/instructions/procedures are uniformly applicable to all theenterprises irrespective of the fact whether theyare loss or profit making or whether they are inthe core sector with high technology or otherwise.The respective administrative ministry underwhich the public enterprise functions, by playingthe role of ownership and monitoring, interfereson a day to day basis under the guise ofparliamentary accountability. The ChiefExecutive, full and part time directors in the Boardof Directors are appointed by the administrativeministry. Though only the representatives of theFinance Ministry and the concernedadministrative ministry are called governmentdirectors, the fact remains that all directors on theboard, full and part time, are in effect, governmentdirectors. Another problem is the lack of

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participation of the two government directors inthe decision-making process. A bureaucratic workculture has thus been created in the managementstructure of the public enterprises. Though thePublic Enterprises Selection Board wasconstituted in the seventies to select the ChiefExecutives and full-time directors, itsrecommendations are usually ignored. In addition,all short and long-term investment decisions aretaken by the concerned administrative ministryin consultation with the Union Finance Ministryand the Planning Commission, resulting in asubordinate-superior relationship. Anotherproblem is multiplicity of audit which stultifiesthe decision-making process (audit by charteredaccountants as per questionnaire given by CAG,followed by test audit of this questionnaire,followed by comprehensive review of publicenterprises by CAG and in addition, direct scrutinyof public enterprises by the Committee on PublicUndertakings).

Increasing managerial autonomy has been anexplicitly stated goal but still the autonomy isnon­existent. In 1969, Mrs. Gandhi’s governmenttook a policy decision not to depute IAS officersto run the public enterprises. This practice re-surfaced during the Janata Government and sincethen , has not been discontinued. Other efforts togive autonomy were also experimented likeforming holding companies or appointment ofindependent directors to boards of public sectorunits like for e.g. to those of Indian Airlines andAir India. In 1984, as per the recommendation ofthe Arjun Sengupta Committee, the device ofMOU was also implemented. The SenquptaCommittee recommended MOU only for holdingPSUs and apex companies for a period of 5 years(to be reviewed/updated every year). The MOUwas intended to be a’contract between equalpartners with mutual responsibilities andobligations instead^of treating PSUs assubordinate entities. This was supposed to ensurean appropriate balance between autonomy andaccountability without disturbing ownership norreducing government control. The government

was to be concerned with only fulfillment of anoverall plan contained, in the-MOU withoutinterfering in the day-to-day affairs of PSUs. AnMOU signing company was granted’certainenhanced delegation of powers in matters likewage revision, incentive related schemes,voluntary retirement scheme, transfer of directorswithin the organisation and approval of projectsin which capital investment was less than 100crores. The problems with MOUs are:bureaucratic structure, government is non-committal in its obligations/responsibilities whileobligations/targets of PSUs are spelt out,evaluation of MOU is one sided i.e., onlyobligations/ targets of PSUs in the MOU areevaluated but not the government’s, MOU hasbecome an additional step over and above theexisting system of reporting and monitoring andfinally, chief executives of big organsiations likeONGC/SAIL are able to negotiate a satisfactoryMOU while small PSUs have to practically acceptstipulations of the administrative ministry. TheMOU has increased accountability but has notsignificantly enhanced accountability. In spite ofthis, the MOU process has now been extended tocover more PSE’s since 1993-94.

4. Misguided Technology Acquisitions : Exceptthose public sector units in the strategic and hightechnology sectors who could acquire the state-of-art technologies, the other public sector unitsin general, suffered from misguided technologyacquisitions. Quite often, the technology acquiredeither domestically or from external sources, wasof a sub-standard nature because of political andbureaucratic considerations in the acquisition oftechnology and also because of lack of capital forupgradation and modernisation. The technologicalobsolescence manifested itself in the form of lowproductivity and high cost of operations.’

5. Poor Location Decisions : Due to the statedobjective of developing tne backward areas of thecountry, the public sector units came to be locatedin areas which lacked even basic infrastructurefacilities for their corporate functions. This

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resulted in enhanced project costs which includedthe de. eiopment of infrastructure to a certainextent and later on, higher operational costs. Inaddition, the iocation decisions were ofteninfluenced by political leaders who could succeedin most cases to i ocate the public sector units intheir respective constituencies.

6. Conflicting Objectives : A look at the objectivesof the public sector in India mentioned earlier,shows that they are mutuall conflicting. For e.g.,the public sector is expected to generate argesurplusses while at the same time, it is supposedto protect the interests of the disadvantagedsections of the society and also provide essentialcommodities to the people at reasonable prices.In the hierarchy of priorities, profitability andbusiness activities on a commercial basis occupieda lower rung.

Thus, all the above factors, to name the few mostimportant, led to what is today described as the publicsector inefficiency problem.

MAJOR POLICY CHANGES ON PSE’sPolicy Changes: The policy changes are due to

the problems of’”PSE’s, and also due to factors likeglobalisation / liberalisation of economy, resourcecrunch of the government, and compulsion to increasecompetitiveness of Indian Industry. The major policychanges are:

1. IPR 1991 :

(i) Government equity in PSE’s to be di sinvested to increase autonomy /competitiveness.

(ii) BIFR to be extended to PSE’s(iii) Extending MRTP to PSE’s(iv) Extend and strengthen the MOU system

(v) Reduce budgetary, support

(vi) Professionalise boards of PSE’s(vi) Compel PSE’s to compete with private sector

where social considerations are notparamount.

As a follow up to this new policy

(a) Sick Industries.Companies Act - 1985 was.amended in 1991 to extend BIFR to PSE’s.

(b) Government launched a disinvestmentprogramme in 91-92 budget.

(c) Efforts were made to reduce budgetarysupport to PSE’s.

2. Plan’s Changed Policy on PSE’s :(i) PSE’s to be withdrawn from non-

infrastructure and non-priority areas.

(ii) Fresh PSE investment only in infrastructure,security and defence / strategic sectors, hightech areas and for population control,education and health.

(iii) PSE’s to concentrate in areas relating topreservation of basic resources like land,forests, water and environment.

3. Access to Capital Markets : PSE’s werepermitted to access the capital markets (bothwithin India and abroad) to raise equity.

4. Navratna Package : Autonomy Package for 9important PSE’s (Navratnas) was announced in1997 which is considered the most importantinitiative since the MOU system recommendedby Arjun Sengupta in 1984. The Bureau of PubHcEnterprise^uses 6 parameters to confer Navratnastatus which are

(i) Total manpower cost as a percent of totalcost of production

(ii) Profit before depreciation, interest and taxes(PBDIT) as a percent of capital employed

(iii) Inter sectoral performance

(iv) PBDIT to turnover ratio

(v) Earnings per share

(vi) Net profit to Net worth.

In addition, the PSU should be a miniratna, musthave 4 independent directors in its Board beforeit is chosen as a mahar&tna. For Navratna statusto be given, the PSU must get a score of at least60 on the total 100 based on the above parameters.The Navratna status empowers the managementto nvest upto 1000 crore or 15% of the net wortjion a single project without seeking approval fromthe government. “However the overall ceiling onsuch investment in all projects put together mustnot exceed 30% of the net worth of a Navratna.

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No ceilings on capital expenditure. Can raise debtfrom domestic capital markets / borrow frominternational debt market (subject to approval byRBI or Department of Economic Affairs).Autonomy in Personnel Policy (structuring andimplementing schemes related to personnel andhuman resource management, training, voluntaryor compulsory retirement schemes).Organisational restructuring (for appropriatemarketing, including opening of offices in India /abroad). Government to induct professional, non-official directors to the Board. Committee ofSecretaries to monitor the autonomy, The aim isto make these Navratnas global giants.

5. Autonomy Package for Mini Ratrsas : Anotherautonomy package for consistently profit makingPSE’s called the Mini-Navratna Package was alsoannounced. The details of this package are :

(i) Category I Mini Ratnas : Th.is will havePSE’s which made profits for threeimmediate previous continuous years. Thepre-tax profit should be a minimum of 30crore in any one of the 3 preceding years.The PSE’s should not have availed ofbudgetary support and also should not havedefaulted on government loans in the 3 years.The units should have a positive net worth.The category-I PSE’s under the Mini-Ratnadeal will be permitted to incur capitalexpenditure upto 500 crore or equal to theirnet worth without government approval (tobuy new equipment, modernise or invest innew projects). They can structure their ownHRD schemes and professionalise theirboards (by including 3 private experts as part-time directors).

(ii) Category-II Mini Ratnas : These shouldhave made profits for immediate proceeding3 years and should have a positive net worth.PSE’s under this will be permitted to incurcapital expenditure (on new projects,modernisation, new equipment) upto 300crore or 50% of their net worth (whicheveris lower). They can enter into a joint venture

with an equity participation upto a specifiedlimit. They can structure their own HRDschemes and professionalise the boards.

6. Relaxing BPE Guidelines: The UnionGovernment has accepted the Vittal Committee’srecommendations on BPE guidelines. As a result,from 892 BPE guidelines, only 171 are to beretained.

7. Liberalising Salaries and Wages: TheGovernment has appointed the Justice MohanQommittee to examine issues relating to pay,financial management, audit procedures~etcTof’PSE’S.

8. Professionalizing Boards: The government hasallowed inclusion of outside professionals as parttime non-official directors. It has also restrictedthe number of government nominated directorsto one-sixth of the strength of the Board ofDirectors subject to a maximum of 2 directors. Ithas also allowed including of functional directorsupto a limit of 50% of the strength of the board ofdirectors.

9. Restructuring and Revival: The Board forReconstruction of PSE set up in 2004. This willrecommend .measures for restructuring and-

reviving the sick PSE’s, recommend cases fordisinvestment, closure or outright sale is to beconsidered. As of 2008-09, about 70 firms havebeen referred to the Board.

Impact of PSE Reforms : The profitability i.e.,profits to total paid up capital employed, has doubledfrom 10.9% in 1991 to around 21% in 2010-2011. Thenavratnas have come to develop the status of IndianMNC’s (like for e.g., BHEL or ONGC). The PSE’slisted on the stock exchanges have shown a sharpirrcrease in their profits and revenues. The governmenthas been moving rapidly in completing many ongoingPSE’s in different stages of being commissioned. Thecost overruns of central PSE’s to be commissioned havebeen brought down from 62% in 1991 to 12% in May2010.

Norms for Maharatnas : The following areeligibility conditions for a central government PSE tobe chosen as a Maharatnas.

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1. It should be a navratna.

2. It should be listed on India’s stock exchanges withminimum prescribed public shareholding underSEBI regulations.

3. It should have an average annual turnover of20,000 crore during three immediate precedingyears.

4. It’s average annual net worth should be 10,000crore.

5. It average annual net profit after tax should bemore than 5000 crore during each of the 3immediate preceding years.

6. It should have a significa global presence andinternational operations.

Benefits enioved by Maharatnas : The boardsof management of Maharatnas in addition :: exercisingall benefits of Navratna boards will enjoy additionalpowers like 1) they are allowed to ~ake equityinvestment to set up joint ventures and wholly ownedsubsidiaries in India or abroad 2 they can undertakemergers and acquisitions in India or abroad subject toa ceiling of 15% of :_e:r net worth in the project or anabsolute ceiling of 5000 crore. However, the overallceiling on equity investment in mergers andacquisitions in all projects put together not to exceed30% of the ~et worth of the given Maharatnas. Theboards will have autonomy in creating belowmanagement board posts upto to a given level.

The National Investment Fund : This was setup in 2005 with a fund of 994J32 crores. Thegovernment set up three Asset Management Companiesto .manage the fund (these are the UTI AssetManagement Company Private Limited) the SBI FundsManagement Private Limited and the LIC Mutual FundAsset Management Company Ltd.). The objectives ofthe NIF are: proceeds from disinvestment of centralPSE’s will be put into NIF which will be outside theCFI and the money in the fund will be of a permanentnature. The NIF will be professionally managed toprovide sustainable returns to the government withouteroding the fund size. Around 75% of the annual incomefrom the NIF will be used to finance select social sectorschemes particularly in. education, health andemployment. The balance 25% of the income from the

NIF will be used to meet the capital investmentrequirement of profitable and revivable central PSE’swith a view to enlarge their capital base and to financeexpansion and diversification. In January 2013, it hasbeen decided that NIF will use its funds to buy sharesof central PSE’s. The NIF money to be used forrecapitalization of public sector banks and public sectorinsurance companies. Proceeds of disinvestment ofgovernment equity in PSE’s to be credited to NIF inthe Public Account of India. The idea of NIF to buyPSE shares and shares of PSE banks is to~ensure thatgovernment shareholding in these does not go downbelow 51,%. The NIF will issue preferential shares tocentral PSE’s so that government shareholding doesnot drop to below 51%. Currently, most money of NIFis being used for social sector programmes, tnough itwas to be used for social sector programmes, meetinvestment needs of profitable PSE’s and revival ofsick PSE’s.

PRIVATISATION AND DISINVESTMENT OFPSE’s

DISINVESTMENT OF CENTRAL PSE’S:The policy of disinvestment of government equity incentral PSEs was announced in the IPR-1991. Theobjectives disinvestment are

1. To make the PSEs competitive and autonomous

2. To mobilize resources in a non-inflationarymanner

3. To deploy these resources to complete variouscentral government public sector projects indifferent stages of being commissioned.

The Government of India set up the DisinvestmentCommission in 1996 to evolve a comprehensivepolicy on disinvestment. The first round ofdisinvestment was held in 1991-92. It may benoted that whenever a particular public sector ‘company is being aisinvested via the mechanismof Strategic Sale, the government transfers 74%of its equity to private enterprise and retains theremaining 26% equity. In this methodofdisinvestmentTthe errTrifeht’Transfersdecision-making power in all policy matters andoperational control to the private sector. In BookBuilding as a. method of disinvestment of

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government equity, there is public offer of sharesbased on SEBI guidelines. The issue price of shareis determined on the basis of bids received frominvestors but not by the issuer or merchant banker.The Bids can be made between the floor price(minimum price) and ceiling price (maximumprice). All bidders get sha_res^at the bid price tillthe offer is exhausted. Book building retainsgovernment control over management unlikestrategic sale. French Auction : The bidder is askedto bid for shares being disinvested above the floorprice upto the ceiling price (which are pre-determined). The bidders are offered shares at theprice they have bid till the offer is exhausted.Institutional Placement PrograrnrneTnd Offer ofShares: These were approved by the SEBI inJanuary 2012 to disinvest government equity incentral PSE’s. In Institutional PlacementProgramme, the government can offer shares ofPSE’s being disinvested to a maximum of 10qualified Institutional Buyers (like banks, foreignand domestic mutual funds, insurance companieslike GIC/LIC/domestic and foreign venture capitalfunds registered with SEBI etc). In offer of shares,the shares are offered to people as well asinstitutions via the stock exchanges. This wasresorted to in December 2012 for disinvestingHindustan Copper Ltd and NMDC. Buyback ofShares : The government aisols~thinking ofbuyback of shares by the PSE from thegovernment. That is,, the PSE buys back its ownshares from the government using its cashsurpluses.

The government of India had set up theRangarajan Committee to recommended an appropriatepolicy of disinvestment. The Rangarajan Committeelaid down the following norms :

1. The government to disinvest upto 49% ofgovernment equity in industries reserved forPSE’s.

2. Disinvest upto 100 % in rest.

3. Disinvest 49% of government equity in arms /defence production, atomic energy, nuclearminerals and rail transport. For purpose of

disinvestment, in 1999, there was classificationof PSE’s. into strategic and non-strategic.The strategic sectors include : arms andammunition, defence equipment, atomic energy,rail transport. The government to disinvest onlyup to 49% of the equity in the strategic sectors.

Privatisation of public sector has to be understoodin the context of the structure of Public Enterprises, inIndia. There are public enterprises which areDepartmental Undertakings and are extensions ofCentral / State Government departments likeChittaranjan Locos or Integral Coach Factory. Thenwe have Public Corporations which have been createdby Acts of Parliament like the Damodar ValleyCorporation and lastly the public sector enterpriseswhich are Government owned companies set upunder^the Companies Act - 1956 and which for allpractical purposes, are corporate entities. The focus ofprivatisation are the Government Companies set upunder the Companies Act and to a certain extent, thecorporations, set up under Acts of Parliament.

Rationale of Privatisation :

1. Private sector can manage public sector efficientlyand offer better services to society.

2. Liberalisation and globalisation of Indianeconomy demand restructuring of PSU’s since thePSU’s in their present form will not be able tocompete with the private sector.

3. Failure of PSU’s to deliver and mounting losses.Hence the need to use resources efficiently.

4. Generate competition by reforming the PSU’swhich have led to the development of a high costindustrial structure for lack of effectivecompetition.

5. Resource crunch of the Government and henceits inability to offer budgetary support toinefficient PSU’s.

6. Emphasis of liberalisation on market forces andprivate enterprise demands reform of PSU’s.

NATIONAL MANUFACTURING POLICY ANDNIMZ

National Manufacturing Policy : The policyseeks to increase the share of manufacturing sector in

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GDP from 16% to 25% within a decade. To achievethis goal, the policy proposes.

1. Setting up of National Investment andManufacturing zones

2. Promote labour intensive industries.

3. Add value to industry, by use of local technologies

4. Develop industries which are of strategicimportance and have competitive advantage

5. Encourage small and medium enterprises (SME’s)6. Simplify / rationalize business regulations

7. Speed up the development of infrastructures.

The National Investment and ManufacturingZones (NIMZ):

1. These will be mega industrial clusters to createlOOjnjnion jobs by 2022, make Indianmanufacturing comparable to China and Japan,and increase tTrelHiare of industryTrom 16% to25% of GDP by 2022.

2. The clearance for unitsin the NIMZ will becoordinated by a speciafpurpose vehicle

3. UnitsTrTthe NIMZ have to provide job losscompensation either through insurance or adedicated fund in case of closure of the unit. Thespecial purpose vehicle will help find alternativeemployment such labour

4. Private enterprises will be encouraged to set uptraining centres for skill development of labour.These will get tax deduction of 150% of the capitalexpenditure on setting up the centres.

5. There will be no subsides for units in NIMZ

6. Around 12 NIMZ will be set up initially

7. NIMZ will not enjoy any unique tax benefits likeSEZ’sTT

8. The states will acquire land for NIMZ while thecentre will fund the development andinfrastructure cost.

9. There will be capital gains tax exemption on saleof plant / machinery for units in NIMZ

10. Individuals will be’ exempted from capital gainstax on sale of property to SME’s and entrepreneurswhich.will be located in NIMZ.

Competition Commission of India: TheCompetition Commission of India (CCI) is a statutorybody set up under the Competition Act-2002. The Actcame into force in October 20C3 and was amended in2007. The 2007 amendment was to provide a dualstructure a Regu ate. Body i.e. the CompetitionCommission and an adjudicatory body i.e. Competitionappellate Tribunal. The Competition Act rules werenotified in ,2009.. Hence beginning September 1, 2009,the MRTP Act - 1969 lapsed and the MRTP commissionwas not to accept fresh filings of cases after a periodof 2 years of the enactment of the Competition Act -2002. The Act is valid throughout India except the stateof Jammu andKashmir. The competition Act looks into

1. Anti competition Agreements such agreements areeTWTeTTiorizontal agreements (the agreementsbetween competitors like forming cartel’s) orvertical agreements (which are those relating toactual or potential relationships between firms onselling and purchasing from each other,particularly if they are in a position of dominance).

2. Abuse of dominance : i.e. a firm which enjoys aposition of strength by which it is able to operateindependently of competitive forces of the marketor affects its competitors or consumers or themarket in its favour, resorts to abuse of thedominant power. Dominance is said to be abusedwhen the enterprise imposes unfair ordiscriminatory conditions in sale or purchase ofgoods / services or in the price in purchase / saleof goods /’services. Though the Act does notprohibit / restrict enterprises acquiring dominance,it only prevents abuse of dominance.

3. Acquisitions and Mergers : The Act regulates theoperation of acquisitions and mergers. For e.g.,domestic mergers and acquisitions have to beinformed to the Commission if the combinedentity has assets of 1000 crore or a turnover of3000 crore. If a group of companies acquireanother group of companies, the merger has to beinformed to the Commission if the combinedentity has assets of 4000 crore or a turnover of12000 crore. The Commission can also scrutiniseoffshore mergers ^ acquisition only if the

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combined entity has a market present in India withassets of 500..crore. 4) Competition advocacy i.e.to create a culture of competition. For e.g., theunion government can refer to the CCI for itsopinion on the likely effect of a policy underformulation or an existing law related tocompetition. It can suggest measures to thegovernment on introducing policies that lower thebarriers to entry so that there are many marketparticipants, promote deregulation and tradeliberalization and other measures that promotecompetition in the market place. The CCI doesnot adjudicate on disputes but passes cease anddesist orders. These orders can be appealed againstin the Competition Appellate Tribunal. The CCIconsists of a chairman and 6 other membersappointed by the central government. Thechairperson and members need not be qualifiedto be judges of a High Court. The selectioncommittee to select members, chairperson of theCCI to be headed by the CJI or a nominee of theCJI. The Competition Appellate Tribunal will beheaded by a chairperson who is or has been a judgeof the supreme court or the chief justice of a highcourt.

Monopolies and Restrictive Trade Practices:Monopolistic trade practices can also be described asdominant firm practices. These refer-to the behaviorof an individual firm or a group of not more than threefirms which have attained such a dominant position inthe industry that they are able to control the market byregulating prices or output or eliminating competition.Restrictive trade practices refer to the action: taken by.a group of two or more firms to avoid competitionregardless of whether the market share of the memberfirms is or is not dominant. The Government of Indiaenacted the Monopolies and Restrictive Trade PracticesAct jn 1970, Under the MRTP Act- 1970, a statutorycommission called the MRTP Commission was.set upto investigate the effects of such monopolistic andrestrictive trade practices and recommend appropriateaction. In the case of monopolistic practices, the MRTPCommission was vested with only recommendatorypower but in trie cause of restrictivi trade practices,the MRTP Commission was vested with jthe powers

of a court cfjaw. The MRTP Act defines a businesshouse in terms of a group of interconnectedundertakings. To determine whether or not a companybelonged to large business house, the licensingauthorities would have to establish

(i) Its interconnection with other undertakingsand

(ii) Whether or not the total value of assets ofall the interconnected companies added upto 1.00 crore.

Apart from the interconnected large house, theMRTP Act referred to dominate undertakings. These.vere firms whose assets were not less than one croreand which either on their own or along with otherinterconnected undertakings, supplied at least one-thirdof any goods or services within India as a whole

The MRTP Act required both the large houses andthe dominant undertakings to register with thegovernment under the MRTP Act. Undertakings underthe jurisdiction of the MRTP act were required toobtain government approval when they proposed toundertake

1. Expansion of capacity

2. Diversification of existing capacities.

3. Establishment of interconnect undertakings

4. Merger or amalgamation with any undertakings.

5. Takeover of the whole or part of any otherundertaking. It may be noted that the Governmentof India has replaced the MRTP Act with the newcompetition law

MRTP Act-1970: The Act did not apply to PSE’s,trade unions, cooperatives and financial institutions.Any company with assets of more than 25 crore wasclassified as an MRTP company. However the thresholdlimit was raised to 50 crore by Industrial LicensingPolicy - 1980 and 100 crore by the Industrial LicensingPolicy of 1985. The threshold limit was scrapped in1991 Industrial Policy Resolution. The MRTP Actcreated the MRTP Commission as an organ of theDepartment of Company Affairs as a quasi-judicialbody. It’s major function was to enquire into and takeappropriate action in respect of unfair trade practices /restrictive trade practices. The.MRTP Act has ceased

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to be in force since September 1, 2009. It may be notedthat restrictive trade practices are those by t’raders whoattempt to block flow of capital into production tomaximize their profits. These traders may also imposeconditions of delivery to affect the flow of suppliesleading to unjustified costs. Any trade practice whichindicates misuse of one’s power to abuse the market interms of production and sale of goods, services wasdefined as monopolistic trade practice. Such practiceseliminate competition, can lead to decline in quality ofproduct, reduce technological development and leadto adoption of unfair trade practice. Unfair tradepractice refers to false representation and misleadingadvertisement of goods / services in terms of usefulness,quality/standards and need.

ECONOMIC PLANNING IN INDIA

Economic Planning is to formulate sound macro-economic policies to achieve a pre-determined set ofmacro-economic objectives.

The Approaches / Concepts in Planning in India :

Physical Planning : The phvsicaj_output targetsfor different sectors and sub-sectors are ordered inpriority along with the development of Inter-sectoralbalance. Output targets in physical terms are outlined.

Financial Planning: Plans focus on allocatingfinancial resources to various sectors. This includessetting physical targets for different sectors and sub-sectors in accordance with available financial resources.

Rolling Plan: Within an overall 5-year plan, thesectoral targets and allocation of resources are fixedon a yearly basis. The 5-year plan is extended by oneyear at a time (rolls on for another year beyond theoriginal 5-year period by excluding each previous year).The plan includes 3 plans made each year

1. AnjaruiuaLpJan which is reflected in the annualbudget

2. A 5- year plan whose base year is changed eachyear in response to changing conditions of theeconomy.

3. A perspective plan for 10 to 15 years whichincludes the annual plan and the 5-year plan.

Rolling plan is to meet the needs of an uncertaineconomic situation due to natural catastrophes or events

like war where targets fixed for a given period of timecannot be achieved due to economic instability. The7th 5 year plan (1985-1990) was integrated with aperspective plan of 15 years and the annual plan wasadopted in 1962 in the context of India-China war.

Top Down Approach ( Trickle Down Approach):High growth rate of GNP is the objective. Gains ofeconomic growth are expected to trickle down to allsections of society.

Trickle UP Approach : Increasing the minimumpurchasing power of people rather than maximisationof GNP. Economic development is geared to meet thedemands of bottom 50% of population.

The Mahalonobis Model of Plan Strategy: P.C.Mahalonobis, the deputy chairman of the planningcommission in the period of the second 5-year planoutlined a developmental strategy called theMahalonobis Model. It Is a 4 stage model in whicheach stage will focus investment on a particular sector.It declares that the initial focus of investment shouldbe on development of basic and capital goods industries(industries producing plant / machinery, equipmentwhich help in the production of other goods and settingup of other industries). The broad base of the basicand capital goods industry would hence facilitate thedevelopment of a modern industrial economy.Simultaneously, investment should be madecontinuously in developing small and cottage industryfor producing wage and consumer goods which wouldalso help in development of a new small entrepreneurialclass. The model also called for import substitution,and state development of infrastructure industries. TheMahalonobis strategy aimed at self-sustained growth.The strategy included the following as its chief elements

1. Private sector to complement public sector.

2. Use fiscal policy of taxation and publicexpenditure to achieve two objectives of planningi.e., remove inequalities and self-reliance insavings/ investment.

3. Emphasis is on heavy industry to build capitalstock.

4. Village and cottage industry to produce consumergoods. The model was accepted by Nehru andbecame the basis for the 2nd 5 - year plan (1956-

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1961) and hence is called the Nehru - MahalonobisModel.

Rao-Manmohan Singh Model: This became thebasis for structural reforms inaugurated in India in 1991by P.V. Narasimha Rao the prime minister andManmohan Singh, the then’Finance Minister. It’s focusis on productivity, efficiency, competitiveness andglobalization. It specifically calls for increased role forprivate sector in economic development, reorientingthe role of the state from that of developer of theeconomy to facilitator of ..nomic development alongwith state investment focused on social andinfrastructure development, and development of theexternal economy of India i.e. foreign trade and twoway movement of-foreign direct investment.

Planning Commission: This was set up in 1950March by a cabinet resolution for formulating five yearstrategies of economic development (the 5-year plans).The planning commission works under the guidanceof the National Development Council and is-chairedby the Prime Minister. The 1950 resolution outlinedsome functions for the Commission like

1. determine the priorities of economic developmentand include them in 5 year plans

2. Identify resources (physical, financial and human)for formulating development strategies and alsoidentify the deficiency of India in these resources.

3. Identify hurdles to economic development andsuggest strategies to overcome them

4. Identify the administrative machinery tosuccessfully execute the plan projects

5. Suggest corrective steps if the plan projects arenot being successfully implemented. The planningcommission’s deputy chairman (a nominee of thegovernment) has the rank of a cabinet ministerand all members of the planning commissionenjoy the rank of minster of state of the unioncouncil of ministers.

The Commission is to function like a think tankand develop a series of possible plans inconsultation with the state planning boards toeventually finalize a 5 - year plan in accordancewith the priorities of the state. The planningcommission works through its General Divisions

(concerned with the entire economy) and SubjectDivisions (concerned with specific fields ofeconomic development). The ProgrammeEvaluation Organization of the Commissionmonitors the working of plan projects andprovides feedback to the commission for betterplan, project formulation and corrective steps’tomake the existing plan achieve its goals.

Plan and Non Plan Expenditure: Planexpenditure includes central assistance to states andunion territories (with state legislatures), centralbudgetary support to central plan and union territorieswithout legislatures (i.e. directly administered by thecentre), and budgetary support to central PSE’s. Theresources of the centre are made up of budgetaryresources (revenue mobilization through taxes, non-tax revenues, borrowings, external assistance routedthrough budgets and Internal and External BudgetaryResources (IEBR) of central PSE’s. Gross Budgetary,support to fund plan investment by the centre includesall the above.

Funding 5 year Plans: The resources to support5-year plans came from a) central budgetary resources2) by state budgetary resources 3) Resources of PSE’s4) Investment by domestic private sector 5) Externalassistance (which is included in Gross BudgetarySupport of the centre).The most important sources ofplan funds were Domestic Budgetary Sources. Theseincluded : contribution of public enterprises;government revenue surplusus; internal borrowings anddeficit financing. External assistance was anothersource of plan funds.

National Development Council : This was setup in 1952 to carry out functions like 1) Lay downguidelines for formulation of the national plan 2) Toconsider/ examine national plans formulated by theplanning commission 3) to assess availability ofresources to implement the plan and suggest a strategyto raise the resources 2) To review the working of the5- year plans in mid-course of implementation andsuggest measures to achieve the targets 4) provide aconsultative mechanism between the centre and statesso as to accommodate state priorities in national plans.The NDC is headed by the prime minister and includes

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all union ministers with a cabinet rank, chief ministersof all states, administrators of union territories and allmembers of the planning commission including thedeputy chairman of the planning commission. The NDCis the top body to vet (approve) the 5- year plans,Approach Papers to 5-year plans and also considersthe mid-term review of the 5-year plans.

Features of Indian Planning :

Indian planning was basically concerned with theallocation of the productive resources of the economyby quantitative apportionment between sectors, regionsand over time. It was a centralized physical allocationmechanism in terms of target setting and allocation ofreal investment in sectors and projects. It was anexercise to allocate resources to priority sectorsdetermined nationally on the basis of social good, andnot necessarily based on market demand. It was in thenature of detailed investment planning by which planswent down to details of sectoral plans and micro level/ specific industry level investment and execution.Indian 5-Year plans were a combination of physicaland financial planning. The plans allocated resourcesto various sectors in a centralised fashion. Theallocation of resources was prioritized across differentsectors (the priority sectors are determined nationallybut not necessarily on market demand ). The plans madeuse of centalised planning instruments like licensing,reservation of economic activity for public sector, fiscalprotection to trade and industry etc to achieve theirobjectives.

India’s 5-vear plans1. First Plan (1951-56): Focus was on agriculture

and food security Target growth rate of GDP was2.1% p.a. but actual growth achieved was 3.61%p.a.

2. Second Plan (1956-61") : Focus was ondevelopment of infrastructure, core and heavyindustry. The plan was based on the Mahalonobisstrategy. The target growth was 4,5% butachievement was 4.27%

3. Third Plan (1961-66): The objective was self-sustained growth (self reliance) and attempted todevelop agriculture and industry. The Third Plancould not achieve the targeted growth due tdjlndia-

China conflict (1962) India-Pak conflict (1965)and repeated droughts. The tarqet “was 5.6% butthe achievement was 2.84%

4. Annual Plans (Plan Holiday Period of 1966-69) : Three one year plans as part of rolling planswere formulated and implemented in 1966-67,1967-68 and 1968-69.

5. Fourth Plan (1969-1974) : This was focused onGrowth with Stability and Balanced RegionalDevelopment. The target rate of growth of 5.7%p.a. could not be achieved as the growth was only3.30% p.a.

6. Fifth Plan (1974-1979) : The focus was’onGrowth with Social Justice. Target growth ratewas 4.40/0 p g, but the GDP grew by 4.8% p.a.However the 4th plan was cut short in 1977 by theJanata Party which came to power.

7. Sixth Plan (1980-85) : Removal of Poverty(Garibi Hatao) was the top objective. Indialaunched the world’s biggest anti-povertyprograrrime, the IRDP. The target growth was5.2% and the achieved growth rate was 5.06%p.a.

8. Seventh Plan (1935-90) : Food, Work andProductivity were the themes. The growth rate of6.01% of GDP was higher than the target of 5.0%

9. The Eighth Plan (1992-97) : The Eighth Plancould not be started in 1990 due to the economiccrisis in India and hence was started in 1992.Human development was the focus. The plan forthe first time included features of indicativeplanning. The target was 5.6% but theachievement was 6.78% p.a.

10. Ninth Plan (1997-2002): Growth with SocialJustice and Equality were the main themes. Thetarget was 6.5% p.a. growth of GDP but theachievement was 5.4% p.a. due to drought andother factors.

11. The Tenth plan: Inclusive growth and humandevelopment were the focus. The target was 8%p.a. but the achievement was 7.8% p.a.

12. The Eleventh Plan (2007-12): The target was8.1% p.a growth of GDP (as revised later due to

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global economic crisis). The focus wasdevelopment of infrastructure, and inclusivegrowth. The achievement was 7.9%.Gadgil Formula: This was formulated in the 4th

5-year plan, named after D.R.. Gadgil, deputy chairmanof planning commission. The Gadgil formularecognizes special category states and non- specialcategory states. For a special category states, a lumpsum amount is set apart from Central Plan Assistanceto states. The balance is distributed a.nong the non-special category states in accordance with the followingformula (as revised in 1990 and called the Gadgil-Mukherjee Formula). The weights for different criteriain the Gadgil - Mukherjee formula are 1. Population -55% 2. Per capita income of state - 25% 3. FiscalManagement - 5% 4. Special problems - 15%. In 2000,performance by states was added to the criteria inGadgil - Mukherjee formula and given weightage of7.5%. Hence Fiscal Management weight was reducedto 2% and ‘5.5% weight would be given to performanceand other criteria.Weaknesses of Indian Planning :1. The centralized physical allocation mechanism

called for elaborate licensing, extensive trade andfiscal protection, different forms of reservationand commercially non-viable operations of thePublic Sector.

2. Central planning became over centralized takingthe form of over-regulation in industry and trade,which stifled initiative and enterprise andproduced unintended inefficiency in the publicand private sectors. In the case of the states, over-centralized planning took the form of an array ofcentrally aided and centrally sponsored schemes,leaving little room for innovatory state- specificthinking on the part of the state governments. Overcentralization freezed thinking in states and to agreat extent even in the central ministries.

3. Since the Planning Commission allocatedresources after the Union Finance Ministryindicated the quantum of central assistanceavailable to the states, the Planning Commissioncame to be overshadowed by the over-reachingpowers of the Union Finance Ministry whichdetermined economic policies and priorities.

4. Detailed investment planning going down tospecific industry level investment and executionbecame the central concern of the PlanningCommission leaving little room for evolvingsound macro economic policies and priorities.

5. Planning Commission’s preoccupation withresource allocation neglected a critical part ofeconomic policy, i.e., finding ways in whichresources are to be generated, and hence leavingit to the Finance Ministry.

6. Planning emphasized investment in a manner suchthat the commanding heights of the economy bedominated by the public sector. This led touncontrolled or rapid expansion of the publicsector leading to sub-critical investment andhence, time and cost overruns. In addition, detailedinvestment planning was never followed bycareful project planning resulting in sub-optimalutilization of resources and deterioration of capitaloutput ratios of many projects.

7. Over-centralization of planning robbeddevelopmental programs of people’s participationdue to mis-match between needs and plans. Hence,implementation suffered.

8. Planning Commission has not been able to makean impact on the planning process at the state level.In many states, Planning Boards do not havetechnical and economic experts to prepare the FiveYear and Annual Plans and to monitor theimplementation. Most boards have becomedormant / defunct and hence schemes ofimportance were therefore not implementedproperly. The sector-wise working groups for Stateplans by central/state experts curbed freedom ofstates on how agreed plan funds were to be spent.Non-Plan Expenditure: All governmental

expenditure that is not included in a plan is called non-plan expenditure. This can be both developmental andnon-developmental. The major items in India’s non-plan expenditure are : interest payments; pensions;statutory transfers to states; defence and internalsecurity. Non-plan expenditure in India also includesdepreciation and maintenance funds i.e., funds tomaintain assets created in previous plans, expenditureon administration and, expenditure on subsidies.

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7. Populatioin

First results of Census 2011 have been released.India now has a population of 1-21 billion, comprising624 million males and 587 million females. This is anincrease of 181 million people since the census 2001which is nearly equivalent to the population of Brazil.

India’s population growth rate has decelerated to17-64 per cent in the decade 2001-11, the slowest rateof growth in the past century with exception of 1911-21 in which India had negative population growth rate.

The preliminary figures of the census 2011 showthat India’s female population grew by 18-12 per centover the past decade against 17-19 per cent of males.

The sex-ratio (i.e., number of females per 1000 males)has improved to 940 from 933 a decade ago. But amatter of over­ whelming concern lies in the fact thatthe child sex-ratio stands at 914 which is the lowestsince India’s independence.

India’s literacy rate has gone up from 63-83 percent in 2001 to 74-04 per cent in 2011. Male literacyand female literacy stand at 82-14 per cent and 65 46per cent respectively. Lite­ rates constitute 74 per centpopula­ tion aged seven and above.

The density of population has gone upto 382 from325 of census 2001.

Selected Indicators of Human Development for Major States

S. Major State Life expectancy Infant Mortality Birth Death

No. at birth (2002-2006) Rate (Per 1000 live rate ratebirths) (2007) (per (per

1000) (1000)

Male Female Total Male Female Total 2008 2008

1 2 3 4 5 6 7 8 9 10

1. Andhra Pradesh 62.9 65.5 64.4 51 54 52 18.4 7.5

2. Assam 58.6 59.3 58.9 62 65 64 23.9 8.6

3. Bihar 62.2 60.4 61.6 53 58 56 28.9 7.3

4. Gujarat 62.9 65.2 64.1 49 51 50 22.6 6.9

5. Haryana 65.9 66.3 66.2 51 57 54 23.0 6.9

6. Karnataka 63.6 67.1 65.3 44 46 45 19.8 7.4

7. Kerala 71.4 76.3 74 10 13 12 14.6 6.6

8. Madhya Pradesh 58.1 57.9 58 68 72 70 28.0 8.6

9. Maharashtra 66.0 68.4 67.2 33 33 33 17.9 6.6

10. Odisha 59.5 59.6 59.6 68 70 69 21.4 9

11. Punjab 68.4 70.4 69.4 39 43 41 17.3 7.2

12. Rajasthan 61.5 62.3 62 60 65 63 27.5 6.8

13. Tamil Nadu 65.0 67.4 66.2 30 33 31 16.0 7.4

14. Uttar Pradesh 60.3 59.5 60 64 70 67 29.1 8.4

15. West Bengal 64.1 65.8 64.9 34 37 35 17.5 5.2

India 62.6 64.2 63.5 52 55 53 22.8 7.4

Source : Sample Registration System. Office of the Registrar General India, Ministry of Home Affairs.

a. Data relating to Bihar, Madhya Pradesh and UttarPradesh include Jharkhand, Chhattisgarh andUttarakhand respectively.

India’s population accounts for According toUNFPA report the world’s 17.5 per cent, second onlyentitled’State of World Population to China thatconstitutes 19.5 per cent of world population. India’s

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popula­ tion is now bigger than the combined populationof USA, Indonesia, Brazil, Pakistan and Bangladesh.Uttar Pra­ desh is the most populous state and thecombined population of Uttar Pradesh and Maharashtrais bigger than USA. Uttar Pradesh population isestimated at 199 million, being the most populous statewhile the Laksha- dweep with only 64429 peoplebecomes the least populated.

Another remarking features of the preliminarycensus results shows that the percentage growth of sixmost populous states-Uttar Pradesh, Maharashtra,Bihar, West Bengal, Andhra Pradesh and MadhyaPradesh have declined which show another impact ofimproved literacy and economic growth.

According to 2011 census, the total Indianpopulation at the dawn of 1st March, 2011 was 121.02crore. India accounts for a meagre 2.4% of teh worldsurface area of 135.79 million sq. km. Yet, it supportsand sustains a whopping 17.5% of the world population.

According to UNFPA report entitled 'State ofWorld Population' world population has touched theheight of 6 billion on October 12, 1999. UNO hasdeclared October 12 as 'Day of 6 billion.'

Indian population growth rate is high enough todraw serious atten­ tion. India today possesses about2.4% of the total land area of the world but she has tosupport about 16% of the world population. Accor­ dingto United Nations Population Fund (UNFPA) estimates,out of an annual increase of 76 million in worldpopulation, India alone accounts for as much as 16million, making a sizeable (21%) contri­ bution. Indiais a second country in the world after China to crossthe one billion mark. It is now esti­ mated that by 2050,India will most likely overtake China to become themost populous country on the earth with 19-4%population liv­ ing here. The United Nations hasestimated that the world population grew at an annualrate of 1-4% during 1990-2000, China registering amuch lower annual growth rate of population of 1% ascompared to that for India, at i-95% during 1991-2001.The first census in India was done in 1872 but a seriesof census was adopted in 1881. In the year 1881, India’spopulation was 23-7 crore which increased upto thelevel of 84-64 crore in 1991. According to 2001 censusthis population level touched the height of 102-87 crore.

India is following the demo­ graphic transitionpattern of all developing countries from initial levelsof “high birth rate-high death rate” phase to the

intermediate stage of “high birth rate-low death rate”with high rates of population growth, before graduatingto the “low birth rate-low death rate” phase over thelast two decades while the crude birth rate declinedfrom 33-9 per thousand persons in 1981 to 23-5 perthousand persons in 2006, the crude death rate alsodeclined from 12-5 per thousand persons in 1981 to 7-5 per thousand persons in 2006.

Cabinet Approves Caste Census Process

The government has finally decided to add caste in theongoing census process of 2011. The union cabinet hasapproved the recommenda­ tions of the Group ofMinisters that the caste of all people as reported bythem will be incorporated in the census 2011.

It is also decided that the caste enumeration would beconducted as a separate exercise from June 2011 andcompleted in a phased manner by September after thePopulation Enume­ ration phase (to be conducted inFebruary-March) of the Census 2011 is over.

According to the cabinet deci­ sion, a suitable legalregime for collection of data on castes would beformulated in consultation with the law ministry.

The office of the Registrar Gene­ ral and CensusCommissioner would conduct the field operations ofthe caste enumeration. The central govern­ ment hasdecided to constitute an expert group to classify thecaste/ tribe returns after the enumeration is com­ pleted.

The economy of a country is directly related tothe size of its population. In a country like India, wherewe find a huge population with high population growthrate, develop­ ment has become a problem. Ifdeve­ lopment rate in an economy lags behind thepopulation growth rate, the country becomeseconomically weak (It is true in context of India). Insuch a country, all efforts for planning and investmentsbecome meaningless. Under such circumstances, thequalitative aspect of the population also becomesadversely affected. High birth rate supplemented withimproved health and medical facili­ ties (which makesdeath rate fall) pushes the economy towards the stateof “population explosion”. India faces the samesituation at present. An increasing difference betweenbirth rate and death rate has created a scene ofpopulation explosion in India. This problem in India isnot the result of declining death rate alone, which isactually an indicator of social development. But asimul­ taneous effort for reducing birth rate should havebeen made, where we totally failed. The death rate in

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India •is continuously falling due to the decline in infantmortality. The infant mortality rate which stood at 146per thousand of new births in 1991 has come down to57 in 2006. Improved medical and health service andgradual increase in literacy rates are the other reasonsresponsible for decline in death rate. The relatively slowdecline in birth rate, on the other hand is mainly anoutcome of tradi­ tional attitudes and institutionalfac­ tors which take a long time to change.

India's Population Vs. World

• Country's share in World Population (in %)

China 19.4

India 17.5

USA4.5

Indonesia 3.4

Brazil 2.8

Pakistan 2.7

Bangladesh 2.4

Nigeria 2.3

Russian Federation 2.0

Japan 1.9

Other Nations 41.1

Total 100

Major Results of Indian Census

Census Populatin Chage Rate of Compound Female-Male

Year lation per change per Average Annual Ratio

(in crs.) decade decade (%) growth rate of (Females per

(in crs.) Population (%) thousand males)

1891 23.60 — — — —1901 23.84 + 0.24 — — 972

1911 25.21 + 1.37 + 5.75 0.56 964

1921 25.13 -0.08 -0.31 -0.03 955

1931 27.90 + 2.77 + 11.00 1.04 950

1941 31.87 + 3.97 + 14-22 1.33 945

1951 36.11 + 4.24 + 13.31 1.25 946

1961 43.92 + 7.81 + 21.51 1.96 941

1971 54.82 + 10.90 + 24.80 2.22 930

1981 68.33 + 13.51 + 24.66 2.20 934

1991 84.64 + 16.30 + 23.87 2.14 927

2001 102.87 + 18.23 + 21.54 1.95 933

2011 121.02 + 18.15 + 17.64 — 940

India: Population Projections

(In Million)

2001 2006 2011 2016 2021 2026

Total 1,029 1,112 1,193 1,269 1,340 1,400

Below 15 years 365*(364) 357 347 340 337 327

15-64 years 619*(613) 699 780 851 908 957

Above 65 years 45*(49) 56 66 78 95 116

According to the Technical Group on PopulationProjections constituted by the National Commissionon Population (May 2006), annual population growthis expected to gradually decelerate from 1-6% in thefive years ending in 2006 to 0-9% in the five years

ending in 2026. India’s population which is estimatedto have gone up from the census 2001 figure of 1029million to 1112 million in 2006, is projected to increaseto 1400 million by 2026.

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Selected Health Indicators

Parameter 1951 1981 1991 Current

Levels

1. Crude Birth Rate (CBR) 40.8 33.9 29.5 22.1

(Per 1000 population) (2010)

2. Crude Death Rate (CDR) 25.1 12.5 9.8 7.2

(Per 1000 populatio) (2010)

3. Total Fertility Rate (TFR) 6.0 4.5 3.6 2.6

(Per woman) (2009)

4. Maternal Mortality Rate NA NA 437 212

(MMR)(Per 100,000 live births) (1992-93) (2007-09)

5. Infant Mortality Rate (IMR) 146 110 80 47

(Per 1000 live births) (2010)

6. Child (0-4) Mortality Rate 57.3 41.2 26.5 14.1

(Per 1000 children) (1972) (2009)

7. Life Expectancy at birth

Total  – 55.5 59.4 63.5

(1981-85) (1989-93) (2002-06)

(i) Male 37.2 55.4 59.0 62.6

(1981-85) (1989-93) (2002-06)

(ii) Female 36.2 55.7 59.7 64.2

(1981-85) (1989-93) (2002-06)

Source : Office of Registrar General, India. (Shown in Economic Survey, 2011-12)

Literacy Rate in India

Census Year Males Females Male Female gap Total Per­ sons

in literacy rate

1951 27.16 8.86 18.30 18.33

1961 40.40 15.35 25.05 28.30

1971 45.96 21.97 23.98 34.45

1981 56.38 29.76 26.62 43.57

1991 64.13 39.29 24.84 52.21

2001 75.26 53.67 21.59 64.84

2011 82.14 65.46 16.68 74.04

RuraL& Urban Population (%) (1901-2011)

Census Year Per cent

Rural Urban

1901 89.2 10.8

1911 89.7 10.3

1921 88.8 11.2

1931 88.0 12.0

1941 86.1 13.9

1951 82.7 17.3

1961 82.0 18.0

1971 80.1 19.9

1981 76.7 23.3

1991 74.3 25.7

2001 72.2 27.8

2011 68.8 31.2

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The improvement in the quality of health care overthe years is reflec­ ted in some of the basic socio-demo-graphic parameters. The Crude Death Rate (CDR)declined rapidly from 25-1 in 1951 to 7-4 in 2008 vis-a-vis the less sharp decline in Crude Birth Rate (CBR)from40-8 in 1951 to 22-8 in 2008.The document of the10th plan targeted a reduction in Infant Mor­ tality Rate(IMR) to 45 per thou­ sand by 2007 and 28 per thousandby 2012, reduction in Maternal Mortality Rate (MMR)to 2 per thousand live births by 2007 and 1 per thousandlive births by 2012 and reduction in decadal growthrate of the population between 2001-11 to 16-2%.

In the five decades after inde­ pendence, theincrease in literacy rate during the period 1991-2001has been the highest, i.e., from 52-2 to 64-84 per cent,which is an increase of 12-6 percentage points. For thefirst time, the country witnessed a faster growth infemale literacy i.e., 14-9 percentage points (from 39 to54 per cent) compared to that of males, which increasedby only 11-7 percen­ tage points (from 64 to 75 per cent).Through this there was a narrowing of the gender gapin literacy, which was 25 per cent in 1991 and to 22per cent in 2001. There is also, for the first time, aconverging trend in the rural-urban literacy gap.Between 1991 and 2001 rural literacy increased by 7per cent, thereby reducing the urban-rural gap from28-4 per cent in 1991 to 21-69 per cent in 2001.

Urban-Rural Population Statistics of Census 2011Released

Government released Census 2011 data relatedto urban-rural popu­ lation on July 15,2011. As perrelea­sed statistics, out of country’s total population of121 crore, 37-7 crore population reside in urban areaswhile the remaining 83-3 crore population belongs torural areas. Thus, 31-16 per cent population of thecountry is urban based while the 68-84 per centpopulation is rural based. As per 2001 Census, urbanand rural popula­ tion percentage were 27-81 per centand 72-19 per cent respectively. Dur­ ing the period2001-2011, urban population increased from 28-61crore to 37-71 crore while rural population went upfrom 74-26 crore to 83-31 crore. Thus, during thedecade 2001- 2011, urban population size increasedby 9-10 crore while the rural population went up by 9-05 crore. During 2001-2011, rural population and urbanpopulation registered 12-18 per cent and 31-8 per centgrowth respec­ tively.

According to rural-urban popula­ tion data ofCensus 2011, Tamil Nadu has the maximum urbanpopu­ lation (48-5%) in the country follo­ wed by Kerala(47-72%), Mahara­ shtra (45-23%) and Gujarat (42-58%).

National Commission on Population

The National Commission on Population wasconstituted on May 11, 2000 under the Chairmanshipof the Prime Minister to provide overall guidance forpopulation stabilisation by promoting synergy betweendemo­ graphic, educational, environmental anddevelopmental programmes.

On May 19, 2005 the National Commission onPopulation was reconstituted. This commission has nowbeen transferred from Planning Commission toMinistry of Health. The Prime Minister will remainthe chairman of NCP while Deputy- Chairman ofPlanning Commission and Union Minister of Healthand Family Welfare will work as Deputy Chairman ofNCP. The membership of NCP has also been reducedfrom 131 to 44.

Birth Rate and Death Rate in India

(Per Thousand Population)

Year Birth Rate Death Rate1950-51 39.9 27.4

1960-61 41.7 22.8

1970-71 36.9 14.9

1980-81 33.9 12.5

1990-91 29.5 9.8

2000-01 25.4 8.4

2007-08 23.5 7.4

2008-09 22.8 7.4

2009-10 22.5 7.3

2010-11 22.1 7.2

The National Commission on Population hasundertaken various ini­ tiatives for implementing theNational Population Policy such as review of theimplementation of National Family WelfareProgramme espe­ cially in the high fertility States,identification of high fertility districts and preparationof District Action Plans, selection of Social Economicand Demographic Indicators for moni­ toring purpose,promotion of policy- oriented relevant research forpopula­ tion stabilisation and promotion of publicprivate partnership in meeting the unmet needs offamily planning services.

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Stabilising population is an imperativerequirement for promot­ ing sustainable development.The main problem concerned in the populationstabilisation in the short- term perspective is the high-levels of unmet-needs for contraception in high fertilityStates of Uttar Pradesh, Bihar, Rajasthan, MadhyaPradesh and Odisha. The focus is on develop­ ing area-specific approach for meet­ ing the gap in the demandfor contraception in these States.

Population Policy 2000

The National Population Policy 2000 provides apolicy framework for advancing goals and prioritizingstrategies during the next decade to meet thereproductive and child health needs of the people ofIndia. This new policy states that the objec­ tive ofeconomic and social develop­ ment is to improve thequality of lives people lead to enhance their well beingand to provide them with opportunities and choices tobecome productive assets in society.

The immediate objective of this new policy is toaddress the unmet needs of contraception, healthinfra­ structure, health personnel and to provideintegrated service delivery for basic reproductive andchild health care.

The medium term objective is to bring the totalfertility rates to replacement level by 2010.

The long term objective is to achieve a stablepopulation by 2045.

In pursuance of these objectives, 14 NationalSocio Demographic Goals are formulated to beachieved by 2010. The important goals of this categoryare—

(i) Making School education compul­ sory andto reduce dropouts.

(ii) Reduce infant mortality rate to 30 per 1000live births.

(iii) Reduce maternal mortality rate to below 100per 100000 live births.

(iv) Promote delayed marriage of girls.

(v) Achieve 80% institutional delive­ ries.

(vi) Prevent and Control Communicablediseases.

(vii) Promote vigorously the small family normto achieve replacement levels of TFR.

The policy speaks about the formation of aNational Commission on Population under theChairman­ ship of Prime Minister to monitor and

implement population policy and to guide planningimplementations.

Policy also suggests some pro­ motional & motivationalmeasures to promote adoption of the small family norm.The important are—

(i) Reward Panchayat and Zila Pari- shads forpromoting small family norm.

(ii) Incentives to adopt two child norms.

(iii) Couples below poverty line, havingsterilisation with not more than two livingchildren will be eligible for health insuranceplan.

(iv) Strengthening abortion facility scheme.

Uttar Pradesh Holds One-sixth Population of theCountry: Census 2011

The provisional figures of Cen­ sus 2011 werereleased on March 31, 2011. The population of thenation was estimated at 1210-19 million having 51-54% males and 48-46% females. Uttar Pradesh stoodat top place being the most populous state whichaccounted for the largest share of 16-49 per cent. UttarPradesh holds about one-sixth population of the nation.The percentage decade growth rate in Uttar Pradeshhas declined during 2001-11 compared to 1991- 2001.In 1991-2001, this growth was 25-85% which declinedto 20-09% in 2001-2011. Uttar Pradesh holds 29-7million children population in the age group of 0-6years.

Uttar Pradesh Census 2011 Few Figures : At aGlance

• Total Population: 199581477

Male : 104596415, Female : 94985062

• Two Most Populous Cities

Lucknow : 2815033, Kanpur : 2769413

• Top Five Populous Districts

Allahabad : 5959798, Moradabad : 4773138,Ghaziabad : 4661452, Azamgarh : 4616509,Lucknow : 4588455

• Top Least Populous Districts

Mahoba : 876055, Chitrakoot : 990626, Hamirpur: 1104021, Shravasti : 1114615, Lalitpur: 1218002

• Districts having Highest Literacy

Ghaziabad : 85%, Gautambudh Nagar : 82.2%,Kanpur City : 81.3%, Orai : 80.3%, Etawah:79.9%

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• U.P. possesses about l/6th, population of thecountry’s population.

• Shravasti is the least literacy having district.

• State’s literacy 69.72%.• Gautambudh Nagar registered highest while

Kanpur City had the least population growth in2001-2011.

• Sex Ratio in U.P. (per 1000 males): 2001 : 898females, 2011 : 908 females

• Three districts show sex-ratio in favour of females(per 1000 males)—Jaunpur (1018), Azamgarh(1017) and Deoria (1013).

• Two districts having least sex ratio (per 1000males—Gautambudh Nagar (852) and Hardoi(856).

• Two districts having highest density : Ghaziabad(3954), Varanasi (2399)

• Two districts having least density :

Lalitpur (242), Sonbhadra (270)

National Population Register to Start Bio­ metricsData Collection from Dec. 2010

The National Population Regis­ ter (NPR) willstart collecting bio­metrics data of the country’s entireadult population between December 2010 and January2011.

NPR will be the biggest bio- metric database—including face, fingerprint and iris recognition of theover 1 billion Indian population—that has ever beenmade. The Unique Identification Authority of India(UIDAI) has been established by the government toimplement the scheme and assign unique numbers toall citizens.

UIDAI has made ageement with The Registrar Generalof India that the NPR exercise under the 2011 censuswould collect biometrics data as well. At present UIDAIis in the first phase of NPR which gets the basicinformation of an individual. The biometrics data willbe covered under the second phase.

Gender Disparities Declined in India

According to a study made by the Ministry ofWoman and Child Development, the gender-baseddisparities in the country have shown a decline over aperiod of 10 years from 1996 to 2006. Both the GenderDevelopment Index (GDI) and the GenderEmpowerment Index (GEI) —the two key parametersof women’s development—have shown better resultsbetween 1996 and 2006. The GDI scores estimated for

India were 0-514 in 1996 and 0-590 in 2006 showingan increase of 0-076 points.

The GDI is the Human Develop­ ment Index (HDI)adjusted for disparities between men and women andthe estimated GDI score for India are lower than theHDI score at both years 1996 and 2006 due to theexistence of gender-based disparities in all threedimensions i.e., health, literacy and standard of living.GDI having these three dimensions also reflects anincrease over the decade, thereby implying that progresshas been in each of these areas.

Besides, the Gender Empower­ ment Index whichmeasures political participation and decision-makingpower, economic participation power over economicresources, also shows the increased score from 0-416in 1996 to 0-497 in 2006.

An analysis of the data for states and UnionTerritories shows that Kerala has the highest score of0-721 in the country. However, in 2006, it was rankedsecond in the GDI with a score of 0-745.

Chandigarh has been ranked second on both GDIand HDI in 1996, but attained the highest HDI and GDIscores in 2006 at 0-784 and 0-763 respectively.

Goa was ranked third on both HDI and GDI in1996. It improved its rank to second on HDI and GDIin 2006.

None of the states has a GDI less than 0-5 exceptBihar.

Global Gender Gap Report Puts India on PoorFront

The World Economic Forum’s Global Gender GapReport assesses gender equality in 134 countrieslooking at economic participation and opportunity,educational attain­ ment, political empowerment, healthand survival. The report examines both men andwomen’s access to resources and opportunities ratherthan the levels of resources and opportunities availablein a country.

Iceland, Norway, Finland, Swe­ den and NewZealand are the top 5ranking nations in global gendergap assessment. Lesotho, in sub-Saharan Africa ranksat 8th place showing smaller gender gap than UK whichgets 15th ranking in the list.

India has been ranked on poor front in the listReport puts India at 112 ranking out of 134 nations.Last year in 2009 India’s ranking was 114th in the list.Both the rankings are almost same showing no

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improve­ment in gender equality. India’s rank­ing isthe lowest even among BRIC nations. Moreover, India’sgender equality performance remains the worst in theregion with Sri Lanka and Bangladesh got 16th and82nd ranking.

The Global Gender Gap 2010 Ranking

Top 5 Nations

Nation Rank

Iceland 1

Norway 2

Finland 3

Sweden 4

New Zealand 5

BRIC Nations

Brazil 85

Russia 45

India 112

China 61

South Asia Nations

Pakistan 132

Sri Lanka 16

Bangladesh 82

Nepal 115

At the bottom of the ranking table of genderequality are nations— Yemen (134th), Chad (133rd)and Pakistan (132nd).

Family Welfare

India is following the demo­ graphic transitionpattern of all developing countries from initial levelsof ‘high birth rate-high death rate’ to the intermediatetransition stage of ‘high birth rate-low death rate’ whichmanifests in high rates of population growth, beforegraduating to ‘low birth rate-low death rate’.The current high population growth rate is due to—

(i) The large size of population in thereproductive age-group (esti­ matedcontribution 60%);

(ii) Higher fertility due to unmet need forcontraception (esti­ mated contribution 20%);and high wanted fertility due to prevailinghigh IMR (estimated contribution 20%).

The goal of population stabilization is achievedonly when child survival issues, maternal health issuesand contraception issues are addressed simultaneouslyand effec­ tively. Actual success in containing the

growth of population would how­ ever, depend upon:Publicly stated support by the community leaders;Resources available for the Family WelfareProgramme; Efficiency and accountability in the stateHealth System for ensuring effective deli­ very ofservices to citizens; as also Women’s education andstatus in the family. All these inputs have so far notbeen uniformly available to the required extent for theFamily Wel­ fare Programme, thereby not allow­ ing theoptimal and potential/best possible benefits to be reapedfrom the same.

Important Highlights of National Family WelfareSurvey (III Round)

• Indian families are giving prefe­ rence of nothaving children more than two.

• Total Fertility Rate (TFR) came down to 2-7 in2006 from 2-9 obtained in 2000. In urban areasTFR stands at 2-1 in 2006.

• Eight states still have TFR more than 3 while fourstates (Bihar, Uttar Pradesh, Meghalaya andNagaland) have TFR more than 4.

• The target for replacement level in 2000 policywas 2-1 but a few states show this level to be muchhigher-Bihar (4-22), U. P. (4-13), Meghalaya (4-38), Nagaland (4-15), Madhya Pradesh (3-34) andJharkhand (3-69).

World’s PopulationAccording to the UNO’s agency UNDP report the

world population, which stood at 6-9 billion in May2011, is estimated to cross the level of 7-0 billion thisyear. UNDP report has mentioned a proposed date ofcrossing 7-0 billion level to be October 31, 2011. UNDPhas announced its count down to begin from October24, 2011. It is worthnoting that the world’s populationhad crossed 6 billion mark on October 12,1999 and 5billion level mark on July 11,1987.

This report of UNDP has also projected world’spopulation at 9-31 billion by the year 2050. EarlierUNDP had projected world population at 9-15 billionin the year 2050.

Projected Indian Population Scenario After 20Years

The Technical Group of National PopulationCommission constituted in July 2000 has presented theprojected scenario of Indian popula­ tion after 20 yearsi.e., 2026.

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The highlights of projections are—• Total projected population (in 2026): 140 crore.

Birth Rate : 16 per thousand. Infant mortality rate: 40 per thou­ sand.

Sex ratio : 930 females per 1000 males.

Population density : 426 persons per sq. km.

Population growth during (2001-26) : 36%.

• Highest population growth (2001- 26): In Delhi(102%).

• Lowest population growth (2001 — 26) : In TamilNadu (15%), in Kerala (17%).

• Population growth (2001-26) : Bet­ ween 40-50%in Haryana, Rajas- than, Uttar Pradesh andMadhya Pradesh.

• Population growth (2001-26) : Bet­ ween 20-30%in Himachal Pradesh, Punjab, West Bengal,Odisha, Andhra Pradesh and Karnataka.

• Out of 31-7 crore additional popu­ lation during2001-26 50% contribu­ tion will alone be madeby seven states—Bihar, Jharkhand, MadhyaPradesh, Chhattisgarh, Rajasthan, Uttar Pradeshand Odisha.•With 24-9 crore population Uttar Pradesh willmaintain its status of the most populace state.

National Rural Health Mission (NRHM)

The NRHM was launched in 2005 to provideaccessible, affordable and accountable quality healthservi­ ces to rural areas with emphasis on poor personsand remote areas. It is being operationalized throughoutthe country, with special focus on 18 states, whichinclude eight

Empowered Action Group States (Bihar,Jharkhand, Madhya Pradesh, Chhattisgarh, UttarPradesh, Uttara- khand, Odisha and Rajasthan), theeight north-eastern States, Himachal Pradesh andJammu & Kashmir. Among major innovations of theNRHM are the creation of a cadre of Accredited SocialHealth Activists (ASHA) and improved hospital care,decentralization at district level to improve intra andinter-sectoral convergence and effective utilization ofresources through PRIs, NGOs and the community ingeneral. The NRHM further aims to provide anoverarching umbrella to the existing programmesincluding the Repro­ ductive Child Health Project(RCH-II), Integrated Disease Surveil­ lance and otherprogrammes for treat­ ment of malaria, blindness, iodinedeficiency, filaria, kala azar, TB and leprosy by

strengthening the public health delivery system at alllevels. The SCs, PHCs and CHCs are proposed to berevitalized through better human resource management,including provision of additional man-power, clearquality standards, revamping of existing medicalinfra­ structure, better community support and untiedfunds to facilitate local planning and action so as toachieve the goals laid down in the National PopulationPolicy 2000. Further, the Mission, in a sector-wideapproach addressing sanitation and hygiene nutritionand safe drinking water as basic determinants of goodhealth seeks greater convergence among the relatedsocial-sector departments, i.e., AYUSH, Women andChild Deve­ lopment, Sanitation, ElementaryEducation, Panchayati Raj and Rural Development. Theexpected outcomes of the Mission include reductionof IMR to below 30 per 1,000 live births, MMR tobelow 100 per 1,00,000 live births and TFR to 2-1 by2012.

National Rural Health Mission (NRHM)

Vision of NRHM

• To be implemented throughout the country withspecial focus on 18 States with weak public healthindicators and/or weak infrastructure.

• To improve the availability of and access to qualityhealth care.

• To build synergy between health and determinantsof good health like nutri­ tion, sanitation, hygieneand safe drinking water.

• To mainstream the Indian Systems of Medicinesto facilitate comprehensive health care.

• To increase the absorptive capacity of the healthdelivery system to enable it to handle increasedallocations.

• To involve the community over the planningprocess.

• Upgradation of infrastructure.

• Capacity building.

• Increasing the fund allocation for health sector.

Target Outcome

• IMR to be reduced to 30/1000 live births by 2012.

• MMR to be reduced to 100/100,000 live birthsby 2012.

• TFR reduced to 2.1 by 2012.

• Malaria Mortality to be reduced by 50 per centby 2010 and 60 per cent by 2012.

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• Elimination of Kala Azar mortality by 2010.

• Filaria to be reduced by 70 per cent by 2010. 80per cent by 2012 and elim­ inated by 2015.

• Dengue mortality to be reduced by 50 per cent by2010 and sustaining it at that level till 2012.

• Cataract operations increasing to 46 lakh perannum.

• Leprosy prevalence rate to be reduced from 1.8per 10,000 in 2005 to less than 1 per 10,000thereafter.

• TB DOTS series-maintain 85 per cent cure ratethrough entire Mission period.

Achievement Under NRHM• ASH As Link Workers : So far 7.36 lakh ASH

As have been selected, 6.92 lakh trained at leastin the first module and there are 4.95 lakh withdrug kits in their respective villages.

• Addition of Human Resources : Under theNRHM, 2,474 specialists, 8,782 MBBS doctors,26,253 staff nurses, 46,296 auxiliary nursemidwives (ANMs), 12,485 paramedics have beenemployed on contract.

• Conversion of Health Facilities into 24 X 7 : Atotal of 14,716 Additional Primary Health Centres

(APHCs), PHCs, CHCs and other sub-districtfacilities are functional 24x7.

• Janani Suraksha Yojana Beneficiaries : Over 2crore women have so far been covered under theJanani Suraksha Yojana (JSY).

• Rogi Kalyan Samitis (RKSs) : So far 573 districthospitals (DHs) 4,217 CHCs, 1,111 other thanCHC hospitals and 16,568 PHCs have their ownRogi Kalyan Samitis (RKSs) with untied fundsfor improving quality of health services. VillageHealth and Sanitation Committees : So far 4-41lakh villages (68 per cent) have their own VillageHealth & Sanitation Committees and each hasbeen provided HIO.OOO as untied grant per year.

• Village Health and Nutrition Days (VH & NDs): There have been 35 lakh VH & NDs in 2006-07,49 lakh VH & NDs in 2007-08, 58 lakh VH &NDs in 2008-09 and 29 lakh VH & NDs so far in2009-10 to reach basic health services.

• Mobile Medical Units (MMUs) : 343 MMUsfunctional so far.

• Ayurveda, Yoga & Naturopathy, Unani, Siddhaand Homeopathy (AYUSH) services have beencolocated in 9,608 health facilities and 7,399AYUSH doctors and 3,110 AYUSH paramedicshave been added to the system.

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8. WTO

Objective of WTO: To set rules on internationaltrade which would help in the growth of world tradefreely, fairly and predictably.

Structure of W.T.O :

(a) Secretariat: Geneva

(b) Ministerial Conference : The top decisionmaking body. This meets once in two years.Decisions by the ministerial conference areby consensus.

(c) General Council of WTO, Geneva : it ismade up of ambassadors / delegates ofvarious countries to WTO.

The General Council functions as a Trade PolicyReview Body and also a Dispute Settling Body. TheGeneral Council includes a) The Goods Council b) TheServices Council c) The IPR Council.

Birth of WTO : It is a successor of GATT with amuch wider membership and covering more areas ofinternational trade. The last round of GATTnegotiations was the Uruguay Round held between1986 and 1994. (Launched In Punta del Este, Uruguay,1986 ). The Uruguay round led to 60 new agreements(i.e., on 60 new areas of world trade, legally bindinginternational rules governed by WTO have been framed). The member countries of GATT met in Marrakesh,Morocco, in 1994 andj& issued the MarrakeshDeclaration which signified the end of the UruguayRound of GATT and the declaration,also named theW.T.O. as the successor body to GATT. The UruguayRound adopted the Dunkel’ Treaty (Which includes allthe new agreements concluded as part of the UruguayGATT including agreements”like TRIPS_and GATSQ.

Principles Of WTO : The WTO agreements arebased on some fundamental principles. These are 1.Most Favoufred Nation (MFN)jprincipJe - membercountries are not to discriminate between themselvesin Interna tip na i trade. If a country gives favourabletreatment to some other member country, then it mustbe extended to all member countries. The exceptionsto MFN are preferential treatment within regional tradeagreements, including free trade areas, customs unions

and also preferential treatment to developing countriesunder the principle of Special and DifferentialTreatment. The Generalized System of Preferences(GSP) are an exception to MFN. Under this.ICs canlower import duties preferentially for imports fromPC’s. The MFN is provided for under Article 1 of WTOfor goods, Article II under GATS of WTO for servicesand Article 4 under TRIPS Agreement of WTO.

National Treatment: This declares that memberscannot discriminate between domestic and foreignin terms of products, services and nationals.National treatment applies to internal measures(unlike cross-border or external measures).Internal measures could be domestic taxes anddomestic laws, regulations affecting infernal saletransportation or use of products. The purpose ofnational treatment is to remove hidden domesticbarriers to imported products, services or foreignnationals. However thereare some exceptions tonational treatment like government procurement,subsides to demestic producers or internal pricecontrol measures.

Predictable and Open Trade: Member countriesare to eliminate or reduce obstacles to trade and alsoshould not apply measures affecting trade arbitrarily.This will be done by lowering trade barriers.

Transparency : Member countries to informWTO about their trade regulations to allow otherembers countries to be familiar with their trade rules.

Special and Differential Treatment ofDeveloping Countries: Developed member countriescan provide preferential treatment to DevelopingCountries and.LDC’s to participate in trade and benefitfrom it. Developing countries and LDC’s are allovyedless.liberal rules than Industrialized countries.

Important Concepts of WTO Trade Rules

1. Dispute Settlement : The General Council ofWTO functions-as Dispute Setting Body. (GATTJiad no dispute settlement process). The uniqueprinciple-in DSB of WTO is that the rulings givenby DSB have to be accepted unless there is.

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consensus among all members against itsadoption. WTO requires 60 days of consultationsbetween disputing parties to resolve the dispute,failing which, a disputes panel is set up.

2. Trade Remedies: Member countries are allowedtrade remedies and depart from WTO rules toremedy an unfair trade situation. These are

(i) Anti - dumping measures - members canresort to anti-dumping measures against aproduct being dumped in their country.(Dumping is sale by a country in.another ata price which is less than cost of productionor less than sale price in its own market).The anti dumping measures usually take theform of anti-dumping duties which neutralizethe dumping margin.

(ii) Applying counter-vailing measures likecounter - vailing duties

(iii) Resorting to safeguard measures to protectinjury to domestic producers due to dumping.

3. Tariff Bindinqs : AII member countries are toindicate the maximum’ import duty that theywould levy on, 10,000 products in harmonizedschedule of WTO. However, the actual importduties could be’less than the bound tariff.

4. Tariff Rate Quotas : These refer to less importduties for a given product upto a limit (the quota)to allow greater volume of import that product.However above the limit (the quota) a higher ornormal import duty is levied.

5. Plurilateral Agreements : These are agreementsbetween WTO members who have say of morethan 80% in world trade and these agreements areopen to all others.

6. Multilateral Agreements : These are agreementsbetween 25 WTO members and are binding onthese countries only.

7. Regional Trade Agreements / Arrangements :These are allowed under article 24 of GATT(where GATT 1994 is part.of WTO)

8. Special Products and Special Safeguareds :Special products are either agricultural productsof industrial products of particular importance to

DC's which seek to protect demestic agricultureand manufacturing. The Hong Kong MinisterialMeet of WTO in December 2005 allowed DC’sto name special products and also allows sgecialsafeguard mechanisms (SSM). The SSM allowmember countries to raise import duties above thebouTuTratis on the import of a particular agroproduct if there is sudden surge in import of thatproduct into the country. The SSM are availableto DC’s and LDC’s. The SSM agreed to at HongKong provides for SSM based on both price andvolume triggers i.e. or sudden surge in imports.Developing countries have also been allowed atHong Kong Ministerial to name some specialproducts in industrial goods which will remainoutside the import duty cuts proposed underNAMA.

9. Safeguard Duties : These are import duties leviedby the importing country when imports (due toWTO obligations or rules) have caused or threatento cause serious injury to domestic producers ofsimilar products. Hence the importing country canwithdraw the WTO obliged import duty to protectits domestic producers temporarily. However theimporting country is expected to providecompensation by offering some other concession.

10. Quantitative Restrictions : The WTO membersare’to eliminate Quantitative Restrictions (QR’s)like imposing physical guotas on guantity ofimports or banning imports. These non- tariffbarriers can be resorted to in exceptionalcircumstances underWTO rules such asvulnerability of BoP or critical shortage of foodetc. But these are to be for a specific period oftime.

Trade Policy Review Mechanism. (TPRM):This was agreed to,in the Uruguay Round. The TPRMreviews the member countries domestic trade policiesarid practices to enable the other members to understandthese policies, to provide the feedback to the memberreviewed and to determine if these are in harmony withWTO rules. The TPRM helps the developing countriesand LDC’s to adjust their domestic policies incompliance with WTO agreements; The TPRM is

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carried out by the Trade Policy Review Body of theGeneral council

The Uruguay Round and the Dunkel Treaty:The Uruguay Round of GATT led to adoption of theDunkel Treaty which covers 60 new agreements inaddition to the existing agreed rules of GATT till 1994.The important ones among them are briefly discussedbelow.

Issues in Built-in Agenda : The built-in agendaincludes agreements already concluded under theUruguay Round of GATf but on which furthernegotiations are to be held. The issues in built-in-agendaare with respect to Agreement on Agriculture andGejneral Agreement in Trade in Services.

Agreement on Agriculture ( AOA) : This definesnew rules on trade related agriculture measures. TheAOA provides for:

a) Market Access : All members of WTO toconvert non-tariff barriers on agriculturalproducts to tariffs. Developed Countries areto cut tariffs ( i.e., import duties ) onagricultural products by 36% whereasdeveloping counties are to cut tariffs by 24%.

b) Domestic Support : This refers to subsidiesprovided by governments to agriculture. Thesubsidies to agriculture are expressed asAggregate^ Measure of Support ( AMS). TheW.T.O. rules classify all farm subsidies into:

(i) Amber Box subsidies : These aresubsidies provided to farmers (Tikesupport prices ) without imposing anylimit on output. These are consideredto be trade distorting. The WTO callsfor reduction of amber box subsidies.

(ii) Blue Box Subsidies : There aresubsidies linked to production butunlike amber box subsidies, the bluebox subsid”esTmpose limiETonproduction ( in the”form of quotas).These are also considered to be tradedistorting.

(iii) Green Box Subsidies : Thesesubsidies to the farm sector are

considered to be minimally tradedistorting or non-trade distorting.

c) Export Competition : This is anothercomponent of the Agreement on Agriculture.According to this, Developed Countries areto reduce the value opexport subsidies toagricultural products by 36% and reduce thevolume of export subsidies to agriculturalproducts by 24% over a 6- year period. TheDeyeloping_Countries are to reduce thevalue and volume of export subsidies by 24%and 10% respectively ove^a 10 year period.One of the most sharply debated issues atthe CancurTMinisterial Conference of WTOwas trade in agriculture. China. 5. Africa,,India and Brazil formed a group, of 2 1countries (i.e.. the G-21) in Cancup. Thiscalled for reduction in agricultural subsidiesin EU and the U.S.A. Initially, the EU wasunwilling to discuss a reduction i^fa^msubsidies. Later the EU was willing tocultsubsidies to agriculture but was unwillingto fe^y^import duties on farm products. TheU.S. wanted subsidy cuts to be linked toreduction in import duties.

NOTE : THE CAIRNS GROUP : A group of 15countries (including developed and developing ) whichcalls for reduction of agricultural subsidies and tariffson agricultural products by the EU and the U.S, --eCAIRNS Group includes major agriculture exportingcountries like Australia. Brazil, New Zealand, Canada,Fiji, Paraguay, Uruguay, Chile, Colombia, Argentina,Malaysia, Thailand, Indonesia, the Philippines etc.

TRIMS Agreement (Trade Related InvestmentMeasures Agreement): This is agreement of theUruguay Round recognizes that certain investmentmeasurers could cause re­ strictive effects oninternational trade in goods. Under TRIMS, membercountries are not to apply trade related investmentmeasurers that are inconsistent with Article III (nationaltreatment) or Article XI (general elimination ofquantitative restrictions),of tbeiGATF. Under TRIMS,the following are explicitly prohibited,

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a) Local Content requirement ijntfab’ercountries requiring foreign enterprises set upin their domestic economy to use domesticproducts in their production

b) Trade balancing requirements - which callupon foreign enterprise’s in the domesticeconomy to limit use of imported productsin proportion to volume or value ofHpcalproducts that they export

c) Forex -estrictions - which restrict access toforeign.exchange to restrict imports

d) Domestic sales re­ quirement - measures thatrestrict export in proportion of volume orvalue of local production to campel “firmsto sell more in the domestic economy.However, developing countries can retainsome TRIMS in accordance with thedevelopment needs of their economies.

Agreement on Sanitary and PhvtosanitarvMeasures (SPS Agreement): Under the SPSagreement of the Uruguay round, WTO rules imposestandards relating to food safety (like content ofbacterial contaminants, pesticides, etc) inspection andlabeling as well as safety standards for plant healthfPhvtosanitary) and animal health. The SPS measurescan take many forms like prescribing maximumpermissible levels of pesticides in food products,certification that food products, a-imals and plants arefrom a disease free area and minimum safety /inspection standards. These can be used by membercountries to restrict imports on legitimate objectivesof protecting human, animal and plant life. The WTOrules on SPS borrow norms of the Codex AlimentationsCommission. Under the SPS, the burden of proof todemonstrate scientifically that some product noseimport is regulated in dangerous, is on the countryimposing the regujation.

Agreement on Technical Barriers to Trade(TBT Agreement): This was renegotiated as part ofUruguay round. It is to ensure that technical regulations,standards, testing and certification procedures do notcreate obstacles to trade. The agreement coverstechnical egulations on quality, packaging and labeling.The exporting country normally has to satisfy these

technical regulations under the laws of the importingcountry. However, the TBT empowers the WTO toscrutinize such technical regulations in terms ofwhether they are legitimate or are aimed to cotectdomestic industry (protectionist).

The Singapore Issues : ( The New Issues). Theseare issues which were not discussed in the ,-jguayRound of GATT but were included in the agenda ofthe WTO in the Singapore Ministerial Conference in1996. The Singapore Issues are Competition Policy,Multilateral Investment Agreement, GovernmentProcurement and Trade Facilitation. The DevelopedCountries want the WTO to frame es covering all theSingapore issues while the Developing Countries areopposed to WTO taking tne Singapore Issues for thepresent. Briefly the Singapore Issues are :

i) Multilateral Investment Agreement (MAI) : This agreement, if reached, willprovide for a liberal set of international rulesconcerning foreign direct investment.

ii) Competition Policy : The WTO to framemultilateral rules concerning fair competitionin markets of all WTO members. TheDeveloped Countries argue that unfair tradepractices in developing counties (likeformation for cartels by domestic companies)is hurting the trade prospects of DevelopedCountries.

iii) Government Procurement : TheDeveloped Countries want a set ofmultilateral rules concerning governmentprocurement In many developing countries,governments are major buyers of goods andservices. The Developed Countries want aset of transparent rules on the basis of whichthe governments offer contracts for thepurchase of goods and services.

iv) Trade Facilitation : This calls forstandardization of customs procedures anddocumentation for all WTO members.

Implementational Issues: These refer toagreements which have been concluded as part ofthe Uruguay Round ofGATT and included in theDunkel text but where the implementation is not

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satisfactory. Hence these items require review andmodification. These include :

1. TRIPS : (Trade Related Intellectual PropertyRights ): The TRIPs agreement of WTOrecognises seven forms of intellectual propertyrights. These are industrial designs, integratedcircuits, trade marks, copyrights, geographicindications, patents and trade secrets.According to the TRIPS agreement:

• Plants andanimais cannot be patented• Essential biological processes for production of

plants and animals cannot be patented.• Genes, micro-organisms, non-biological processes

and microbiological processes to produce plantsand animals can be patented.

• Geographic indications (which identify a good onthe basis of its origin in a specific region andwhere the characteristic or / ‘and reputation ofthat good is essentially attributable to that regionI Ms a permanentgrjghf (unlike patents which aretime bound) and are community intellectualproperty rights (unlike patents which areindividual rights). Under TRIPS, GeographicIndication” FrotectiprTiFavailable to wines andspirits’where the member countries are to preventthe use of geographic indications for wines andspirits by using qualifying names. At the DohaMinisterial in 2000, the WTO agreed to examinethe extension of geographic indication protectionto products other than wines and spirits. TheTRIPS agreement calls upon member countriesto provide both process and product patents forpharmaceutical products and agriculturalchemicals for a period of 20 years. Tlieindustrialisaed countries are to provide productand process patents beginning on January 1, 2000,while the developing counties are to provide thesame beginning an 1st January, 2005. At the DohaMinisterial Conference, the TRIPS agreement wasamended to provide for Least DevelopedCountries are to provide product and processpatents to agrichemicals and pharmaceuticalsbeginning on lsl January 2016 A.D. bythe DohaDeclaration on Public Health and Trips providesfor manufacture of a patented drug without’

approval of the patent holder to meet a publichealth emergency under cpmpulsory licensing. InAugust 2003, the Doha Declaration of PublicHealth and TRIPS was further liberalised toprovide for the import of a patented drug by acountry which faces a public health emergencybut which cannot produce a patented drug undercompulsory licensing (because it does not have apharmaceutical industrial base). This country canimport patented drug from another developingmember country of WTO which has the capabilityto manufacture / import the drug.Data Exclusivity : Industrialised countries want

WTO rules to be amended so that clinical test datasubmitted by pharma companies to patent offices toget market approval for their generic drugs are notdisclosed to other producers of generic drugs. Theargument of developed countries is that pharmacompanies producing imitator drugs and get marketingapproval for these drugs as patent offices rely on datasubmitted by the original inventors of the drugs to grantsuch market approval. This move is being seen as adeliberate attennpt by developed countries to delaycompetition in generic drugs and hence extend the lifeof a patented drug indirectly. However, it is also a factthat each new investigation of the therapeutic effectsof a drug leads to more data and hence a higher overallsafety of the drug. Under article 39.3 of WTO, membersare not obliged to grant data exclusively but are toprotect clinical data against unfair commercial use.

The Sui Generis system: The TRIPS Agreementof the WTO provides for protection of new plantvarieties by protecting their seeds either by Patents orby a Sui Generis System. Sui Generis System ofprotecting new plant varieties is to”protect them byinterpreting plant varieties in the scientifically correctmethod of describing their botanical characteristics int’ne form of a sub-species rather than a scientificallyincorrect and commercial / industrial descriptionpftheip characteristics. The Sui Generis System ofprotection of new plant varieties was already part ofGATT and has been retained under WTO. Theprotection of new plant varieties according to WTOrules calls for all member countries of the WTOenacting Plant Breeders Rights Act by 2000 A.D. The

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Plant Breeders Rights system will protect new plantvarieties invented after 2000 A,D, The Plant BreedersSystem recognises the rights of farmers, researchersand plant breeders (i.e., the right of farmers to exchangepatented seeds and to save a part of the harvest as seedto sow for the next crop, the right of researchers andbreeders to use one protected seed to carry outexperiments to breed new varieties are recognised underthe Plant Breeder Rights System)

Agreement on Textiles and Clothing ( ATC) :This is a another trnplementational issue. The ATC ispart of the WTO, having been negotiated in the UruguayRound. It provides for a phased dismantling of the MultiFibre Arrangement ( Mf ’A ) of the GATTwhich,governs textile trade. Under the MFA, textiletrade between countries “of GATT was based oncountry-specific quotas, arrived on the basis of bilateralagreements between countries. The ATC calls fordismantling the MFA completely by December 31. 2004so that textile trade is free from quantitative restrictionsbeginning on 1st January 2005. The DevelopingCountries argue that the ATC is not being properlyimplemented i.e., the phased removal of quantitativerestrictions on textile trade is not being adhered to bythe Developed Countries.

Agreement of Anti-Dumping Duties: The WTOrules provide for the levy of anti-dumping duties ifcountries are suspected of resorting to dumping ( i.e.,selling goods at prices less than the cost price or /andselling goods in other countries at a price less than thesale price of the same good n their own economics).The issue of anti-dumping duties has to do with thefrequent resort to anti­ dumping duties by DevelopedCountries against the imports from DevelopingCountries. At the Doha Ministerial Conference In 2000,the WTO agreed that the implementationa issues willalso be discussed n the Doha Round along with theother issues.

Non-Trade Issues: At the Singapore Ministerialof the WTO, the industrialsed countries attempted toinclude labour standards and environment as part ofthe agenda of WTO but were successfully preventedby the Developing Countries.1. Labour Standards : This is to evolve a set of

minimum rights of labour ( like right to collectivebargaining, bar on exploitative forms of labour

like forced labour/child labour and underpaidlabor ). After evolving these minimum rights oflabour,.W.T.O, should have rules under which itcan impose sanctions against a member countrywhich does not abide by the minimum labourstandards. The Developing Countries declare thatthe link between labour standards andinternational trade is not clear and hence opposethe inclusion of labour standards as part of theagenda of WTO.

2. Trade Vs Environment : The DevelopedCountries want W.T.O. rules providing forsanctions against countries which carry outinternational trade by destroying the environment( like exporting tropical timber by large scaledeforestation of tropical rainforests ). TheDeveloping Countries declare that the linkbetween environment and international trade isnot clear and hence are opposed to the inclusionof environment in the agenda of WTO. The DohaMinisterial has however set up a committee toexamine on whether negotiations can+ake placeon trade Vs environment.NAMA (Non-Agricultural Market Access) :

The U.S. and the EU are at the lead in the W.T.Q. as faras NAMA is concerned. The U.S. proposal is that allmember countries of W.T.O. should reduce customsduties to zero percent on industrial goods by 2015 A.D.to boost world trade in manufactured goods, TheDeveloping Countries, while not Opposed to thissuggestion, call for a longer period of time i.e., forreduction of customs duties to zero percent by 2025.However, the Doha Round has agreed to carry outnegotiations on elimination and reduction of customsduties in respect of Seven Categories of industrialgoods. The talks are to be completed by Is1 January2005.

The Doha Round: This was launched in Doha,Qatar in 2001. The key issues in Doha round are relatedto further liberalization of trade in Agriculture(including implementation issues in Agreement onAgriculture), Non-Agricultural Market Access(NAMA), GATS and some issues in TRIPS. These arebriefly

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1. Agriculture : The talks are focused on substantialreduction in trade distorting domestic support toagriculture (i.e. subsidies) within Amber Box andBlue Box categories, by developed countries. Self-designation of appropriate numberofLspecial’’products in agriculture by developingcountries, an operational and effective specialsafeguards mechanism (SSM) and simplificationof tariffs and tariff capping by IC’s.

2. Non-Agricultural Market Access (NAMA) :This covers manufacturing products, fuels andmining products, fish and forestry products. Theseare not covered by AOA or in negotiations underGATS.

3. Liberalisation of Trade in Services : TheGeneral AgreementjnJngde in Services ( GATS)covers trade in services. The GATS was adoptedin the Uruguay Round of GATT and further talkswere to be held beginning in 2000 for liberalisingtrade in services. The services trade is classifiedunder 4 modes. These are :(i) Mode - 1 : This involves supply of service

from one country to another i.e., cross bordersupply of services, like InternationalSubscriber Dialling (ISP),

(ii) Mode - II : This includes services providedin the territory of the service provider ( andhence the service is consumed abroad ),Examp’lejs tourists consuming services likeboarding lodging and transport in the countrythey visit

(iii) Mode -III : This includes commercialpresence abroad. For example, companies.,setting up branches or subsidiaries in anothercountry, like a bank branch ,;^eing-.opinedin some other country,

(iv) Mode-IV : This includes Movement ofNatural Personsrto provide some service.Example is movement of labour from onecountry to another. The developing countrieslike India want a liberal set of rulesconcerning mode-IV whereas the developedcountries are more interested in a liberal setof rules involving mode-III.

4. TRIPS : Further talks on TRIPS are on providinga clear linkage between TRIPS Agreement andConvention in Biodiversity by incorporatingspecific disclosure norms for patent applicationand enhanced protection foTgeographicalindications in addition to wines and spirits. Theother issues in TRIPS are related to evergreeningand data exclusivity. Evergreening refers topatents on drug molecules by altering the patenteddrug molecule only marginally. The developingcountries argue that evergreening is only to extendthe patent period of patented drug beyond 20 yearsby the multinational drug companies by alteringthe patented drug partially and claiming a newpatent for a further period of 20 years. This issometimes referred to as TRIPS plus.The Anti-Counterfeitinq Trade Agreement(ACTAT) : The ACTA is a proposed plurilateralagreement for establishing international standardson IPR enforcement. That is the proposed ACTAseeks to establish a new international legalframework that would create its own governingbody outside existing international institutionssuch as WTO, WIPO or the UN. The scope ofproposed ACTA is very broad, counterfeit goods,generic drugs, copyright infringement on theinternet etc. The ACTA draft text requiressignatory countries to provide for procedures forcustoms seizure of goods suspected of infringingtrademarks, copyrights and other IPR’s againstgoods in transit. According to ACTA, in-transitincludes customs transit and transshipmentseizures are to be allowed even when there is mereprima facie case of IPR violations. The ACTA isbeing criticized by developing countries as adeliberate attempt by developed countriest£Tm£ede legitimate competition, like in the caseof generic medicines. India argues that ACTAreduces the power of courts and transfers muchpower to the owners of IPR's by allowing forseizure of goods withoud court oversinght. TheACTA was originally proposed by USA and Japanbut today enjoys support of Canada, the EU,Switzerland, Australia, Mexico, Morocco, SouthKorea, New Zealand and Singapore.