indian and global economic development

Indian And Global Economic Development

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Chapter 1

Introduction

Economic Development and Economic Growth

Define and explain Economic Development and Economic Growth.

Explain the meaning of Economic Development.

Very often the terms economic growth and economic development are

used interchangeably, suggesting that they both mean the same thing. In fact,

they are different from each other.

Economic Development:

There are two views defining and explaining Economic Development.

They are a) Traditional Economic View and b) The New Economic View.

a) Traditional Economic View: In this view economist considered two facts.

A) All modern developed industrial nations were once undeveloped agrarian

societies. B) The then latest experience had shown that the war-torn economies

of Europe could rebuild and modernize their economies in a matter of a few

years. They could do it because of the Marshall Plan under which U.S.

provided a massive financial and technical assistance to them. Prof. Rostow,

constitute a „theory about economic growth.‟ According to Rostow, all

societies pass through the five stages of economic development, viz. a) the

traditional society b) the preconditions for take-off c) take-off into self-

sustaining growth iv) the drive to maturity and v) the age of high mass

consumption. For the take-off of the economy needs several requirements. One

of them is domestic and foreign savings to generate investment.

Under the Traditional Economic View, economic development is

defined as follows: ‘Economic development is a process whereby an economy’s

real national income increases over a long period of time.’ (Meier and Baldwin

1957)

According to Meier and Baldwin the „process‟ implies an operation of

certain forces over a long period and represent certain changes. These changes

are divided into two parts a) Changes in factor supplies b) Changes in the

structure of demand. Most of the changes in factor supplies need investments.

b) The New Economic View: The Third World countries were a part of a

highly integrated and complex international system and that the best

development policies also can be nullified by external forces over which the

less developed countries have no control. This gave birth to a more recent

approach that attempts to combine economic and institutional factors into a

social system model of development.

The new approach is called the „international-structuralist‟ model. This

has two major streams of thought. One is the Neo-Marxist view that highlights

the exploitation of poor countries by the rich countries. The second view

blames the inappropriateness of advice given by international agencies and

other experts. Both these streams reject the exclusive emphasis on the growth

of GNP. This new approach wants more emphasis to be placed on the needed

structural and institutional reforms so as to eradicate absolute poverty, provide


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growing employment opportunities reduces income disparities and raise the

levels of living of the masses. The new economic view goes beyond narrow

economic criteria.

Definition of Economic Development under the new view is as follows:

‘Development must therefore be conceived of as a multi-dimensional

process involving changes in structures, attitudes and institutions as well as the

acceleration of economic growth, the reduction of inequality and eradication of

absolute poverty.’(Michael Todaro)

The above definition suggests that the whole social system has to go through

the process of economic development. This process involves several changes,

which enable the system to move from a situation widely though to be

unsatisfactory to a condition of life regarded a better.

Economic Growth:

Prof. Simon Kuznet defines economic growth as follows:

‘It is a long-term rise in capacity to supply increasingly diverse

economic goods to its population, this growing capacity being based on

advancing technology and the institutional and ideological adjustments that it

demands.’

This definition suggests –

1. Indicator of economic growth is the increase in the capacity of the

economy to produce goods and service.

2. An advance technology is necessary for this long-term growth of

capacity,.

3. Growth calls certain adjustments, both institutionally and ideologically.

Distinction between Economic Development and Economic Growth

Several authors have reversed the term „development‟ for the growth-

process in developing countries, while the term „growth‟ is used in the context

of advanced or developed countries. There is some logic in doing so. The fact

that the problems of underdeveloped countries are concerned with the

development of unused resources, even though their uses are well known. The

problems of advanced countries on the other hand are related to growth, since

most of the resources are already known and developed to a considerable

extent.

Definitions - Prof. Simon Kuznet defines economic growth as follows:

„It is a long-term rise in capacity to supply increasingly diverse

economic goods to its population, this growing capacity being based on

advancing technology and the institutional and ideological adjustments that it

demands.‟

Michael Todaro defines economic development as follows:

„Development must therefore be conceived of as a multi-dimensional

process involving changes in structures, attitudes and institutions as well as the


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acceleration of economic growth, the reduction of inequality and eradication of

absolute poverty.‟

These two terms can be distinguished as follows

Qualitative v/s quantitative – Economic growth is related to a quantitative

sustained increase in output and income. Increase in GNP is a broad indicator

of growth. Economic development, on the other hand, is related to qualitative

changes in the economy. These changes include the nature of wants, the quality

of goods, tastes of consumers and so on.

Labour Force – Economic growth is accompanied by an expansion of labour

force, consumption capital and volume of trade. Growth implies such a

quantitative expansion. Economic development, on the other hand, tries to

analyze and explain the qualitative changes in wants, goods, incentives and

institutions. Structural changes – Economic growth is accompanied by certain structural

changes. E.g. workers may shift from agriculture to industry or urbanization

may accompany growth. Economic development describes the underlying

determinants of growth. The change in attitude of labour is important. E.g.

agricultural labour shifted to urban industry. Here we can find the change in

attitude of labour. Income and other variables – Economic growth there is a continuous increase

in income. E.g. The increase in annual income by some percent comparing to

previous year, can be called growth. On the other hand in economic

development beside increase in income, several variables are also considered.

e.g. government policy, social changes, industry, etc. Difference in concept – Economic development includes economic growth. In

a way, the term economic development is broader than the term economic

growth. The countries having high rate of economic growth may not be called

economically developed countries. Thus there can be growth without

development, but development without growth is not possible. Conclusion – In the words of Prof. Kindleberger, „Economic growth means

more output, while economic development implies both more output and

changes in the technical and institutional arrangements by which it is produced

and distributed.‟

Que. State the Indicators or Characteristics of Economic Development.

We must have some measures or some characteristics to judge whether

economic development is taking place. Prof. Simon Kooznets, a Nobel Prize

winner economist has mentioned six characteristics of the process of economic

development through which almost all the modern developed nation have gone.

These can serve as indicators of economic development. These characteristics

can be classified into three types given below:


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I] Aggregate economic variables

1. High rates of per capita output and

population growth.

2. High rates of increase in Factor

Productivity

II] Structural transformation variables

3. High rates of structural

transformation

4. High rates of social and ideological

transformation

III] Factors affecting the international

spread of growth

5. International economic outreach

6. International factor and product

flows

A. Indicators mentioned by Prof. Kooznets –

1. High rates of per capita output and population growth – Economic

development includes the process of economic growth. Economic

growth is there when the per capita output is increasing at a high rate.

Even if the total output is increasing it is possible that the per capita

output has not increased. This will be a situation when the population is

also growing at a high rate along with the output. In such a situation it

will not lead to economic development. Based on the output the income

level will vary in different countries. The countries of the world can be

divided into -

a) High-income economies – An average income is more than US$

25000. And the countries are USA, Canada, etc.

b) Middle-income economies – An average income of about US$ 2000.

And the countries are China, Iran, South Africa, etc.

c) Low income economies – An average income of less than US$ 500.

And the countries are India, Pakistan, Kenya, etc.

Thus the per capita income in a country helps to indicate whether

economic development is taking place or not.

2. High rates of increase in Factor Productivity – Productivity refers to

the input and output ratio of the various factors of production. It has

been noticed that the main reason for high level of output is the high rate

of productivity increase. In the developed countries use of scientific and

modern methods of production and manufacture helps to increase the

productivity level. On the other hand in the LDCs, the use of

unscientific and outdated methods leads to low productivity. Prof.

Kooznet has claimed that more than half of the growth of per capita

GNP is due to the growth in productivity.

3. High rates of structural transformation – A high rate of structural

transformation is the third characteristic of the historical growth record


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of the present day. Economic growth requires structural transformation

or changes. One such change is the gradual shifts away from agricultural

to non-agricultural activities. A further shift from industry to services is

observed in the advanced and mature stage of development. Another

change is in the scale or average size of the unit of production. A third

shift is away from rural agricultural and allied employment of labour to

the urban manufacturing and urban-oriented service sectors.

4. High rates of social political and ideological transformation –

Economic development means not only economic growth but also a

change in attitude and social behaviour. Such changes are an ingredient

of development as well as causes of economic growth. That is why they

can be viewed as indicators of economic development. There must be

equality of status, opportunities, wealth and levels of living in a value of

a modern society. Such a social, political and ideological transformation

is not only shown by urbanization but urbanization acts as booster for

such a transformation because, urbanization leads to division of labour,

specialization and extension of the markets. It involves more costs on

transportation; it causes a change in the basic pattern of life and

facilitates modernization.

5. International economic outreach – Rapid economic growth was

observed in a few European countries. These countries reached out to

the rest of the world for raw materials, cheap labour and markets for

their manufactured products. This outreach was made possible by means

of the increased power of modern technology, especially in the field of

transport and communications. These outreach activities mean „even-

increasing interdependence among nations because of the potential of

closer contact and because of the sharing of an increasing number of

nations of one and the same transnational stock of knowledge.‟

6. International factor and product flows – The growing

interdependence of nations is a cause and consequence of international

factor and product flows. The migration of men and flow of capital to

Asia, Africa and the new World from developed nations was a

remarkable feature of the last century. In modern world, transfer of

technology, foreign investments and international migrations play an

important part in accelerating the rate of economic development.

Therefore they can be taken as an indicator of development.

These are the indicators mentioned by Prof. Kooznets. But there are

some more indicators.

7. Increase in the real GNP – An increase in the economy‟s real national

income over a long period of time is taken as a measure of economic

growth. Such economic growth is required for economic development.

So it is taken as an indicator of development. Increase in national

income means there is an increase in country‟s total output of final

goods and services in real term at stable prices. But this has following

limitations:


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a) This measure does not take into account the changes in population.

b) It cannot reflect the externalities or social costs of development

including loss to environment, pollution, overcrowding of cities, etc.

c) it tells us nothing about the distribution of income.

8. Welfare – Economic welfare is measured by considering the flow of

goods and services. But this has following limitations:

a) What weight age be given b) What composition be judged to be

better, c) How goods are produced d) How to measure tastes, etc. are

problems which place severe limitation.

In spite of this consumption pattern and changes in it can be viewed ans

an index.

9. Social Indicators – Economic development is a much wider concept.

Several social indicators have been suggested. These include health,

nutrition, education, employment, consumption pattern, social security,

etc. such indicators describe the quality of life..

10. Other indicators – Capital formation is another indicator. In advanced

economies there is high capital output ratio. Changing structure or

imports and exports can also serve as an indicator. An underdeveloped

country imports manufactured goods and exports raw materials and

primary products. Use of energy is another indicator. In developed

countries there is high-energy consumption.

All these and many more indicators can be mentioned. But for the sake of

simplicity of calculation, understanding and objectivity, economists as well as

U.N. Organization very frequently use GNP per capita as the ready reckoner of

development.

Meaning of the Term ‘Less Developed’

Some Terms

First World - The advanced capitalist countries. USA, UK, etc.

Second World - The Socialist countries. Mainly USSR

Third World – The African, the Asian and the Latin American member

countries of the U.N. who achieved independence mostly after the Second

World War are called collectively the Third World.

An Undeveloped country – A country, which has no prospects of

development. The Antarctic and Arctic regions can be called undeveloped.

Developing country – A country that is not stagnant (still / without progress)

and is undergoing the process of development.

Underdeveloped country – A country that has potentialities (possibilities) of

development.

Less Developed Country – A country, which is not as developed as the mature

advanced countries.


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Characteristics of the Indian Economy as a less Developed Economy

Indian economy displays a number of characteristics, which proclaim that the

Indian economy is a less develop economy. The characteristics are as follows.

1. A Dualistic Economy – When contradictory things come together it is

called as dualism. There are the four key elements of dualism. They are as

follows. a) Low per capita real income, b) low level of capital per person,

c) high incidence of mass poverty and d) the existence of a dual society

where outdated organizational methods, production techniques and attitudes

co-exist with modernism. This characteristic of dualism is found in India.

We find both modern i.e. Urban-based market economy and the traditional

sector i.e. Agro-based economy in India. The dualism is found in various

sectors of the economy. In agricultural sector, some plantations and farms

are managed professionally with modern methods of production,

accounting and marketing. At the same time the vast area of agriculture

follows traditional methods.

In the industrial sector, along with modern industries, there exist a number

of cottage and village industries. In transport sector, there are planes, trains,

buses, and cars along with bullock-carts, and wheelbarrows and animals

used for transport. In finance, indigenous bankers and moneylenders co-

exist with modern banks. This dualism has continued to exist over the last

50 years and the gap between the two sectors appears to be widening.

2. Widespread poverty – „Poverty is defined as deprivation (lack) in well-

being.‟ This means that poor people who are living in poverty are lacking

behind in attaining their well-being. In a country like India poverty is a

multi-dimensional deprivation. There are various dimensions of poverty.

a) Income poverty or material deprivation – Income level or level of

consumption expenditure, per capita is used to find out the number and

percentage of people below the poverty line. The average income level in

India is very low. More than 75% of the Indian poor live in rural areas.

b) Health and education – Healthy living and education are very

important goals for human development. They help people to overcome

material or income poverty. In India the health facilities are poor. The life

expectancy (hope) is low, and there is high infant mortality.

Similarly education facilities are poor. As a result many people are

illiterate. Illiteracy is more in female. Also there are number of dropouts

from the school.

c) Vulnerability (helplessness) and exposure to risk – Due to poverty

there is a problem of vulnerability. This is observed in the general

helplessness among the poor people. Such people have lack of insecurity

and protection from violence, crime, etc. This is specially observed in India

among agricultural workers. It is also observed in respect to women.

d) Voicelessness and powerlessness - Due to such vulnerability the people

find themselves voiceless and powerless. No one is ready to listen their

problems. As a result even if the democracy is there the opinion of the poor

does not matter. They are not able to take part in decision-making.


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3. Predominance of Agriculture – Agriculture, animal husbandry, poultry,

dairy and such other allied occupations constitute „primary sector.‟ In the

process of evolution of economic activity, primary sector was the first to be

developed. Industry as a secondary sector emerged next and at last the

tertiary sector as the service sector. The contribution of each sector in

economy is important. As a less developed country, India has a large

contribution of primary sector in the economy. It is more than one-fourth of

the national product. The share of agriculture in India‟s Gross Domestic

Product (GDP) is 28% while the world average for low-income economies

is 27%.

The pre-dominance of agriculture in India does not mean that the

agriculture sector is developed. It only indicates its importance. In fact the

productivity of agriculture in India is very low.

4. Low levels of Living – A reasonable standard of living is expected to be

available to a human being and its absence means low level of living. The

comparison of low level of living is not with the rich countries but with the

richer sections in the same country. The most standard indicator of low

level of living is „low per capita income‟. But there are other indicators too.

a) Low per capita income – The per capita income in India according to

the World Development Report is about US $450. Whereas in the

developed country like USA it is $30000.

b) Other quality of life indicators –Nutrition, mother and the child‟s care,

basic education, drinking water and sanitation are the most basic needs. In

respect of these, where advanced countries have achieved almost 100%

success, in India the level of achievement is much lower.

5. Pressure of population – Rapid growth in population puts pressure on

Indian economy. India‟s population in 1921 stood at 25 crores. In 1951 it

grew at 36.1 crores and in 2001 it was 101.2 crores. Very soon India will be

ranked first, as she has high growth rate of population. The figures of

dependent on agriculture in the year 1951 and 2001 are 25.3 crores and 62.7

crores which reduces the average holding of agricultural land to 3.5 acres.

The number of working population has only doubled during the period of

50 years; but at the same time the number of unproductive consumers has

gone up from 20.6 crores in 1951 to 69 crores in 2001; while working

population was 15.5 crores & 32.3 crores respectively. In other words the

dependency burden has increased from 57% to 70%.

With growing population, when job opportunities are not growing, the

obvious result is swelling number of the unemployed. According to

planning commission the backlog of unemployment in 1951 was 5 lakhs

inflated high to 75 lacks in 2001.

The metro cities are swollen with a large number of slum area leading

towards the overburden to drinking water, medical facilities, transportation,

dwellings, education, etc.

The number of children below 14 years have grown from 14.4 crores to


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34.7 crores during second half of the 20th

century.

The most horrifying aspect of population pressure is that the per capita

availability of grain land, which was 0.21 hectares in 1960, came down to

0.10 hectares in 1999.

6. Low rate of Capital formation – Capital formation takes place out of the

savings of the society. In all LDCs, due to low levels of income, the rate of

domestic saving is low. Naturally, the rate of capital formation is also low.

Technological advancement all over the world shows necessity of

increasing capital-intensive techniques of production. This means that with

passage of time, the capital required per worker would goon increasing. In

the interest of economic growth, the rate of capital formation must keep

growing. The savings in terms of money are converted into real capital i.e.

steel, cement, machinery, etc. which can be used for producing consumer‟s

goods. The total of such goods is called economy‟s capacity to produce and

counted as the rate of capital formation. In India we cannot see the

appropriate picture.

7. Deficiencies in Infrastructure – India has got a great potential for

development. In spite of richness of resources, she suffers from highly

inadequate infrastructure facilities. Transport, communication, power-

supply, water supply, banking and credit facilities, etc. are the various

infrastructures.

India consumes 32 times less per capita electricity than the Americans.

Almost one fifth i.e. 25% of electricity produced is lost in transmission and

distribution. Countries like China and Japan has this wastage are only 8%

and 4% respectively.

During the last 50 years, India has made quite a good progress in respect of

infrastructure development, but the rate of growth is low in relation to

demand.

8. Widespread chronic unemployment – Unemployment in developed

countries is structural, cyclical or temporary. Due to change in technology

or due to change in the structure of economy or due to shortfall of demand

resulting from recession or depression, people are thrown out of

employment. But the problem of unemployment in India is altogether

different. Here people are unemployed because – a) There is shortage of

capital i.e. there are workers but no machines to work with. b) Lack of

infrastructure facilities new production units can‟t be started. c) People who

are unemployed are unskilled and uneducated.

9. Poor quality of Human Resources – Human resources of a country is the

real strength of the economy, since human resources are the motive force of

all economic activity. Even though India has got a huge amount of human

resources it is very poor in quality. Poor quality of life means low

efficiency, low levels of motivation to work and low productivity. In India

there is a great difference between men and women workers. So greater the

inequality, lower the Gender Development Index which results in poor

quality of Human Resources.


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10. Low lever of World or Global Competitiveness – Competitiveness means

the ability of a national economy to achieve sustained high rates of

economic growth, on the basis of suitable economic policies, institutions

and other economic characteristics. After adopting the economic reforms

and accepting globalization as the main aspect of economic policy, World

or Global competitiveness has become a very important parameter for

judging a country‟s capacity to sustain economic growth. As there is low

productivity and low level of technology in LDCs, it affects World or

Global competitiveness. In over all ranking of Global competitiveness India

is ranked at 52 while Singapore is at the first and USA is at the second rank.

11. Disparities, inequalities and imbalances – For rapid economic growth

with sustainability and competitiveness, the socio-economic order must be

just and balanced. India displays wide disparities, inequalities and

imbalances.

Besides the economic disparities, social inequality and cultural diversity is

another major characteristic of Indian society. This has a great impact upon

the Indian economy.

The above-mentioned characteristics prove that India cannot be counted as

modern countries even though she has progressed her in past 50 years. India is

a Less Developed Country.


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Chapter 2

Agricultural Development in India

Explain the Role of Agriculture in the Indian Economy.

Agriculture in the Indian economy is decreasing its importance. This is an

indicator of economic development. But still it does not mean that the

agricultural sector is neglected not it has lost its importance. Beside this decline

agriculture plays an important role in Indian economy. Agriculture plays

several roles in Indian economy. They are as follows:

1. Share in National Income – The National Income statistics shows that the

contribution of agriculture to India‟s total national income remains

considerable. In 1950-51 agriculture contributed 55.4% of the total national

income. With the development of the economy, the share of the other

sectors to total national income increased and there is a decline in the

agricultural income. In 1970 it was 44.5% and in 1990 it stood at 30.9%.

Compared to the economies known for their highly modern agriculture, like

Australia, Canada, Denmark and USA the share of agriculture in their total

GDP stood at 3%, 3%, 4% and 2% respectively.

2. Share in total Employment – In 1901, 71% of the Indian workers were

engaged in agriculture. This share of agriculture in total employment lasted

for 1971. But with the development of other sectors there started a setback

in agriculture. In 1981 the total workers in agriculture and allied sector were

68.8% and in 1991 they were 66.7%. While the share of agriculture in

modern countries like UK and USA are 2% and 3%.

3. Role in Industrial Development – Agriculture plays a vital role in

industrial development. This role is manifold as follows:

a) As a source of raw material – Cash crops like oilseed, tobacco, cotton,

sugarcane, jute, tea and coffee supply raw material for the industry. During

last tow decades (1981 to 2000) all non-food crops have recorded almost

85% growth in quantity produced.

b) Food for industrial workers – Industrial workers are concentrated in

industrial area which is urban area and depended upon agriculture sector for

their daily requirement of food, milk, eggs, etc.

c) Demand for agricultural product – Many industrial product are directly or

indirectly used in agricultural sector. They are manure (fertilizers),

machines, pesticides, etc. used directly and from motorcycle to TV sets and

electric fans consumed indirectly as to make the lives comfort in

agricultural sector.

4. Supply of food and fodder in general – As India is increasing her

population day by day; she is solely depending upon agriculture as the

source of food. In 1951 India's population was 36 crores and reached over

101 crores during last 50 years. India used to import the food grain till

1969. After Green Revolution India's food production started growing. In

1954 per capita availability of food grain per day was 457 grams reached to

467 grams in 1999.


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5. Importance in Exports – Agriculture and allied products occupy an

important position in India's exports. In 1960-61 it was Rs.284 crores i.e.

44.23% which shows increase up to Rs.26, 164 i.e. 78% in 1998-99.

However over a period of time the export of agricultural produce has been

declining which indicates that there is economic growth taking place in

India.

6. The Backbone of the Indian Economy – In 1990-91 there were 6.27 lakh

villages in India where the main occupation is only agriculture. The

electricity, transport and marketing facilities in these villages and the credit

and other infrastructure of these villages revolve around agriculture. So it is

clear that agriculture provide work to 66.7% of the country‟s 27.9 crores of

main worker. And it supports 71% of the country‟s population. Naturally

being the main source of income in India has become the backbone of

Indian economy.

7. Role in Economic Development – Indian economy is solely depending

upon agriculture. This fact has serious implications for India's economic

development. They are as follows:

i) The rate of growth of the economy as a whole depends upon the rates of

growth of various sectors in the economy. The agriculture sector is one of

the important sectors. It this is depressed it would adversely impact the

whole economy.

ii) Agriculture is a labour-intensive occupation and because of small size of

land holding, it is not possible to invest heavy capital. In this case the

output from the agriculture is very low. But still the small doses of capital

invested in agriculture gives the utmost possible output.

iii) Indian industry is overloaded with number of workers. There is no

scope to absorb more workers. The place where the working opportunities

can make available is only agriculture. This way agriculture plays an

important role.

iv) The present position appears to provide increasing export opportunities

for certain agricultural products like Basmati rice, turmeric and other herbs,

fruits, vegetables, etc. The processing industry based on agriculture has a

potential of generating employment.

v) The regional imbalances is one of the persistent characteristic of Indian

economy. To rectify this imbalance Union as well as State Government is

concentrating on agricultural development.

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Productivity of Indian Agricultural

Causes of low productivity of Indian Agriculture.

Agriculture Productivity – Productivity means input output ratio. Low Productivity

in agriculture can be judged either as productivity per hectare i.e. Land productivity or

productivity per worker ie. Labour productivity. In 1960-51 the average productivity

was Rs 500. as against Rs.1700 per worker in large establishments and Rs. 1500 in

commerce, transport and communication. In short the labour productivity was the

lowest in agriculture. Low productivity means the output is low comparing to the

input. In 1998 the per hectare yield of wheat in India was 2583 kilograms per hectare

comparing with UK – 7560 kg, France – 7600 kg, China – 3670 kg, is very low. It is

true that the productivity of Indian agriculture has improved to a certain extent in the

last 50 years. But when we compare our productivity with those in other countries, the

picture appears to be miserable one.

Cause of low productivity of Indian Agriculture –

1. Pressure of population on Agriculture – The percentage of people depended

upon agriculture as their mean of livelihood was 70% remained stable from 1901

to 1970. In 1901 only 16.3 crores of the people out of 23.6 crores of total

population were depended upon agriculture. In 1981 it went up to 48.3 crores out

of 64.4 crores with above 70% of total population. This shows a tremendous

pressure of population on agriculture.

2. Unfavourable Rural Atmosphere – The overall atmosphere in rural area is

unfavorable for an increase in productivity. Illiteracy, ignorance, superstitions,

conservativeness and outdated customs are some of the reasons for unfavorable

atmosphere. To make the things worse, political rivalries have polluted the

atmosphere of villages. All these things keep the productivity of agriculture low.

3. Inadequacy of Non-farm services – Several non-farm services like, provision of

finance, technical advice, marketing and so on are inadequate keeps the

productivity low. Even today regulated markets are limited and whatever regulated

markets are available not function at their fullest efficiency.

4. The small size of agriculture holding – The average size of land holding in India

is very small. Out of the total holdings in India, 59% are between 0 to 2.5 acres,

while 20% are between 2.5 to 5 acres each. In other words land-holding

percentage below 5 acres is 70%. Such small pieces of land prove unproductive.

5. System of Land Tenure – Agriculture has inherited, number of system of land

tenure. Landlords own the land and the tiller (cultivator / farmer) labour in it. He

pays the landlord. Even though the „land for tiller‟ was introduced. It has not been

implemented properly. There are many intermediaries between the government

and the tiller of the land. As the tiller does not own the land, he never pays the

attention towards cultivation. So there is less productivity of agriculture.

6. Outdated techniques of production – After Green Revolution the modern

techniques of farming is introduced to Indian farmers. Still majority of Indian

farmers use the traditional outdated farming techniques. Unless they use the

modern farming techniques, the productivity of agriculture is not going to

increase.

7. Inadequate irrigation facilities – In spite of huge investments in medium and

large irrigation projects during the last five decades, over 2/3rd

of the agricultural

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land in India is under dry farming depending upon monsoon. Monsoon remains

only for four months. The annual rainfall all over India varies from 5 cm to 1250

cm. Obviously there exists the need of irrigation, which results in low productivity

of agriculture.

Features of Agricultural Marketing

Marketing is the last stage of production. Agricultural marketing has special features,

which have to give special consideration. They are as follows:

1. The Buyers – the buyers of agricultural commodities are of three types. A)

Consumers who buy agricultural products for their direct consumption. B)

Manufactures who buy agricultural products to use as raw material in

manufacturing their own products. C) Buyers who purchase agricultural goods for

export to other countries.

2. Vast Geographical area – Agricultural produce is scattered over a vast

geographical area. The collection of agricultural produce becomes an important

and special problem.

3. Wide Variation in products – There is a wide variation with respect to quantities,

qualities and varieties produced. There is variety in the quality of one produce.

E.g. wheat can be produced of different qualities, shape and size.

4. Bulk products – Agricultural commodities are most bulky. They require more

space compared to their money value. Obviously they require more space and

freight in transporting and warehousing.

5. Perishable products – some of the agricultural products are perishable. So they

require safe and quick transportation.

6. Seasonal products – Agricultural products are produced in particular seasons.

However their consumption continuous for the whole year. The stock of

agricultural product is needed preservation. They are released when there is

demand.

7. Throwaway prices – Agricultural products are ready all over the country at the

same time. Because they are seasonal. As there is bulk production of these

commodities. The farmers have to sell it at throwaway prices. This benefits the

middlemen, moneylenders to exploit the farmers. As a result he remains poor.

Essentials of Sound Marketing in Global Perspective

1. Graded and Standardized Products – For geographical expansion of the market

and for having comparable prices of these products throughout the country, there

must be the standardization of products in to various grades. Also there must be

quality control for the agricultural products.

2. Adequate Warehousing facilities – As agricultural products consume a huge

space for stocking. It is necessary that there should be adequate warehousing

facilities. Moreover it is required for the purpose of distribution also.

3. Good Means of Transport – Prompt and efficient transport system is important

for the agricultural marketing. Because some of the goods are perishable and some

15

of them acquire a huge space. At the same time the transport system should be cost

effective.

4. Market information – Information regarding prices, demand and arrivals at the

markets should be readily available to all concerned. This enables the producers to

explore more profitable markets and the consumers to find out cheaper or better

quality products. This may reduce the market imperfections.

5. Organized Markets – Sound marketing system needs the existence of organized

agencies in the market. There is always a danger of middlemen who exploit the

farmers. Also the services like credit, warehousing, transportation, and regulation

of markets can be efficiently carried out when they are organized.

Defects in Marketing System in India

After independence several steps have been taken to improve the agricultural

marketing system. Still there are many defects and shortcomings in the system. They

are as follows:

1. Inadequate Transport Facilities – Agricultural marketing requires all the

villages to be connected to the main roads, and these roads further to be connected

to railways so that all the areas are properly served. In India such kind of network

does not exist. Many villages are still not accessible. As agricultural commodities

are bulky and therefore, the transport charges do affect the price of these

commodities. Therefore a cheap transport system is needed.

2. Inadequate Credit Facilities – Farmers should get the credit facilities over the

period between the harvesting and the selling the products. This helps the holding

capacity, especially of the small farmers who are weak. Otherwise the farmers are

forced to sell their produce at whatever price is ruling at the market. But the credit

facilities are inadequate.

3. The long chain of Middlemen – Lack of transport and other facilities resulted

into a long chain of middlemen in the agricultural market. Village traders purchase

the produce at every door of cultivator at low prices. Moneylenders take advantage

of the small farmers. The income of the farmers is unnecessarily reduced. Even in

the markets the middlemen like commission agents (arthias) purchases the

commodities against paying an advances to the farmers. Exporters and processing

firms to have their own agents in the market who rob the farmers.

4. Forced Sales – Indian cultivators are forced to sell their produce at unfavorable

places, at an unfavorable time and at unfavorable terms. The main reason for such

forced sales are the lack of staying power, the pressing financial requirements and

the lack of transport facilities. To repay the loans farmers are forced to sale their

produce. 2/3 of total sales of agricultural produce carried out at the village level

only.

5. A Variety of Incidental Charges – A wide variety of incidental charges decreases

the income of the producers. Besides octroi duties, arhat (commission), tulai

(weigh man‟s charges), dalali (brokerage), hamali (coolie‟s charges), dharmadaya

(charity) and other charges by way of tips and gifts to the sweepers, watchmen,

dispensary, school, etc. are charged.

6. Malpractices in buying and selling – Indian agricultural markets follow a strange

„Hatta system.‟ In this system buyers and their representatives offer their rates by

16

raising fingers under a piece of cloth. The arhtaia (agent) announces the name of

the highest bidder. Another system is auction in the open, which is unscientific. In

both the system commission agents and traders cheat the ignorant farmers.

7. Lack of Grading and Standardization – The lack of proper grading of different

varieties of agricultural produce is another defect. The arrangements for grading

are inadequate. Thus pricing the goods according to grades becomes impossible.

As a result the farmer can‟t secure a fair price for their product. On the other hand

consumer too deprived of getting the good quality in return of their money. This

defect becomes serious in the global context.

8. Lack of Organized Agencies – Most of the Indian farmers sell their produce

independently. In doing so they meet the powerful intermediaries and merchants

and both of them conspire against the farmers.

9. Lack of storage facilities – Storage facilities for agricultural produce are highly

inadequate and whatever facilities available are not scientific. Grains are stored in

earthen cylinders, mud houses, where produce are exposed to dampness, ants, rats

and so on. This problem forces the farmers to dispense their produce immediately

after harvest.

10. Lack of market intelligence – Agricultural market is primary market. Farmers

don‟t know the prices of the agricultural commodities in the primary market as

well as secondary market. They depend upon the traders and traders seek their own

benefits. In absence of adequate market information, market imperfection persists

to the great disadvantage of the individual producers and consumers as well as for

the government.

Explain the measures taken by the Government to remove the defects in

agricultural marketing.

There are a number of other measures needed to improve the agricultural marketing

system in India. Government has taken several steps in removing these defects. They

are as follows –

1. Improving Storage Facilities – The provision of storage facilities is an important

measure for increasing the staying capacity of the farmers. At the end of March

1978, the Central warehousing Corporation was running 203 general warehouses

with a total storage capacity of 29 lakh tones. The National Co-operative

Development Corporation has launched a scheme at a cost or Rs. 15 crores to add

20 lakh tones as additional storage capacity. Besides the 15 state warehousing

corporations were running 854 warehouses and sub-warehouses at the end of

1975-76 with the total capacity owned by the Food Corporation of India. The total

capacity in the country was 186 lakh tones in 1979-80. At present the FCI is

constructing a network of godowns in different parts of the country. However, by

the end of the year 2000 the total storage capacity is between 3.5 & 4 crores tones.

But the stock of food grains with government is 4.5 crores tones. Still government

needs to do more in this respect.

2. Use of Standard Weights – there is a need to have an uniform weights and

measures throughout the country. In 1959 the Standard Weights Act was passed

under which the state governments tried to promote the use of standard weights.

But no much progress could be made and with a wide variety of weights and

17

measures with respect to different commodities. This continued till the sixties. In

1957 Government adopted a phased programme of the decimal system beginning

with decimal coins. Since 1962 throughout the country it was made compulsory to

use metric weights.

3. Provision of credit - The farmers must meet the expenses for their daily

requirements of life. At the same time they can have an adequate holding capacity

and make the best of market opportunities. Moreover to take the produce to the

market, they need credit. Thus credit is important for farmer as well as agricultural

marketing system. In the last few years, co-operative credit institutions have made

considerable progress.

4. Grading and standardization – The grading of the goods according to quality

lead to get good price. It is also necessary to stop mixing inferior goods and cheat

producers and consumers by the middlemen in the marketing system. Grading also

tend the farmers to grow qualitative produce to fetch good price. For the purpose

in 1937 the Agricultural Produce (Grading and Marketing) Act was passed. Under

this act a certificate of grades issued to graded goods. After independence, during

the planning period, agricultural products were listed as „Agmark‟ goods. Some of

the agricultural produce listed as Agmark are rice, wheat, coffee, tobacco, oilseeds,

cotton, etc. Rigorous quality control has been introduced in the fields of export.

5. Betterment of Transport – Means of transport for carrying goods to the market

speedily and at a low cost should make available. During the Planning Period rapid

progress has been made in this respect. In 1950-51, there were 1.6 lakh kilometers

surfaced roads and 2.5 lakh kilometers of unsurfaced roads. In 1995-96, there were

15.7 lakh kilometers of surfaced roads and 18.03 lakh kilometers of unsurfaced

roads. In the new Millennium Government of India has launched the „Golden

Quadrangle‟ project. Under which the four metro cities in India would be

connected with fast roads track. Cities like Pune and Mumbai are connected with

speedways. The length of railways increased from 55.5 thousand kilometers to

62.5 thousand kilometers during this period i.e. 1997-98. The shipping tonnage,

which stood at 1.9 lakh tones in 1947 increased to 68.43 lakh tones in 1997-98.

However, to connect 6.27 lakh villages in transport network is the problem

persisting yet. Some more five-year plans will require solving this problem.

6. Market inspection, research and training – The Directorate of marketing and

Inspection, through its special division, undertakes from time to time the

inspection of major agricultural commodities throughout the country. It also

conducts research into the various aspects of agricultural marketing. Facilities

have also been provided for the training of various categories of personnel at

places like Nagpur, Hyderabad, etc. rigorous quality control has to be adopted; but

farmers themselves oppose such controls. Such controls are necessary in regard to

WTO norms.

7. Market Information – The farmers, buyers and various functionaries at market

must be informed about conditions prevailing at the market. Government is

attending this aspect. Weekly data on market arrivals, sales, prices, etc. are being

regularly collected from about 1300 reporting agencies. Government publishes

data on retail prices. Selected agricultural commodity prices are published in

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newspapers as well as broadcasted on various radio stations. However this

information cannot be reached to every farmer in the country. On the other hand

farmers never take advantages of such facilities.

8. Setting up of Regulated Markets – Government has taken a very important

measure to improve the agricultural marketing. The setting up of regulated markets

is the important measure. Today there are more than 7000 regulated markets in the

country. And almost 80% of agricultural produce is being sold through these

regulated markets. But these regulated markets have their own drawbacks.

9. Organization of Co-operative Marketing – Government has given all possible

encouragement to multipurpose co-operative societies which give emphasis on

credit and marketing. The primary marketing societies are linked to central

marketing societies and further with National Agriculture Co-Operative Marketing

Federation (NAFED). National Co-operative Development Corporation (NCDC)

established in 1965, plays important role in planning and promoting programmes

for the production, processing, storage and marketing of agricultural produce

through co-operative channels.

10. Special Commodity Boards – A number of specialized commodity boards have

been established for promoting and operating properly the marketing of rubber,

coffee, tea, tobacco, spices, coconut, oilseeds, vegetables oils and so on. National

Dairy Development Board (NDDB) has successfully organized the marketing of

dairy products. In recent years the government of India has set up a number of

development councils for special commodities like rice, pulses, jute, cotton,

tobacco, oilseeds, sugarcane, etc.

11. Promoting Exports of Agricultural products – Exports in agricultural products

is showing increase in recent years. In 1999-2000 the share of agriculture and

allied products stood at 14.5% valued at Rs. 26164 crores. Agricultural exports

include pulses rice, wheat, cashew nuts, edible oils, etc.

Factors responsible for the small size of land holding

In India the average size of the land holding is very small. Following factors affect the

size of land holding and made it small.

1. The pressure of Population – In India seven out of every ten persons live in rural

areas. The growth of population in rural areas would be 4 times that in urban areas.

It is quite difficult to develop non-agricultural sectors in rural areas. As a result

every one tries to get his income from agricultural sector. Naturally the land is

divided into small pieces.

2. The Laws of Inheritance – The growing population is not the only cause of

smallholding of land. The law of inheritance leads to the division of land holding.

Hindu and Muslim laws of succession allows all sons and daughter equal share in

ancestral property. As a result the land divides into smaller parts over a few

generation.

3. Decline of Joint Family System – The joint family was the characteristic of

Indian society. For centuries together agriculture was the main occupation of these

joint families. Thus the holding remains large and could fetch the advantages of

19

large-scale production. Because of industrialization joint family broke into nuclear

families. This causes the subdivision of holding.

4. Widespread indebtedness of farmers – Indian farmers are well known for their

indebtedness. Absences of institutional credit supply farmers depend upon the

moneylenders and indigenous bankers. They exploit the farmers for the repayment

of loans they have taken. As a result farmers have to surrender their lands to the

moneylenders, piece by piece. This causes the fragmentation of land.

5. British System of Law and Judiciary – British rulers introduced various laws

and judiciaries in India. They established the hierarchy of judicial courts. The

major defect of this judiciary system is delay in justice as it has many chances for

appealing in higher courts. Thus it has become costly affair. Indian farmers

involved in the dispute tend to either sell or mortgage their lands to meet the court

expenditures. Thus the British system of laws and judiciary helped the

fragmentation of land.

6. Decline of handicraft and village industries – in the later half of 19th

century

India experienced the decline of handicraft and village industries. The large-scale

production with the help of machines was one of the reasons. Commodities were

made available which was produced with machines in rural areas. This resulted de-

industrialization in rural areas. Obviously agricultural sector is the only source of

income for rural population. It resulted the large agricultural land broken into

small pieces.

Explain the problems of Uneconomic Holdings.

The small size of land holding relates to the productivity and profitability of the

agricultural sector. Prof. Amartya Sen has summed up the whole controversy about

the productivity and the relationship with the size of the farm. Per acre productivity of

the land decreases with the size of the land i.e. smaller the size, greater the

productivity and vice-versa. But if modern and capital intensive techniques of

production are used, the productivity and profitability will increase with the size. In

India, the landholding is small. It is called the uneconomic holding. These

smallholdings create several problems. They are as follows.

1. Continuation of poverty – Because of uneconomic holding the farmers is not in a

position to have surplus. Whatever is produced is used for self-consumption.

There remains no additional income, which can be utilized for land improvement.

Eventually a stage comes when the soil gets incapable of producing anything

worthwhile. Further fragmentation forced the cultivators to sell their lands. This

increases the landless labours.

2. Continuation of inefficient methods and techniques – Growth in productivity

can be increased with the modern techniques and methods of agriculture. But to

serve this purpose the size of holding must be large. Otherwise the investment

proves uneconomical. As the landholding in India is small there is no scope of

investment as such. Hence the traditional farming methods are used.

3. Physical constraints on mechanism – Very smallholding can not afford the

mechanization. Even physically it is not possible. Some holdings like those in the

20

Konkan region or hilly areas are so small that farmers cannot use even a bullock-

driven plough.

4. Wasteful and costly – Farming with small and fragmented landholdings is

wasteful and costly in many ways. Many smallholdings are divided into small

fragments at two different sides of the villages. The farmer cannot supervise all

the pieces simultaneously. He has to waste is time and energy in traveling from

one piece to another piece of land. There is wastage of land under bunds,

boundaries and the access ways. In India about 12% of the land is wasted under

boundaries and access ways.

5. Exploitation and misery – small agricultural producers are dependent upon the

mercy and goodwill of the large landowners. These landlords have all the

political, social and economic power to exploit these masses. They are forced to

work for such landlords. Small landholders are trapped in the chronic poverty

where there is no escape. These small peasants are gradually transformed to tenant

farmers and sharecroppers, then landless labours then job-hunters and finally the

slum-dwellers on the outskirts of the modern city.

Explain the problems of adoption of new methods and mechanization.

The transformation of agriculture form the traditional nature to the modern

commercial one involves changes in inputs, methods, technology and attitudes or

approach. The new methods and mechanization include high yielding varieties of

seeds, irrigation, pesticides and insecticides, chemical fertilizers and machinery. But

there are problems in adopting new methods and mechanization. They are as follows –

1. Uncertainties - The root of problems for adopting the new methods and

mechanization is uncertainties the farmers feel. All the improved methods require

investment and require assured water supply. Indian farming has to depend almost

wholly on rains. Rains may or may not be sufficient. They may or may not come

in time. Weather conditions, market prices and other factors are all uncertain. So

Indian farmers rarely dare to adopt the new methods and mechanization.

2. Survival motives – Because of small size whatever Indian farmers produce is only

sufficient for his consumption. There is no leftover of the produce so that he could

sell it out and make money. Many times nature is adverse to him. He and his

family starve in this condition. To satisfy the hunger is the only motive for him.

Even though the new methods of farming are promising he finds risk in adopting

them. At this stage he never shifts himself from the traditional technology and

cropping pattern with which he is familiar.

3. Lack of adequate insurance – Many programmes were launched for popularizing

the new methods and techniques. But they failed as farmers avoid taking risks. To

make them accept the risks there must be a support of adequate insurance cover.

Some of these risks are imaginary but many are real. What is required is

understandings of the major role played by risk and uncertainty and give the

farmers assurance to overcome them with proper insurance facilities.

4. Lack of assured water supply – A country like India where monsoon brings

rains. Monsoon is uncertain in timings and quantum. Moreover it is not distributed

evenly. Some parts get heavy rainfall and some are rain-shadow areas. When a

21

modern technique is adopted it involves a time schedule of watering the plants. It

is highly difficult to serve this need in a country like India. An alternative to this

situation is irrigation. It is very costly matter and even if it is done large areas

remain no irrigated.

5. Lack of supplementary services – Prof. Griffin has pointed out, ”If peasants

sometimes appear to be unresponsive or hostile to proposed technical changes, it is

probably because the risks are high, the returns to the cultivator are low or because

credit facilities and marketing outlets are inadequate and the necessary inputs

including knowledge are missing.” Thus quality seeds, pesticides, insecticides,

fertilizers, transport, marketing system, etc. are the necessary supplementary

services. These help in building confidence for the use of modern methods.

6. Alien contents – With the seeds, some quality food is not accepted in India. Cattle

with emotions kept till their death but not sold out to butcher. In such

circumstances cattle farm for butchery is highly unacceptable concept. A country

like India where majority population is vegetarian may not accept poultry, piggery,

and goatary as the supporting to agriculture. But day-by-day things are changing.

7. Knowledge and skills - Many times modern techniques and particularly machines

are not suitable or affordable in the Indian environment. A proper alteration should

be made according to the local conditions and requirements. In case of failure of a

machine, farmer should know the technology and could repair them. There must

be a set up to repair those gadgets.

8. Fear of unemployment – Over mechanization may lead to unemployment is a

fear factor in the Indian mentality. Indian agriculture is already overburdened with

the disguised unemployment. Mechanization may put extra pressure upon it. So

mechanization must be well-planned phased programme with provisions of

rehabilitation of the displaced workers.

9. Disadvantages at markets – A small, uneducated and poor farmer, while buying

inputs like machines, seeds, fertilizers, etc. is always being cheated in the market.

His bargaining power is extremely low. A common sense prompts him not to go

for the modern tools and techniques available in the market and tempt him to adopt

the traditional ways of farming.

10. Social and systemic constraints – Majority of farmers are small landholders.

They are on the mercy of moneylenders and landlords. These small peasants are

voiceless. Even if government has given many facilities like subsidies, credit

facilities, etc. the small farmer is far away from them. The landlords or the large

holders take all the benefits of the various schemes. Red tapism and malpractices

in beurocracy make the farmers to neglect those facilities. He never turns up to

these schemes.

This problem can be concluded with Prof. Todaro‟s words. “Peasant farmers do act

rationally and are responsive to economic incentives and opportunities. Where

innovation and change fail to occur, we should not assume that peasants are stupid,

irrational or conservative; instead we should examine carefully the environment in

which the small farmer operates for the particular institutional or commercial

obstacles which may be blocking or frustrating constructive change.”

22

Explain the nature of the problems of agricultural Credit.

The Rural Credit survey Committee (1954) has classified the credit for agriculture into

three types.

A) Short Term Credit up to the period of 90 days and used for purchase of seeds,

repairs of implements, for annual operations and payment of wages.

B) Medium term credit for a period of 15 months to 5 years used for improvement of

land, repairing of the wells, purchase of implements and power cattle, etc.

C) Long-term credit for the period exceeding 5 years and extended up to 15 or 20

years, used for purchase of heavy machinery like tractors, digging of wells,

purchase of additional land, etc.

Above-mentioned classification of agricultural credit can give us the idea of credit

needs. But meeting these needs becomes a problem because of following features.

1. Requisition of cheap, adequate and timely supply of credit – Agricultural

sector in LDC like India requires a credit at low rate of interest. The productivity

of agricultural sector is low. It is not in a position to raise the productivity high. So

the cost of borrowing must be low. Private moneylender and profit-oriented

institutions may not offer such a cheap credit to agriculture. Alternatively,

government and co-operative credit institutions must come up to help the needy

farmers. But the coverage of such agencies is limited and several agricultural

needs remain unsatisfied. Moreover timely credit facilities (i.e. most of the

agricultural credit required at a specific time,) must be made available.

2. Small farmers and landless labours – Large landholders can mortgage their land

and meet their credit needs. But the problem with the small landholder remains

unsolved. In India 3/4th

of the landholdings are small landholdings. They have

nothing to offer as a security. They are the persons who need these credit facilities

the most.

3. Uncertainty covering credit requirements – Another aspect of this credit

problem is the uncertainty of its requirement. In the industrial sector the demand

can be forecasted and the plan for borrowing can be prepared. Even banks also

sanction loans to these proposals. But in agriculture everything is uncertain and no

precise assessment of credit needs and repayment capacity is possible. So banks

hesitate to give credit facilities to agricultural sector.

4. Government policies – In 1979 Government of India, subsided agricultural loans

worth Rs. 17000 crores. The nationalized banks issued these loans suffered a lot.

As a result banks, especially commercial bank put the agricultural credit into a

blacklist. Since then the problem is persisting. The various decisions taken by

government in regards with agricultural loans may change and differ from time to

time. The credit institutions have fear in their mind that anytime government may

subside all the loans they have given to agriculture.

23

Problems of Institutional Credit

In LDC like India several efforts were made to create an institutional structures for

meeting the credit needs of agriculture. These institutes are

1. Government – The Government itself came forward to extend loans to farmers.

The rate of interest at these loans is very low.

2. Co-operative institutes – In India co-operative institutes plays a vital role in

financing agricultural sector.

3. Commercial banks and other institutions – Besides government and co-

operative societies, commercial banks and institutions also entered into the field of

agricultural credit.

All these institutions play an important role in agricultural credit. However,

institutional credit encounters the following problems. They are as follows.

1. Proper Security – The various institutions giving credit requires proper security

on the bases of which the loans are given. However majority of the farmers are not

in a position to provide such securities. They find it difficult to take loans from

them.

2. Procedural Delays – One of the essential requirements of agricultural credit is

that it requires credit at a particular time. On the other hand in case of institutional

credit there is a lot of paper work and procedures to be followed. This leads to the

delay in sanctioning the loans.

3. Uncertain recovery – Due to uncertainty in agriculture the repayment of loans is

also uncertain. In the event of crop failures, arrears to on increasing. When the

loans are not repaid, it difficult to give them the new loan.

4. Benefits to big landlords – Many farmers are the small holders and they cannot

offer their land as the mortgage. The benefit of institutional finance goes to the big

landlords. They can offer their land as the mortgage and make arrangements of the

repayment. Thus the poor farmer is far away from the institutional finance.

5. Inadequate coverage – The financial institutes find it difficult to open branches in

each and every village. Due to this there is an inadequate coverage of institutional

credit. Many times there are regional imbalance in such coverage.

6. Other factors – The small farmers, who are illiterate, have lack of confidence

finds it difficult to approach to the institutions for agricultural credit. These small

farmers prefer to approach moneylenders who are informal and friendlier. They

give the loans to farmers for many nonproductive purposes like marriages.

7. Mismanagement of cooperatives – The government has tried to promote co-

operatives in various sectors. This includes commercial banks, co-operative

societies, which have been set-up to provide agricultural credit. However most of

these co-operatives are mismanaged and they are also running in losses. Due to

this they are not in a position to provide the required agricultural credit.

These are the various problems of institutional credit to agriculture.

24

Chapter 3

Industrial Development in India

Explain the role of industrialization in economic development of India.

Industry is the backbone of the economy. Modern countries are known for their

industrial development. India being LDC has less developed industry.

Industrialization plays an important role in the economic development of a country.

This is as follows.

1. Increase in income and betterment of living standard – Industrialization is the

result of human efforts. It leads to an improvement of the standard of living,

because it is always possible to use most modern techniques of production. The

process of improvements in the techniques of production is a continuous and

cyclical process. This accelerates the rate of capital formation, which in turn

increases the level of production. All this ultimately increases the standard of

living of the people. There is a close relationship between the economic

development and industrialization. Countries like US, Canada, france and Belgium

have made tremendous economic progress during the last hundred and fifty years.

This is because the share of the industrial output in the national income of these

countries in 1999 is 26%, 33%, 26% and 28% respectively. In case of India it was

15% in 1971, which rose to 25% in 1999.

2. Increase in the International Trade – When the goods are exchanged between

different countries it is known as International Trade. Diversified finished products

can open the new horizons for exporting. It ensures all the advantages of the

division of labour and also makes the commodities available in any country.

Formerly people believed that the countries engaged in primary production should

produce and export only primary products and import manufactured products. But

experience has proved that this is harmful to the development of international trade

of countries. The demand for primary products is more or less fixed and does not

increase rapidly. This makes impossible for the countries to expand their exports.

The earnings from exports in terms of foreign currency can be utilized for

increasing the standard of living of the people. So international trade is always

beneficial to all the countries.

3. Satisfaction of Additional Demand – The internal demand for primary products

continues to increase up to a certain point. Once the level is reached the further

expansion seems impossible. The demand for comforts and luxuries goes on

increasing after the basic necessaries are satisfied and it becomes necessary to

increase the industrial output in the country. In other words to satisfy the luxurious

demands industrialization is necessary.

4. The diversification of production – Every economy has to face several

economic, natural or manmade calamities. It is difficult to face such calamities. If

the production in the economy is diversified then it becomes easier to face such

calamities. With the globalization, diversification has become still more important.

It has become necessary to find out new areas of industrialization, which would be

advantageous to us.

5. Increase in employment opportunities – The problem of unemployment has

become very crucial. On one hand, it is necessary to provide employment to an

25

ever-increasing population and on the other hand it is necessary to reduce the

dependence of the population on agriculture. Agriculture and other primary fields

of productions have proven the law of diminishing returns. It is industry, which

keeps the returns constant. This makes it possible to provide greater employment

opportunities by starting large and small-scale units at large.

6. Development of agriculture and other primary producing sectors – Industrialization also helps in agricultural development and other related activities.

It increases the income of the people. This additional demand increases the

demand of finished goods including agricultural commodities. Industrialization

also provides modern machines and techniques to agricultural sector. Thus

industrialization indirectly helps development of agriculture.

7. Strength and stability of the economy - Following are the ways industrialization

gives strength and stability to economy. Following are the ways industrialization

gives strength and stability to economy.

a) Industrialization makes it possible to undertake the research. Hence there is

progress in techniques of production. This makes to construct roads, dams and

railways profitable by using latest technology. Such infrastructure is the base for

industrialization. b) Industrialization makes the economy more balanced and

stable. c) The ability to stand in the competition is increase and optimum

utilization of economic resources is possible. d) Industrialization makes it possible

to supply the raw material required by the transport and communication and other

sector of the economy and also provides demand for their products.

8. The sovereignty of the Nation – In order to maintain the sovereignty of the

nation, it must not depend on other countries to meet its requirement of arms and

ammunition. Again imports of weapons entirely depend on the international

relations and conditions. Even dependence on imports for capital goods,

machinery damages the sovereignty of the country. So to maintain the sovereignty

of the nation, it is necessary to have industrialization.

9. Welfare functions of the state – The ability or capacity of the industries to create

surplus is large. Similarly, the industrial section is always better organized. It is

possible for the government to charge and collect the taxes from the industries and

use the money for the welfare function of the state.

10. Social Change – Industrialization changes the society by raising the level of

income, standard of living. It also leads the economy towards the aggression. The

industrial society is time scheduled. They work together. This always increases the

new values and ethics in the society. The society leads towards more cultured and

civilized.

Explain the importance and problems of Small Scale Industries in India.

The terms, „small scale industries‟, village industries‟ and „cottage industries‟ are used

as one and the same. But for the sake of economic analysis there is difference in them.

In various ways these terms can differentiate with each other. Broadly these all are the

small industries having low capital investment. Cottage industries have a special

phenomenon, this kind of industry belongs to a family, and in which commodities are

produced without the help of machinery.

26

The importance and problems SSI face can be described as follows.

1. Contribution to National income – The SSI and Cottage Industries contribute to

the nation income of India on a very large scale. In the year 1998-99, the total

national income was Rs. 1597416 crores and out of this Rs. 527515 crores was the

contribution of SSI and Cottage Industries. In other words, SSI contributed 1/3rd

of

the national income. This would not be possible without the special efforts taken

by the government encouraging the SSI.

2. The Employment Potential – Most of the SSI and Cottage Industries are labour

intensive. The large-scale modern industries make use of more capital than the

labour. The extravagant problem of unemployment in India can be reduced with

turning up the unemployed labour force into SSI. So it is essential to start SSI in

large number as they have large employment potential. Out of every five persons

employed in industry four are employed in small scale or cottage industries.

3. Low Capital Input and Cost of Production – The capital required for the SSI

and cottage industries is comparatively small. As the capital is a scarce resource in

India, it is essential to economize its use and its distribution. A large network of

small scale and cottage industries created in India is therefore most welcomed.

This also stabilizes the base of industry in India. Large-scale industries have per

worker capital of Rs. 3-4 lacks, where as SSI needs Rs. 25 – 30 thousands.

4. Skill required – In the large-scale units a high level of technical and managerial

skills are required. Where the production in the SSI is on small scale and even

unskilled workers can be absorbed in it. Mostly the technical knowledge is handed

over traditionally. But now a day it has become necessary to support the traditional

knowledge with the modern techniques of production.

5. Marginal dispense on Imports – Large-scale industries have often to depend on

imports for machinery, technical skill, raw materials, etc. The SSI has not to

depend on imports. Most of the requirements of the SSI are fulfilled locally and

these industries may even help to increase exports and thus serve to earn foreign

exchange.

6. Decentralized nature and quick results –There is no large time-gap between the

beginning of the investment and getting returns out of it. The gestation (growth)

period is less in SSI. The large-scale industries are centralized in metro-cities.

They develop those regions. While SSI is scattered all over the country and help in

developing backward area.

7. Social Justice – As SSI is spread all over the country, there is not a concentration

of wealth and economic power in any specific region. During last 100 years

specific areas like Mumbai, Kolkata, and Chennai. Backward areas have a chance

to develop themselves because of SSI.

8. Complementary to Large Scale Industries – Large-scale industries are always in

a need of small components and subsidiaries. These are manufactured and supplied

by SSI. Similarly these SSI can provide supplementary employment to the people

engaged in agriculture and may also supply tools and implements required by the

farmers.

9. Large source of supply of consumers goods – The SSI are most suited for

producing consumers goods on a large-scale. It is comparatively easier to produce

consumers goods in the small industries. As the capacity of the small-scale

27

industries is small and so is the market, it is possible for them to cater to the needs

of the consumers in a better manner.

10. Overall performance – It is observed that the overall performance of small-scale

industries has continuously remained remarkable during the 90s. Not only the

share of this sector in total national income is very high, but also the rate of growth

has always remained in the range of 13% to 21%. The exports of this sector have

also recorded a significantly high annual growth rate.

Explain the problems faced by SSI.

SSI has proven its important role in national development during the ages. It has

helped in reducing the unemployment; increased exports and so on. The report of the

second All India Census of Small Scale Industrial Units (1992) has identified some of

the problems. They are as follows:

1. Financial Problems – The census of SSI units has found that almost 35%of the

problems faced by the SSI in India is financial problems. The internal financial

resources of the SSI are so insufficient that even in the time of minor strains they

can‟t depend upon such scanty resources. In such cases banks and other financial

institutions are very cautious in lending to this sector. Considering the important

role of SSI, commercial banks have included it into the priority sector. In 1998

bank finance to the SSI was Rs. 43958 crores. It was 16% of the total loans

sanctioned by commercial banks. But still there are lots of problems in getting

financial aid from banks. They are provision of security, timely payment of

installments to the banks, withstanding the high interest costs, etc.

2. Marketing Problems – The census indicates the marketing problems faced by SSI

are 14.4%. These are of various types. The traditional industries and crafts are

facing the problem of absence of standardized products. Because of no

standardization they find it difficult to compete with the machine-made products.

Secondly the capacity of the individual SSI units is limited they can‟t spend on

sales promotion and advertising. Thirdly, these small firms cannot afford the

network of distribution channel. Fourthly, the large-scale producers occupy the

best means of transportation available; the SSI has to manage with whatever is

available. Finally to attract the customers SSI can‟t launch various sales schemes

like large-scale industry.

The government has reserved quota for the products of small firm and it has taken

several measures to ensure that the products of SSI units would get a preferential

treatment. However, the problem continues.

3. The Problem of Raw materials – Many small firms find it difficult to secure raw

material, whether imported or indigenous, in time and in adequate quantities. The

international team studied this problem and recommended that the small-scale

sector should be allotted a specific a quota of raw materials. However several

difficulties continues to persist in this field. SSI can‟t secure bulk quantities of raw

materials. Secondly, importing raw materials involves a number of problems like

arranging for foreign exchange, obtaining samples and searching for alternative

source of raw materials.

28

4. The problem of Technical Excellence – The technology becomes outdated within

2 t 3 years. The small firms don‟t have the capacity to rationalize the unit every 2

years. Secondly it is difficult to get technically trained workers. Thirdly, the

government has established a network of technical education industries and the

supply of trained technicians do not match. Fourthly, the supervisory staff also

does not get the skill-upgradation opportunities. Finally, while adopting a

particular technology the producers themselves commit mistakes in choosing

between locally available technology, market oriented technology, cost effective

technology an globally competitive technology.

5. Labour Problems – SSI are labour-intensive and they provide employment on a

large scale. But at the same time, this causes the problem of maintaining industrial

peace. Employer-employee relations are friendly when the unit is small. But the

union rivalries and growing unrest among the workers causes many disputes. This

may cause the stopping of the production, which SSI can‟t bare.

6. Other Problems – Besides above problems, the SSI encounter a number of other

problems. They are as follows:

a) Local & state governments‟ control, constraints of power supply, regulations of

factories laws, etc. may cause the difficulties.

b) Pleasing all the officials representing above said authorities becomes a difficult

task.

c) Many of these units are scattered in vast areas and they have to face the

problems of failures of several facilities and services such as power supply, water

supply, communication, transport, etc.

d) Small scale units working as ancillaries to large units have special problems.

They need to supply their product on credit, which delays in recovering from main

units.

e) Borrowing from non-institutional has a very high cost.

f) The holding capacity is limited. So such small units are forced to sell out their

products at whatever price is ruling at the market.

Explain the role of Public Sector.

In 1954, the Indian Parliament adopted the Resolution on the „Socialistic pattern of

society‟, which broaden the concept of mixed economy. Under mixed economy

government will establish ownership of and control over means of production. The

government‟s entry into industrial sector was the result of mixed economy. Thus the

public sector was emerged. The implications of mixed economy necessitated the

expansion of the public sector and the establishment of a joint sector.

Up to the adoption of liberal economic policy in 90s, public sector has played an

important role in Indian economy. It can be noted as follows.

1. Capital formation – Accumulation of capital is an important determinant of

economic growth. During the time of first five-year plan; depending only upon the

private sector for capital formation would be dangerous for Indian economy. This

may lower the rate of economic growth. The public sector, therefore, is called

upon to assist the capital formation. In the first plan (1951-56) gross capital

29

formation from public sector was 3.5%, while form private sector was 7.2%.which

grew to 9.2% and 12.4% respectively in the eighth plan (1992-97)

2. Volume of sales handled – The trade of public sector during last five decades is

growing. Sales of industrial units owned by the Central Government have

increased from Rs. 134 crores to Rs. 3320 crores during the period 1959-60 to

1970-71; further it increased to Rs. 304994 crores in 1998-99.

3. Creation of infrastructure – Infrastructure need heavy investment and the rate of

return to these investment is very low. They require longer gestation period. That

is why the private entrepreneurs never turn up in creating such infrastructure. So

this becomes public sector‟s responsibility to create these infrastructures. The

public sector in India has performed a vital service in the field of railways,

passenger road transport, electric supply, telecommunication, etc.

4. Regulation and control of the economy – Developing economy suffers from

shortage of various consumer products. So the control and regulation of the

economy is utmost important. The public sector in India has attained a position,

which can be used for directing economic activities. By 1969-70 the public sector

enjoyed monopoly in the production of lignite, crude oil and supply of electricity.

Half of the steel, fertilizer and petroleum products were produced by public sector.

So it became the price leader. At the same time because of its growing share in the

industrial investment, the public sector can be in a position to control the overall

industrial activities.

5. Social Transformation – Private sector is profit oriented while public sector does

not give importance to profit. They are for the benefit of society. Transportation to

the remote villages are never profitable. But still public sector is engaged in

making available such facilities in spite of big losses.

6. Foundation for industrialization – Though public sector is always an issue of

criticism, it‟s a fact that during the first two decades after independence it has laid

a sound foundation for the industrialization. Government has also accepted the

responsibility of starting or expanding the basic and key industries in public sector

and paved the way of industrial diversification and self-reliance.

7. Export promotion – Right from the beginning public sector has a vision of export

promotion. State Trading Corporation (STC) and Minerals and Metals Trading

Corporation (MMTC) have helped in increasing the export trade of India. The

foreign exchange earnings of the public sector enterprises stood at just Rs. 35

crores in 1955-56 increased to Rs. 18827 crores in 1998-99.

8. Import substitution – Many enterprises in the public sector have been started

with the intension of producing goods, which India has to import. Drug companies

like Hindustan Antibiotics Limited and many petroleum companies and BEL,

BHEL are some of the examples. In recent years India has demonstrated her

strength in import-substitution.

9. Raising internal resources – With the expansion of the public sector it was

expected to generate resources not only for its won expansion but also for

contributing something to the development of other priority sectors. By creating

depreciation, development and reserve funds as well as through retained profits,

the public sector was able to mobilize larger and larger quantities of internal

resources in course of five-year plans. During eighth plan public sector

30

undertakings generated internal resources of Rs. 101212 crores, which averages

annually Rs. 20242.4 crores.

10. Contribution to the Central Exchequer – It is a matter of dispute that the public

sector being facilitated by government may not increase the revenue. But the fact

is public sector units are paying corporate taxes, excise duty, customs duty and

other duties so as to agreement the tax revenue of the government. The total

contribution made by the public sector in this way during the sixth plan was Rs.

27570 crores and in the year 1998-99 it was Rs. 44608 crores.

The above analysis shows that the public sector in India has grown to occupy a

prominent place in the economy.

Drawbacks of the Public Sector

Acceptance of mixed economy gave importance to public sector. Public sector has

played a very important role in the developing Indian economy. However, this sector

demonstrated some drawbacks. They are as follows.

1. Delays and Red-tapism – Public sector have to go by rules and practices laid

down for every purpose. This causes delays in implementation and procedural

delays. This creates a number of problems in decision-making as well as timely

action. This has been found commonly from Trombay Fertilizer Project to the

Bokaro and Salem steel plants. Procedural delays and red-tapism result into loss of

market, financial losses, etc. this can be avoid by adhering to proper planning and

time scheduling and a degree of autonomy to the plant level management.

2. Political elements in economic decisions – One of the fall-outs of the democratic

system as operated in India is the political consideration interfering with the

national decision-making. The location or other decisions about public sector units

are taken more upon the constituency of the ministers or political leaders instead

of national gain. All these have resulted in rising costs, deteriorating the quality

and an overall mismanagement.

3. Over capitalization – Many of the public sector units are said to be over-

capitalized. The report of the Study Team on Public Sector Undertakings (1967)

have criticized the public sector for over-capitalization and have blamed

inadequate planning, delays in implementation, avoidable expenditures during

construction, surplus machine capacity, tied aid leading to compulsory purchase of

equipment without testing, bad location and liberal provision of facilities to the

employees as cause of over-capitalization.

4. Over staffing – Public bodies like Public Accounts Committee have pointed out

that most public enterprises have recruited manpower in excess of the actual

requirement. At the same time this poor manpower planning reflected through

inadequate training and refresher facilities for the workers. In fact, there are sever

lacunas in personal management in the PSUs including lack of skill up-gradation

programmes for technicians, want of incentives for research and development,

poor management, labour relations, labour indiscipline, etc.

5. Under utilization of capacity – This is one of the notable drawbacks of public

sector. Due to negligence on the part of management the PSUs have suffered form

under utilization of capacity. Thus during 1998-99 about 51% of all the

31

manufacturing PSUs recorded a capacity utilization of more than 75% while 20%

operated at 50% to 75% of their capacity and the remaining 29% operated at below

50% of the capacity. This is highly unsatisfactory situation in view of the over-

growing global competition.

6. Improper control mechanism – Public sector units are accountable to the public.

Hence it has several controls such as finance ministry, the in charge ministry of the

undertaking and the Parliament. It is a high time that the PSUs are given greater

functional autonomy and their governance is left more to professional experts

rather than to the political bosses.

7. Lack of professional management – IAS officers who are transferred from one

posting to another head Most of the PSUs. Efficiency in business decisions

requires prompt operational decisions. The PSUs therefore need some more

autonomy and flexibility. Delegation of authority rather than the present practice

of passing the buck of responsibility to higher authorities is the mantra of

efficiency. Every officer should have a clear idea of his role in the mission of the

unit; unfortunately responsibilities are neither clearly defined nor properly

understood. These enterprises are criticized as colonies for bureaucrats.

8. Providing employment – Provision of employment was one of the intensions of

public sector. But unfortunately it has given more importance rather than the

productivity of the enterprise. Automation of the enterprise has been left aside

wherever it would be possible. Many times it was suggested that wherever it is

possible to atomize the production process with due employment it should be

done. But public sector has ignored it.

9. Pricing Policies – There are different pricing principles, but public sector never

follows them. Because these enterprises are non-profit oriented. Each PSU has its

own objective and its own role in the overall economic development which can be

variously termed as basic, key, vital, crucial, etc. Each one of them has a bearing

on the pricing policy which pulls the price away from cost coverage and towards

the direction of losses.

10. Mounting losses – Most of the public sector units are bearing losses. The

performance of the central public sector is relatively much better, but most of the

state government public enterprises have made continuous losses. The great loss-

makers are the irrigation projects, State Electricity Board and State Road

Transport.

The Causes of the Unbalanced Regional Industrial Development in India

Industrial development of India is unbalanced. According to RBI Report (1995-96)

Maharashtra is advanced in industrial Development having 13.8% factories and 14.7%

of industrial employment of India. Only six states i.e. Maharashtra, TN, Gujarat,

W.Bengal, A.P. and Karnataka; have 62.7% factories, providing 57.7% employment

and 59.9% output. Rests of the states are not having that much industrial development.

This shows that India has unbalanced industrial development. The following are the

main reasons responsible for the unbalanced regional development of India.

1. Geographical Factors – It is possible to overcome the geographical hurdles in the

industrial development. Countries like Switzerland or Japan, in spite of hilly or

uneven nature of the land they have succeeded in industrial development. But this

32

needs a huge amount of capital investment. In case of India, it has not been

possible to overcome this kind of geographical hurdles not only because of

unavailability of funds but also lack of strong desire. One more reason is the

availability of suitable land elsewhere in the rest of the country.

2. Historical Factors – Whatever industrialization found in India before

independence was rooted by the British companies as a part of then government‟s

policies. Europeans had factories in Mumbai, Kolkata, Chennai, Hubli, Surat, etc;

more over Europeans settled these cities. Naturally, these cities developed with

industrial area and also the states having these cities came up as industrial states.

Also British policy ruined the indigenous industries and concentrated some cities

with modern industries.

3. Location Factors – Location of the particular industry some times decided by the

availability of raw material. As India had poor transportation facilities, industries

like jute situated in West Bengal, Steel and coal in Bihar & Jharkhand, Fabric in

Maharashtra & Gujarat and so on.

4. The Infrastructure - Other facilities like banking, insurance, power and water

supply, communications also decide the location of the industrial area. At the same

time this facilities should be easily available and cheap.

5. Unwise Policies during the Planning Period – After independence, it was

expected that several efforts would take place to reduce this industrial imbalance.

Since 1956, balanced industrial development is the main objective of industrial

policies during planning period; was declared frequently. But unfortunately

nothing could happen in this regard. What ever was the „productive investment‟,

made in already developed cities like Mumbai, Kolkata, Chennai, Banglore, etc.

This investments made such areas more developed and the rest of the part of the

country remained undeveloped. Central and state governments started many PSUs

in backward areas in Punjab, Hariyana, and Gujarat, which helped developing

those regions. But many of the PSUs in other parts of India failed to develop that

region.

Explain the measures adopted by the Government to remove Regional

imbalances.

One of the major problems in industrialization in India has been the large amount of

regional imbalance. This imbalance had led to problems like over crowding, migration

of people, and development of slum, etc. it is essential that there should be a balanced

regional development.

The government has taken various steps to remove the regional imbalances. The

government has been taking special efforts in the five-year plan. In the second five-

year plan, it was mentioned that the balanced regional development of economy must

be achieved and special efforts were adopted for this purpose. This includes

programmes like decentralization of industries and programmes for rural

development.

Under the third five-year plan development of SSI, construction of roads, providing

electricity and establishment of industrial estates were undertaken.

Under the fourth five-year plan again special efforts were undertaken to remove

regional imbalance this includes –

33

1. Special financial assistance to economically backward states. The amount of

assistance to be given was based on population and backwardness of the state.

2. Various facilities and concessions were given to the entrepreneurs who wanted to

start industries in the balanced areas. This incentive includes tax incentives and

subsidies. The facilities given included fully developed plots of land with power,

water facility at nominal rates.

3. The state governments also started their own industrial development corporations.

Eg. The MIDC was started to develop industrial estes in the backward areas of

Maharashtra.

During the sixth five-year plan a committee was formed known as „National

Committee for Development of Backward Areas‟, which made recommendations

regarding how to solve this problem of regional imbalance. These recommendations

were adopted in planning process.

The seventh and eighth five-year plans gave importance to agricultural development

and human resource development (HRD) as instruments, which would help to remove

the regional imbalance.

The ninth five-year plan gave importance to the development of infrastructure in the

less developed states. The planning commission has also recommended the large

transfer of funds from the Central Government to backward states. Special area

development programmes and promotion of private investment in the backward areas

has been recommended in order to remove the regional imbalance.

Although many measures have been adopted through the planning period in order to

remove the regional imbalance, this has helped in the development of certain balanced

areas. However the steps taken to remove regional imbalance are not sufficient as a

result the regional imbalance continues to a great extent. Unless this problem of

regional imbalance is solved effectively it is difficult for a country to have full

industrialization.

Explain the Recent Policy Initiatives of Industrial Liberalization

The liberalization process in India started in 1991. New reforms have been introduced

as a part of liberalization process. Introducing and adopting certain policy initiatives

have carried out these reforms. Some of the recent policy initiatives are as follows.

1. Industrial Licensing – As a part of liberalization process the licensing system was

abolished for all industries except a few important one. The removal of this system

has made it easy for the private sector to enter into the market. It is expected that

this will lead to more competition, which will be beneficial to the consumers.

2. Location Policy – The location policy has been framed in such a way that

approval is not required. If the industrial location is not falling within 25 kms of

the cities having a population of more than 10 lakhs it does not need any approval.

If they are near the cities they are permitted to start their activity only if they

located in specified areas.

3. Special Policy Package for North East Region – The North East Region of India

was neglected for a long time and in order to remove imbalance a special package

has been adopted in 1997-98for this region. Thee objective are to see that this

region gets industrially and economically developed in comparison to other parts

of the country.

34

4. Foreign Direct Investment Policy – This is one of areas where major policy

reforms have taken place. This is to attract foreign capital, which will help in

capital formation. The government has set up Foreign Invest Promotion Board

(FIPB), which is headed by a minister to clear the application for FDI. The FDI is

allowed in most of the areas except agricultural and real estate.

5. Infrastructure – The government has given high priority for the development of

infrastructure. It has allowed private participation and competition in infrastructure

sector. The infrastructure includes setting up of power projects, construction of

roads, etc.

6. Housing Policy –Many changes have been undertaken in order to promote the

housing sector in the country. Various tax incentives are given if loans are taken

for housing constructions. E.g. the interest paid on housing loan is deductible item

from the taxable income of a person. Due to such incentives more people have

been attracted towards housing loans.

7. Small Scale Industries – Certain policy programmes have also been announced

for SSI. One major problem for SSI has been early recovery of their money from

large-scale industries that are the customers of SSI units. A rule has been passed

that if there is such delay in the payment is has to be mentioned in the annual

accounts and reports of the large-scale industries. It is expected that this will help

the SSI units to receive early payments, which is required for their working capital

needs. Also the limits of the SSI units for calculation of their working capital has

been increased which will ensure that such units have adequate working capital.

One of the important reasons for the failure of SSI units has been the shortage of

working capital. It is expected that these policy changes will help to solve their

problems.

8. Tiny Sector – The tiny sector is the part of SSI. Certain specific policy changes

have been announced for the tiny sector. Enhancing or increasing the ceiling limit

from Rs. 5 lakhs to Rs. 25 lakhs revises the definition of tiny sector. It is expected

that the increase in the limit will help the tiny sector to modernize and to adopt

new technology. Similarly the banks have been advised to transfer the 60% of the

their SSI credits to tiny sector.

9. Industrial Policy – The budget of 1999-2000 has made various changes to

improve the development of the country. It includes making changes in the excise

structures, providing tax incentives for mergers and amalgamation, takeovers,

positive change in the custom duty and providing further incentives to the

infrastructure projects within the country. In the budget of the year 2001 further

liberalization has been allowed. With this Indian companies are allowed to invest

in abroad up to a particular limit.

Thus in the recent years the government has taken various policy initiatives in order to

further liberalize the Indian economy and to ensure that the Indian economy is

integrated with the global economy. Such integration will help in the economic

development of the country.

35

Chapter 4

Capital Constraints

Capital formation is one of the important factors in economic development.

The vicious circle of poverty in underdeveloped countries can be broken through

formation.

Importance of Capital formation –

The countries, which could attain high rates of capital formation, were the countries,

which could record high rates of economic development. The capital formation is thus

very important.

1. Productivity – Economic growth is possible either by increasing the quantity of

inputs i.e. agricultural land or by raising the productivity i.e. production per

hectare. Increase in the inputs can grow the GNP but the other increase the per

capita income. For the less developed countries (LDC) it is important that they

should accept the first alternative i.e. increase in the quantity of inputs because it

increases the capital formation.

2. Toil and hardship – Machines and equipments are the substitutes to land and

labour. More often they are invented for the same purpose. More use of machines

and equipment needs capital formation.

3. Social overheads – There are man large social projects, which form the

precondition for economic development. This type of capital is known as the

social overhead capital. It is in the form of roads, railways, irrigation projects,

immunization programme, etc. Many of these overheads are useful to the private

sector firms.

4. Investment in Human Capital – Expenditure on health, education, training

research and social security is the investment in human capital. But such

investment needs a large amount of capital.

5. Development of Science and Technology – Science and technology is always

helpful to the economic development. The first steam engine invented is the

milestone of economic development. But such scientific and technological

inventions and application need lot of capital investment. E.g. satellite

communication needs huge capital.

6. Employment – Capital investment generates employment opportunities.

Technological progress and capital formation together create more jobs helping

large-scale production.

7. Expansion of Market –Industrial and economic development were followed by

commercial revolution and a revolution in transport. Modernization of transport

and commercial and trade practices have led to a widening of the markets.

Expansion of market creates a growth in demands and intends increase in

production. But this is possible by advanced means of communication, which

needs large amount of capital.

8. An Answer to Balance of Payment Problems – Less developed countries are

importing finished goods and exporting primary products. LDCs always face the

deficit in their balance of payments (BOP). The solutions to such problem are

36

either to diversify the industrial structure of the country or import substitution. But

both these require capital investment.

9. Coping with Growing Population – Rapidly growing population is the main

characteristic of LDCs. That create two problems a) the capital-labour ratio goes

on falling. b) Fall in average saving rate, which affects the rate of capital

formation. To avoid these downfalls the country requires high rate of capital

formation.

10. Self-reliance – LDCs are more depended on foreign countries. A high rate of

capital formation can gradually make the foreign aid and it‟s subsequent problems

less and makes the country self-reliable by reducing foreign debts.

11. Containing Inflation –LDCs face the price rise problem at the beginning of

economic development leading the inflation. Because on the one hand investment

level is increased followed by rise in the money income but on the other hand, the

supply of goods and services in the market does not increase immediately. The

solution to this problem is to raise the rate of saving so that increased income are

diverted to capital formation rather than going to the market.

12. Breaking the vicious Circle of Poverty – According to Prof. Nurske, the vicious

circle of poverty can be broken through capital formation. Capital formation

increases the physical supply of capital goods like machines, tools and

equipments, helps a better utilization of available resources, and increases the

national output. Such increase is useful to break the vicious circle of poverty.

Reasons for the low rate of Capital Formation

There are three steps in capital formation. They are a) saving b) mobilization

(collection) of savings c) investments of these savings. These steps show two sides of

capital formation i.e. the supply side and the demand side. The reasons of the low rate

of capital formation can be discussed in the view of these two sides.

A] Reasons from the supply side 1. Low levels of income – Capital formation takes place out of savings and saving is

the function of income. Less income is the characteristic of LDCs. There can be

many reasons for low level of income such as population, etc.

2. Low productivity – Productivity is the source of income for all factors of

production. When productivity itself is low it causes low rate of saving and low

capital formation. In LDCs low productivity is the result of under utilization of

natural resources, labour inefficiencies, limited technological skill, etc.

3. Income inequalities – Rate of savings increases due to income inequalities. But

there are two reasons why income inequalities in the LDCs do not have the effect.

a) Per capita income is less. So the rate of savings could be 3 to 5 per cent. b) The

group at the top of the income pyramid consists of landowners and traders who

tend to invest in more land, real estate rather than long term industrial investments.

This causes the low rate of capital formation.

4. Demographic (population) reasons – The rate of high population is also

somehow affects the low capital formation in the LDCs. A country has to spend

much amount of entire income on bringing up the growing numbers of people. The

37

high dependency ratio raises the tendency of low rate of savings, which leads to

low rate of capital formation.

5. Budgetary policy of the government –Governments in the most LDCs tempt to

use deficit budgets as an important source of capital formation, but when deficit

financing crosses the safe limits, it becomes inflationary. The high prices due to

inflation tend people to spend on their current needs rather than savings.

6. Inadequacies of financial markets – Inadequacies of the money and the capital

markets also causes the low rate of capital formation in India.

B] Reasons from the demand side - 1. Lack of enterprise – It is the entrepreneurs who come forward with promises of

attractive rates of return on capital which encourage the people to save. But due to

social, cultural and economic factors the supply of entrepreneurship is very limited

in India.

2. Undeveloped capital goods industries – A high level of demand for funds to be

invested presupposes a well-developed capital goods industry. Such a developed

industry has the capacity to propel the demand of machinery and instruments. For

this purpose they will borrow the savings collected by the financial institutes. But

in LDCS such industry is undeveloped, it can‟t propel the demand of capital.

3. Limited market – In LDCs the market is limited due to the limited purchasing

power. The capacity of such market is very limited to absorb the additional

supplies of commodities. The investors have no incentives to save and to invest

more for catering to the needs of an uncertain and limited market.

4. Factor supply inelasticity – There are many obstacles in the way of mobility of

labour such as illiteracy, extended relationship, inability to adopt to new

circumstances, etc. Capital and enterprise also lacks mobility. This keeps the factor

cost high and disperses away the potential investors.

5. Infra structural gaps – New productive activities have to depend upon the

availability of infrastructure and basic amenities like railways, roads, water and the

power supply and other facilities. An absence of these facilities can have adverse

effect on investors.

6. Economic backwardness – General economic backwardness causes the low rate

of capital formation. Low efficiency of labour, low levels of skill formation,

prevalence of traditional values all these tend to keep the demand for new capital

formation low.

7. Technological backwardness – Technological backwardness acts as a double-

edged weapon. On the one hand large traditional sector is using outdated

techniques of production, which does not need the modern capital equipment. So

the demand remains low. On the other hand these outdated techniques cannot

generate high levels of production and causes low rate of income. So the rate of

savings remains low.

38

Vicious Circle of Poverty

One of the very important reasons for low capital formation is the

vicious circle of poverty. Prof. Ragnar Nurrkse says, “It implies a circular

constellation (group) of forces tending to act and react upon one another in

such a way as to keep a poor country in the state of poverty.” E.g. A poor man

may not have enough to eat, being unified, his health may be week. Physical

weakness results in low working capacity, which means that he is poor, nor

have enough to eat. In other words „a country is poor because it is poor.‟

The basis of vicious circle is that in LDCs total productivity is low due

to deficiency of capital, imperfect market, economic backwardness and under

development. The vicious circle operates both on the demand side and on the

supply

side.

On demand side: The low level of demand leads to low rate of investment and

results in low investment. Hence back to deficiency of capital, low productivity

and low income.

On supply side: Low productivity is reflected in low real income. This means

there is a low savings lead to low investment and deficiency of capital. This in

turn leads to low level of productivity and low income.

The third vicious circle is underdeveloped human and natural resources.

Development of natural resources depends on the productive capacity of the

people in the country. If people are backward, illiterate, having lack of

technical skill and knowledge, then the natural resources remain unutilized or

misutilized which keeps again the people backward.

Thus a country is poor because it is underdeveloped. Because the

country is underdeveloped are poor and remains underdeveloped, as it does not

have necessary resources for promoting development.

Low productivity

Low income

Capital deficiency

Low Savings /Demand

Low investment

Vicious

Circle of

Poverty

39

Population Constraint

Theory of Demographic Transition

Population in a country is responsible for providing human resource. The

various types of skilled, unskilled, supervisors, managers, etc. are all provided

from the population of a country. These are Human resources which are

required by every businesses and firms. The population also provides the

consumers for various goods and services. It is important to study the

composition of population which includes the age structure and population,

educational background of the population, income level of the population, etc.

One important theory in the study of population is the theory of Demographic

Transition. It tries to explain the relationship between the death rate, birth rate.

It tries to explain the effect the economic growth on death rate and birth rate.

The rate of population in a country is influenced by death and birth rate. If both

these rates are equal, there would be no population growth. But the birth rate is

more than the death rate which leads to increase in population. This effect is

explained through this theory.

According to this theory there are three stages related to death rate and birth

rate.

First Stage - In the first stage, the population of a country is more or less

stable. In this stage both death and birth rates are at a high level. This stage

indicates economic backwardness having much low income level. Most of the

people are engaged in the primary sector such as agricultural activities. In this

stage there is inadequacy of health facilities and lack of education. Due to this

the death rate is high at the same time the birth rate is also high because of

ignorance and other social factor.

Second Stage – In the second stage there is an improvement in the public

health and other facilities. The number of dispensaries and hospitals are more

and there is an improvement in the standard of living. Due to this there is a

sharp fall in the death rate. However the attitude and social factors of the

people donot change to a great extent. So the birth rate continues to be at a high

level. As the time goes by the gap between the birth and death rate keep on

increasing ultimately leading to population explosion.

Third Stage – In the third stage the birth rate also reduces and matches the low

death rate. This is the stage of economic development and industrialization and

urbanization. In this stage the spread of education leads to a change in the

attitude of the people and this helps to decrease the birth rate. Both death and

birth rates are at low level and the rate of growth of population reaches at a

zero level. So this stage is known as „Zero Population Growth Stage‟ which

indicates an advanced, mature and developed economy.

40

In recent times here are a few countries which have gone beyond this point

where the birth rate is much low than the death rate leading to negative

population growth. E.g. Japan, Germany, etc. On the other hand LDCs like

India is visualizing the adverse picture with its high population.

Reasons for fall in death rate

The death rate in India upto 1921 was quite high because of various reasons.

But after this year the death rate started declining. The reasons are :

1. Medical facilities – Medical facilities have recorded considerable progress

durig the post-independence period. Epidemics like malaria, small-pox,

plague, cholera, etc have either been eradicated or controlled to a great

extent. Deceases like tuberculosis and leprosy which were observed as a

curse, are under control with the modern drugs. In 1997-98 there were

22400 primary health centers and community health centers and rural

hospital were 2600 and 15100 respectively. Medical facilities available for

the pregnant women and at the time of labour have made the infant

mortality rate low.

2. The Spread of Education – The educatin facilities have spread to a great

extent. Schools, libraries have been opened in the rural areas. Due to

education, people have become more aware of the importance of clean

drinking water, sanitation, etc. Medical advice and aid have replaced

superstitions and witchcraft. As a result, the death rate has declined.

3. Improvement in the means of transportation – Improved and fast means

of transport has made the quick medical facility for the serious and dying

patients. Developed roads have brought the cities close to each other so that

the doctors and other medical facilities could be made available in time. At

the same time aviation has also been improved which has proved its

usefulness in saving the people in natural calamities.

4. Control of famine – Famine was one of the reasons for the mass mortality

in the history of India. Now a days famine relief measures are applied

properly. The famous „Green Revolution‟ has made India self supportive to

eradicate the glimpses of famine and the developed means of transportation

have made it easy to supply the food grain to the draught prone areas in

time.

Reasons for high birth rate

Various cause lead the decline in death rates at the same time it is observed that

th birth rate is showing a surprising inflation. In 1997, the birth rate per

thousand of Germany was 10, UK 12, USA 15, Canada 12. At the same time

India was having the birth rate of 25. it is amazing that developed countries are

trying to increase their birth rate and India is trying to control and reduce the

birth rate. The reasons of India‟s high birth rate are follows –

Poverty – Comparing to other developed nations India remained a poor

country. Average Indian citizens are poor. The standard of living is low. Even

if Indian families bare more children, and it leads them to more poverty, they

41

least bother about it because they are already poor. On the contrary number of

children is useful for the families as a helping hand and earning source. Further

these children are the support for their old age. Also as Indians are poor they

cannot afford medical facilities which are at high cost. In such circumstance

there is a fear of losing their children because of sickness. Hence they prefer

having more children so that at least some of them would survive.

Early marriages – The census of 1991 shows the average age of a man and a

woman at the time of marriage 22.2 and 18.3 years. But in the developed

countries i.e. Norway 28 and 24; Germany 27 & 24 is really low. Average

Indian marriage age which is on an average is below 20 give more fertile

period to these young couple and helps producing more children.

Universality of Marriage – According to Indian customs and traditions it is

not fare that one should be bachelor or spinster for whole life. One more thing

is that unmarried person is the subject for gossip and teased. So parents are in a

hurry to get their son or daughter married.

Illiteracy and ignorance – There is a close relation between education and

Planned Parenthood. More is the education less is the number of children. But

in India literacy rate in women is quite high. 57 % women of the Indian

population are illiterate so they are having more child birth.

Socio-religious factors – Indian society if full of beliefs and rituals. To peform

some sacred rituals a person must be married and that too have children.

Otherwise he is banned by the community and kept away from such religious

practices. Particularly women are expelled out of the community if she is

childless. One can not claim „moksha‟ if he remains childless. They believe

that such man‟s forefather also would not be benefited in the heavens. More are

the children, more blessed is the father and mother. Such outraged society tends

to produce more children.

Effects of growing population on Indian Economy

Growing population affects the development of economy by following ways.

1. Per Capita Income – A rapidly growing population tends to bring down

growth of income. Such rapid growth puts a pressure on land and tends a

decline in capital accumulation and raises cost of production. All these

results in a very slow growth of per capita income.

2. Standard of living - Per capita income is a major determinant of the

standard of living of the people. Naturally, the factors affecting per capita

income also affect the standard of living. Growing numbers of people need

increasingly larger quantities of necessaries of life.

3. Agriculture development – Agriculture being the source of livelihood for

majority of Indian population, the growth of population increases the

absolute number of people depending on agriculture. The growing

population disturbs the land-man ratio because the land is limited. That

results in smaller size of holdings. Such small farms cannot produce large

quantity of crops to fulfill the need of the nation.

42

4. Burden of unproductive consumers – Two third of the population of

India is dependent. People who are in between 15- 64 years of age may not

be actually working. Most of the women do not offer their labour for

productive work because they are uneducated and are busy in nurturing

children.

5. Unemployment – Growing population increased the unemployment and

underemployment. The unemployment in India is of a chronic type with its

roots in underdevelopment of the economy. It only increases the labour

capacity but not the production, because the economy requires is a skilled

manpower.

6. Pressure on social infra-structure – A rapidly growing population puts a

pressure on social overheads. Moreover an increasing investment in social

overheads constitutes a diversion of scarce resources from directly

productive assets to less and long run productive human assets.

7. Capital formation – A growing population created the obstacles in capital

formation. It raises the propensity to consume and reduces the tendency to

save. It also increases the demand for capital because the consumption

goods in larger quantities would require more capital. It also causes the

diversion of funds to social overheads. So the capital formation is less.

8. Reduction of resources – Growing population creates imbalances between

nature and man. Growing human needs are to be fulfilled by using more

and more of the natural resources. This creates a threat of collapse of many

mineral and other rare resources.

9. Damage of environment – Adverse land-man ratio caused by

overcrowding of men pushes men to ecologically sensitive areas like

hillsides and tropical forests. They domicile over there and cause the

damage of environment.

10. International economic relations – The rapidly growing population leads

the country towards the poor country. Emigration and brain drain go against

India because growing population makes the india‟s demand for imports

inelastic.

43

Chapter 5

PLANNING FOR DEVELOPMENT

Planning: Definitions

Hayek - “The direction of productive activity by central authority.”

Dalton – “Planning is the deliberate direction by persons in charge of large

resources of economic activity towards chosen ends.”

Features of planning –

1. Conscious efforts – in an unplanned economy various decisions

regarding what to produce, how to produce and when to produce are all

decided y mechanism. Planning means a conscious effort by the

government to take various economic decisions. So that the economy is

directed in and in some areas controlled in a particular direction.

2. Economic variables – Planning involves influencing various economic

variables like consumption, saving, investment, etc. There are the

variables at macro level i.e. for the whole economy. E.g. the total

income of the country is Rs. 80000 crores of which the savings is 10%.

Supposing this savings is to be increased by 2% then certain policy

decisions will have to be taken by the government and this will be done

through planning process.

3. Country of region – The planning process may be carried out for the

whole country or for a particular region. E.g. In India planning is carried

out by the central government for the whole country. State government,

city corporations, municipalities, etc also carry it out.

4. Time schedule – The planning is for a particular time period. It may e

for 5 years or 10 years or some times it is for 15 years. In India the time

frame adopted is five-year plan and within this the annual plans are

prepared.

Need for Planning

1. Inadequacy of the market mechanism – Markets in the LDCs are faced

with imperfections and structural shortcomings in commodity markets,

factor market and capital and money markets. They have various

deficiencies. So planning is made necessary in LDCs.

2. Elimination of instability – Market economies are unstable and suffer

from wide fluctuations. Progress is not possible under such circumstances.

The objective therefore is usually expressed as steady progress, which

means progress without fluctuations. This is made possible by the way of

planning.

3. Resource mobilization and allocation – LDCs are under a severe resource

constraint. They have very limited financial as well as skilled manpower

resource. They cannot afford to waste those resources. To avoid the wastage

planning is necessary.

44

4. Equitable distribution of income – Some of the LDCs have high-income

inequalities. Planning can be used as an instrument of equalizing

opportunities, wealth and income.

5. Harmonizing wage-relations – Price mechanism can ensure a harmony of

wage relations only under conditions of perfect competition and full

employment. Planning can ensure the utilization of labour in such a way as

to create more demand for the labour of the disadvantaged sections.

6. Coping with major economic changes – Natural calamities, political

instability, eruption of violence, etc. are some of the changes that cannot be

foreseen. These non-economic changes generate economic changes. The

planning authority with the all the resources in materials, men and money at

its command can however cope up with such changes.

7. Wastes of competition and duplication of services – When competition is

not perfect, it breeds several wastes like cutthroat competition, price wars,

wasteful sales promotion, etc. All these wastes can be avoided with

judicious planning.

8. Externalities – Damage to excessive use of non-restorable resources,

health-hazards caused by productive activities to the workers are some of

the externalities. In planned economy, social costs and social benefits are

given due consideration.

9. Creating a climate – Preparation of a plan incorporating a detailed

statement of national economic goals and social objectives create a climate

for a change. It can give a purpose to the actions of the people. A plan of

national campaign against poverty, ignorance and disease may create the

climate to fight for the common cause.

10. Trade and aid – In foreign trade, plan serves a useful purpose. Once the

whole plan is ready the magnitude of trade becomes clear. The govt. can

enter into bilateral trade agreements with other countries.

Formulation or preparation of plan / Steps in planning

Usually the different countries may adopt different ways of planning. There

will be diversity in planning. However there are few steps, which are more or

less common in the planning process. Usually formulation of plan includes the

following steps.

1. Central planning authority – Each country has to set up machinery,

which will formulate and implement the planning process. In India we have

a planning commission which is headed by a prime minister and which is

responsible for the various aspects of planning. This planning commission

includes various experts like economists, financial experts, politicians, and

other government officers.

2. Survey of the Economy – A plan has to be based on a proper survey of the

economy. Including the strengths and the weaknesses of the economy,

availability of resources and its utilization, etc. Usually this survey is

carried out on an annual basis. In India we have CSO (Central Statistical

45

Organization) in different states, which is responsible for carrying out the

survey.

3. Setting objectives – The planning process should have certain objectives,

which are to be fulfilled or achieved. These objectives are laid down in

relations to future development of the economy. Thus objectives can be to

increase the employment or reduce unemployment, to decrease poverty, etc.

these objectives must be realistic and flexible so that if required necessary

changes can be carried out in the objectives.

4. Priorities and targets –Once the objectives are decided the priorities and

the targets have to be laid down. E.g. the objectives may be to increase the

employment level. Within this the priority may be to increase the

employment for rural people or to increase the employment for women. The

target gives a definite number for achieving the objectives.

5. Strategy- The word strategy is a military word. Indicating the technique of

reaching a particular point. In the planning process different strategies

would be required for achieving different objectives. These strategies are to

be planned, implemented and properly discussed. A proper strategy will

help in achieving the target.

6. Internal consistency and balance – The strategies which are decided

should be internally consistent and properly balanced otherwise it may lead

to shortages and surpluses. The balance in planning process includes the

physical and financial balance. The physical balance will try to ensure that

the outputs of various sectors of the economy are properly balanced.

Otherwise it will lead to a situation of non-availability of raw material,

manpower, etc. the financial balance refers to balancing of income and

savings to the supply of goods and services.

7. Mobilization of resources – In order to implement the plan various

resources are required. The sources of finance include taxation provident

fund, deficit financing, etc. the planning process has to ensure how much

amount will be collected from each of these sources. A planning process

also has to consider how the private sector will be able to mobilize the

different resources.

8. Choice of planning a model – For implementing the plan for the economy

various planning models are available. The right type of planning model

will have to be selected which includes – a) Aggregate Growth Model – In

this model the aggregate Growth of the whole economy is considered. B)

Sectorial projection model – In this model the whole of the economy is

divided into sectors and planning is carried out respectively for the sector.

E.g. agricultural sector, industrial sector, etc. c) Comprehensive inter

industry model – This is the most sophisticated model in which activities

of all productive sectors of the economy are inter related. Each industry is

considered a producer of output and at the same time a user and input from

other industry. Depending upon the level of development of a country a

country may se more sophisticated model. India makes use of this

sophisticated model.

46

9. Plan period – The planning process is for a particular time period. It may

be for 5 years, 10 years or 15 years. In India the time frame adopted is 5

year plan in which the annual plan can also be there in order to ascertain

whether the targets are being achieved or not.

10. Efficient administration- A plan may be prepared but if it is not

implemented n a right and efficient manner then the targets and objectives

will not be achieved. Proper implementation of plan requires strong,

efficient and non-corrupt administration.

11. Evaluation – A plan prepared and implemented must be periodically

evaluated. It may become necessary to change the targets in certain

situations. The reasons of not achieving the targets will have to be

discussed and this reasons will to be considered into future planning.

Limitations of Planning:

In spite of several arguments in favour of planning many economist like

Killick say that “It is doubtful whether plans have generated more useful

signals for the future than would otherwise have been forthcoming.” In other

words, the experiment of planning in most of the LDCs over the past few

decades has not fulfilled the expectations of the people. Here are the limitations

of planning.

1. Deficiencies in plans and their implementation – Plans are over-

ambitious. They look like election manifestoes, promising too many things

within a short span of the plan period. There arises a gap between plan

formulation and implementation.

2. Insufficient and unreliable data – The quality and reliability of the data

decides what will happen to the plan. The situation becomes worse if

trained economists and statisticians are not available.

3. Unanticipated economic disturbances – LDCs are greatly dependent upon

external variables like inter-national price changes, trade fluctuations,

import-export policies of developed countries, etc. Beside that uncertainties

arising out of calamities like wars, floods, droughts and so on. All these

factors render even short-run forecasting difficult.

4. Institutional weaknesses - The planning process of the LDCs suffer from

several institutional weakness like separation of the planning agency from

the implementers, the lack of continuous dialogue among planners,

administrators and political leaders. In addition, there are weaknesses like

incompetent and corrupt administration, red-tapism, resistance to

innovation and change, inter-departmental rivalries, etc.

5. Lack of political will – The ultimate cause of plan failures is largely

attributed to a lack of commitment and political will on the part many Third

world leaders and high level civil servants. A political will requires unusual

ability and political courage to challenge the various vested groups and to

persuade them for the planning and completion of the plan.

6. Reduction in lines of control – Planning in India is only indicative. It

gives guidelines. Several institutes, firms and individuals implement the

47

plan. The success of such a plan can be ensured through various lines of

control wherein, the decisions like what to produce, how to produce, how

much to produce, fro whom to produce are taken by private individuals.

With the adoption of economic reforms and the policy of liberalization, all

these lines of control have considerably weakened and some of which have

actually be discarded.

7. Socio-cultural Barriers – In an open economy working in close co-

operation with other countries of the world existing at various levels of

development, the social-cultural aspects achieve great importance. The

competitiveness of an economy depends upon the quality of population not

only in terms of education and health but also in terms of motivation, work

culture and work ethic. In absence of these Indian planning is bound to face

hurdles at every step.

8. The hazard of population growth – A rapidly growing population forces

several limitations upon planning. The growing numbers for satisfying their

minimum needs takes away the additional income resulting from growth.

This adversely affects the rates of saving and investment. The growing

dependency burden also dampens the efforts of development. Finally the

planning collapse.

9. Inherent drawbacks of public sector – Public sector and government

departments have to go by rules. Public accountability demands this. But

this fact entails red-tapism, delays, and misuse of power and increases

corruption.

10. Allocating real resources – How to allocate men, machines, land,

electricity, steel and imported goods is not decided properly. Only

allocation of money is not the real resource. All the above mentions should

be allocated properly. But this is not possible for want of control.

48

Chapter 6

Human Resource Development

* Explain the term ‘Population Dynamics’. State the factors / elements

responsible for population dynamics.

* Write a short note on ‘Population Dynamics’.

althus has painted a gloomy picture of the prospects of development.

He was of an opinion that food grain increases at arithmetic ratio and

population grow at geometrical ratio. So the society could hardly come out of

substance level. But according to the modern view of population, society could

be trapped in it in the first and second stages of demographic transition. So

modern thinking about population is rather dynamic.

Population dynamics basically views the population of a country from

two angles, i.e. Quantitative and qualitative. Both are inter-dependent and are

influenced by multitude of forces. In due course of time, the social, political,

economic and natural environment changes take place. Along with these

changes the forces working on the population also change. They are change in

the size, age-structure and the quality of population. Such comprehensive view

of population is the content of population dynamics.

Following are the important elements of population dynamics.

1. Urbanization and Economic Growth: According to the World

Development Report (1991) „Urbanization and economic growth in

developing countries both tend to reduce population growth. In India farm

households in higher growth areas, which were exposed to the new

technologies of the green revolution, had fewer children. But the economic

growth has a double linkage in population growth. A rapid growth of

population is a constraint on economic growth and a slow pace of economic

betterment creates hurdles in slowing down the population growth. To

improve the situation, equitable distribution of income is suggested.

2. Eradication (abolition) of poverty: A high birth rate leads the poverty.

Unless the population come out of poverty and gain a certain minimum

standard of living, they will not realize the importance of limiting their

families. Improvement is only when they have desire to have more and

more material good. This desire would create a sense of small family norm.

3. Role and status of women: In a male-dominated society, women have no

say in matter of family planning, even though she gives birth to children

and take the responsibility of rearing them. They get a better status only

because of their income-earning capacity or their education. Women can

play a vital role in family building.

4. Education: A primary and secondary education has a bearing on family

size. Education creates a better awareness and an understanding of social

responsibilities. It widens the horizons of aspirations and creates

achievement motivations. It also raises the standard of living.

5. Health and nutrition: Studies in some countries like Chile, Philippines,

Kenya have revealed the fact that high female employment opportunities

M

49

outside he home have led to fall in fertility rate. This fall in fertility rate is

because of fall in infant mortality rate. Along with the control of infant

mortality, various health programmes are also found to be instrumental in

lowering fertility rates.

6. Socio-cultural transformation: There are several socio-cultural factors

affect the living styles and the family size. They are disintegration of joint

family, a closer relation between work and earning and urbanization,

emergence of a new industrial culture and acceptance of a new set of values

and above all the challenges of a highly competitive and dynamic new

world. These all tend to reorient the minds of people and make them

conscious about the number and the quality of their children

Describe the Population Policies of Developing Countries.

Describe the Blueprint for Active Population Policy.

Dr. Frank Notestien has suggested the blue print of a policy for

population control. This policy is adopted with some necessary modification by

the LDCs. It has some measures. They are as follows:

1. Economic measures: The economic measures, which along with

stimulating economic development make decline in fertility. They are as

follows:

a) The development of industry in less developed areas is one of the most

important economic measures. This results in emerging small modern

townships pulling people out of their former context and permits the

growth of new individualistic aspiration (ambition). This also helps to

withdraw the surplus population from the agriculture sector.

b) The rationalization and extension of agriculture. This is made

possible by introducing the modern techniques of agriculture, reform of

land tenures and credit systems. Also the new techniques of crop-

protection, new ways of using water resources and appropriate

mechanization are also helpful.

c) The promotion of international trade. Trade is one of the most

important means of diffusing new ideas and attitudes.

d) Promotion of self-employment. Most LDCs have invested much more

on education as the investment in Human Resources, which result in

educated unemployed youth instead of skilled workers. The result is

waste of money. So the self-employment, which the society needs for

economic development, is necessary to be promoted.

2. Educational measures: General education through formal and non-

formal have close relation with small family norm. Various studies have

shown that the higher is the level of education, the smaller is the number

of children born in the family and the better is the health care taken of

the children.

Population education has very important position. It is necessary

that people should know a) the implications of population change for the

50

quality of their own individual, family and social life and b) the role

they themselves play in determining the nature of that population

change.

Population education has to be given through formal channels of

schools, colleges, technical and professional education institutions, etc

through curricular and co-curricular.

3. Birth control measures: Instead of having big families it is worth to

have a small family and to take care of health and welfare of children.

This should be given widest possible publicity. Controlled fertility will

have to be made an integral part of the public health programme. The

govt. can provide health an contraceptive services in order to encourage

the desired behaviour.

The right policy of popularizing and distributing contraceptives is of

utmost important. In poverty-ridden sections, vasectomies (family

planning surgery) and mechanical devices like copper-T are very

important. At the same time, other alternatives should also be within an

easy reach (both physically and financially) of the population.

4. Public Health: Dr. Notestein observes that the healthy life develops the

interest in the dignity and material well being of the individual essential.

This reduces the rate of fertility.

The World Development Report 1991 suggests two tasks. A) To provide

nutrition to improve the mental and physical well being of children and

adults. B) To improver the control and treatment of disease.

5. Political factors: Along with political leaders, the civil servants and the

middle classes can play the vital role in the population policy. China is

the best example of how a strong political will coupled with a well

thought-out pan can make population policy successful. On the other

hand Indian experiment of mid-1970s illustrates how politics can set the

clock back on the population front. So it is necessary that all the political

parties should have a code of conduct to be accepted in which they

should avoid taking political advantages by damaging social harmony in

general, and population policy in particular.

6. Social determinants: The success of population policy demands public

participation and involvement. The role of voluntary social

organizations and of other institutions with a mass base, in this respect is

important. Along with hospital and dispensaries, universities, collages,

youth and women‟s clubs and a host of other voluntary organizations

can take part in this point.

7. Migration: In a developing economy, where efforts at lowering fertility

are well under way, migration could be of great help in facilitating the

transition to low fertility. Third World nations have rural-urban

migration. A massive rural-urban migration in the past fe years has

created an imbalance in the distribution of population. This trend can be

reverted by creating economic and social opportunities in the rural areas,

such as making small farms profitable through better techniques, high

yielding varieties of seeds, crop-protection programme, etc.

51

State the present position of education.

Explain the problems of Education in LDCs.

The term education contains, general, technical and vocational education,

which also relates to formal and non-formal education.

General education – It is imparted through schools, colleges, technical

institutions, etc involves well planned, time bound, time schedules of teaching

and evaluation. LDCs have to face many problems in planning the formal

education. Primary education must reach to all. Secondary education is also

be given importance because it is useful in all levels in government, industry,

commerce and agriculture. It must be broad-based to provide education in

science, mathematics, arts and humanities. General education provides basic

education to be a good citizen, to orient the minds of students towards change

and development, equip them with general skills like literacy, numeric ability,

etc.

Technical and vocational education – Building technical capacity is

necessary for economic growth. Use of computers has caused a major

technological change. This needs the expansion and improvement of primary

and secondary education and the creation of incentives to increase the supply

and demand for more specialized technical training. Technical education is

required to be imparted at various levels. Technical trades like electrician,

mechanic, welder, etc. is required to be taught for manning the basic cadre of

workers. For higher level of technical education, poly-techniques institutions,

engineering collages are established.

Vocational education is essential to prepare typist, surveyors, and field

workers of various types, veterinary assistants, and other sub-professionals to

fill various posts of key importance in a developing economy.

The developing countries have been following policies of spreading

education- especially formal education- to all the sections of the society.

Though health and education are important components of HRD, government

spends larger amounts on education than on health.

Problems of Education in LDCs –

Education in LDCs is unsatisfactory. The difficulties in the field of education

have been notified. This is because of following reasons.

1. Heavy investment – Spread of education initially depends upon the

availability of school buildings. Classrooms, administrative and library,

labs accommodation plus all other facilities for each school requires a large

amount of capital investment.

2. Recurring responsibilities – It is not only enough to make a capital

investment once and for all. Salaries of teaching and non-teaching staff,

books, other teaching aids, stationary, laboratory apparatus and chemicals,

etc. constitute this recurring expenditure. Both fixed and recurring

investments are not directly productive as they neither increase the supply

of goods available at the market not it cause an increase the government‟s

52

revenue in the immediate future. So this investment is a constraint in

education in the LDCs.

3. Dearth of trained staff.- It is necessary to have trained staff in the field of

education. For want of an adequate institutional set-up, training facilities

cannot be increased rapidly. Many who have no aptitude of becoming good

teachers turn to this profession only out of unemployment.

4. Teaching and learning aids – To expand the horizons of knowledge

teaching aids play an important role. LDCs cannot mobilize the resources

for this purpose. They even don‟t have necessary skills to prepare and se

this material.

5. Inertia (Lethargy) and inefficiency – World Development Report

observes a large proportion of students who complete primary education in

low-income countries fail to reach national or international standards of

achievement in maths, science and reading. Use of technology in

educational sector changes very slowly. Still the useless technique of

cramming (reciting/revise) and forgetting after the exam is going on in the

LDCs. This never evaluate a student‟s personality and intellectual and his

power of thinking, reflecting, reasoning. The teaching methods and learning

techniques are rusty, irritable and antiqued.

6. Poor management and distorted incentives – The society‟s needs are not

perceived. No sufficient information is available. Structural rigidities are a

great obstacle. Corruption, political interference and a distortion of values

may make the system unrelated to the primary goals of development.

7. Maladjustment of social needs, especially at primary level – A minimal

arithmetical and clerical skills can be given at primary and secondary

levels, which is useful in all fields and all levels. But education system is

poor because a) 70% children live and enrolled in rural area. What they

learn in the schools is useless in their daily life. B) Primary schools are the

feeders to the high schools. Hardly 25-30% students from the primary

schools reach the high schools and 20% reach the collage. And out of those

who complete higher education, hardly 30% get employment.

8. Problems of higher education - Even though there are higher educational

institutes in LDCs, they are misadjusted to the real needs of development.

The basic mis-adjustment is these institutes are established on the lines of

developed countries instead of their own needs. Thus the imported structure

is bound to meet with limited success. Moreover per student cost of higher

education is 85-88 times than those of primary education. A serious

problem of higher education is that this system is overblown and produces

an output that greatly exceeds the capacity of the economy to absorb them.

This results in a wasteful use of resources, unemployment and

underemployment.

&&&

Explain The Employment Generation Programme In India.

53

The specifically designed anti-poverty programmes for generation of self

employment and wage employment in rural areas have been redesigned ad

restructured to improve their impact on poor. The economic survey, 1999-2000

gives a very lucid and latest classification of various employments in India.

1. Self-Employment Programmes Swarnajayanti Gram Swarozgar

Yojana (SGSY)

Integrated Rural Development Programme (IRDP) and allied programmes

such as Training Of Rural Youth For Self Employment (TRYSEM),

Development Of Women And Children In Rural Areas (DWCRA) and Million

Wells Scheme (MWS) have been restructured in to a single self-employment

programme called the „Swarnajayanti Gram Swarozgar Yojana‟(SGSY) from

April 1999. It has following objectives a) Focused approach to poverty

lessening/improvement. B) Capitalizing advantages of group lending. C)

Overcoming the problems associated with multiplicity of programme. The

SGSY is conceived as a holistic programme of micro enterprises covering all

aspects of self-employment, which includes organizing rural poor into self-help

groups (SHGs). The object of SGSY is to bring up the poor family above the

poverty line by earning monthly Rs. 2000. Subsidy of 30% of the project cost

or Rs.7500, which ever is less, is given under this aid. SGSY is funded by the

center and the states in the ratio of 75-25.

2. Wage Employment programmes:

There are two programmes under wage employment programme. They are

i) Jawahar Gram Samridhi Yojana (JGSY) ii) the employment Assurance

scheme (EAS)

i) Jawahar Gram Samridhi Yojana (JGSY) – in April 1999 Jawahar

Rozgar Yojana has been structured, streamlined, and renamed as Jawahar

Gram Samridhi Yojana (JGSY). The primary objective of JGSY is

creation of demand driven village infrastructure. And to generate the

supplementary employment for the unemployed poor in the rural areas is

the secondary objective. Families below poverty line are benefited under

this scheme.22.5% of the annual allocation must be spent on beneficiary

schemes for Scheduled Castes/ tribes and 3% for the disabled.

ii) The Employment Assurance Scheme (EAS) – This scheme was

launched on 2nd

October 1993 in 1772 identified backward blocks situated

in draught prone, desert, tribal and hill areas. This scheme was

restructured as a single wage employment programme from April 1999

with a fixed annual outlay. The primary objective of the EAS is creation

of additional wage employment opportunities during the period of acute

shortage of wage employment through manual work for the rural poor

living below the poverty line. The secondary objective is the creation of

durable community, social and economic assets to sustain future

employment and development. The Zilla Parishads are designated as the

implementing authorities of the scheme.

3. Urban Employment and Anti-poverty Programme (UEPP)

54

This programme is specially planned for the urban areas. There are two

schemes under this programme. They are I) Prime Minister‟s Rozgar Yojana

(PMRY) ii) The Swarna Jayanti Shahari Rozgar Yojana (SJSRY)

i) Prime Minister’s Rozgar Yojana (PMRY) – This scheme was

launched in urban areas in 1993-94 and extended to rural areas also from

1994-95 for providing self-employment to educated unemployed. In

Eighth Plan (1992-97) it attempted to generate employment for more

than a million people by setting up of seven lakh micro-enterprises. In

Ninth Plan (1997-2002) the scheme was continued with certain

modifications.

ii) The Swarna Jayanti Shahari Rozgar Yojana (SJSRY) – Nehru

Rozgar Yojana (NRY), Urban Basic Services for the Poor (UBSP) and

Prime Minister‟s Integrated Urban Poverty Alleviation Programme

(PMIUPEP) were combined together and The Swarna Jayanti Shahari

Rozgar Yojana (SJSRY) came into operation from December 1997.

Under this scheme the urban unemployed or underemployed poor living

below poverty line and educated up to std. IX are provided employment

through setting up of self-employment ventures or provision of wage

employment. The scheme gives special impetus to empower and uplift

the poor women and launches a special programme, namely,

Development of Women and Children in Urban Area (DWCUA).

55

Chapter 7

Growth Of Global Economies In 1990’s

Population As An Important Determinant Of Development

The size of the population along with its structure and quality acts as a

constraints on the economic development of a country. It is necessary to

remember that given a large capital stock and a high quality of population, the

size of population can become an asset. World‟s top ten populous countries in

1999 are China, India, USA, Indonesia, Brazil, Russian Federation, Pakistan,

Bangladesh, Japan and Nigeria. China and India account for 37.6% of the

World‟s population. Though China‟s population is one and quarter times

India‟s population, the surface area with China is almost three times that of

India. As a result, the density of population i.e. the number of people living per

sq. km is 134 in China but336 in India.

These top ten populous countries account for 355.7 crores or 59.4% of

the World‟s population. However, they occupy just 38.9% of the world‟s

surface are. Among the top ten Bangladesh is the most crowded country with

981 people per sq km. While the Russian Federation is the most thinly

population country with 9 persons per sq km. China has 20.9% of the world‟s

population and 7.2% of the world‟s surface area. India other hand has 16.7% of

the world‟s population with just 2.5 of the surface area of the world.

Low density of population can be an advantage in the sense that it shows

a larger surface area, meaning a greater share of natural resources available, per

person. Along with the manageable size of population, a higher quality of

population larger stock of capital per person and a higher level of technological

advancement make for rapid economic development.

Explain The Challenges of Initiating and Sustaining Reforms.

The revolution in the information technology, introduced several countries

the economic reforms. But India was undergoing apolitical transition from a

single-party rule to the coalition rule. This made the policy decisions difficult

and on the eve of 90s, India was forced to initiate the first phase of reforms for

overcoming the „first-order problems‟ afflicting the Indian economic policy.

The challenges of initiating and sustaining (maintaining) reforms can be

described as follows:

1. Sustaining Mass production without economic concentration – Today‟s

industrial economy is sustained by mass consumption. This needs a)

growing demand ensured by variety, quality and warranty. And b)

Technically dominated production processes. Large sized firms have these

advantages. These trends would indicate concentration of economic power.

Also access to information is available to large firms. India has always

opposed the concentration of economic power and dominance of

multinational companies (MNCs).

56

2. Technological progress – Technical knowledge is important in today‟s

production. Traditionally, land, labour and capital were given importance.

But today, we find that technical knowledge and innovation change the

comparative advantage of a country. With technology an innovation, a

nation can increase it‟s competitiveness. New ideas, new products, new

processes, new inventions, etc. are coming out at such a speed that products

become outdated much before they are worn out.

3. Lessons from the American Text of Development – USA is the largest

economy in the world has greatly benefited though the development of new

technologies. India has got the potential to become the cradle of innovators,

designers, thinker, artists and entrepreneurs because she has democratic,

secular, diverse, individualistic society. But firmly establishing the

conditions listed above as American lessons is a challenge, which calls for

a political will, and courage to remove communalism, fanaticism,

regionalism and what Gandhi has once called „misguided patriotism‟.

4. Global Trading – Communication technology reaches millions and

millions of people around the world. Globalization is a fact and not an

option. Trade in goods must increase. But trade in commercial services has

still greater a scope to increase. Freedom of trade in goods and services is

itself a challenge because such a trade imposes a strong discipline on local

producers as well as labourers. Higher levels of work ethic and productivity

norms, which need to be accepted as a challenge.

5. Financial Sector Integration – Private capital flows for direct and

portfolio investment to developing countries has grown rapidly. According

to World Bank‟s Report (2000-01) net private capital flows to the low and

middle income economies have increased for 6.28 times in eight years. And

a seven times growth in foreign direct investment. Financial market reforms

would encompass foreign exchange market, stock market, banking sector

reforms and so on. It involves several considerations and several issues.

India will have to adapt its policies to sort out these issues and turn the

difficulties into opportunities by carrying out second-generation reforms.

6. Outward orientation – Economies emphasizing exports of manufactured

goods have given a better performance than inward looking economies like

Indian one. India will have to give an outward orientation to her economy.

The growth of manufacturing exports form India faces three basic hurdles –

a) poor infrastructure b) high cost of capital and c) high barriers to imports.

By removing the hurdles, we can accept the challenge. Similarly

knowledge-oriented services need to be exported in larger and larger

quantities.

7. Higher education – The knowledge economy requires highly educated

people. But for that primary education is important. Education plays an

important role in HRD. To flourish the Indian creativity it has to be

rewarded. A system of intellectual property rights will open up possibilities

of large rewards for innovators.

8. Legislative Reforms – Industrial Relation Act, Factory Acts and such other

business laws need amendments that would facilitate the structural reforms

57

in the Indian economy. Several barriers to domestic trade and transport will

have to be removed.

9. High growth rates in Agricultural sector - Indian farmers must be free

from all domestic restrictions on storage, transport and sale of agricultural

products. Public investments on irrigation, agricultural research and

infrastructure must be enhanced as to remove market imperfections and

help exports of agricultural products.

10. Empowering the poor – Employment programmes are the most effective

kind of anti-poverty measures. They should be strengthened. HRD policies

should be reoriented. Private sector initiatives in the service sector such as

health, education, etc. is the today‟s need.

These are the challenges of economic reform. They are worth accepting. What

needed is the courage and will to introduce these reforms and take corrective

steps to ptotest the vulnerable sectors from their fall-out. If this done, the

Indian economy can demonstrate a rare capacity of rapid growth.

***

Explain Economic Rationale Of State Intervention.

India has opted for a mixed economy. Such an economy with

democratic planning placed special responsibility on the state. The government

accepted several economic functions. Some of them were directly carried out

through the public sector, which had emerged as the senior partner in the

economic activity of the country. With the dawn of liberalization and

globalization the whole context of state intervention changed. Therefore it is

necessary to redefine the role of state in term of economic intervention.

1. Promotion of Social Welfare – In the present Indian society almost 35

crores of people are below the poverty line. The government has to accept

the responsibility of poverty alleviation by undertaking programmes like

employment generation and providing facilities for training the people for

self-employment. One of the important causes of poverty is the lack of

income earning assets available to the poor. Land reforms- especially the

ceiling on the land holding – aimed at providing assets to the tenants and

landless labour. Besides the building up of rural infrastructure is going to

provide an opportunity for the poor to avail of credit and obtain income-

earning assets.

2. Economic and social infrastructure – The state, in a developing country

like India, has to come forward and take initiative in building up economic

and social infrastructure. The provision of roads and railways, hydro-

electricity and irrigation projects, drinking water and sewerage projects,

etc.constitute economic infrastructure. Even though private sector is coming

forward in the fields of power generation and telecommunication it is

accepted as the primary responsibility of the state. The social infrastructure

in te form of health and education is another area of state intervention. The

same way provision of health facility also requires state participation

58

because the private sector does not come forward to accommodate the poor

by providing free or cheap medical aid.

3. Macro economic management – The state has to intervene to promote

industries where the poor and the unorganized workers are seeking

employment. The state has also to come forward in rectifying the regional

imbalances in respect of economic development in general and industrial

development in particular. Besides financial assistance to small-scale

industries, boosting the micro finance schemes and plugging the credit

gaps, supply9ing market information to the agricultural sector etc. are other

examples of micro economic management.

4. Reform of the public sector – Many public sector enterprises are

experiencing hardships due to lack of autonomy, red-tapism, interference

from the politicians as well as the bureaucrats and several other drawbacks.

The reformulation of policy and restructuring of the administrative set- up

with regard to public sector is an urgent need of the hour.

5. Market failures – The market failure comes from the lack of wage and

price flexibility which leads to evils like business fluctuations,

unemployment and inflation. Under such circumstances the state has to

come forward.

6. External constraints – Problems arise when government lose creditability

in financial markets. In this situation private investors are likely to be

scared away. In such cases the government of the country is called upon to

become active obtain assistance from international as well as foreign

agencies.

7. Conflicting interests – In a federal country like India, the interests of

constituent states are likely to be conflicting. Conflicts may also arise

among national interests of various countries. Sometimes nations resort to

anti-social practices like dumping. In all such cases, not only state

intervention by state initiative in securing international co-operation is

needed.

The role of the state has undergone a considerable change especially

during the last two decades. The economic rationale of such a change itself

goes on changing due to the changing environment, not only inside but also

outside the country. The current role of the state would not last very long or

attain an equilibrium at least for some years to come.

$$$

US Dollar as an International Currency

From World War II the United States emerged not only victorious but as a big

brother with its economy intact – able and willing to help top reconstruct the

economies of the countries all over the world. The major international

economic institutions, which were created during the post warr period, were

GATT, the Bretton Woods exchange rate system, the International Monetary

59

Fund (IMF), and International Bank for Reconstruction and Development

(IBRD) or the World Bank. But still there were major economic crises.

Under the leadership of John Maynard Keynes, nations gathered in

1944 at Bretton Woods, and hammered out an agreement that led to the

formation of major economic institutions. The outcome was a system for

regulating international financial transactions. The participants of the

conference were aware of the rigidities of the Gold Standard. They wanted the

Bretton Woods system to replace the gold standard. This system established a

parity of each currency in terms of both the US dollar and Gold.

American economy was the strongest economy unaffected by the war

and because the USA had stated a plan of helping the nations rebuild their

economies, American dollar enjoyed a prestige backed by a worldwide

demand. This made the dollar a hard currency. In addition the Bretton Woods

Agreement had almost recognized the US dollar as an international currency.

For the first three decades after World War II, under the Bretton woods

arrangements, the US dollar was the key currency. Most ot the international

trade and finance were carried out in dollars. In international transactions,

payments were very often made and accepted in dollars. Exchange rate parties

were quoted in dollars. Private and government reserves were kept invested

dollar securities. This period was remarkable for rapid recovery and beginnings

of development of the LDCs. During this period, the world was on a dollar

standard and the US dollar was the world currency because of its stability,

convertibility and worldwide acceptability.

This situation last up to the trade deficits of the US. Growing overseas

investments by the American companied resulted in a piling u of dollars

abroad. By the beginning of the 70s, the stock of liquid dollar balances had

become so large that governments found it difficult to maintain the official

parties with the dollar. Dollar no longer enjoyed public confidence. In 1971

President Nixon officially served the connection between the dollar and gold.

With this the US dollar would no longer allow an automatic conversion of

dollars into other currencies no would it allow the conversion of dollars into

gold for $35 per ounce. As the US abandoned the Bretton Woods system, the

role of dollar as the world currency came to an end.

()()()()()

Partially Convertible Indian Rupee

After independence Indian rupee was pegged to the pound sterling on

account of historic links with Britain and this was in line with Bertton Woods

system. With the breakdown of the Bretton Woods system in the early

seventies and the consequent switch towards a system of managed exchange

rates, and with the declining share of the UK in India‟s trade the Indian rupee,

effective September 1975 was delinked from the pound sterling in order to

overcome the weakness of pegging to a single currency. The exchange rate,

now determined with reference to the daily exchange rate movements of an

60

undisclosed basket of the currencies of the countries with which India was

trading partner. The basket composition was at the discretion of the RBI,

subject to approval of Government of India. The basket linked management of

the exchange rate of rupee, however, did not fully reflect the market dynamics

and developments in exchange rates of competing countries, the rupee‟s

external value has been allowed to determined by market forces in a phased

manner following the payments difficulties since the early 90s.

###

61

Chapter 8

International Economic Co-operation

[A]

International Monetary Fund (IMF)

The Bretton Woods Conference (1944) paved the way for the establishment of

IMF. The fund came into existence in Dec 1945 with a modest membership of

44 nations. The number has gone up to 145 in 1990. The establishment of the

IMF is a landmark in international monetary co-operation.

The purpose of IMF

1. To promote international monetary co-operation through a permanent

institution which provides the machinery for consultation and collaboration

on international monetary problems.

2. To facilitate smooth and stable growth of multilateral international trade.

3. To promote stability in exchange and to avoid competitive exchange

depreciation.

4. To remove temporary disequilibrium in the balance of payment of member

countries.

5. To assist in the establishment of a multilateral system of payments in

respect of current transactions between members and in the elimination of

foreign exchange restrictions, which obstructs the growth of world trade.

Organization

1. Every member country is required to subscribe to the capital of the fund at

fixed quota.

2. USA, UK, China, France and India have the largest share in the initial

capital, which is $8.5 billion.

3. The contribution of member countries was collected partly in gold and

partly in domestic currency. A member country has to pay 25% of this

quota in gold.

4. In 1969, IMF introduced a new currency called Special Drawing Rights

(SDRs)

Management

1. The fund is carried by the Board of Executive Directors under the direction

of Board of Governors and each member country deputing its governor to

the Board of Governors.

2. The board of Executive Directors consists of 20 members of whom five are

appointed by each of the five largest quota holding members. Rest of the

members elects the remaining fifteen.

3. A managing director who is also the „chairman‟ of the board heads the

Board.

62

Functions of IMF

1. Short-term Credit Institutions – The fund serves as a short –term credit

institution and assets to the country facing a temporary disequilibrium in its

balance of payments. A temporary disequilibrium can be caused by crop

failure or other natural calamities, which can be effectively overcome by

the fund.

2. Adjustment by Consensus – In the absence of a forum like the IMF, the

rivalries among different countries of the world would have caused a great

damage to al the countries. The IMF no only maintains a reserve of

currencies but also examines the accuracy or otherwise of the currency

parties of the member countries.

3. Active dispensation of justice – The IMF helps to tide over the balance of

payment deficit. It also asks the countries facing a balance of payment

surplus to revalue their currencies.

4. Training and technical assistance – The fund provides technical

assistance to member countries in the formulation and execution of general

economic policies, fiscal as well as monetary policies. It also provides

training either at its headquarter or by sending its representatives for a

period up to six months in member countries.

5. Publication – The fund also brings out several publications for the benefit

of all the member countries. The annual reports of the executive directors,

balance of payment year book, the annual report of exchange restrictions,

international financial news survey, international financial statistics,

schedule of par values are some of the regular publication of the IMF.

Evaluation of IMF

A] Achievements

1. The fund has been useful as a short-term credit institution.

2. The fund‟s technical advice and assistance programme has helped the

members from the third World.

3. It has also provided assistance to many LDCs to strengthen their central

banking and monetary systems.

4. It has co-operated with many international organizations, to promote

economic development of many countries.

5. It has maintained a limited flexibility of exchange rates.

6. It has established various special funds like the compensatory financing

fund for meeting fluctuations in exports earning, etc.

B] Failures

1. One serious charge against the IMF is that it has served as the Rich Nations

Club.

2. Though it is a fact that the IMF has helped to reduce exchange rate

fluctuations, the fact remains that the fund could not take effective steps to

remove the scarcity of certain currencies.

63

3. In the field of liberalization of trade and international liquidity, the success

that the fund has achieved, is very limited.

[B]

SOUTH ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION

(SAARC)

SAARC was established in December 1985. The member countries were

Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

Objectives and Principles of SAARC

1. To promote the welfare of the people of South-Asia and to improve their

quality of life.

2. To accelerate economic growth, social progress and cultural development in

the region and to provide all individuals the opportunity to live in dignity

and to realize their full potentials.

3. To promote and strengthen collective self-reliance among the countries of

south Asia.

4. To contribute mutual trust, understanding nd appreciation of one another‟s

problems

5. To promote collaborations and mutual assistance in the economic, social,

cultural, technical and scientific fields.

6. To strengthen co-operation with other developing countries.

7. To strengthen co-operation among themselves in international forums on

matters of common interest.

8. To co-operate with international and regional organizations with similar

aims and purposes.

The institutional framework of SAARC consist of four tiers.

1. Heads of State, as the highest decision making authority, meet once a year.

2. The Council of Foreign Ministers formulates policies for which they meet

twice a year.

3. Standing Committee of foreign secretaries reviews the progress of SAARC

activities, approves projects and finalizes programme including their

financing.

4. Technical Committees are responsible for implementation, co-ordination

and monitoring the programme, besides identifying new areas of co-

operation.

India’s Trade with SAARC Countries

In the last few years,

India‟s trade with SAARC countries has shown a considerable growth but the

growth is not uniform in respect of all the countries.

Bangladesh accounts for more than half of India‟s total exports to SAARC

countries.

64

The imports from Bangladesh, which were limited earlier, have started growing

in recent years.

In case of Pakistan, imports have shot-up signifying a better economic co-

operation.

In case of Nepal also, India‟s export surplus is diminishing and imports from

Nepal are growing.

India‟s trade relations with Bhutan are however declining.

In respect of Sri Lanka, India‟s exports have continuously increased but the

imports in money terms have remained stagnant.

Problems SAARC facing

1. Barriers to Trade – Larger economies like India, Pakistan, and

Bangladesh have higher tariff rates than those of other smaller economies.

2. Discriminatory bi-lateral arrangements – Regional trade organizations

are expected to have equitable terms amongst all member countries.

However, their mutual relations have obviously governed bi-lateral trade

relations between countries. e.g. Indo-Pak Trade.

3. Lack of information – There exists a considerable information gap

reporting export potential, import requirements, domestic economic

policies, business opportunities, infra-structural facilities, etc.

4. Problems of finance – There is lack of credit and finance to the exporters

and importers.

5. Co-ordinating transport facilities – The transport and communication

networks are not the same in all the member countries.

6. A matter of relations – For growth of regional trade, an atmosphere of

mutual trust is required. In respect of SAARC, this condition does not

obtain.

[C]

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The agreement, which had the membership of 83 nations and coverage of four-

fifth of the world trade, came into existence in 1947. In 1960 a provision was

made for the creation of a board of representatives for the administration of the

agreement. This board kept a watch so as to ensure that the conditions agreed

upon by the member countries were observed. The General Agreement on

Tariffs and Trade (GATT) is the first successful effort at increasing

international co-operation in the field of trade aimed at removing trade barriers

and laying down a cod of conduct for the member countries.

The main objectives of the GATT are as under:

1. World trade should be placed on a non-discriminatory footing.

2. Domestic industries may e protected by raising tariffs but no other

commercial measures should be taken.

3. The international co-operation and consultations should aim at

protecting theinterests of the member country.

65

4. The agreement should server as a frame for negotiations among the

member countries, regarding tariffs and the removal of trade barriers.

Various rounds of discussions held from time to time on matters of trade

and tariffs, settlements of complaints or disputes and encouragement of

bilateral trade pacts are the characteristic features of this Agreement.

The developing countries have been given a special treatment in the

GATT in as much as it allowed –

1. Uni-lateral facilities

2. Physical restrictions

3. Freedom of extending financial help for the growth of exports.

Even though GATT is called “Rich Nations‟ Club” it is not denied the fact that

the GATT has facilitate the growth of trade and has provided a forum for

mutual consultations and settlement of disputes.

The Uruguay Round -

GATT works through periodical conferences. The eighth conference

was held at the Punta del Estc in Uruguay. Hence this is known the Uruguay

round. This round raised a number of controversial issues. It contained the

mandate to have negotiations in fifteen areas; fourteen areas in respect of trade

of goods forming part one of the mandate and trade in services forming the

fifteenth area in part two which related to the trade in services. The new

subjects like Trade Related Investment Measures (TRIMs) and Trade Related

Intellectual Property Rights (TRIPs) and the entire part two related to trade in

services were included in the agenda of GATT for the first time. But there was

no unanimity among the participant countries and the Uruguay found itself in a

deadlock. To overcome this difficulty, the Director General (D.G.) of GATT,

Mr. Arthur Dunkel prepared a document and presented it before the member

countries as a compromise solution. This document is known a Dunkel

Proposals. By the end of 19*93 these proposals were passed as the Final Act

and was signed by 117 nations including India, on April 15th

, 1994.

Effects of the Uruguay round agreement on the Indian economy –

1. Import Duties and Export Subsidies – India has promised reduce the basic

duty by 30% within six years. Raw materials, intermediate goods and capital

goods are covered by this provision. Countries like India ith a per capita

income of below $1000 were exempted form the removal of such subsidies,

this has not much impact on India‟s exports.

2. TRIPs and the Indian economy – Because of the provisions of TRIPs,

according to some critics, India was likely to face disastrous effects in respect

of pharmaceuticals and agriculture. By its coverage the entire industrial and

agricultural sectors and part of the biotechnology sector are covered under the

patent provisions. Because the patent holder can challenge all price-centered

measures this provision was feared to be disastrous for India.

3. Protection in Agriculture – The TRIPs text demands protection for

microorganisms, non-biological and microbiological processes and plant

66

varieties. India can provide for protection of plant varieties by patent or some

other effective method after completing the first transitional ten years.

4. Possibility of bio-piracies – India is rich in herbal wealth and has inherited

traditional wisdom regarding its use. This whole traditional knowledge is in

danger of bio-piracy. Unless we are alert enough, foreign companies and multi-

nationals will try to take patents of preparations based on Indian herbal wealth

and wisdom.

5. TRIMs and its effects – The main provisions of TRIMs are as follows

which have become harmful to Indian economy –

1. Removal of all restrictions on foreign investments

2. Non-discrimination between national and foreign companies

3. Opening all areas for foreign investment

4. No ceiling on equity participation by foreigners

5. Free imports of raw materials and components

6. No obligations regarding use of local material or export of out put

7. Removal of restriction on repatriation of dividend, interest and royalty

7. Effects on Textile – Certain proposals under this agreement aim at

liberalizing the trade of textile and clothing. The liberalization is supposed to

take place in a planned manner spread over ten years. The provisions of this

move also are titled in favour of the developed countries. As a result, India‟s

most important sector is also likely to be in danger.

$$$

[D]

WORLD TRADE ORGANIZATION (WTO)

GATT was converted form a provisional agreement into a formal international

organization as the consequence of the Uruguay Round Agreement. This

organization is called World Trade Organization, which became functional

with effect from January 1, 1995. The General Council of WTO is in charge of

its regular business while a ministerial conference meeting atleast once every

two years gives direction to the working of WTO.

Principles of WTO –

1. Non-discrimination – this principle implies that all trading partners shall be

granted the most favoured nation treatment and foreign goods, capital,

services, trade marks, and patents are given the same treatment as is given

to their national or domestic counterparts.

2. Freedom of trade – The most important and ultimate objective of WTO is

progressive liberalization of trade so that there remain no barriers in the free

flows of goods and services internationally.

3. Stability and predictability – The WTO is committed no to create or raise

trade barriers arbitrarily.

4. Fair competition – The WTO system of trade, it is claimed aims at creating

open fair and undistorted competition.

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5. Cases of developing countries - In respect of developing countries,

especially the least developed, is given more time to adjust and is given

special privileges.

Functions of WTO –

1. Facilitating the implementation, administration and operation for the

furthering of the objectives of multilateral trade agreements and providing

the framework for such implementation and operation.

2. Providing a forum for negotiations among the members concerning their

multilateral trade relations.

3. Administering the „Understanding on Rules And Procedures Governing the

Settlement of Disputes‟

4. Administering the Trade Review Mechanism.

5. Achieving greater global economic policy co-ordination in co-operation

with such agencies as IMF, IBRD, etc.

Functions of General Council of WTO –

1. To supervise the operations of revised agreements relating to goods,

services and TRIPs.

2. To act as the Dispute Settlement Body.

3. To serve as the Trade Review Mechanism.

4. To establish the three councils for goods, services and TRIPs as its own

subsidiaries.

The agreements covered by WTO -

The WTO agreements are three in number. They are

1. General Agreement on Tariffs and Trade (GATT)

2. General Agreement on Trade in Services (GATS)

3. General Agreement on Trade Related Aspects of Intellectual Property

Rights (TRIPs)

These are followed by extra agreements and annexure dealing with special

requirements of specific sectors like agriculture or textiles, etc. besides there

are detailed and lengthy schedules of commitments made by individual

countries allowing specific foreign product or services and access to their

markets.

###

68

[E]

EURO-DOLLAR MARKET AND EURO CURRENCY

During the periods when some strong national currency performed as an

international currency, international liquidity was no problem and trade and

transactions were facilitated. On the other hand, the absence fo such a strong

currency or the fluctuations in the exchange rates of national currencies vis-à-

vis (in comparison with) the strong currency has always created obstacles in the

growth of trade.

Meaning and scope –

Eurodollars, in a narrow sense, are financial assets and liabilities denominated

in US dollars but traded in Europe. The scope of the market, however, is not

longer limited to Europe and the Eurodollar transactions are now held in its

broader sense. Today, Eurodollar transactions are held in money markets other

than the European markets and in currencies other than the US dollar. Today,

the term euro-currency Market is in popular use, rather than the Eurodollar

market. In the wider sense, the dollar deposits with banks in Montreal, Toronto,

Singapore, Beirut, etc. are also Eurodollars, and so are the deposits

denominated in European currencies in the money markets of USA and at the

above centers. The term foreign currency market should be more appropriate to

describe the expanding Eurodollar market of the present day.

Characteristic features of the market –

1. International market Sans (without) national Control – The Euro

currency market is a international currency market and it is under no

national control. In fact this market has emerged out of necessity and as the

most important channel for mobilizing and developing funds at the

international level.

2. Short-term money market – The deposits in this market are short-term

deposits with maturity ranging from one day to several months. All these

deposits are paid interest. The Eurodollars loans are short-term loans for a

period less than or equal to three months.

3. A wholesale market – The Eurodollar is said to be a wholesale market

because it deals with large sums of money in the form of Eurocurrencies.

4. A highly competitive and sensitive market – This market has undergone a

qualitative growth and operational expansion because of its efficiency and

competitiveness. Eurodollar market responds to the interest rate changes

promptly by varying the supply of and the demand for funds.

Factors responsible for the growth of the Eurodollar Market –

1. The Suez Crisis – In 1956 during the Suez crisis, sterling credit facilities

came under restriction. This crisis provided a stimulus to the growth of the

Euro dollar market.

2. Exchange control relaxations and convertibility of currencies – After

the process of the post-II war reconstruction got ell under way, the

exchange controls came to be gradually relaxed. The stability of the

69

exchange rate markets enabled the West European countries to resume

currency convertibility. This gave a further motivation to the growth of the

Eurodollar market.

3. The political factor- The cold war between the capitalist and the

communist blocks of countries also contributed to the growth of the Euro

market. A fear always creep around in the minds of banks that the dollar

balances might be seized by the US if the cold war turned hot. This

tendency served to supplement the dollar resources of the Euro market.

4. Deficits in the American Balance of Payment – Since 1950, the USA

continuously experienced deficits, which went on increasing during the

subsequent period. This was another important factor leading to the rapid

growth of the Euro market.

5. The Regulation ‘Q’ – The regulations of the Federal Reserve System,

which prohibited interest payment deposits for a period of less than 30 days

greatly, contributed the fast growth of the Euro dollar market. This is

because the Eurodollar market paid interest for less than 30 days also.

6. Innovations in Banking – The beginning of innovative banking in Europe

and America attracted more and more customers encouraging the growth of

the Euro market.

7. The Petrodollars – The flow of petrodollars, which resulted from OPEC‟s

hikes in oil prices since 1973, has been a significant source of the

Eurodollar market.

8. The participants in the market – Participants in the Euro currency

business include governments, international organization, commercial

banks, central banks, the multinational corporations, export-import firms

and trading firms and individuals also.

$$$

70

Chapter 9

FOREIGN CAPITAL

ROLE OF FOREIGN CAPITAL IN DEVELOPMENT Foreign capital coming to the LDCs in various forms can play an important

role in the context of economic development. It can be summed up as follows –

1. Raising the rate of saving- LDCs are trapped in the vicious circle of

poverty. Raising the rate of saving can break this. But saving is impossible

for LDCs. Under such circumstances, if foreign capital supplements

domestic capital, total capital formation rises above the static level and

generates economic growth.

2. Attaining a higher level of investment- Saving and investment must

balance. But when a development plan is prepared and executed a higher

level of investment is needed. Savings can attain this, which is not possible

for LDCs. This gap can be filled up by foreign capital.

3. Providing venture capital – There are many areas, which require heavy

investments. But what is „heavy‟ for an investor in an LDC can be „light‟

for one from an advanced country. Again „new‟ investments are familiar in

advanced countries. Therefore, such investments can be left to the foreign

investors.

4. Building up of infrastructure - The LDCs require the building up of

economic infrastructure in the form of social investment such as railways,

bridges, etc. All these involve huge investments, which is possible with the

help of foreign capital.

5. Developing basic and key industries – Basic industries such as steel,

cement, etc. need heavy investment, which is a burden over an

underdeveloped economy. But investment in such industry is useful in

development of growth, which can be made possible with the foreign

investments.

6. Creating employment opportunities – Foreign capital invested in the

building up of infrastructure, directly creates employment opportunities. As

a result foreign capital becomes instrument in creating employment

opportunities.

7. Raising Government Revenue – Government can impose an import duty

on goods being imported. This way government can get revenue. An

alternative policy is to allow multinational corporations to function in the

country. This would avoid imports, start the process of import substitution

and thereby contribute to development. At the same time, by taxing these

multinationals, the government can get a share in their profit as a source of

revenue.

8. Developing human resources – When foreign capital comes into a

country, especially private foreign capital, it is in the form of plant,

machinery and equipment along with the technological benefits. This helps

the development of human resources of the LDCs.

9. Creating industrial culture- Industrial culture is useful in the overall

development of economy, which cannot be found in LDCs. The way of

71

working of foreign firms has a demonstration effect on local firms and

entrepreneurs as well as workers. These new values and attitude are the

basic to economic development.

LIMITATIONS OF FOREIGN AID

Foreign investment has its limitations. They are as follows –

1. Availability of funds – There are vry few countries who can spare surplus

funds required on. Many advanced countries themselves have been

borrowing from the US. Sparing surplus requires containing one‟s own

expenses. This involves several hurdles besides motivating and persuading

democratic bodies like parliaments of donor countries.

2. Absorption capacity of the LDC – The aid receiving country may demand

and does need large amounts of foreign capital. But the crucial question is

how much an LDC can absorb? Absorption capacity of an economy

depends upon the ability to plan and execute development projects.

3. Availability of resources – Capital is an important factor of production and

foreign capital is welcome on a number of counts. But for utilizing capital,

a country must possess other factors of production ie. Adequately

developed human and natural resources must be available.

4. Repaying capacity – The recipient LDC must possess potentialities for

repayment of debt. Debt-servicing itself involves a large burden in terms of

foreign exchange. The repayment capacity therefore would depend upon the

capacity to generate surpluses and because these surpluses must be in the

form of foreign exchange.

5. Will to develop – Foreign capital is a catalytic agent. It is the economy that

develops and the society promotes such a development. The people in the

LDCs must therefore possess the will to develop. They must put in their

efforts and work to make the best of scarce capital resources that have

become available through foreign aid.

Arguments against Foreign Capital –

Some problems related with foreign capital can be spelt out as arguments

against foreign capital. They are as follows.

1. Distortion of priorities – Most of the LDCs have prepared their own plans

for development according to their priorities. But the lending governments

may tie their aid to some projects, which may not stand priority.

2. Inappropriate techniques – Foreign capital is said to help a transfer of

technology and modern managerial skills, etc. Sometimes this is

inapplicable in the recipient countries.

3. Balance of payment problems – To overcome balance of payment

problems, LDCs resort to foreign borrowing. Multinational companies‟

72

investment helps in rise in income and employment. This creates

inflationary pressures. But still developing countries have to face a serious

problem of deficit in their balance of payment.

4. Debt trap – Continued dependence on foreign capital and unproductive or

inefficient utilization of external debt may put a country in what is known

as a debt-trap. A country can be said to be caught in a debt-trap when it is

required to borrow for repaying of old debts. But this situation may arise

even when a country is capable of repaying because their export –earnings

is much more.

5. Wasteful utilization – Borrowing is a softer option. When external debt is

easily available, a government is tempted to go on borrowing. Such easy

loans tend to be utilized in a wasteful manner. Where they get invested may

not stand priority.

6. Gap between rural & urban sector – Foreign companies are interested to

invest in urban areas where they get ready infrastructure. They help the

development of urban areas. This creates a wide gap between urban and

rural areas. This encourages the rural-urban migration.

7. Damaging the domestic entrepreneurship – Foreign capital accompanied

by foreign managerial skills and direct investment has damaging effects on

domestic entrepreneurship of the host economies.

8. Erosion of Sovereignty – The most important objection to foreign aid

when it comes through official channels is that it curbs the sovereignty of

the LDCs. The conditions set by the donor countries are so humiliating that

if the country were not in need of aid would not have accepted them.

***

TYPES OF FOREIGN INVESTMENT

Foreign investment takes different forms.

A] Private Foreign Investment –

1. Direct foreign investment – People in the investing countries may directly

invest in the LDCs by starting a factory or a firm. A foreign company may

set its subsidiary in a developing country. Or a corporation in some

advanced country might operate various companies in different LDCs.

2. Indirect foreign investment – This type of investment is also known as

portfolio investment. E.g. foreign individuals and financial institutions may

hold shares of companies in India. Generally the government of India

would guarantee such shares and securities. Holding of shares of companies

in developing countries by private foreign investors does not involve right

to control the company of which the shares or debentures are held by

foreigners. They are only entitled to dividends.

73

B] Public Foreign Investment –

1. Bilateral loans – An LDC might enter into an agreement with an advanced

country and under such an agreement, a loan may be made by the lender to

the borrower country. Such agreement may or may not specify the purpose

of the loan.

2. Bilateral soft loan – The lender country may grant a „soft‟ loan, under a

bilateral agreement. According to Public Law 480, the American president

is empowered to give such loans to poor countries for specific reasons. The

purpose of these loans is to purchase goods and commodities from specific

(lender) country.

3. Multilateral loans – When developed countries contribute to „sow agency‟

brought into existence for the purpose of giving development assistance to

the LDCs and by agreement the loan made by such agency becomes a

multilateral loan.

4. Intergovernmental grants – Grants given officially by one government to

another government fall into this category. Such grants are usually

conditional and for specific purposes only.

C] Tied and Untied Aid – Source, project and commodities can tie Aid, or it

may be tied by both project and source and become double tying aid. Untied

aid on the other hand is a general-purpose aid, which is also known as „non-

project aid‟ or „programme aid‟

***

indian and global economic development

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