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INDIAN ECONOMY(PART-II)

CONTENTS

Sl. No. TOPICS Pg. No.

1. Monetary & Fiscal Policy .................................................................... 5-9

2. Manufacturing Sector ...................................................................... 10-14

3. Parallel Economy in India ............................................................... 15-21

4. Money Laundering: Brief Introduction ........................................... 22-30

5. World Economy ............................................................................... 31-40

6. International Trade and Finance .................................................... 41-53

7. Poverty & Un-employment ............................................................. 54-71

8. Population of India (India's Census) .............................................. 72-79

9. Multilateral Agencies ....................................................................... 80-98

10. Interim Union Budget 2014-2015 ................................................ 99-107

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© Chronicle IAS Academy 5

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The use by the Central Bank of interest rateand other instruments to influence moneysupply to achieve certain macro economic goalsis known as monetary policy. Credit policy is apart of monetary policy as it deals only withhow much and at what rate credit is advancedby the banks. Objectives of monetary policy are:accelerating growth of economy, maintainingprice stability, stabilization of exchange rate,balancing savings and investment andgenerating employment.

Monetary policy is generally referred to aseither being an expansionary policy, or acontractionary policy, where an expansionarypolicy increases the total supply of money inthe economy, and a contractionary policydecreases the total money supply. Expansionarypolicy is traditionally used to combatunemployment in a recession by loweringinterest rates, while contractionary policy hasthe goal of raising interest rates to combatinflation.

The Reserve Bank of India announces theMonetary and Credit Policy twice a year-October and April. October policy is called busyseason as it is the harvesting time for the kharifseason which used to account for the majorpart of India’s agricultural operations Thispolicy determines the supply of money in theeconomy and the rate of interest charged bybanks. The policy also contains an economicoverview and presents future forecasts.

The instruments of monetary policy are bankrate, SLR, CRR and open market operations bythe RBI on the basis of repo and reverse reporates (buying and selling of Government

securities in the open market to regulate moneysupply). Monetary policy works throughinfluencing the cost and availability of creditand money.

Tools of Monetary Policy

The tools available for the central bank toachieve the above ends are: Bank rate, Reserveratios, Open market operations, Intervention inthe forex market and Moral suasion

Bank rate

Bank Rate is the rate at which RBI lends tocommercial banks. Bank Rate is a tool whichRBI uses for managing money supply and credit.Any revision in Bank Rate by RBI is a signal tobanks to revise deposit rates as well as PrimeLending Rate. It stands at 6% presently (2008July)

Reserve Requirements

In economics, fractional-reserve banking isthe near-universal practice of banks in whichbanks keep a fraction of the total depositsmanaged by a bank as reserves and are not belent. The reserve ratios are periodically changedby the RBI. The reserve requirement (or requiredreserve ratio) is a bank regulation that sets theminimum reserves each bank must hold as apart of the deposits. These reserves are designedto satisfy various needs like providing loans tothe Government (SLR) and inflation management(CRR). They are in the form of RBI approvedsecurities (SLR) kept with themselves or cashthat is kept with the RBI (CRR).

Statutory liquidity Ratio (SLR)

It is the portion of time and demand

MONETARY AND FISCAL POLICY

OF INDIA

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liabilities of banks that they should keep in theform of designated liquid assets like governmentand other RBI-approved securities like publicsector bonds; current account balances withother banks and gold. SLR is aimed at ensuringthat the need for government funds is partlybut surely met by the banks. The commitmentof the Government to reduce fiscal deficit meansthat it will borrow less and so the SLR wasprogressively brought down from 38.5% in 1991to 25% today.

The Reserves Bank of India Act, 1934 andthe Banking Regulation Act, 1949 fixed the floorand cap on SLR at 25% and 40% respectively.But the amendment made in these statutesremoved the limits-lower and upper: RBI has,as a result, the freedom to fix the SLR at anyrate depending on the macro economicconditions. The amendment was an enablingone.

Cash Reserve Ratio (CRR)

CRR is a monetary tool to regulate moneysupply. It is the portion of the bank depositsthat a bank should keep with the RBI in cashform. CRR deposits earn no interest

The Reserve Bank of India Act, 1934 andthe Banking Regulation Act, 1949 fixed the floorand cap on CRR at 3% and 20% respectively.But the amendment made in these statutesremoved the limits-lower and upper. RBI has,as a result, the freedom to fix the CRR at anyrate depending on the macro economicconditions. The amendment was an enablingone.

CRR is adjusted to manage liquidity andinflation the more the CRR, the less the moneyavailable for lending by the banks to players inthe economy. CRR was 15% in 1991 and todayit is 8.75%. If inflation is high, money supplyneeds to be taken out and so CRR is generallyincreased. But in a regime of moderate inflation,low CRR is in place.

RBI increases CRR to tighten credit forexample, CRR today (July 2008) stands at

8.75%-high because inflation is also at 13-yearhigh at 1.89% on WPI (July 2008). It needed tobe controlled by a variety of means one of whichwas hike in CRR.

CRR as a tool of monetary policy is usedwhen there is a tremendous need to reduceinflation and tighten credit as in 2008.Otherwise, normally, RBI relies on open marketoperations for liquidity management.

Open Market Operations (OMOs) of RBI

OMOs of the RBI can be described as:Purchases and sales of government and certainother securities in the open market (banks andfinancial institutions) by the RBI in order toinfluence the volume of money and credit inthe economy: Purchases of governmentsecurities injects money. Into the market andthus expands money and credit; sales have theopposite effect – absorb excess

Liquidity and shrink credit. Open marketoperations are RBI’s most important and flexiblemonetary policy tool. Open market operationsdo not change the total stock of governmentsecurities but change the proportion held bythe RBI, commercial and cooperative banks.

Ready Forward Contracts (Repos)

It is a transaction in which two parties agreeto sell and repurchase the same security. Undersuch an agreement the seller sells specifiedsecurities with an agreement to repurchase thesame at a mutually decided future date and aprice. Similarly, the buyer purchases thesecurities with an agreement to resell the sameto the seller on an agreed date in future at apredetermined price.

In India, RBI lends on a short term basis tobanks on the security of the government paper(repo). Banks undertake to repurchase thesecurity at a later date-over night or few days.RBI charges a repo rate for the money it lends.It is 8.5% presently (2008 July)

Reverse repo is when RBI borrows from themarket (absorbs excess liquidity) with the sale


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of securities and repurchases them the next dayor after a few days. The rate at which it borrowsis called reverse repo rate as it is the reverse ofthe repo operation. Reverse repo rate presentlyis 6% (July 2008)

The repo rate and reverse repo rate are 6%and 8.5% respectively today (July 2008)

The Repo/Reverse Repo transaction canonly be done at Mumbai and in securities asapproved by RBI (Treasury Bills, Central/StateGovt securities). RBI uses Repo and Reverse repoas instruments for liquidity adjustment in thesystem.

Selective Credit Controls

Certain businesses can be given more andcertain others may get less credit from bankson the orders of the RBI. Thus, selective creditcontrols can be imposed for meeting variousgoals like discouraging hoarding and black-marketing of certain essential commodities bytraders etc. Either credit can be rationed orinterest rate can be hiked by RBI as a part ofSCCs. In SCCs, the total quantum of credit doesnot change, but the amount lent and the costof credit may be changed for specific sector orsectors.

Moral suasion

A persuasion measure used by central bankto influence and pressure, but not force, banksinto adhering to policy. Measures used areclosed-door meetings with bank directors,increased severity of inspections discussion,appeals to community spirit etc.

Recently the RBI Governor appealed tobanks not to raise rates even though the centralbank was following a tight money policy.

FISCAL POLICY

Fiscal policy refers to the policy related torevenue and expenditure of the governmentwith a view to correcting the situations of excessdemand or deficient demand in the economy.The instruments of fiscal policy are:

(a) Fiscal Instruments Related toGovernment Expenditure: The government ofa country incurs various types of expendituresuch as expenditure on public works(construction of roads, dams, bridges etc),education and public welfare, defence,maintenance of law and order, various types ofsubsidies, and transfer payments to the public.Government corrects the situations of excessdemand or deficient demand in the economyby varying any or all types of expenditure.

(b) Fiscal Instruments Related to Financingof Government Expenditure: Taxation, publicdebt and deficit financing are the three fiscalinstruments related to financing of governmentexpenditure. Government can correct thesituations of excess demand or deficient demandin the economy by using above mentionedinstruments.

(c) Fiscal Policy and Deficient Demand:Following fiscal measures to correct the situationof deficient demand:

(1) Decrease in Taxes: Governmentdecreases taxes, which leaves the householdswith more purchasing power and the firms withmore cash reserves. Direct taxes like incometax, corporation tax etc are reduced. As a resultboth households as well as investors will beencouraged to spend more. Consequently,demand will increase.

(2) Increase in Public Expenditure: Tostimulate the demand the government increasesexpenditure over public health, education,subsidies and transfer payments, and publicworks. Public expenditure causes the level ofincome to increase in economy. Higher level ofincome causes high level of demand.

(3) Increase Deficit financing: Deficitfinancing (by way of printing more notes foradditional expenditure) is increased during timesof deficient demand so that the overall level ofpurchasing power is enhanced in the economy.

(4) Public Borrowing: Public borrowing isreduced so that people are left with greaterdisposable income.


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(d) Fiscal Policy and Excess Demand :Excess demand generates inflationary pressuresin the system. Following fiscal measures aretaken to correct the inflationary situation.

(i) Increase in taxes: Tax rates are increasedprogressively to mop up additional purchasingpower within the economy.

(ii) Decrease in Government Expenditure:Government expenditure is reduced so as tocause the demand to decline.

(iii) Reduce Deficit Financing: Deficitfinancing is greatly restricted. The printing ofmore notes would only increase the rate ofinflation.

(iv) Public Borrowing: The situationdemands less purchasing power with thepeople. So, the government takes resort toincreased public borrowing.

Main Objectives of Fiscal Policy in India

The fiscal policy is designed to achievecertain objectives as follows:-

1. Development by effective Mobilizationof Resources : The principal objective of fiscalpolicy is to ensure rapid economic growth anddevelopment. This objective of economic growthand development can be achieved byMobilization of Financial Resources.

The central and the state governments inIndia have used fiscal policy to mobilizeresources.

The financial resources can be mobilized by :-

a) Taxation: Through effective fiscalpolicies, the government aims to mobilizeresources by way of direct taxes as well asindirect taxes because most important sourceof resource mobilization in India is taxation.

b) Public Savings: The resources can bemobilized through public savings by reducinggovernment expenditure and increasingsurpluses of public sector enterprises.

c) Private Savings: Through effective fiscal

measures such as tax benefits, the government canraise resources from private sector and households.Resources can be mobilized through governmentborrowings by ways of treasury bills, issue ofgovernment bonds, etc., loans from domestic andforeign parties and by deficit financing.

2. Efficient allocation of FinancialResources: The central and state governmentshave tried to make efficient allocation offinancial resources. These resources are allocatedfor Development Activities which includesexpenditure on railways, infrastructure, etc,whereas Non-development Activities includesexpenditure on defence, interest payments,subsidies, etc.

But generally the fiscal policy should ensurethat the resources are allocated for generationof goods and services which are sociallydesirable. Therefore, India’s fiscal policy isdesigned in such a manner so as to encourageproduction of desirable goods and discouragethose goods which are socially undesirable.

3. Reduction in inequalities of Income andWealth : Fiscal policy aims at achieving equityor social justice by reducing income inequalitiesamong different sections of the society. Thedirect taxes such as income tax are chargedmore on the rich people as compared to lowerincome groups. Indirect taxes are also more inthe case of semi-luxury and luxury items, whichare mostly consumed by the upper middle classand the upper class. The government invests asignificant proportion of its tax revenue in theimplementation of Poverty AlleviationProgrammes to improve the conditions of poorpeople in society.

4. Price Stability and Control of Inflation :One of the main objectives of fiscal policy is tocontrol inflation and stabilize price. Therefore,the government always aims to control theinflation by reducing fiscal deficits, introducingtax savings schemes, Productive use of financialresources, etc.

5. Employment Generation: Thegovernment is making every possible effort to


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increase employment in the country througheffective fiscal measure.

6. Balanced Regional Development:Another main objective of the fiscal policy is tobring about a balanced regional development.There are various incentives from the governmentfor setting up projects in backward areas suchas Cash subsidy, Concession in taxes and dutiesin the form of tax holidays, Finance atconcessional interest rates, etc.

7. Reducing the Deficit in the Balance ofPayment: Fiscal policy attempts to encouragemore exports by way of fiscal measures likeExemption of income tax on export earnings,Exemption of central excise duties and customs,Exemption of sales tax and octroi, etc.

The foreign exchange earned by way ofexports and saved by way of import substituteshelps to solve balance of payments problem. Inthis way adverse balance of payment can becorrected either by imposing duties on importsor by giving subsidies to export.

8. Development of Infrastructure:Government has placed emphasis on theinfrastructure development for the purpose ofachieving economic growth. The fiscal policymeasures such as taxation generates revenue tothe government. A part of the government’srevenue is invested in the infrastructuredevelopment. Due to this, all sectors of theeconomy get a boost.

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MANUFACTURING SECTORCHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE

MANUFACTURING SECTOR

Manufacturing Industry in India has gonethrough various phases of development overthe period of time. Since independence in 1947,the Indian manufacturing sector has traveledfrom the initial phase of building the industrialfoundation in 1950’s and early 1960’s, to thelicense–permit Raj in the period of 1965–1980,to a phase of liberalization of 1990’s, emerginginto the current phase of global competitiveness.It has grown at a robust rate over the past tenyears and has been one of the best performingmanufacturing economy. In a country likeIndia, where employment generation is one ofthe key policy issues, this makes this sector acritical sector to achieve inclusiveness in growth.

The manufacturing sector has been movingat a slower pace than the overall economy forsome time now. As a result, the sector’scontribution to GDP has declined marginallyfrom 16.1 to 15.2% in the five years till March2013. Growth rate in manufacturing reducedfrom 9.7% in 2010-11 to 2.7% in 2011-12 and1% in 2012-13. In FY13, only 3.3% of thecountry’s growth was generated bymanufacturing as opposed to 83% contributedby services. The sector is not at its strongest atthe moment, but are the manufacturingcompanies in lockstep with rest of the economy?

Why do we need focus on manufacturing?

The Eleventh Plan has targeted growth inmanufacturing at 10 11 percent but actualperformance will be only about 7.7 percent. Itis a matter of concern that the manufacturingsector has not shared in the dynamism of theeconomy, not just in the XIth Plan, but even inpreceding Plan periods. As a result, the share

of the manufacturing sector in the country’sGDP has remained stagnant at 15% (excludingmining) for the last 30 years. This share is verylow, especially when compared with 34 percentin China and 40 percent in Thailand. The slowpace of growth of the manufacturing sector atthis stage of India’s development is not anacceptable outcome, and we must ensure thatmanufacturing becomes the driver for GDPgrowth. This can be accomplished by themanufacturing sector growing at a faster ratethan GDP. Only then will manufacturing beable to attain a significant share of the GDP. Inorder to attain a 25% share of the GDP by2025, manufacturing would need to grow at arate of 2-4% higher than the GDP. This willensure that manufacturing becomes the engineof growth for the economy.

In addition, manufacturing must provide alarge portion of the additional employmentopportunities required for India’s increasingnumber of youth. Agriculture cannot beexpected to provide more jobs. On the contrary,it should be releasing labour which has verylow productivity in agriculture to be absorbedin other sectors. While the services sector hasbeen growing fast, it alone cannot absorb the250 million additional income seekers that areexpected to join the workforce in the next 15years. Currently, manufacturing in Indiaprovides only 12% of jobs, and this share issignificantly less than that of other countries.Unless manufacturing becomes an engine ofgrowth, providing at least 100 million additionaldecent jobs, it will be difficult for India’s growthto be inclusive.

India’s trade balance must also be improved,and this necessitates a larger volume of exportsof manufactured goods In order to increase


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exports as well as provide its internal marketwith domestically produced manufacturedgoods that compete with imports, India mustmanufacture a much larger volume of productsat competitive costs and quality.

A strong focus on improving the “depth”in Indian manufacturing is essential. “Depth”can be defined as the capability and expertisein all aspects of a product value chain.Achieving a greater depth in manufacturingentails ensuring a higher level of value additionwithin the country. This requires focus on afew key areas like the heavily import-skewedcapital goods sector, technologicaladvancements in nearly all manufacturingsectors, and a focus on improved domesticresearch and development.

The shape of global manufacturing supplychains has changed dramatically with theadvent of computers and telecommunications.Manufacturing has been ‘deconstructed’.Therefore, the ability to engineer productsquickly and at low cost is becoming anincreasing source of competitive advantage. Intoday’s open-trade world, it is essential thatIndian industry develop global competitiveness.While scale remains an advantage in industry,the deconstructed value chain of manufacturingensures that this scale and competitiveness canbe achieved through growth of networks ofmanufacturing enterprises.

While industrial growth is the need of thehour, we must also ensure that this growthhappens in a sustainable manner, especiallywith regard to the environment. Industrialgrowth is a leading factor in the degradation ofthe environment. With the high rates of growthtargeted by the manufacturing sector, it mustbe ensured that this growth happens in asustainable manner and with minimal cost tothe environment.

INITIATIVES TO BOOSTMANUFACTURING IN THE LAST FIVE

YEARS

Manufacturing has shown a fluctuatinggrowth trend measured in terms of the Index

of Industrial Production in the last few yearswhile there has been both moderation anddecline growth, (IIP), in the last few months asshown in the previous sections.

Government has taken a number ofinitiatives and confidence building measures forimproving the industrial climate and boostingmanufacturing in the country. Government hadapproved the National Manufacturing Policy(NMP) in October, 2011 with the objectives ofenhancing the share of manufacturing in GDPto 25% by 2022 and creating additional 100million jobs. One of the instruments in the NMPis the creation of National Investment andManufacturing Zones (NIMZ) as plannedintegrated industrial townships. Nine NIMZshave been announced, eight of which are alongthe Delhi Mumbai Industrial Corridor (DMIC).Other measures for facilitation of industrialinvestment include promotion of foreign directinvestment through consolidation of press notesinto a single document; development of industryrelevant skills and regular meetings withindustry associations and stakeholders to fasttrack implementation of industrial projects.

National Manufacturing Policy

The Government of India notified theNational Manufacturing Policy on 4thNovember, 2011 with the objective of enhancingthe share of manufacturing in GDP to 25%within a decade and creating 100 million jobs.It also seeks to empower rural youth byimparting necessary skill sets to make thememployable. Sustainable development is integralto the policy and technological value additionin manufacturing has received special focus.The policy is based on the principle of industrialgrowth in partnership with States. The CentralGovernment will create the enabling policyframe work, provide incentives forinfrastructure development on a Public PrivatePartnership (PPP) basis through appropriatefinancing instruments, and State Governmentswill be encouraged to adopt theinstrumentalities provided in the policy. Theproposals in the policy are generally sector


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neutral, location neural and technology neutralexcept incentivisation of green technology.

One of the instruments in the NMP is thecreation of National Investment andManufacturing Zones (NIMZ) as plannedintegrated industrial townships. Nine NIMZshave been announced, eight of which are alongthe Delhi Mumbai Industrial Corridor (DMIC).Approval, in principle, has been secured forsetting up of the ninth NIMZ at Nagpur. Apartfrom NIMZs, NMP also applies tomanufacturing industry throughout the countryincluding wherever industry is able to organizeitself into clusters and adopt a model of self-regulation as enunciated. Policy instruments formanufacturing industry are applicable to bothNIMZ and Clusters. These includeRationalization/simplification of businessregulations; simple/expeditious exit mechanismfor non viable units; Technology development,including green technologies; Industrial trainingand skill upgradation measures; Incentives forMSMEs; Special Focus Sectors; Leveraginginfrastructure deficit and Governmentprocurement; and Trade Policy.

Major feature of NMP is the rationalizationand simplification of regulations based on thebasic tenet of self regulation of industry to theextent possible. The Central/State Governmentswill suspend operation of particular provisionswherever such powers exist subject to analternative mechanism, annual audits byconcerned departments and third partycertification. Other features include delegationof powers to a single body in case of otherprovisions, combined application forms andcommon registers as far as possible andSystematization of inspections through thirdparty certification.

Some of the important initiativesundertaken/ being undertaken under NMP,include formulation of a scheme on Job LossPolicy; simplification of forms / register /returns under 13 central Labour Laws into 3Forms; setting up of Technology Acquisition andDevelopment Fund (TADF) for acquisition of

appropriate technologies including environmentfriendly technology.

For the effective implementation of theNMP, a number of institutional structures havebeen constituted. These include ManufacturingIndustry Promotion Board (MIPB), under theChairmanship of Commerce & IndustryMinister; High Level Committee (HLC) underthe Chairmanship of Secretary, DIPP; Board ofApproval (BOA) under the concerned JointSecretary. In addition Green ManufacturingCommittee (GMaC) has also been set up topromote green technology for manufacturingunder NIMZ.

Delhi Mumbai industrial corridor (DMIC)

As part of the Japan India Special EconomicPartnership Initiative for developing requisiteinfrastructure and facilitating investment, DMICProject was conceptualized to take benefit ofthe high quality rail and road connectivityoffered by 1483 km long Delhi MumbaiDedicated Rail Freight Corridor (DFC), existingrail passenger- cum- freight corridor andNational Highways. The vision of DMIC is tocreate strong economic base on both the sidesof the Dedicated Freight Corridor with globallycompetitive environment and state-of-the-artinfrastructure to activate local commerce,enhance foreign investments and attainsustainable development.

The Government of India accorded inprinciple approval to the project outline ofDMIC Project in August, 2007. Twenty fourInvestment Regions/ Industrial Areas across thesix States of Uttar Pradesh, Haryana, MadhyaPradesh, Rajasthan, Gujarat and Maharashtrawere identified for development in DMIC. Aninstitutional framework with a dedicated SpecialPurpose Vehicle (SPV) viz. Delhi MumbaiIndustrial Corridor Development Corporation(DMICDC) was set up for project development,coordination and implementation of thenumerous projects.


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As the Master Plans progressed, it was feltnecessary and essential that new industrial citiesmust be created on the back of world classtrunk infrastructure i.e. drainage, sewage, solidwaste, water supply, internal roads. Withoutthe trunk infrastructure the development of PPPprojects in Greenfield cities was not feasible andmay lead to real estate development withouttrunk infrastructure and a developed backbone.The Government of India, therefore, inSeptember, 2011 restructured the DMIC Projectwith an Implementation Fund of Rs.17,500crore to be utilized over a period of five yearsand an additional project development Fund ofRs.1000 crore. The land for the new industrialcities will be the contribution of the StateGovernment. The Japanese Government havealso announced their financial support forDMIC project to an extent of US $ 4.5 billionfor projects with Japanese participation in thefirst phase of the project.

Looking at the magnitude and diversity, theentire project has been planned to beimplemented in phases. Initially, the followingindustrial cities have been taken up fordevelopment as industrial cities:

(i) Ahmedabad-Dholera InvestmentRegion, Gujarat;

(ii) Shendra-Bidkin Industrial Park citynear Aurangabad, Maharashtra;

(iii) Manesar-Bawal Investment Region,Haryana;

(iv) K h u s h k h e r a - B h i w a d i - N e e m r a n aInvestment Region, Rajasthan;

(v) Jodhpur-Pali-Marwar Industrial Area,Rajasthan;

(vi) Pithampur-Dhar-Mhow InvestmentRegion, Madhya Pradesh;

(vii) Dadri-Noida-Ghaziabad InvestmentRegion, Uttar Pradesh;

(viii) Dighi Port Industrial Area,Maharashtra.

(ix) In addition one more NIMZ is beingconsidered near Nagpur.

The overall perspective plan for the entireDMIC Region has been completed. The MasterPlanning of the first six industrial citiesmentioned above have been completed. Theconcerned State Governments have initiated theprocess of Land pooling/ procurement/acquisition for the industrial cities as well asfor the Early Bird Projects. Project Developmentof four (04) Gas Based Power Projects iscomplete including the final Environmentalclearance.

PROMOTION OF BUSINESSENVIRONMENT

Promoting FDI- Significant changes havebeen made in the FDI policy regime in therecent times to ensure that India remainsincreasingly attractive and investor-friendly.Some of the main changes have been as follows:

Consolidation- For ease of reference, allexisting regulations on FDI were integrated intoone consolidated document. The consolidationinvolved integration of 178 Press Notes, coveringvarious aspects of FDI policy since 1991, as alsoother regulations governing FDI. The documentwas released as Circular 1 of 2010, effective 1April, 2010.

Rationalization and liberalization- In orderto make the FDI policy more liberal andinvestor-friendly, further rationalization andsimplification has been carried out since.Accordingly, a number of clarifications wereissued on various subjects, including interaliathe concepts of controlled conditions for FDI inAgriculture/Animal Husbandry etc., value-addition in case of mining and mineralseparation of Titanium bearing minerals andintroduction of a specific provision fordownstream investment through internalaccruals .

Subsequently, significant policy changeswere introduced in Circular 1 of 2011 effectivefrom 1.4.2011. These include: (i) flexibility infixing pricing of convertible instrumentsthrough a formula, rather than upfront fixation


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(ii) Inclusion of fresh items for issue of sharesagainst non-cash considerations, includingimport of capital goods/ machinery/ equipmentand pre-operative/ pre-incorporation expenses(iii) Removal of the condition of prior approvalin case of existing joint ventures/technicalcollaborations in the same field (iv)simplification and rationalization of guidelines

relating to down-stream investments and (v)development and production of seeds andplanting material, without the stipulation ofhaving to do so under controlled conditions .FDI has also recently been permitted in LimitedLiability Partnerships (LLPs), subject to specifiedconditions.

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recorded high growth rates and has become anattractive destination for investments; but therecent unearthing of corruption cases has thrownlight on the dark side of the growth that is riseof the black money circulation in the economy.

In 1955, a study conducted by notedeconomist Nicholas Kaldor showed that theblack economy accounted for 4-5 % of thecountry's gross domestic product (GDP)amounting to roughly Rs 600 crore. In 1969, apanel headed by Justice Wanchoo recommendedseveral measures to streamline the taxationsystem and estimated the size of the blackeconomy at Rs 7,000 crore. Since then, severalexperts have undertaken various projects andgiven their assessments of the problem. A studyconducted by the National Institute of PublicFinance and Policy under the chairmanship ofRaja Chelliah in 1980-81 showed that the blackeconomy accounted for 20% of GDP whichwould now translate to about Rs 15 lakh crore.A study by S.B Gupta in 1992 put the figure at42% of GDP for 1980-81 and 51% for 1987-88.

Estimates by eminent economists reveal thatIndia's parallel economy has risen from a mere3 percent of the GDP in the mid 50s to around50 percent today.

WHAT IS PARALLEL ECONOMY?

Black money or unaccounted moneycirculating in the parallel economy is a bigmenace to the economy. Thus it is necessary tounderstand the concept of parallel economy.

According to Feige when economic activitiesgoes unreported or not measured by societiescurrent techniques to monitor economic activityit falls under parallel or hidden economy.

Parallel economy connotes the functioningof an unsanctioned sector in the economy. Ahidden economy in its broadest sense mayconsist of - a) illegal economy, such as moneylaundering, smuggling, etc; b) unreportedeconomy including tax evasion; c) unregulatedeconomy, ie economic activities outsideregulations.

Money laundering involves disguisingfinancial assets so that they can be used withoutdetection of the illegal activity that producedthem. Through money laundering, the launderertransforms the monetary proceeds derived fromcriminal activity into funds with an apparentlylegal source. The most common types of criminalswho need to launder money are drug traffickers,embezzlers, corrupt politicians and publicofficials, mobsters, terrorists and con artists.

BRIEF HISTORY OF PARALLELECONOMY IN INDIA

The Indian black economy is immense,lucrative, widespread, and has grownsignificantly since independence. The blackeconomy has grown from about 3% in the mid-50s to 20% by 1980, to 35% by 1990, and 40% by1995. As a percentage of GDP and at almost $1trillion in absolute terms, the black economy islarger than both the industrial and agriculturalsectors. Corruption is pervasive from the lowestto the highest levels of public administration,public enterprise, bureaucracy, judiciary, lawenforcement, and elected officials.

The history of corruption in India can betraced to late 18th century British East Indiacompany rule. The first governor-general ofIndia, Warren Hastings was notably impeachedon accounts of corruption in 1787. Though he

PARALLEL ECONOMY IN INDIA CHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE


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was acquitted in 1795, his lengthy trial broughtvarious aspects of illegitimate company activityto light. The East India Company laid thefoundations of both a corrupt bureaucracy anda parallel economy. During World War II, thisblack economy experienced a surge. When largequantities of products and resources wereallocated to the war effort, the general publicexperienced acute shortages of daily necessities.Scarcity, government controls, and privatehoarding stimulated the growth of the paralleleconomy.

The most significant growth in the blackeconomy occurred during and after the 1960s.Until this time, Gandhian and Nehruvianpoliticians who had been part of theindependence struggle had largely administeredthe government. As their careers ended, officialswho lacked their idealism, and were more likelyto engage in corruption and rent-seekingpractices, entered the government.

Today, corruption pervades the politicalleadership, the bureaucracy, law enforcementand the judiciary. Some of the most prominentcauses have been patron-client relationships andcommunalism in the democracy, excessivebureaucratic administration and low wages atthe bottom rung of public sector employment,ineffective punitive and combative measures, anda social environment conducive to corruptpractices.

REASONS FOR GROWTH OF BLACKMONEY

There are several factors responsible for theemergence of black money.

a) Controls and licensing system:

The system of controls, permits, quotas andlicenses which are associated withmisdistributions of the commodities in shortsupply results in the generation of black money.Since considerable discretionary powers lays inthe hands of those who administered controlsthis provided them with a scope for corruption –‘speed money’ for turning a blind eye to the

violation of controls. All this gave rise to tradingin permits, quotas and licenses, malpractices indistribution and in the process; it generatedsizeable sums of black money.

Price and distribution controls have in thepast led to the generation of black money on asignificant scale. Any price control without anyadequate machinery of distribution and speedyarrangement for increasing supplies ispotentially a source of black money generation.

Similarly, the system of licenses requires largenumber of inspectors for completing variousformalities and thus good amount of hush moneyhas to be paid. Where controls are notimplementable, they have led to harassment andblack money generation.

b) Tax structure:

High tax rates and defective tax structurehave also been responsible for the existence ofblack money to a large extent. Till recently thetax on income and on wealth was very high toinvite evasion. The marginal rate of income taxwas as high as 75 per cent. And when it wascombined with the tax on wealth, it was stillhigher. This was the situation in respect ofpersonal taxation until a decade ago. Thecorporate tax rate too was very high. In thesecircumstances the temptation/gain from taxevasion was substantial.

Tax-laws in country are so complicated thata layman fails to understand it. Even honestassesses are unable to file cor-rect returns. Thisencourages people to evade tax.

c) Donation to political parties:

Black money also arises from politicalactivities such as elections where candidatesspend well above the ceiling prescribed by theElection Commission. This huge expense in turnmakes them corrupt.

The Government has decided to bandonations to political parties in 1968; it promptedbusinessmen to fund political parties, especiallythe ruling party, with the help of black money.


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Ostensibly, this decision was taken to reduce theinfluence of big business on the electoral process,but in practice what happened was precisely theopposite. Businessmen everywhere have by nowlearnt that they should pay a certain charge outof the black money to the coffers of politicalparties and then be sure that the political leaderswill only bark but not bite. Big business, in theprocess, has been able to tame the politicalleadership. This is evidenced by the relaxationof various controls, permitting business housesto enter areas reserved for the public sector,putting a large number of banned items on theOpen General License list etc.

d) Generation of black money in the publicsector:

Every successive five-year plan is planned fora larger size of investment in the public sector.The projects undertaken by the public sector haveto be monitored by the bureaucrats in Governmentdepartments and public sector undertakings.Tenders are invited for the various works andthese tenders are awarded by the bureaucracy inconsultation with the political bosses.

Thus, a symbiotic relationship developsbetween the contractors, bureaucracy and thepoliticians and by a large number of devices costs‘are artificially escalated and black money isgenerated by underhand deals. Instability of thepolitical system has given a further momentumto this process. Since the ministers are not sureof their tenure and in a majority of cases, thetenure is very short, the principle ‘Make heywhile the sun shines’ is adopted by most of them.The larger number of scandals that are unearthedby the Opposition only support the contentionthat huge investment in the public sector is a bigpotential source for black money generation. Inthis process, bureaucrats act as brokers forpolitical leaders and thus the nexus betweenbusiness, bureaucracy and politicians promotesthe generation of black money.

e) Deterioration in the moral and civicstandards:

The most important reason of tax-evasion and

black-money is the genera deterioration in themoral and civic standards of our people.

Our businessmen employ very ingeniousmethods to generate black-money. Largeamounts of black-money can be generatedthrough the sale of fixed assets and scrap.Sometimes influential firms obtain quotas orimport licenses in excess of their actualrequirements and sell them at cash premiums.Industrial manufac-turing licenses are similarlyobtained through influences and sold to a secondparty at an enhanced value. Purchase bills oreover-invoiced or dummy bills are prepared.Large-scale smuggling of gold and various luxuryitems is an important source of black-money.Sometimes, relatives whose income is not taxableare kept on the payrolls of a company; they arepaid their salary which is taken back in the formsof black-money.

IMPACT OF BLACK MONEY

The economic impact of corruption is apowerful one. The circulation of black money hasadversely affected the Indian economy in severalways.

In India, the black economy has resulted inan immense loss of tax revenue. If it accountedfor 40% of GDP in 1998-99, the loss of directtax revenue at the prevailing rate would amountto at least Rs. 200,000 crore, or 47.5 billion U.S.Dollars (Kumar 1999). According to the BBC(2004), only 2 million of India's billion peoplepay taxes, just 2% of the population. Thegovernment therefore suffers a perennialshortage of funds and public services languish.

Because of the growing black economy,policies fail both at the macro-level and themicro-level. Planning or monetary policy orfiscal policies do not achieve the desired resultsbecause of the existence of a substantial blackeconomy. Targets for education, health, drinkingwater and so on are not achieved because“expenditures do not mean outcomes.” Theeconomy does not lack resources but facesresource shortage. Much investment goes intowasteful and unproductive channels, like


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holding gold or real estate abroad. The flight ofcapital lowers the employment potential andthe level of output in the economy. Capital sentabroad does not generate output in India butdoes so where it goes. A country that isconsidered capital-short has been exportingcapital. A nation that gives concessions tomultinational corporations to bring in capitalloses more capital than it gets, and that too ata high cost, from foreign institutionalinvestments or foreign direct investment. India'spolicies are open to the dictates of internationalcapital because the country's businessmen andpoliticians have taken capital out in large dosessince Independence. The costs are huge.

The direct and indirect costs are of policyfailures, unproductive investments, slowerdevelopment, higher inequity, environmentaldestruction and a lower rate of growth of theeconomy than would have been possible. It hasenormously worsened the income-distribution,and has thereby undermined the fabric of thefixed income salary class finds itself ever be thelower rung of the income-ladder.

The inflation rises while the black moneycirculates in the market. The price of eatable/others goods are increased to supply of thatblack money and less production of thingsin the market. So people which have thatmoney they offer more price in the market.As compared from other person in themarket.

At the social level, the cost is a loss of faithin society and its functioning. At the politicallevel there is fragmentation, with Statesdemanding their own packages because thebelief that the nation as a whole can deliverhas been dented. The demand for smaller Statesis a corollary because the bigger States neglectthe less vocal regions. Each caste, communityand region now wants to have its own party torepresent its narrow interest, leading to theproliferation of smaller parties.

In the absence of Black Money India couldhave been growing faster, by about 5 per cent,

since the 1970s if it did not have the blackeconomy. Consequently, India could have beenan $8-trillion economy, the second largest inthe world. Per capita income could have beenseven times larger; India would then have beena middle-income country and not one of thepoorest.

INITIATIVES BY THE GOVERNMENTTO COMBAT BLACK MONEY

Many steps have been taken by theGovernment from time to time to check the tax-evasion.

Following Wanchoo Committee's recommendationsthe Government enacted the Taxation Laws(Amendment) Act, 1975. This act has brought on thestatute vari-ous provisions for preventing tax-evasionand proliferation of black-money Deterrent punishmentshave been, provided for tax-evasion. The othercommittees were—the Dangli Committee on Controlsand Subsidies (1980), The Rajah Chelliah Committee,and the National Institute of Public Finance and Policy(1985).

With a view of bringing about simplificationand rationalization of the direct tax laws, theGovernment appointed a committee of expertsknown as the "Direct Tax Laws Committee' inJune 1977. The recommendations of the Committeeare being processed for implementation.

In 1976 the Government imposed astatutory obligation on the management tocarryout physical verification of its assets forthe satisfaction of the auditors to ensure thatno money is created through the sale of fixedassets. Management is also obliged to maintaina proper record of the sale of scrap.

Another step taken by the Government tounearth black-money was the launching of thevoluntary disclosure scheme in 1975, Nopenalties were impo-sed on the personsdisclosing black-money voluntarily.Demonetization of the notes of higherdenomination has also been one of the recentsteps of the Government to unearth black-


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money. Curbing of the smuggling activities inthe country has been the main concern of theGovernment, The conservation of ForeignExchange and Prevention of SmugglingActivities Act was passed for this matter on19th December, 1974.

In a bid to mop up black-money, theGovernment announced on 12th January, 1981a new scheme of issuing a ten-year bond of theface value of Rs. 10,000 each. An ordinance forthis purpose was issued by the President. Thebonds were known as 'Special Bearer Bonds.'The scheme gives immunity to the investor fromprosecution as well as disclosure of the sourceof the money in-vested. Several other series ofsuch bonds have been released in recent years.

To tackle the menace of illicit funds, thegovernment has adopted a five-prongedstrategy. It comprises joining the global crusadeagainst ‘black money'; creating an appropriatelegislative framework; setting up institutions fordealing with illicit funds; developing systemsfor implementation; and imparting skills to themanpower for effective action.

During the last two years, India has negotiated19 new Double Taxation Avoidance Agreements(DTAAs) and 17 new Tax Information ExchangeAgreements (TIEAs). In addition, 22 existingDTAAs have been re-negotiated.

What is Double Taxation AvoidanceAgreement?

Double taxation refers to taxation by two ormore countries of the same income, asset ortransaction. India has adopted the system underwhich Income Tax on residents is imposed onthe "total world income" i.e. income earnedanywhere in the world. Whereas the source ofincome may be in some other country and thatcountry also claims a right to tax the incomearising in the country. The result is that incomearising to a resident out of India is subjected totax in India as it is part of total world incomeand, also in host country which provides thesource for that income.

“In the case of non-residents, however, it isnot the "total world income" but only thatincome is subjected to tax in India which isearned in this country. Since a resident is taxedin respect of foreign income in his own countryas well as in the country where it is earned,he is subjected to tax in both the countries inrespect of the same income. The purpose ofdouble tax avoidance agreement is to avoidsuch double taxation to the extent agreedupon.

The DTAA provides that business profits willbe taxable in the source state if the activitiesof an enterprise constitute a PermanentEstablishment (PE) there. The Agreementprovides for fixed place PE, building site,construction & installation PE, service PE,insurance PE and agency PE. Dividends,interest and royalties & fees for technicalservices income will be taxed both in thecountry of residence and in the country ofsource.

India also became a full member of globaleconomic body the Financial Action Task Force(FATF) last year in pursuit of its fight againstblack money.

The government simultaneously hasstrengthened its tax enforcement agencies likethe Income Tax department, allowing them tocreate a new Directorate of CriminalInvestigation to probe illicit funds includingthose stashed abroad. It has strengthened itsFinancial Intelligence Unit (FIU) to detectsuspicious transactions in economic channels.

India has recently signed the Conventionon Mutual Administrative Assistance in TaxMatters, developed jointly by the Council ofEurope and the Organisation for Economic Co-operation and Development (OECD).

All members of the G20 have now becomesignatories but the Convention will have to beratified by the Indian Parliament to become law.

Tax evasion and illicit flows are a seriousproblem and over the last two years, in order


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to check this trend, India has negotiated 19new double taxation avoidance agreements and17 new tax information exchange agreements.

The Convention facilitates international co-operation for a better operation of national taxlaws, while respecting the fundamental rightsof taxpayers. The Convention provides for allpossible forms of administrative co-operationbetween states in the assessment and collectionof taxes, in particular with a view to combatingtax avoidance and evasion. This co-operationranges from exchange of information, includingautomatic exchanges, to the recovery of foreigntax claims. However the Convention imposessafeguards to protect the confidentiality of theinformation exchanged.

Further India has signed an Agreementwith the Eurasian Group (EAG) to enhancecooperation in curbing Money laundering andTerrorist Financing. The agreement was signedby Dr. Thomas Mathew, Joint Secretary (CapitalMarkets) Division of the Department ofEconomic Affairs.

The EAG is a Financial Action Task Force(FATF) styled regional body with 9 membersincluding India, Russia and China and 29observers of which 12 are countries and 17 areinternational organisations. India was accordedmembership in the EAG in December 2010.

At the 15th Plenary meeting of the EurasianGroup on Combating Money laundering andFinancing of Terrorism India has offered helpto member nations in enhancing their technicalskills in establishing better financial systems,capital market monitoring and surveillancethrough sophisticated IT tools. Help was alsooffered in drafting legislation, law enforcementtechniques and strengthening of their respectiveFinancial Intelligence Units.

The EAG is soon emerging as an effectivebody engaged in combating money launderingand financing of terrorism.

Government proposes new measures totackle bureaucratic corruption

Government has suggested new measures tocheck corruption at bureaucratic level. Underthe civil services code, penalties are dividedas major and minor. The major includes theprovisions of Reduction to Lower Rank;Compulsory Retirement; Removal fromService and Dismissal from Service. Whereasminor penalties include: Censure;Withholding of Increments; Withholding ofPromotions; Recovery of Pecuniary Loss.

The salient features of proposed guidelines are:

• After even retirement proceedings againstcorrupt government servants will not end.The person will now have to face a 10 percent cut in pension in case of minor penalty.

• Major penalty of compulsory retirementwith full benefits will be changed to anew provision of having a cut of 20 percent in pension.

• Cases will be solved using fast trackmethod. The intermediaries forconsultation in between will be eliminatedto increase the pace of solving the case.

• A cut in pension upto 10 per cent may beimposed in case of minor penalty. Thiscut will have a ceiling of five years as alife-long reduction in pension would comeunder the category of major penalty.

• There would be no cut in pension in thosecases of compulsory retirement of officersbeing weeded out for non-performance.

• The departments and ministries will haveto appoint serving officers as Inquiry andPresenting Officers to speed up the processof proceedings.

• In important cases, the officers mayrequest the Central Vigilance Commissionto appoint their Commissioner of DirectInquiries as IO (Inquiry officers).

• The prescribed limit for sanctioning ofprosecution of public servants within 3 months.


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CONCLUSION

There had been umpteen talks andvoluntary disclosure schemes in the past forchecking evasion and black money, but noperceivable results have come. Rather, thequantum of black money in circulation hasincreased substantially in volume. Recently thegovernment has been forced to commission astudy by three top economic thinks tanks to getan estimate on the size of the black economy.The study is expected to be over by September2012 and provide fresh insights.

A major factor contributing to the increasinglevel of black money are the tax havens. Taxhavens are those countries which has zero orvery low income tax, where no questions areasked on origin of money coming into theirbanks, which keep all banking records secretsand cooperate very little with other countries.During the years 2002-06, around $3 trillionwere deposited in such tax havens from the

developing countries. During the same period,a sum of $136.5 billion Indian black money wasdeposited. The most notorious of the more than70 tax havens in the world is Switzerland. It isestimated that the share in Swiss banks accountfor almost a third of the total black money inthe world. Hence, it could be safely assumedthat some $45 billion out of the 136.5 billionstashed away from India would have beenhoarded in Swiss.

India must summon the strength andcourage to bring back the money that is stashedaway in the tax havens. India can enter intoagreements with the foreign banks andgovernments put the topic on a global agendaand cooperate with other powerful countries.This money belongs to the poor farmers andunorganized workers of India. It is assumedthat, India will be in the top-five league if allthe ill-gotten money is brought back. It willchange the Indian scenario. It will change thelife of the common man.

•••


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financial assets so that they can be used withoutdetection of the illegal activity that producedthem. Through money laundering, the launderertransforms the monetary proceeds derived fromcriminal activity into funds with an apparentlylegal source. The most common types ofcriminals who need to launder money are drugtraffickers, embezzlers, corrupt politicians andpublic officials, mobsters, terrorists and conartists.

Every year, billions of dollars are derivedfrom drug trade and are then reinvestedthroughout the world by otherwise legitimatebusinessmen, accountants and bankers and itis the increasing awareness of the huge profitsgenerated from this criminal activity that hascreated the impetus for governments to legislateagainst such activities.

Money laundering is becoming veryprotuberant with the passage of time. Theestimated amount of money laundered globallyin one year is 2 to 5% of the global GDP (orUSD 800 billion to USD 2 trillion).In December,2012, HSBC Holdings Plc. had to agree to paya record USD 1.92 billion in fines to USauthorities for getting itself involved in money-laundering issues.

The basic money laundering process has threesteps:

i) PLACEMENT

This is the first stage in the washing cycle.Money laundering is a "cash-intensive" business,generating vast amounts of cash from illegalactivities (for example, street dealing of drugswhere payment takes the form of cash in smalldenominations). The monies are placed into the

financial system or retail economy or aresmuggled out of the country. The aims of thelaunderer are to remove the cash from thelocation of acquisition so as to avoid detectionfrom the authorities and to then transform itinto other asset forms; for example: travellerscheques, postal orders, etc.

ii) LAYERING

In the course of layering, there is the firstattempt at concealment or disguise of the sourceof the ownership of the funds by creatingcomplex layers of financial transactionsdesigned to disguise the audit trail and provideanonymity. The purpose of layering is todisassociate the illegal monies from the sourceof the crime by purposely creating a complexweb of financial transactions aimed atconcealing any audit trail as well as the sourceand ownership of funds.

Typically, layers are created by moving moniesin and out of the offshore bank accounts of bearershare shell companies through electronic funds'transfer (EFT). Given that there are over 500,000wire transfers - representing in excess of $1 trillion- electronically circling the globe daily, most ofwhich is legitimate, there isn’t enough informationdisclosed on any single wire transfer to knowhow clean or dirty the money is, thereforeproviding an excellent way for launderers to movetheir dirty money. Other forms used by launderersare complex dealings with stock, commodity andfutures brokers. Given the sheer volume of dailytransactions, and the high degree of anonymityavailable, the chances of transactions being tracedis insignificant.

iii) INTEGRATION

The final stage in the process. It is this stage

MONEY LAUNDERING : BRIEF

INTRODUCTION



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at which the money is integrated into thelegitimate economic and financial system andis assimilated with all other assets in the system.Integration of the "cleaned" money into theeconomy is accomplished by the launderermaking it appear to have been legally earned.By this stage, it is exceedingly difficult todistinguish legal and illegal wealth.

Methods popular to money launderers atthis stage of the game are:

a) the establishment of anonymouscompanies in countries where the rightto secrecy is guaranteed. They are thenable to grant themselves loans out ofthe laundered money in the course of afuture legal transaction. Furthermore,to increase their profits, they will alsoclaim tax relief on the loan repaymentsand charge themselves interest on theloan.

b) the sending of false export-importinvoices overvaluing goods allows thelaunderer to move money from onecompany and country to another withthe invoices serving to verify the originof the monies placed with financialinstitutions.

c) a simpler method is to transfer themoney (via EFT) to a legitimate bankfrom a bank owned by the launderers,as ‘off the shelf banks’ are easilypurchased in many tax havens.

IMPACT OF MONEY LAUNDERING ONTHE ECONOMY OF THE COUNTRY

Money laundering constitutes a seriousthreat to national economies and respectivegovernments. The infiltration and sometimessaturation of dirty money into legitimatefinancial sectors and nations accounts canthreaten economic and political stability.

Economic crimes have a devastating effecton a national economy since potential victimsof such crimes are far more numerous thanthose in other forms of crime. Economic crimes

also have the potential of adversely affectingpeople who do not prima-facie, seem to be thevictims of the crime.

For example, tax evasion results in loss ofgovernment revenue, thus affecting the potentialof the government to spend on developmentschemes thereby affecting a large section of thepopulation who could have benefited from suchgovernment expenditure. A company fraud notonly results in cheating of the people who haveinvested in that company but may alsoadversely affects investors’ confidence andeventually the growth of the economy.

The negative economic effects of moneylaundering on economic development aredifficult to quantify, yet it is clear that suchactivity damages the financial-sector institutionsthat are critical to economic growth, reducesproductivity in the economy’s real sector bydiverting resources and encouraging crime andcorruption, which slow economic growth, andcan distort the economy’s external sectorinternational trade and capital flows to thedetriment of long-term economic development.

Developing countries’ strategies to establishoffshore financial centre (hereinafter OFCS) asvehicles for economic development are alsoimpaired by significant money launderingactivity through OFC channels.

The negative effects of money launderingactivities may be on financial sector, real sectorof formal agents such as state, financialinstitutions and banking sector.

• Effect on financial sector:

Financial sector may get negative effects ofmoney laundering especially financialinstitutions including banking and non –banking financial institutions (NBFIs),andequity markets- may directly or indirectly beaffected. Basically,these institutions facilitateconcentration of capital resources from domesticsavings and funds from abroad. Theseinstitutions provide impetus to furtherance ofinvestment prospects by providing conducive


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environment and efficient allocation of theseresources to investment projects which contributessubstantially to long run economic growth.

Money Laundering impairs thesustainability and development of financialinstitutions in two ways:

1. Firstly the financial institutions are weakeneddirectly through money laundering as thereseems to be a correlation between moneylaundering and fraudulent activitiesundertaken by employees of the institutions.Similarly, with the increase in moneylaundering activities, major parts of financialinstitutions of a state are vulnerable to crimeby criminal elements. This strengthens thecriminals and other parallel system of moneylaundering channels. This may lead to theeviction of less equipped competitors & givingrise to monopoly.

2. Customer trust is fundamental to thegrowth of sound financial institutions, andthe perceived risk to the growth of soundfinancial institutions, and the perceived riskto depositors and investors frominstitutional fraud and corruption is anobstacle to such trust.

• Effect on real sector:

Money laundering adversely affects economicgrowth through the real sector by divertingresources to less productive activities and byfacilitating domestic corruption and crime.

Money laundering carried out through thechannels other than financial institutionsincludes more “sterile” investments such as realestate, art, antiques, jewelry and luxuryautomobiles, or investments of the type thatgives lower marginal productivity in aneconomy. These sub optimal allocations ofresource give lower level of economic growthwhich is a serious detriment to economic growthfor developing countries. Criminals reinvest theirproceeds in companies and real estate with thepurpose to make further profits, legal or illegal.

Most of these investments are in sectors that

are familiar to the criminal, such as bar,restaurant, prostitution. The real estate sectoris the largest and most vulnerable sector formoney laundering. Real estate is important formoney laundering, because it is a non-transparent market where the values of theobjects are often difficult to estimate and wherebig value increases can happen and is anefficient method to place large amounts ofmoney. The price increase in real estate isprofitable and the annual profits on real businesscreate a legal basis for income. The real estatehas the following features, which make itattractive for criminal money:

1. a safe investment2. the objective value is difficult to assess3. it allows to realize “white” returns.

• Threat to Banking System

Across the world, banks have become amajor target of Money Laundering operationsand financial crime because they provide avariety of services and instruments that can beused to conceal the source of money. With theirpolished, articulate and disarming behaviour,Money Launderers attempt to make bankerslower their guard so as to achieve their objective.Though norms for record keeping, reporting,account opening and transaction monitoringare being introduced by central banks acrossthe globe for checking the incidence of MoneyLaundering and the employees of banks arealso being trained to recognise suspicioustransactions, the dilemma of the banker in thecontext of Money Laundering is to sift thetransactions representing legitimate businessand banking activity from the irregular /suspicious transactions. Launderers generallyuse this channel in two stages to disguise theorigin of the funds first, when they place theirill gotten money into financial system tolegitimize the funds and introduce these funds inthe financial system and second, once these fundshave entered the banking system, through a seriesof transactions, they distance the funds from illegalsource. The banks and financial institutionsthrough whom the ‘dirt money’ is launderedbecome unwitting victims of this crime.


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INTERNATIONAL INITIATIVES TOCOMBAT MONEY LAUNDERING

Money laundering has become a crucialcrime and there are countless organizationstrying to get a handle on the problem. In theUnited States, the Department of Justice, theState Department, the Federal Bureau ofInvestigation, the Internal Revenue Service andthe Drug Enforcement Agency all have divisionsinvestigating money laundering and theunderlying financial structures that make itwork.

State and local police also investigate casesthat fall under their jurisdiction. Because globalfinancial systems play a major role in most high-level laundering schemes, the internationalcommunity is fighting money launderingthrough various means, including the FinancialAction Task Force on Money Laundering(FATF), which as of 2005 has 33 member statesand organizations. The United Nations, theWorld Bank and the International MonetaryFund also have anti-money-launderingdivisions.

• FINANCIAL ACTION TASK FORCE(FATF)

The Financial Action Task Force (FATF) isan intergovernmental body that works for thedevelopment of standards for combating moneylaundering and terrorist financing. It also ensuresadherence to its standards by making sure thatcountries across the world bring about legislativeand regulatory reforms in these areas. It furthermonitors the progress of the anti-moneylaundering efforts of its members. Forty plus ninerecommendations of FATF are considered asglobal standards on Anti-money laundering andcombating of financing of terrorism.

Benefits of implementing the FATFRecommendations:

1. Securing a more transparent and stablefinancial system that is more attractive toforeign investors: Corrupt and opaquefinancial systems are inherently unstable.

Excessive money laundering can causeincreased volatility of international capitalflows and exchange rates, marketdisparities, and distortions of investmentand trade flows.

2. Ensure that financial institutions are notvulnerable to infiltration or abuse byorganised crime groups: Financialinstitutions that are exploited in this mannerare exposed to reputational risk, financialinstability, diminished public confidence,threats to safety and soundness and otherlosses.

3. Build the capacity to fight terrorism andtrace terrorist money: Terrorists needmoney to finance attacks. Tracing thismoney is one of the few preventive toolsthat governments have against terrorism.

4. Meet binding international obligations,and avoid the risk of sanctions or otheraction by the international community: Theinternational community- throughnumerous international treaties, UnitedNations Security Council Resolutions andbest practices- has endorsed the FATFRecommendations at the highest politicallevel.

5. Avoid becoming a haven for criminals:Countries with weak AML/CFT systems areattractive to criminals because they providean environment in which criminals canenjoy the profits of their crimes and financetheir illicit activities with little fear of facingpunishment.

India became the 34th country member ofthe Financial Action Task Force in 2010 . Indiais also a signatory to various United NationsConventions which deal with anti moneylaundering and countering financing ofterrorism.

• BASEL STATEMENT OF PRINCIPLES

On the financial front, the Committee onBanking Regulation and supervisory Practices


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issued the Basel Statement of Principles on theprevention of criminal use of the banking systemfor the purpose of money laundering inDecember 1988.

The Statement of Principles does not restrictitself to drug-related money laundering butextends to all aspects of laundering throughthe banking system, i. e. the deposit, transferand/or concealment of money derived fromillicit activities whether robbery, terrorism,fraud or drugs. It seeks to deny the bankingsystem to those involved in money launderingby the application of the following principles:

a) Know your customer - banks shouldmake reasonable efforts to determinethe customer’s true identity, and haveeffective procedures for verifying thebona fides of new customers (whetheron the asset or liability side of thebalance sheet)

b) Compliance with laws - bankmanagement should ensure thatbusiness is conducted in conformitywith high ethical standards, laws andregulations being adhered to andensuring that a service is not providedwhere there is good reason to supposethat transactions are associated withlaundering activities.

c) Co-operation with law enforcementagencies - within any constraintsimposed by rules relating to customerconfidentiality, banks should co-operatefully with national law enforcementagencies including, where there arereasonable grounds for suspectingmoney laundering, taking appropriatemeasures which are consistent with thelaw.

d) Adherence to the Statement - The fulltext of this section of the Statement isworth quoting in full.

• UN CONVENTION AGAINST ILLICITTRAFFICKING IN NARCOTIC DRUGSAND PSYCHOTROPIC SUBSTANCES (THEVIENNA CONVENTION).

This is one of the most importantinternational treaties in the past 50 years. It notmerely requires its signatory states to criminalisethe laundering of drug money, and to confiscateit where found, but lays down so far as possiblea common wording for the criminal statutes,and a common mode of enforcement. It alsorequires full and prompt co-operation betweenthe signatory states for the enforcement of theselaws anywhere in the world. This agreement inDecember 1988 commits all countries that ratifyit to introduce a comprehensive criminal lawagainst laundering the proceeds of drugtrafficking and to introduce measures to identify,trace, and freeze or seize the proceeds of drugtrafficking. The UK was one of the firstcountries to ratify this Convention which hasbeen ratified by over 50 countries.

This UN Treaty is of foundationalimportance in relation to international co-operation in the area of drug trafficking. In theEuropean context alone, it exerted a majorinfluence on the Council of Europe Conventionon Laundering, Search, Seizure andConfiscation of the Proceeds from Crime andon the EC Directive on prevention of the use ofthe financial system for the purpose of moneylaundering. On a wider stage it has formed anessential framework for the work of the FATFand, indeed, implementation and ratificationof the treaty was the first of therecommendations made by the FATF. SeveralUnited Kingdom legislative provisions are takenalmost directly from the treaty.

The recitals narrate that the Parties to theConvention recognise that links between illicitdrug traffic and other related organised criminalactivities which undermine the legitimateeconomies and threaten the stability, securityand sovereignty of States; and that illicit drugtrafficking is an international criminal activitythat generates large profits and wealth, enablingtransnational, criminal organisations topenetrate, contaminate and corrupt thestructures of government, legitimate commercialand financial business and society at all its levels


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and they are therefore determined to deprivepersons engaged in illicit traffic of the proceedsof their criminal activities and therebyeliminating their main incentive for so doing.

• International Money LaunderingInformation Network (ImoLIN).

IMoLIN is an Internet-based networkassisting governments, organizations andindividuals in the fight against moneylaundering and the financing of terrorismadministered by UN office on Drugs and Crime.IMoLIN has been developed with thecooperation of the world's leading anti-moneylaundering organizations. It provides with aninternational database called Anti-MoneyLaundering International Database (AMLID)that analyses jurisdictions' national anti-moneylaundering legislation. It is intended as a toolfor practitioners to assist them in theirinternational cooperation and exchange ofinformation efforts. Currently, the Anti-MoneyLaundering International Database (AMLID)2nd Round of Legal Analysis has been launchedby UNODC on 27 February 2006, IMoLIN hastwelve participating organization, fourinternational organizations85, and fiveinternational financial institutions on its website.

INITIATIVES TAKEN BY INDIA TOCOMBAT MONEY LAUNDERING

With its growing financial strength, India isvulnerable to money laundering activities.

In India, before the enactment of thePrevention of Money Laundering Act 2002(PMLA- 02 hereinafter), the following statutesaddressed scantily the issue in question:

• The Conservation of Foreign Exchange andPrevention of Smuggling Activities Act, 1974.

• The Income Tax Act, 1961.

• The Benami Transactions (Prohibition) Act,1988.

• The Indian Penal Code and Code ofCriminal Procedure, 1973.

• The Narcotic Drugs and PsychotropicSubstances Act, 1985.

• The Prevention of Illicit Traffic in NarcoticDrugs and Psychotropic Substances Act, 1988.

However, this was not sufficient with thegrowth of varied areas of generating illegalmoney by selling antiques, rare animal fleshand skin, human organ, and many such variednew areas of generating money which wasillegal. Money-laundering was an effective wayto launder the black money (wash it to make itclean) so as to make it white. The internationalinitiatives as discussed above to obviate thethreat not only to financial systems but also tothe integrity and sovereignty of the nations andthe Hawala episode in India triggered the needfor an anti money-laundering law.

In view of the urgent need for the enactmentof a comprehensive legislation inter alia forpreventing money laundering and connectedactivities, confiscation of proceeds of crime,setting up of agencies and mechanisms forcoordinating measures for combating money-laundering etc., the PML Bill was introduced inthe Lok Sabha on 4th August 1998, whichultimately was passed on 17th January 2003.

Sec. 3 of PMLA defines offence of moneylaundering as whosoever directly or indirectlyattempts to indulge or knowingly assists orknowingly is a party or is actually involved inany process or activity connected with theproceeds of crime and projecting it as untaintedproperty shall be guilty of offence of money-laundering. It prescribes obligation of bankingcompanies, financial institutions andintermediaries for verification and maintenanceof records of the identity of all its clients andalso of all transactions and for furnishinginformation of such transactions in prescribedform to the Financial Intelligence Unit-India(FIU-IND). It empowers the Director of FIU-IND to impose fine on banking company,financial institution or intermediary if they orany of its officers fails to comply with theprovisions of the Act as indicated above.


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PMLA empowers certain officers of theDirectorate of Enforcement to carry outinvestigations in cases involving offence ofmoney laundering and also to attach theproperty involved in money laundering. PMLAenvisages setting up of an AdjudicatingAuthority to exercise jurisdiction, power andauthority conferred by it essentially to confirmattachment or order confiscation of attachedproperties. It also envisages setting up of anAppellate Tribunal to hear appeals against theorder of the Adjudicating Authority and theauthorities like Director FIU-IND.

PMLA envisages designation of one or morecourts of sessions as Special Court or SpecialCourts to try the offences punishable underPMLA and offences with which the accusedmay, under the Code of Criminal Procedure1973, be charged at the same trial. PMLA allowsCentral Government to enter into an agreementwith Government of any country outside Indiafor enforcing the provisions of the PMLA,exchange of information for the prevention ofany offence under PMLA or under thecorresponding law in force in that country orinvestigation of cases relating to any offenceunder PMLA.

• Financial Intelligence Unit – India (FIU-IND)

It was set by the Government of India videO.M. dated 18th November 2004 as the centralnational agency responsible for receiving,processing, analyzing and disseminatinginformation relating to suspect financialtransactions. FIU-IND is also responsible forcoordinating and strengthening efforts ofnational and international intelligence,investigation and enforcement agencies inpursuing the global efforts against moneylaundering and related crimes. FIU-IND is anindependent body reporting directly to theEconomic Intelligence Council (EIC) headed bythe Finance Minister.

The functions of FIU-IND are:

1. Collection of Information: Act as thecentral reception point for receiving Cash

Transaction reports (CTRs) and SuspiciousTransaction Reports (STRs) from variousreporting entities.

2. Analysis of Information: Analyze receivedinformation in order to uncover patterns oftransactions suggesting suspicion of moneylaundering and related crimes.

3. Sharing of Information: Share informationwith national intelligence/law enforcementagencies, national regulatory authorities andforeign Financial Intelligence Units.

4. Act as Central Repository: Establish andmaintain national data base on cashtransactions and suspicious transactions onthe basis of reports received from reportingentities.

5. Coordination: Coordinate and strengthencollection and sharing of financialintelligence through an effective national,regional and global network to combatmoney laundering and related crimes.

6. Research and Analysis: Monitor andidentify strategic key areas on moneylaundering trends, typologies anddevelopments.

• Enforcement Directorate

The Directorate of Enforcement wasestablished in the year 1956 with itsHeadquarters at New Delhi. It is responsiblefor enforcement of the Foreign ExchangeManagement Act, 1999 (FEMA) and certainprovisions under the Prevention of MoneyLaundering Act. Work relating to investigationand prosecution of cases under the PML hasbeen entrusted to Enforcement Directorate. TheDirectorate is under the administrative controlof Department of Revenue for operationalpurposes; the policy aspects of the FEMA, itslegislation and its amendments are within thepurview of the Department of Economic Affairs.Policy issues pertaining to PML Act, however,are the responsibility of the Department ofRevenue. Before FEMA became effective (1 June


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2000), the Directorate enforced regulations underthe Foreign Exchange Regulation Act, 1973.

Functions:-

1. To collect, develop and disseminateintelligence relating to violations of FEMA,1999, the intelligence inputs are receivedfrom various sources such as Central andState Intelligence agencies, complaints etc.

2. To investigate suspected violations of theprovisions of the FEMA, 1999 relating toactivities such as “hawala” foreignexchange racketeering, non-realization ofexport proceeds, non-repatriation of foreignexchange and other forms of violationsunder FEMA, 1999.

3. To adjudicate cases of violations of theerstwhile FERA, 1973 and FEMA, 1999.

4. To realize penalties imposed on conclusionof adjudication proceedings.

5. To handle adjudication, appeals andprosecution cases under the erstwhileFERA, 1973

6. To process and recommend cases forpreventive detention under theConservation of Foreign Exchange andPrevention of Smuggling Activities Act(COFEPOSA)

7. To undertake survey, search, seizure, arrest,prosecution action etc. against offender ofPMLA offence.

8. To provide and seek mutual legal assistanceto/from contracting states in respect ofattachment/confiscation of proceeds ofcrime as well as in respect of transfer ofaccused persons under PMLA.

• Role of Reserve Bank of India

The regulatory purview of the Reserve Bankextends to a large segment of financialinstitutions, including commercial banks, co-operative banks, non-banking financial

institutions and various financial markets168.The Board for Financial Supervision (BFS)continued to exercise its supervisory role overthose segments of the financial institutions thatare under the purview of the Reserve Bank.

Recently, the RBI has issued a series ofmaster circulars to the banks, about theprecautions to be exercised in handling theircustomers’ transactions. Important amongstthese is a guidance note issued about treatmentof customer and key to knowing the customer.The identity, background and standing of thecustomer should be verified not only at the timeof commencement of relationship, but also beupdated from time to time, to reflect thechanges in circumstances and the nature ofoperations of the account.

RBI plays a significant role in AML activities.RBI, recently blocked the application of Swissbank UBS for a banking license in India on theground that it was involved in $8 billion money-laundering racket. RBI investigators found thelink between UBS and Khan, as thebusinessman had deposited $8 billion at a Zurichbranch of UBS. They cited it as direct evidencefor blocking the license of the bank.

• Role of Securities Exchange Board of India

Vulnerability of securities market to money-laundering activities have been discussed in theearlier part of this paper. Indian securities marketis also prone to money-laundering activities.Intermediaries registered under the SEBI areunder reporting obligation of PMLA 02. FIU-IND has also issued certain guidelines relatingto KYC to be followed by these intermediaries.

The main source of money-laundering wouldbe the Participatory Notes Transaction andOverseas Direct Investment Routes.

The stock market regulator has undertakenvarious initiatives to additionally safeguard theexisting Indian capital market regulatory system.Sebi plans to review and consolidate variousinitiatives undertaken by it and the governmentover the period of time. The initiative is


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•••

necessary to overcome new challenges in rapidtechnological and market advances.

All market intermediaries’ i.e. mutual funds,brokers, depositories, merchant bankers,portfolio managers and investment advisors arerequired to adhere to specified client dealingprocedures like know your customer (KYC) andmandatory requirement of PAN (PermanentAccount Number).

The existing Sebi guideline is based on thePrevention of Money Laundering (PMLA) Act,of 2002, which was further amended in 2005and in 2009. However, Sebi plans to review andconsolidate it by taking into consideration thenew financial action task force (FAFT) standards.

CONCLUSION

Combating money laundering is a dynamic

process because the criminals who laundermoney are continuously seeking new ways toachieve their illegal ends. Many importantfinancial centers have now adopted legislationto curb drug-related money laundering.

However UN data reveals that terror groupfinancing accounts for just 0.2 per cent of thetotal $856 billion money laundered worldwide.While this amounts to just $1.72 billion, thissegment of money laundering has the potencyto cause havoc for the global economy.

In order to reduce the vulnerability of theinternational financial system to moneylaundering, governments must intensify theirefforts to remove any detrimental rules andpractices which obstruct international co-operation against money laundering for thissharing of information is necessary.


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myThere are seven continents in the world viz,

Asia, Europe, Australia, Africa, North America,South America (or Latin America) and Antarc-tica. The countries of the world are passingthrough different levels of development. NorthAmerica, Western Europe, some East Asiancountries are developed countries whereas largenumber of countries in Asia, Africa and LatinAmerica are developing countries, some of themfalling under the category of least developedcountries. The developing countries include'eastern tigers', 'emerging market economies' andmany countries of the 'G-20'. It is, therefore,important to know about them.

North and South

The developed countries are concentrated inthe northern hemisphere whereas the underde-veloped countries are concentrated in the south-ern hemisphere. It is because of this reason thatthe developed and underdeveloped regions areeuphemistically mentioned in economic litera-ture as "North" and "South" respectively.Though Asia, which contains many poor coun-tries is in Northern hemisphere and Australia,which is rich, is in Southern Hemisphere, byand large this North-South categorization ofdeveloped and underdeveloped countries indi-cates geographical concentration.

Third world

The notion of third world refers to underdevel-oped or developing countries which remainedaloof from two cold war camps- Soviet Unionand the United States of America. The wordthird world refers to those countries that re-mained non-aligned or neutral with either capi-talism and NATO (which along with its alliesrepresented the First World) or communism and

the Soviet Union (which along with its alliesrepresented the Second World).

Least developed country (LDC)

Least developed country (LDC) is the namegiven to a country which, according to theUnited Nations, exhibits the lowest indicatorsof socioeconomic development, with the lowestHuman Development Index ratings of all coun-tries in the world. The concept of LDCs origi-nated in the late 1960s and the first group ofLDCs was listed by the UN in its resolution2768 (XXVI) of 18 November 1971. A countryis classified as a Least Developed Country if itmeets three criteria:

• poverty (three-year average GNI per capitaof less than US $905, which must exceed$1,086 to leave the list)

• human resource weakness (based on indi-cators of nutrition, health, education andadult literacy) and

• economic vulnerability (based on instabil-ity of agricultural production, instabilityof exports of goods and services, economicimportance of non-traditional activities,merchandise export concentration, handi-cap of economic smallness, and the per-centage of population displaced by natu-ral disasters).

LDC criteria are reviewed every three yearsby the Committee for Development Policy(CDP) of the UN Economic and Social Council(ECOSOC). Countries may "graduate" out ofthe LDC classification when indicators exceedthese criteria. The United Nations Office of theHigh Representative for the Least DevelopedCountries, Landlocked Developing Countriesand Small Island Developing States (UN

WORLD ECONOMY CHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE


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OHRLLS) coordinates UN support and providesadvocacy services for Least Developed Coun-tries. The classification (as of 1 January 2011)applies to 48 countries.

Since the LDC category was initiated, onlythree countries have graduated to developingcountry status. The first country to graduatefrom LDC status was Botswana in 1994. Thesecond country was Cape Verde, in 2007.Maldives became the third country to graduateto developing country status on 1 January 2011.In 2011 the UN suggested that EquatorialGuinea, Samoa, Tuvalu, and Vanuatu areamong the candidates for promotion from LDCstatus. At the UN's fourth conference on LDCsheld in May 2011, delegates endorsed a goaltargeting the promotion of at least half thecurrent LDC countries within the next ten years.

DEVELOPED AND DEVELOPINGCOUNTRIES

Developing country

Developing country is a term generally usedto describe a nation with a low level of mate-rial well being. These are countries with moreadvanced economies than other developing na-tions, but which have not yet fully demonstratedthe signs of a developed country, are catego-rized under the term newly industrialized coun-tries. A developing country, also known as aless-developed country (LDC), is a nation witha low living standard, undeveloped industrialbase, and low Human Development Index(HDI) relative to other countries.

Developed Nations

There is no single internationally-recognizeddefinition of developed country, and the levelsof development may vary widely within so-called developing countries, with some devel-oping countries having high average standardsof living. Kofi Annan, former Secretary Gen-eral of the United Nations, defined a developedcountry as follows. "A developed country is onethat allows all its citizens to enjoy a free andhealthy life in a safe environment."

Although, there are similar notions about de-veloping and developed countries among themultilateral organizations, they differ in theirmethods of classification of developing and de-veloped nations. While the UN does not giveany quantitative specification, the World Bankand the IMF give some quantifiable basis ofdifference.

THE UN SYSTEM OF CLASSIFICATION

The United Nations Statistics Division says thatthere is no established convention for the des-ignation of "developed" and "developing" coun-tries or areas in the United Nations system.According to the United Nations, the designa-tions "developed" and "developing" are intendedfor statistical convenience and do not necessar-ily express a judgment about the stage reachedby a particular country or area in the develop-ment process. Thus, in common practice, Ja-pan and South Korea in Asia, Canada and theUnited States in northern America, Australiaand New Zealand in Oceania, and Europe, areconsidered "developed" regions or areas. Ininternational trade statistics, the Southern Afri-can Customs Union is also treated as a devel-oped region and Israel as a developed country;countries emerging from the former Yugoslaviaare treated as developing countries; and coun-tries of eastern Europe and of the Common-wealth of Independent States (code 172) inEurope are not included under either devel-oped or developing regions.

THE IMF SYSTEM OF CLASSIFICATIONOF DEVELOPING AND DEVELOPED

COUNTRIES

The IMF uses a flexible classification systemthat considers "(1) per capita income level, (2)export diversification-so oil exporters that havehigh per capita GDP would not make the ad-vanced classification because around 70% of itsexports are oil, and (3) degree of integrationinto the global financial system." From the IMFcriteria India, China, Brazil, Mexico, Indonesia,Malaysia, the Middle Eastern countries, almostall the African countries fall under the category


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of developing countries whereas G7 countries,South Korea, Australia etc. are developed coun-tries. Thus, according to the classificationfrom International Monetary Fund (IMF) be-fore April 2004, all the countries of EasternEurope (including Central European countrieswhich still belongs to "Eastern Europe Group"in the UN institutions) as well as the formerSoviet Union (USSR) countries in Central Asia(Kazakhstan, Uzbekistan, Kyrgyzstan,Tajikistan and Turkmenistan) and Mongolia,were not included under either developed ordeveloping regions, but rather were referred toas "countries in transition"; however they arenow widely regarded (in the international re-ports) as "developing countries".

The World Bank System of classification ofdeveloping and developed countries.

The World Bank classifies countries into fourincome groups. These are set each year on July 1.Economies were divided according to 2008 GNIper capita using the following ranges of income:

• Low income countries had GNI per capitaof US$1,005 or less.

• Lower middle income countries had GNIper capita between US$1,006 andUS$3,975.

• Upper middle income countries had GNIper capita between US$3,976 andUS$12,275.

• High income countries had GNI aboveUS$12,276.

The World Bank classifies all low- and middle-income countries as developing but notes, "The useof the term is convenient; it is not intended toimply that all economies in the group are expe-riencing similar development or that other econo-mies have reached a preferred or final stage ofdevelopment. Classification by income does notnecessarily reflect development status."

Newly Industrialised Countries (NIC)

NICs are countries whose economies havenot yet reached First World status but have, ina macroeconomic sense, outpaced their devel-

oping counterparts. Another characterization ofNICs is that of nations undergoing rapid eco-nomic growth (usually export-oriented).Incipient or ongoing industrialization is an im-portant indicator of a NIC. In many NICs, socialupheaval can occur as primarily rural, agricul-tural populations migrate to the cities, wherethe growth of manufacturing concerns and fac-tories can draw many thousands of laborers.

Emerging Economies

In the 2008 Emerging Economy Report theCenter for Knowledge Societies defines Emerg-ing Economies as those "regions of the worldthat are experiencing rapid informationalizationunder conditions of limited or partial industrial-ization." It appears that emerging markets lie atthe intersection of non-traditional user behavior,the rise of new user groups and communityadoption of products and services, and innova-tions in product technologies and platforms.

Emerging Markets

The term emerging markets is used to de-scribe a nation's social or business activity inthe process of rapid growth and industrializa-tion. Originally brought into fashion in the1980s by then World Bank economist Antoinevan Agtmael, the term is sometimes loosely usedas a replacement for emerging economies, butreally signifies a business phenomenon that isnot fully described by or constrained to geogra-phy or economic strength; such countries areconsidered to be in a transitional phase betweendeveloping and developed status. Examples ofemerging markets include China , India, somecountries of Latin America (particularly Argen-tina, Brazil , Chile, and Mexico), some coun-tries in Southeast Asia, most countries in East-ern Europe, Russia, some countries in theMiddle East (particularly in the Persian GulfArab States), and parts of Africa (particularlySouth Africa). Emphasizing the fluid nature ofthe category, political scientist Ian Bremmerdefines an emerging market as "a countrywhere politics matters at least as much as eco-nomics to the markets."


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BRIC Countries

In recent years, new terms have emerged todescribe the largest developing countries suchas BRIC that stands for Brazil, China, Indiaand Russia, along with BRICS (BRIC + SouthAfrica), BRICM (BRIC + Mexico) and BRICK(BRIC + South Korea). These countries do notshare any common agenda, but some expertsbelieve that they are enjoying an increasing rolein the world economy and on political plat-forms. In economics, BRIC (typically renderedas the "BRICS" or "the BRIC countries") is anacronym that refers to the fast-growing devel-oping economies of Brazil, Russia, India, Chinaand South Africa. The acronym was first coinedand prominently used by Goldman Sachs in2001 before South Africa joined in 2011.

THE WORLD BANK CLASSIFICATIONOF ECONOMIES

The World Bank classifies economies of theworld on the basis of Gross National Incomeper capita for operational and analytical purposes.Based on its GNI per capita, every economy isclassified as low income, middle income (subdi-vided into lower middle and upper middle), orhigh income. Other analytical groups based ongeographic regions are also used. The WorldBank has identified following groups of coun-tries on the basis of GNI per capita:

Income group: Economies are divided accord-ing to 2008 GNI per capita, calculated usingthe World Bank Atlas method. The groups are:low income, $975 or less; lower middle income,$976 - $3,855; upper middle income, $3,856 -$11,905; and high income, $11,906 or more.TheBank's analytical income categories (low,middle, high income) are based on the Bank'soperational lending categories (civil works pref-erences, IDA eligibility, etc.).

Geographic region: Classifications and datareported for geographic regions are for low-income and middle-income economies only.Low-income and middle-income economies aresometimes referred to as developing economies.

The use of the term is convenient; it is not in-tended to imply that all economies in the groupare experiencing similar development or thatother economies have reached a preferred orfinal stage of development. Classification byincome does not necessarily reflect developmentstatus.

Lending category: IDA countries are thosethat had a per capita income in 2008 ofless than $1,135 and lack the financial abilityto borrow from IBRD. IDA loans are deeplyconcessional-interest-free loans and grants forprograms aimed at boosting economic growthand improving living conditions. IBRD loansare noncessional. Blend countries are eligiblefor IDA loans because of their low per capitaincomes but are also eligible for IBRD loansbecause they are financially creditworthy.

EURO ZONE

The eurozone, officially called the euro area, isan economic and monetary union (EMU) of 17European Union (EU) member states that haveadopted the euro (•) as their common currencyand sole legal tender. The eurozone currentlyconsists of Austria, Belgium, Cyprus, Estonia,Finland, France, Germany, Greece, Ireland, Italy,Luxembourg, Malta, the Netherlands, Portugal,Slovakia, Slovenia, and Spain. Most other EUstates are obliged to join once they meet the cri-teria to do so. No state has left and there are noprovisions to do so or to be expelled.

Monetary policy of the zone is the responsi-bility of the European Central Bank (ECB)which is governed by a President and a Boardof the Heads of National Central Banks. Theprincipal task of the ECB is to keep inflationunder control. Though there is no common rep-resentation, governance or fiscal policy for thecurrency union, some co-operation does takeplace through the Euro Group, which makespolitical decisions regarding the eurozone andthe euro. The Euro Group is composed of theFinance Ministers of eurozone states, howeverin emergencies, national leaders also form theEuro Group.


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European Central Bank (ECB)

The European Central Bank (ECB) is the in-stitution of the European Union (EU) that ad-ministers the monetary policy of the 17 EUEurozone member states. It is thus one of theworld's most important central banks. The bankwas established by the Treaty of Amsterdam in1998, and is headquartered in Frankfurt, Ger-many. The current President of the ECB is MarioDraghi, former Governor of the Bank of Italy.

The primary objective of the European Cen-tral Bank is to maintain price stability withinthe Eurozone, which is the same as keepinginflation low. The Governing Council definedprice stability as inflation (Harmonised Indexof Consumer Prices) of around 2%. Unlike, forexample, the United States Federal ReserveBank, the ECB has only one primary objectivewith other objectives subordinate to it.

The key tasks of the ECB are to define andimplement the monetary policy for theEurozone, to conduct foreign exchange opera-tions, to take care of the foreign reserves of theEuropean System of Central Banks and pro-mote smooth operation of the financial marketinfrastructure under the TARGET2 paymentssystem and the technical platform (currentlybeing developed) for settlement of securities inEurope (TARGET2 Securities). Furthermore, ithas the exclusive right to authorise the issu-ance of euro banknotes. Member states couldissue euro coins, but the amount must beauthorised by the ECB beforehand (upon theintroduction of the euro, the ECB also hadexclusive right to issue coins). On 9 May 2010,the 27 member states of the European Unionagreed to incorporate the European FinancialStability Facility. The EFSF's mandate is to safe-guard financial stability in Europe by providingfinancial assistance to Eurozone Member States.

2007-2012 GLOBAL FINANCIAL CRISIS

The 2007-2012 global financial crisis is con-sidered by many economists to be the worstfinancial crisis since the Great Depression of

the 1930s. It resulted in the collapse of largefinancial institutions, the bailout of banks bynational governments, and downturns in stockmarkets around the world. In many areas, thehousing market also suffered, resulting in evic-tions, foreclosures and prolonged unemploy-ment. The crisis played a significant role in thefailure of key businesses, declines in consumerwealth estimated in trillions of US dollars, anda downturn in economic activity leading to the2008-2012 global recession and contributing tothe European sovereign-debt crisis.

Sub Prime Crisis

The U.S. subprime mortgage crisis was a setof events and conditions that led to the late-2000s financial crisis, characterized by a rise insubprime mortgage delinquencies and foreclo-sures, and the resulting decline of securitiesbacked by said mortgages.The percentage ofnew lower-quality subprime mortgages rosefrom the historical 8% or lower range to ap-proximately 20% from 2004 to 2006, with muchhigher ratios in some parts of the U.S. A highpercentage of these subprime mortgages, over90% in 2006 for example, were adjustable-ratemortgages. These two changes were part of abroader trend of lowered lending standards andhigher-risk mortgage products. Further, U.S.households had become increasingly indebted,with the ratio of debt to disposable personalincome rising from 77% in 1990 to 127% at theend of 2007, much of this increase mortgage-related.After U.S. house sales prices peaked inmid-2006 and began their steep decline forth-with, refinancing became more difficult. Asadjustable-rate mortgages began to reset athigher interest rates (causing higher monthlypayments), mortgage delinquencies soared. Se-curities backed with mortgages, includingsubprime mortgages, widely held by financialfirms, lost most of their value. Global investorsalso drastically reduced purchases of mortgage-backed debt and other securities as part of adecline in the capacity and willingness of theprivate financial system to support lending.Concerns about the soundness of U.S. credit


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and financial markets led to tightening creditaround the world and slowing economic growthin the U.S. and Europe.

The immediate cause or trigger of the crisiswas the bursting of the United States housingbubble which peaked in approximately 2005-2006. High default rates on "subprime" and ad-justable rate mortgages (ARM), began to in-crease quickly thereafter. Lenders began origi-nating large numbers of high risk mortgagesfrom around 2004 to 2007, and loans from thosevintage years exhibited higher default rates thanloans made either before or after.

An increase in loan incentives such as easyinitial terms and a long-term trend of risinghousing prices had encouraged borrowers toassume difficult mortgages in the belief theywould be able to quickly refinance at more fa-vorable terms. Additionally, the increased mar-ket power of originators of subprime mortgagesand the declining role of Government Spon-sored Enterprises as gatekeepers increased thenumber of subprime mortgages provided to con-sumers who would have otherwise qualifiedfor conforming loans.

The worst performing loans were securitizedby private investment banks, who generallylacked the GSE's market power and influenceover mortgage originators. Once interest ratesbegan to rise and housing prices started to dropmoderately in 2006-2007 in many parts of theU.S., refinancing became more difficult. Defaultsand foreclosure activity increased dramaticallyas easy initial terms expired, home prices failedto go up as anticipated, and ARM interest ratesreset higher. Falling prices also resulted in 23%of U.S. homes worth less than the mortgageloan by September 2010, providing a financialincentive for borrowers to enter foreclosure. Theongoing foreclosure epidemic, of whichsubprime loans are one part, that began in late2006 in the U.S. continues to be a key factor inthe global economic crisis, because it drainswealth from consumers and erodes the finan-cial strength of banking institutions.

In the years leading up to the crisis, signifi-

cant amounts of foreign money flowed into theU.S. from fast-growing economies in Asia andoil-producing countries. This inflow of fundscombined with low U.S. interest rates from2002-2004 contributed to easy credit conditions,which fueled both housing and credit bubbles.Loans of various types (e.g., mortgage, creditcard, and auto) were easy to obtain and con-sumers assumed an unprecedented debt load.

As part of the housing and credit booms,the amount of financial agreements called mort-gage-backed securities (MBS), which derivetheir value from mortgage payments and hous-ing prices, greatly increased. Such financialinnovation enabled institutions and investorsaround the world to invest in the U.S. hous-ing market. As housing prices declined, majorglobal financial institutions that had borrowedand invested heavily in MBS reported signifi-cant losses. Defaults and losses on other loantypes also increased significantly as the crisisexpanded from the housing market to otherparts of the economy. Total losses are estimatedin the trillions of U.S. dollars globally.

While the housing and credit bubbles weregrowing, a series of factors caused the financialsystem to become increasingly fragile.Policymakers did not recognize the increasinglyimportant role played by financial institutionssuch as investment banks and hedge funds, alsoknown as the shadow banking system. Shadowbanks were able to mask their leverage levelsfrom investors and regulators through the useof complex, off-balance sheet derivatives andsecuritizations.

These instruments also made it virtually im-possible to reorganize financial institutions inbankruptcy, and contributed to the need forgovernment bailouts. Some experts believe theseinstitutions had become as important as com-mercial (depository) banks in providing creditto the U.S. economy, but they were not subjectto the same regulations. These institutions aswell as certain regulated banks had also as-sumed significant debt burdens while provid-ing the loans described above and did not have


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a financial cushion sufficient to absorb largeloan defaults or MBS losses.

These losses impacted the ability of financialinstitutions to lend, slowing economic activity.Concerns regarding the stability of key finan-cial institutions drove central banks to takeaction to provide funds to encourage lendingand to restore faith in the commercial papermarkets, which are integral to funding busi-ness operations. Governments also bailed outkey financial institutions, assuming significantadditional financial commitments.

The risks to the broader economy created bythe housing market downturn and subsequentfinancial market crisis were primary factors inseveral decisions by central banks around theworld to cut interest rates and governments toimplement economic stimulus packages. Effectson global stock markets due to the crisis havebeen dramatic. Between 1 January and 11 Oc-tober 2008, owners of stocks in U.S. corpora-tions had suffered about $8 trillion in losses, astheir holdings declined in value from $20 tril-lion to $12 trillion. Losses in other countrieshave averaged about 40%.

Losses in the stock markets and housingvalue declines place further downward pres-sure on consumer spending, a key economicengine. Leaders of the larger developed andemerging nations met in November 2008 andMarch 2009 to formulate strategies for address-ing the crisis. A variety of solutions have beenproposed by government officials, central bank-ers, economists, and business executives. In theU.S., the Dodd-Frank Wall Street Reform andConsumer Protection Act was signed into lawin July 2010 to address some of the causes ofthe crisis.

The bursting of the U.S. housing bubble, whichpeaked in February 2007, caused the values ofsecurities tied to U.S. real estate pricing to plum-met, damaging financial institutions globally. Thefinancial crisis was triggered by a complex inter-play of valuation and liquidity problems in theUnited States banking system in 2008. Questions

regarding bank solvency, declines in credit avail-ability and damaged investor confidence had animpact on global stock markets, where securitiessuffered large losses during 2008 and early 2009.Economies worldwide slowed during this period,as credit tightened and international trade de-clined. Governments and central banks respondedwith unprecedented fiscal stimulus, monetarypolicy expansion and institutional bailouts. Al-though there have been aftershocks, the financialcrisis itself ended sometime between late-2008 andmid-2009. In the U.S., Congress passed the Ameri-can Recovery and Reinvestment Act of 2009. Inthe E.U., the U.K. responded with austerity mea-sures of spending cuts and tax increases withoutexport growth and it has since slid into a double-dip recession.

Many causes for the financial crisis have beensuggested, with varying weight assigned byexperts. The U.S. Senate's Levin-Coburn Reportasserted that the crisis was the result of "highrisk, complex financial products; undisclosedconflicts of interest; the failure of regulators,the credit rating agencies, and the market itselfto rein in the excesses of Wall Street." Twofactors that have been frequently cited includethe liberal use of the Gaussian Copula functionand the failure to track data provenance.

The 1999 repeal of the Glass-Steagall Act ef-fectively removed the separation between in-vestment banks and depository banks in theUnited States. Critics argued that credit ratingagencies and investors failed to accurately pricethe risk involved with mortgage-related finan-cial products, and that governments did notadjust their regulatory practices to address 21st-century financial markets.

In response to the financial crisis, both mar-ket-based and regulatory solutions have beenimplemented or are under consideration. PaulKrugman, author of End This Depression Now!(2012), argues that while current solutions havestabilized the world economy, the worldeconomy will not improve unless it receivesfurther stimulus. Buchanan, Gjerstad, and


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Smith argue that fiscal and monetary policyare ineffective, failing to reignite residentialinvestment and construction as they have inpast contractions. The current type of contrac-tion requires balance sheet repair via currencydepreciation and export-driven growth. Fiscalstimulus extends a current account deficit andretards export growth. If the world economydoes not improve, many economists fear sover-eign default is a real possibility in several Euro-pean countries and even the United States.

EFFECTS ON FINANCIALINSTITUTIONS

Several major financial institutions eitherfailed or were bailed-out by governments, ormerged (voluntarily or otherwise) during thecrisis. While the specific circumstances varied,in general the decline in the value of mortgage-backed securities held by these companies re-sulted in either their insolvency, the equivalentof bank runs as investors pulled funds fromthem, or inability to secure new funding in thecredit markets. These firms had typically bor-rowed and invested large sums of money rela-tive to their cash or equity capital, meaningthey were highly leveraged and vulnerable tounanticipated credit market disruptions.

The five largest U.S. investment banks, withcombined liabilities or debts of $4 trillion, eitherwent bankrupt (Lehman Brothers), were takenover by other companies (Bear Stearns andMerrill Lynch), or were bailed-out by the U.S.government (Goldman Sachs and MorganStanley) during 2008. Government-sponsoredenterprises (GSE) Fannie Mae and Freddie Maceither directly owed or guaranteed nearly $5trillion in mortgage obligations, with a simi-larly weak capital base, when they were placedinto receivership in September 2008. For scale,this $9 trillion in obligations concentrated inseven highly leveraged institutions can be com-pared to the $14 trillion size of the U.S. economy(GDP) or to the total national debt of $10 tril-lion in September 2008.

Major depository banks around the world hadalso used financial innovations such as structuredinvestment vehicles to circumvent capital ratioregulations. Notable global failures includedNorthern Rock, which was nationalized at anestimated cost of £87 billion ($150 billion). In theU.S., Washington Mutual (WaMu) was seized inSeptember 2008 by the USA Office of Thrift Su-pervision (OTS). This would be followed by theshotgun wedding of Wells Fargo & Wachoviaafter it was speculated that without the mergerWachovia was also going to fail. Dozens of U.S.banks received funds as part of the TARP or$700 billion bailout. The TARP funds gained somecontroversy after PNC Financial Services receivedTARP money, only to turn around hours laterand purchase the struggling National City Corp.,which itself had become a victim of the subprimecrisis. As a result of the financial crisis in 2008,twenty-five U.S. banks became insolvent and weretaken over by the FDIC. As of August 14, 2009,an additional 77 banks became insolvent. Thisseven month tally surpasses the 50 banks thatwere seized in all of 1993, but is still much smallerthan the number of failed banking institutions in1992, 1991, and 1990. The United States has lostover 6 million jobs since the recession began inDecember 2007. The FDIC deposit insurance fund,supported by fees on insured banks, fell to $13billion in the first quarter of 2009 That is thelowest total since September, 1993.

Carl Levin and Tom Coburn committee

The Permanent Subcommittee on Investigations(PSI) is the oldest subcommittee of the U.S. SenateCommittee on Homeland Security and Govern-mental Affairs (formerly the Committee on Gov-ernment Operations). The Permanent Subcommit-tee on Investigations was created at the same timeas the Committee on Government Operations in1952. On April 13, 2011 the Committee releasedits report on Wall Street and the Financial Crisis:Anatomy of a Financial Collapse. The 635-pagebipartisan report was issued under the chairman-ship of Carl Levin and Tom Coburn and also thusreferred as the Levin-Coburn Report.


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Mortgage-backed security (MBS)

A mortgage-backed security (MBS) is an as-set-backed security that represents a claim onthe cash flows from mortgage loans through aprocess known as securitization. The process ofsecuritization is complicated, and is highly de-pendent on the jurisdiction within which theprocess is conducted. The basics are:

1. Mortgage loans (mortgage notes) are pur-chased from banks and other lenders, andpossibly assigned to a special purpose ve-hicle (SPV).

2. The purchaser or assignee assembles theseloans into collections, or "pools".

3. The purchaser or assignee securitizes thepools by issuing mortgage-backed securities.

While a residential mortgage-backed secu-rity (RMBS) is secured by single-family or twoto four family real estate, a commercial mort-gage-backed security (CMBS) is secured by com-mercial and multifamily properties, such asapartment buildings, retail or officeproperties, hotels, schools, industrial propertiesand other commercial sites. A CMBS is usuallystructured as a different type of security thanan RMBS.

These securitization trusts include govern-ment-sponsored enterprises and private entitieswhich may offer credit enhancement featuresto mitigate the risk of prepayment and defaultassociated with these mortgages. Since residen-tial mortgages in the United States have theoption to pay more than the required monthlypayment (curtailment) or to pay off the loan inits entirety (prepayment), the monthly cash flowof an MBS is not known in advance, and there-fore presents risk to MBS investors.

In the United States, the most commonsecuritization trusts are Fannie Mae and FreddieMac, U.S. government-sponsored enterprises.Ginnie Mae, a U.S. government-sponsored en-terprise backed by the full faith and credit ofthe U.S. government, guarantees its investorsreceive timely payments, but buys limited num-bers of mortgage notes. Some private institu-

tions also securitize mortgages, known as "pri-vate-label" mortgage securities. Issuances ofprivate-label mortgage-backed securities in-creased dramatically from 2001 to 2007, andthen ended abruptly in 2008 when real estatemarkets began to falter.

EUROPEAN SOVEREIGN DEBT CRISIS

The European sovereign debt crisis is an on-going financial crisis that has made it difficultor impossible for some countries in the euroarea to refinance their government debt with-out the assistance of third parties. From late2009, fears of a sovereign debt crisis developedamong investors as a result of the rising privateand government debt levels around the worldtogether with a wave of downgrading of gov-ernment debt in some European states.

Causes of the crisis varied countrywise. In sev-eral countries, private debts arising from a prop-erty bubble were transferred to sovereign debt asa result of banking system bailouts and govern-ment responses to slowing economies post-bubble.In Greece, unsustainable public sector wage andpension commitments drove the debt increase.The structure of the Eurozone as a monetary union(i.e., one currency) without fiscal union (e.g., dif-ferent tax and public pension rules) contributedto the crisis and impacted the ability of Europeanleaders to respond. European banks own a sig-nificant amount of sovereign debt, such that con-cerns regarding the solvency of banking systemsor sovereigns are negatively reinforcing.

Concerns intensified in early 2010 and there-after, leading Europe's finance ministers on 9May 2010 to approve a rescue package worth•750 billion aimed at ensuring financial stabil-ity across Europe by creating the European Fi-nancial Stability Facility (EFSF).

In October 2011 and February 2012, theeurozone leaders agreed on more measuresdesigned to prevent the collapse of membereconomies. This included an agreementwhereby banks would accept a 53.5% write-offof Greek debt owed to private creditors, increas-ing the EFSF to about •1 trillion, and requiring


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European banks to achieve 9% capitalisation.To restore confidence in Europe, EU leadersalso agreed to create a European Fiscal Com-pact, including the commitment of each par-ticipating country to introduce a balanced bud-get amendment.

While sovereign debt has risen substantiallyin only a few eurozone countries, it has be-come a perceived problem for the area as awhole. Prior to May, 2012, the European cur-rency remained stable. As of mid-November2011, the euro was even trading slightly higheragainst the bloc's major trading partners thanat the beginning of the crisis. Three countriessignificantly affected, Greece, Ireland and Por-tugal, collectively accounted for 6% of theeurozone's gross domestic product (GDP). Dur-ing June 2012, the Spanish debt crisis became aprime concern for the Euro-zone. Interest rateson Spain's debt rose significantly and its abilityto access capital markets was affected, leadingto a bailout of its banks and other measures.

The European sovereign debt crisis resultedfrom a combination of complex factors, includ-ing the globalization of finance; easy credit con-ditions during the 2002-2008 period that en-couraged high-risk lending and borrowing prac-tices; the 2007-2012 global financial crisis; in-ternational trade imbalances; real-estate bubblesthat have since burst; the 2008-2012 global re-

cession; fiscal policy choices related to govern-ment revenues and expenses; and approachesused by nations to bail out troubled bankingindustries and private bondholders, assumingprivate debt burdens or socializing losses.

Commentator and Financial Times journal-ist Martin Wolf has asserted that the root of thecrisis was growing trade imbalances. He notesin the run-up to the crisis, from 1999 to 2007,Germany had a considerably better public debtand fiscal deficit relative to GDP than the mostaffected eurozone members. In the same pe-riod, these countries (Portugal, Ireland, Italyand Spain) had far worse balance of paymentspositions. Whereas German trade surpluses in-creased as a percentage of GDP after 1999, thedeficits of Italy, France and Spain all worsened.

Paul Krugman wrote in 2009 that a trade defi-cit by definition requires a corresponding in-flow of capital to fund it, which can drive downinterest rates and stimulate the creation ofbubbles: "For a while, the inrush of capital cre-ated the illusion of wealth in these countries,just as it did for American homeowners: assetprices were rising, currencies were strong, andeverything looked fine. But bubbles always burstsooner or later, and yesterday's miracle econo-mies have become today's basket cases, nationswhose assets have evaporated but whose debtsremain all too real."

•••


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INTERNATIONAL FINANCE

The term International trade refers to theexchange (exports and imports) of goods & ser-vices among nations. This process of exportsand imports involves two or more nations withdifferent national currencies. Therefore in or-der to make the exchange effective, some uni-versally accepted currencies or precious metalsare used (other than the barter trade to settlethe transactions). The precious metals used aregenerally gold and bullion whereas the univer-sally accepted currencies are the national cur-rencies of a few developed nations who havesubstantial presence in the world trade andhence their currencies are easily accepted bytrading nations. These currencies include U.S.Dollars, Japanese Yen and European Euro, etc.Since international trade worth billions of dol-lars takes place annually, it seems that thereexists some obvious mutual benefits to the trad-ing nations. Different theories have been putforward to explain their advantages which arelisted below:-

(1) Mercantilism: This was the first formalwriting on international trade, originatedduring the seventeenth and eighteenth cen-tury. This line of thinking advocates thatthe way a nation could become rich andpowerful was to export more and importless. The resulting export surplus wouldthen be settled through inflow of gold andbullion. Therefore this way, one nationcould gain only at the expense of the other.This theory was later discarded by othertheories which stress that trade will ben-efit both the trading nations.

(2) Absolute advantage theory: This theorywas propounded by 'Adam Smith'. It says

that if a nation is more efficient than an-other in the production of a commoditybut is less efficient in producing a secondcommodity, then both nations can gain byeach specializing in production of the com-modity of its absolute advantage and ex-changing part of the output with othernation for another commodity. Thus in thistheory both nations gain unlikemercantilist's view where in internationaltrade one nation can gain only at the ex-pense of the other.

(3) Comparative advantage theory: This theorypropounded by David Ricardo in 1817, isan improvement over absolute advantagetheory and is also till date regarded as themost important and unchallenged law ofeconomics. It says that even if a nation isless efficient (i.e. has an absolute disadvan-tage) than another in the production of boththe commodities there is still a basis formutually beneficial trade. The first nationshould specialize in the production andexport of the commodity in which its abso-lute disadvantage is smaller (i.e its com-modity of comparative advantage) andimport the commodity in which its abso-lute disadvantage is larger (i.e. its commod-ity of comparative disadvantage). This canbe shown with the help of an example: -

In the above table even though U.K is lessefficient in the production of both the com-modity, it can trade by exporting cloth (asits absolute disadvantage is smaller in clothvis-à-vis wheat) and importing wheat and

Wheat (bushels/Labor hour) U.S U.K.

6 1

Cloth (yards/ Labor hour) 4 2

INTERNATIONAL TRADE AND

FINANCE



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still both the nations would gain.

(4) Opportunity Cost Theory: Theory of com-parative advantage has one weakness asit takes labor as the only factor of produc-tion in the production of both the com-modities and difference in the labor pro-ductivity as the cause of trade. However,since labor is not the only factor of pro-duction, Haberler in 1936 propounded theopportunity cost theory. It says that costof a commodity is the amount of a secondcommodity that a nation must give up torelease just enough resources to producean additional unit of the first commodity.Therefore for a 2 nation, 2-commodityworld, the nation with a lower opportu-nity cost in the production of a commod-ity has a comparative advantage in thatcommodity whereas the other nationwould have a comparative advantage inthe other commodity. If we assume anincreasing opportunity cost economy, thenboth the nations would specialize in theproduction of their respective commodi-ties (based on lower opportunity cost) untilthe opportunity costs for both the com-modities equalises in the two nations. Thentwo nations can trade at an exchange rate,which is mutually beneficial to the twonations.

Modern Theory of International Trade

(5) Heckscher - Ohlin Theory: Whereas othertheories explained above assumed com-parative advantage i.e. they do not explainwhy labor productivity differs (in case ofRicardo) or why opportunity costs differs(in case of Haberler). The Heckscher -Ohlin)theory propounded originally by EliHeckscher in 1899 (later developed byOhlin) tries to identify the basis of com-parative advantage i.e. what cause differ-ences in opportunity costs (or relative com-modity prices when expressed in monetaryterms).

H-O theory states that a nation should spe-cialize in the production and export of the

commodity, which is intensive in the useof its abundant factor. Thus in other words,this means that a nation will have its com-parative advantage on the commoditywhich intensively uses its abundant fac-tor. This will happen so because the rela-tive factor price of the abundant factorwill be lower in that nation and given theassumption of similar technology and simi-lar consumer tastes and preferences, therelative commodity prices will also differand this will form the basis of compara-tive advantage and international trade.Thus, the H-O theory identifies differencesin factor endowments out of all otherpossible factors, as the basis of compara-tive advantage and international trade.

One more extension of the Heckscher -Ohlin theory is that International trade willequalize the relative and absolute returnsto homogenous factor in the two nations.Thus international trade serves to bridgethe gap in factor returns in different na-tions and acts as a substitute for Interna-tional mobility of factors. This equaliza-tion will come through because differencesin relative commodity prices will forcetrade among nations. As the nation withthe abundant factor will produce more ofthe commodity which is intensive in theuse of its abundant factor, then demandfor the abundant factor will increase andhence its relative factor price will increase,opposite will happen iwith the other na-tion. This will bring in equality in the rela-tive factor prices in the two nations andlater on will lead to equality in absolutefactor returns also.

BALANCE OF PAYMENT

Till now our discussion has been largelyfocussed on real side of the international trade.We discussed about the comparative advan-tages of the nations in terms of relative com-modity prices and explained how internationaltrade brings about equalisation of relative com-modity prices and relative factor prices. How-


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ever, putting money values to these figuresinvolves some complication as internationaltrade involves more than one currency andhence we need to explain the concept ofexchange rate, balance of trade, balance of pay-ments, etc.

It is an accounting record of international moneyflows (current as well as capital) of a nation withthe rest of the world. It records financial flows ina specific period such as one year. Financial in-

flows such as receipts for exports or when a for-eigner invests in the stockmarket, are treated ascredits or positive entries. Outflows such as pay-ments for imports or the purchase of shares on aforeign stock market are debits or negative en-tries. The accounts are double entry and hencethey are always equal. For eg. the export of goodsinvolves the receipt of cash (credit) which repre-sents a claim on another country (the debit). Thusby definition, the balance of payments mustbalance.

Components of Balance of Payments

The format of the balance of paymentsgiven below shows the important types oftransactions that enter the balance of pay-ments.

Balance of trade (BOT)

= Net visibles

= Export of visibles minus import of visibles

= Export of goods - Import of goods

Balance of payment

= BOT + Net Invisibles

= BOT + (Export of Services - Import of Services)

Current Accounts

The current account consists of two majoritems, namely (a) merchandise (goods) exportsand imports; and (b) invisible (services such astransport, shipping, Banking, insurance, rent,profit and interest etc.) exports and imports.

Capital Account

The capital account consists of short-term and long-term capital transactions. Capital outflows repre-sents debit and capital inflow represents credit. Itmust, however, be noted that payment and re-ceipt on loans and dividend are recorded on cur-rent account since they are really payments for theservices of capital during a particular period.


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Unilateral Transfer Account

Unilateral transfers are another term for gifts,and include private remittances, governmentgrants, repatriations and disaster relief. Unilat-eral payments received from abroad are creditsand those made abroad are debits. These areoften accounted for in the invisible accounts.

Official Reserve Account

Official reserves represent the holdings bythe government in the form of foreign currencyand securities and gold. The official reservesusually consist of such assets only which areaccepted as a means of international payments.

Official reserves refer to the Gold and for-eign currencies held by the government. It in-dicates a country's ultimate ability to pay forimports and signals pressures on the balance ofpayments. They are presented as a nominalvalue at the day, month and/or year end. Ageneral yardstick is that a nation should have,on an average, official reserves sufficient tocover three months' imports. Changes in thelevel of official reserves suggest foreign exchangeintervention and therefore indicated pressureson the currency. A fall in the reserves suggeststhat there was intervention to offset currencyweakness whereas a rise suggests interventionto hold the currency down. The central bankintervention gave rise to a new term called ster-ilization:- It is defined as follows. When a cen-tral bank sells reserves and purchases its owncurrency, the domestic money supply is reducedin size by the amount of domestic currencyswallowed up by the bank. On the other handpurchases of foreign currency boost the moneysupply. Such intervention is sterilized. CentralBank neutralizes the effect on the money sup-ply with some other action, such as the pur-chase or sale of government bonds.

Balance of Trade and Balance of Payment

Balance of Trade - takes into account onlythose transactions arising out of the exports andimports of the visible items, it does not considerthe exchange of invisible items.

Visible items refer to merchandise or tradein goods only. Therefore balance of trade refersto net exports of goods.

Balance of trade = Export of goods - Importof goods.

Invisible items refer to trade in services plusvarious payments and receipts in the form ofrents, interest, profits and dividends. Trade inservices includes payments and receipts regard-ing Banking, shipping and insurance. Invisiblesalso include expenditure by tourists and giftsand unilateral remittances by the nationals of acountry working abroad.

Balance of payments takes into account theexchange of both the visible and invisible items.So to say

Balance of payments = Balance of Trade + netinvisibles.

This represents comprehensive picture of acountry's economic and financial transactionswith the economic and financial transactionsof the rest of the world than the balance oftrade.

Balance of Payments Crisis

As bills must be paid, ultimately a country'saccounts must balance (although because reallife is never that neat a balancing item is usu-ally inserted to cover up the inconsistencies)."Balance of payments crisis" is a politicallycharged phrase. But a country can often sus-tain a current account deficit for many yearswithout its economy suffering, because anydeficit is likely to be tiny compared with thecountry's National Income and wealth. Indeed,if the deficit is due to firms importing technol-ogy and other capital goods from abroad, whichwill improve their productivity, the economymay benefit. A deficit that has to be financedby the public sector may be more problematic,particularly if the public sector faces limits onhow much it can raise taxes or borrow or hasfew financial reserves. For instance, when theRussian government failed to pay the interest


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on its foreign DEBT in August 1998 it found itimpossible to borrow any more money in theinternational financial markets. Nor was it ableto increase taxes in its collapsing economy or tofind anybody within Russia willing to lend itmoney. That truly was a balance of paymentscrisis.

In the early years of the 21st century, econo-mists started to worry that the United Stateswould find itself in a balance of payments cri-sis. Its current account deficit grew to over 5%of its GDP, making its economy increasinglyreliant on foreign CREDIT.

Terms of trade

It refers to the ratio of export prices to importprices. It measures the volume of imports thatcan be bought with one unit of exports. It is pre-sented as index numbers. An improvement in thenation's terms of trade indicates that export earn-ings will buy more imports but its effect on tradebalance or BOP will depend on many other re-lated factors. Terms of trade are said to improveif export prices rise more highly or fall more slowlythan import prices. Typically, an exchange ratedevaluation or depreciation increases importprices relative to export prices and causes theterms of trade to deteriorate.

EXCHANGE RATE

Exchange rate is the amount of the nationalcurrency required by a nation to purchase oneunit of foreign currency say US Dollar. Sincemost of the international trade that takes placetoday is in money terms exchange rates havean important influence on the flow of interna-tional trade. Two types of exchange rate re-gimes exist in the contemporary world today: -

a) Fixed exchange rate.

b) Floating/Fluctuating exchange rate.

In the fixed exchange rate, the exchange rateof the national currency is fixed and tied toanother universally accepted foreign currencysay US Dollar. The Central Bank of the nationstands ready to purchase and sell the foreign

currency to keep the exchange rate fixed. Inthe case of fluctuating exchange rate, exchangerate is determined by the demand and supplyof foreign exchange by the nationals of a coun-try. The exchange rate appreciates or depreci-ates, depending on the market forces of de-mand and supply. This in turn has an impacton the competitive position of the economy. Adevaluation/depreciation of a nation's currencymay decrease imports and increase exports tohelp improve the foreign exchange position ofthe nation. This is measured and reflected inBalance of Payments position of the nation.

Different Exchange Rate Regimes

Gold Standard: Before 1914, exchange rates werefixed in terms of gold, Trade was mainly inphysical goods and capital flows were limited.A country, which developed a deficit on its cur-rent account, would first consume its reserves offoreign currencies. Then it would have to payfor the imports by shipping gold. The transfer ofgold would reduce the money supply in thedeficit country since currencies were then backedby convertibility into gold. The contractingmoney supply in the deficit country would re-duce prices and output and hence would lowerits imports. The opposite will happen in thesurplus country and thus the current accountwould automatically return to equilibrium. Thissystem got out of balance in 1920's and wasabandoned by early 1930's.

Flexible/Floating Exchange Rate

After breaking down of gold standard andthe end of World War II, an international con-ference was convened in America at BrettonWoods, New Hampshire in June 1944. The par-ticipants vowed to form the IMF and the WorldBank and the major currencies were fixed inrelation to the dollar (Pegging). Fluctuationswere allowed to the extent of 1% on either side.In addition, the American Government agreedto buy gold on demand at $35 per ounce. How-ever, this pegged Bretton Woods system brokeby the 1970's. Persistent American deficits hadled to an international excess of dollars and


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American gold reserves came under pressure.In 1971, Americans suspended the convertibil-ity of the dollar into gold. Major currencies ofthe world were allowed to float against eachother depending on the demand and supply.Since then exchange rates are largely floatingand are determined by the market.

How exchange Rate is fixed in India

The Exchange rate of Indian rupee is deter-mined on the basis of a basket of currencies,which comprises currencies of its main tradingpartners as well as world economic powers suchas the USA, the U.K., France, Japan, Germany,etc. In India foreign exchange rates are nowcompletely market determined, i.e Indian ex-change rate is floating exchange rate. TodayRupee is fully convertible on current accounti.e. no prior approval of RBI is required toimport goods and services except those in thenegative list. However, capital account convert-ibility has till date remained a ticklish issue andit has not been permitted till now. The move-ment of capital is today regulated through For-eign Exchange Management Act (FEMA) 1999.The Tarapore Committee set up to study theprocedure for the same recommended a phasedprogramme over the three-year period and toachieve the preconditions for CAC. At presentRBI intervenes only occasionally in the marketto prevent any substantial diversion of the ex-change rate from the fundamental levels.

As to what determines the exchange rate,no neat explanation can be given for the same,but two leading theories put forward are:-(i) Purchasing Power parity (ii) Investment Port-folios theory. Purchasing Power Parity is de-fined as the exchange rate, which equates theprices of a basket of goods and services in twocountries. In the long run it is argued that cur-rencies should move towards their PPP. Big MacIndex is one of the ways to ascertain PPPamong nations. The portfolio approach suggeststhat exchange rates move to balance total re-turns (interest + expected exchange rate move-ments) among nations.

Effective Exchange rate (EER) and Real Effec-tive Exchange Rate (REER)

There exist different versions of Exchangerates, including nominal exchange rate (whichwe have discussed so far).

EER is the average exchange rate against abasket of currencies, with which the nationtrades. It is presented as index numbers.

REER measures the competitiveness of a na-tional currency against the basket of currencieswith which the nation trades.

Thus the exchange rate regime in India is amanaged float with the nominal exchangerate(against a basket of currencies) targeted toachieving the real exchange rate which yields asustainable current account deficit.

Foreign Exchange Market: It is a market whereone country's currency can be exchanged foranother country's. It is not a geographic loca-tion; instead it is an informal network of tele-phone, telex, facsimile and computer commu-nications between banks, foreign exchange deal-ers - arbitrageurs and speculators. The marketoperates simultaneously at three tiers:-

a) Individuals and corporations buy and sellforeign exchange through their commer-cial banks.

b) Commercial banks trade in foreign ex-change with other commercial banks inthe same financial centre.

c) Commercial banks trade in foreign ex-change with commercial banks in otherfinancial centres.

Foreign exchange market consists of a spotmarket and forward market. In the sport mar-ket, foreign currencies are sold and bought fordelivery within two business days after the dayof a trade. In the forward market, foreign cur-rencies are sold or brought for future delivery.There are many types of participants in theforeign exchange market. They include export-ers, governments, importers, multinational com-panies, tourists, commercial banks and central


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banks. However large commercial banks andcentral banks are the two major participants inthe foreign exchange market.

In the foreign exchange market, foreign ex-change quotations are made in terms of num-ber of units of local currency required to buyone unit of a foreign country. Hence India quotesits exchange rates in rupees, which can be ex-changed for one unit of foreign exchange forexample Rs. 46.50/$. This means that we re-quire Rs. 46.50 to get one unit of US $. Practi-cally all-major newspapers in the world print adaily list of exchange rates.

Cross rates: Most currencies are traded againstthe US dollar, but at times exporters and im-porters need to know the exchange rate be-tween two non-U.S. currencies. For example,the exchange rate between Indian Rupee andKorean Won. Because most currency pairs arenot traded actively, their exchange rate is de-termined through their relationship to a widelytraded third currency such as the U.S. dollars.The type of exchange rate desired here is knownas the cross-rate.

The exchange rate quotations in the forwardmarket are made either "outright" or in termsof the spread on the spot rate. For e.g. a tradermay buy the 90-days outright forward quota-tion as Rs. 46.75/ $ 1 or through spread onthe spot rate in terms of basis points (one basispoint - 0.01per cent)

Currency futures and options market: Cur-rency futures market is just like the currencyforward market except that trade in the futuremarket is done in standard units and only inthe future market where forward market is aninformal market in which contracting partiesenter into a tailor made agreement for exchangerate.

Currency options market: Currency option issimply a contract that gives the holder the rightto buy or sell any foreign currency at a speci-fied price during a specified period. Whereasthe currency options do not necessarily need to

be exercised at maturity, payment and deliveryin futures contracts are required at maturity.

Different participants in the foreign exchangemarket enter into spot & forward/futures con-tract for different reasons. The reasons includearbitrage, hedging or risk avoidance and specula-tion.

Arbitrage: Arbitrage is the purchase of an assetor a commodity in one market and its sale inanother market to take advantage of a price dif-ferential. Professional arbitrageurs quickly trans-fer funds from one currency to another in orderto profit from discrepancies between exchangerates in different markets. The process of arbi-trage also works through the foreign exchangemarket to bring interest in national markets to-gether.

Hedgers: They enter into forward/future con-tracts to eliminate possible exchange losses onexport and import orders denominated in foreigncurrencies. Hedgers mostly MNCs, engage in for-ward contract to protect the home currency valueof foreign-currency denominted assets and liabili-ties. This way they insulate themselves from fluc-tuations in the foreign exchange market and areable to focus on the core areas of operation.

Speculations: Deliberately expose themselvesto exchange risk by engaging in forward con-tracts in order to make a profit from exchangefluctuations.

ECONOMIC INTEGRATION

The term economic integration refers to the kindof arrangement between two or more tradingcountries that remove artificial trade barrierssuch as tariff and quotas between them. In factthe term economic integration is a broad andgeneral term, which covers several kinds of ar-rangement by which two or more countriesmutually agree to draw their economies closerin terms of trade, investment and other kindsof economic cooperation. In a very developedkind of arrangement for economic integration,the countries may agree to integrate their social


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and national policies as well. If we considerthe level of integration in ascending order, thereare various kinds of economic integration suchas Free Trade Area, Customs Union, CommonMarket and Economic Union.

Forms of Economic Integration

1. Free Trade Area: A Free Trade Area (FTA)is a grouping of the countries to bring aboutfree trade between them. The FTA abol-ishes all restrictions on trade among themembers but each member is left free todetermine its own commercial policy withnon- members. There are many examplesof FTA, which are operational at present.North Atlantic Free Trade area (NAFTA)is one such arrangement among the USA,Mexico and Canada. There is an FTA be-tween Singapore and Japan. India has alsoFTAs with Sri Lanka and Thailand.

2. Customs Union: A customs Union is amore advanced level of economic integra-tion than the FTA. It not only eliminatesall restrictions on trade among membercountries, but also adopts a uniform com-mercial policy against the non- members.The European union started as a customsunion.

3. Common Market: The Common market isa step ahead of the Customs Union. Acommon Market allows free movement oflabour and capital within the CommonMarket, besides having the two charac-teristics of the Customs Union, namely,free trade among members and uniformtariff policy towards non-members. In itsearlier stage European Union was like aCommon Market.

4. Economic Union: It is the most advancedlevel of integration. This satisfies the con-ditions of the Common Market and addi-tionally it also achieves some degree of har-monization of national economic policies.The European Union is a living exampleof this kind of arrangement, which requiresall its members to abide by certain mon-etary and fiscal disciplines along with someharmonization in social and political arena.

What is Convertibility?

When one currency is freely exchangeablewith another in the market, this attribute isreferred to as convertibility. In a convertible ex-change rate regime we can purchase anothercurrency by paying in with our currency at themarket exchange rate.

Convertibility of a currency may be full orpartial. Full float of a currency in the exchangemarket vis-à-vis other currencies for the deter-mination of exchange rate is practiced by thedeveloped nations. The developing countries likeIndia usually adopt a policy of "managed float"or "partial float" (sometimes referred to as dirtyfloat as well). India's exchange rate was deter-mined through managed float till 1992. BeforeIndia adopted what we call Liberalised Ex-change Rate Management System (LERMS) in1992, the exchange rate of Rupee was deter-mined by the Reserve Bank of India on the basisof a basket of currencies. In LERMS, or PartialConvertibility 60% of foreign currency holdingwas permitted to be converted on the marketrate whereas remaining 40% on official rate.

Full Convertibility on Trade A/C

A unified exchange rate was introduced in1993 & 1994 budgets through the provision offull convertibility of rupee on trade accountunder the unified exchange rate regime; the60:40 ratio was extended to 100 per cent con-version. This 100 per cent conversion was ex-tended to almost the entire merchandise tradetransactions (i.e. export and import of goods);and all receipts, whether on current or capi-tal account of balance of payments (BOP),but not all payments.

Full Convertibility on Current Account

In February 1994, the RBI undertook severalsteps towards achieving full convertibility ofCurrent A/c. India achieved full convertibilityon current A/c on 19the August, 1994, whenthe RBI further liberalized its exchange ratesystem of the IMF, under which India is com-mitted to forsake the use of exchange restric-


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tions on current international transactions asan instrument in managing the BOP. The trans-actions under current account may be one ofthe following:

• All payments due in connection with foreigntrade, current business, including services andnormal short-term banking and credit facili-ties.

• Payments due as interest on loans and as netincome from other investments.

• Payments of moderate amount of amortisa-tion of loans or for depreciation or direct in-vestments, and

• Moderate remittance for family living expenses.

Full Convertibility on Capital Account

Capital account convertibility refers to easyand free conversion of a currency, say rupee,in dollars for loan and investment purposes.India has so far not allowed full conversion oncapital account because the health of financialsector in India is not considered strong enoughfor this. A committee called the Tarapore Com-mittee was formed five years back at the behestof the international lending community and pro-reformists to suggest a roadmap for CAC. Trans-actions in the capital account may include giv-ing and taking Loans and credits, investing forspeculative purposes, etc. among others.

Main Advantages of capital account con-vertibility

1. Smooth availability of funds to industriesand traders.

2. A step forward towards globalisation byway of connecting domestic financial mar-ket with world financial market.

Apprehensions regarding capital account con-vertibility:

1. Flight of capital.

2. Dominance of foreign financial institutionsover domestic players.

Suggestions for moving over to capital account

convertibility:

1. First strengthen your own/domestic mar-ket for Capital and improve financial fun-damentals such as fiscal deficit and infla-tion.

2. Boost exports and then slowly open up.

Tarapore Committee on Capital Account Con-vertibility

Tarapore Committee on Capital Account Con-vertibility suggested that notwithstanding advan-tages of Capital Account Convertibility, Indiashould achieve certain preconditions and sign-post before making any haste towards full con-vertibility. As long as the economy is not robustwith regard to its fiscal management and exter-nal balance of payments, any measure to hastenfull convertibility on the C/A would prove disas-trous.

FOREIGN EXCHANGE MANAGEMENTACT (FEMA), 1999

The Foreign Exchange Management Act(FEMA) has replaced the Foreign ExchangeRegulation Act (FERA). Main reason for mak-ing FEMA that relaxes control on foreign ex-change is that India has made its currency, i.e.Rupee, convertible on current account. This isto facilitate the external trade and paymentsand promote the orderly development and main-tenance of the foreign exchange market inIndia.

PRECONDITIONS AND SIGNPOSTS

FISCAL CONSOLIDATIONS

• Reduction in Gross Fiscal Deficit as per-centage of Gross Domestic Product frombudgeted 4.5 in 1997-98 to 4.0 in 1998-99and further to 3.5 in 1999-2000.

• Introduction of Consolidated Sinking Fund.

• Introduction of a system of fiscal trans-parency and accountability on the linesNew Zealand Fiscal Responsibility Act.


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MANDATED INFLATION RATE

• The mandated rate of inflation for the 3year should be an average of 3% to 5%.

• RBI should be given freedom to attain thetarred mandate of inflation approved bythe Parliament.

• There should be clear and transparentguidelines on the circumstances underwhich the mandate could be changed.

Some features of FEMA are as follows: -

Foreign trade transactions could be done onlywith the persons authorized by R.B.I. No per-son can acquire, hold, own, possess or transferany foreign exchange, foreign security or im-movable property outside India, except in caseswhere the Act provides for this. Current ac-count transactions are freely allowed. However,in the public interest, the union government, inconsultation with the RBI, may impose reason-able restrictions on current account transactions.Foreign exchange can be drawn for all currentaccount transactions, except those that are pro-hibited, while on the capital account forexoutflow is allowed only for transactions thatare permitted. The three schedules of FEMA(current account transactions Rules, 2000)specify the restrictions on current account trans-actions. The first schedule mentions the trans-actions that are prohibited, the second lists thetransactions that need the government's per-mission and the third schedule contains thetransactions that need the prior approval ofthe RBI.

Prohibited Transactions: In the First Sched-ule money earned from lottery winnings, rac-ing/riding or any other hobby is not allowed tobe remitted. The Second Schedule lists trans-actions that need government's approval suchas cultural tours and health insurance from acompany abroad, to mention just two. TheThird Schedule contains items, which requireRBI's permission. Thus, if a current accounttransaction is not found in any of the above-mentioned schedules, RBI permission is not

required. Even on capital account transactions,the Central Bank has come out with twenty-five notifications, some of which cover thesetransactions as well as areas such as exportsand insurance.

MONEY LAUNDERING ACT

The Prevention of Money Laundering Act,which was recently amended to remove cer-tain shortcomings, came into force on July 1,2005. The Act, aimed at combating channellingof money into illegal activities, provides for at-tachment and seizure of property and records.It also provides for stringent punishment, in-cluding rigorous imprisonment of upto 10 yearsand fine of upto Rs. 5 lakh.

Main features:

• FIs, including chit funds, cooperative banks,housing finance companies and non-bank-ing financial entities, and intermediaries likestock-brokers, sub-brokers, share transferagents, bankers and registrars to an issue,merchant bankers, underwriters, portfoliomanagers, investment advisers and othershave to be registered with SEBI.

• Transactions include all cash of over Rs.10 lakh or its equivalent in foreign cur-rency, all series of cash transactions inte-grally connected to each other which havebeen valued below Rs 10 lakh or its equiva-lent in foreign currency where such trans-actions have taken place within one cal-endar month, and all suspicious transac-tions, whether or not made in cash.

• The financial intelligence unit has been setup as a multi-disciplinary unit for estab-lishing links between suspicious or unusualfinancial transactions and underlyingcriminal activities.

• For better coordination and informationsharing, FIU-IND would coordinate andsupport efforts of national and global in-telligence, investigation and enforcementagencies in pursuing efforts against moneylaundering and related crimes.


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• It would be the central nodal agencyresponsibility for receiving, processing,analysing and disseminating informationrelating to suspect financial transactionsto these agencies who would protect itagainst misuse.

• Through its research and analysis func-tion, FIU-IND would monitor and identifystrategic key areas on money launderingtrends, methods and developments.

• For the purpose of money-laundering, theAct has identified certain offences underthe Indian Penal Code, Narcotics Drugand Psychotropic Substances Act, ArmsAct, Wild Life (Protection) Act, ImmoralTraffic (Prevention) Act and Prevention ofCorruption Act.

The Act, in line with India's commitment tofight all forms of economic crimes, came intobeing in 2002 but could not be brought intoforce due to certain lacunae. It was accord-ingly in the Parliament's session to remove theshortcomings that it came into effect on 1 July,2005. As per the Act, every banking company,financial institution and intermediary needs tomaintain a record of all transactions, the na-ture and value of which is being prescribed inthe rules. The Money Laundering (Amendment)Regulations, 2012, have come into force on 1stOctober 2012.

The Government has entrusted the work relat-ing to investigation, attachment of property/pro-ceeds of crime relating to the scheduled offencesunder the Act and filing of complaints, etc. to theDirectorate of Enforcement in the Finance Minis-try. India is committed to fight all forms of eco-nomic crimes, including money laundering.

The government of India has enacted a num-ber of special laws regulating customs, excise,taxes, foreign exchange, narcotic drugs, bank-ing, insurance, trade and commerce to dealwith economic crimes.

SEZ BILL

The Lok Sabha passed the Special Economic

Zones Bill, 2005 after adopting an officialamendment to drop the Bill's provision in grant-ing flexibility in labour laws by the States in theproposed Central Act. The original Act had nodirect Central role in laying down labour policyin the SEZs. The Central legislation proposedthat the States may take suitable steps to grantexemption from labour laws (clause 18) appli-cable in the special economic zones. Hence, theGovernment moved an amendment to the SEZAct, 2005 by dropping this clause.

INDIRECT TAX CHANGES

7 pc additional customs duty would be appli-cable on Laptops as in case of computers.

4 pc countervailing duty removed on compo-nents used in the manufacture of mobilehandsets.

Duty on molasses cut from Rs 1,000 per tonneto Rs 750 per tonne.

Excise duty anomaly on nylon tyre cord fab-ric removed.

Objectives of the Act

(1) Making available goods and services freeof taxes and duties, bolstered by integratedinfrastructure for export production.

(2) A package of incentives to attract foreignand domestic investments for promotingexport-led growth.

(3) The Bill is silent on conferring powers tothe Development Commissioners for allow-ing flexible labour policies in SEZ units.

Important Features of the Act

• To attract investment, both domestic andforeign.

• To ensure employment generation since ex-port activities hold the potential for jobcreation.

• Provides for a stable and long-term fiscalpolicy framework with minimum regula-tory intervention for such zones.

• It also provides for a single-window clear-


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ance mechanism for the establishment ofSEZs.

• The Act provides that SEZs could also takethe form of port, airport, inland containerdepot, land station and land customs sta-tions, as the case may be, under Section 7of the Customs Act.

• It empowers the Union Government tospecify an officer or agency for carryingout surveys or inspections to verify orensure compliance with the provisions ofthe Central Act by a developer or an en-trepreneur.

• Under this dispensation, units would be eli-gible for 100 per cent tax exemption for 5years, 50 per cent for the next five years and50 per cent of the ploughed back exportprofits for the next five years (in all 15 years).

• The Bill also proposes to grant exemptionof capital gains on transfer of assets in thecase of shifting of industrial undertakingfrom urban area or any other area to aSEZ on the lines of Section 54G of theIncome-Tax Act.

Special Economic Zones (SEZs)

A new scheme was introduced in EximPolicy from 1.4.2000 for establishment of Spe-cial Economic Zones (SEZs) in different partsof the country, with a view to providing aninternationally competitive and hassle free en-vironment for export production.

The units operating in those zones are to bedeemed as outside the country's customs terri-tory and will have full flexibility of operations.They would be able to import capital goodsand raw materials duty free and would also beable to access the same from Domestic TariffArea (DTA) without payment of excise duty.

Further no permission would be necessaryfor inter-unit Sales or transfer of goods. Therewould be no wastage norms or input outputnorms. They would be able to undertake jobwork for the DTA units and would also be ableto get their goods processed in the DTA.

The only condition would be that the unitsin the zones would have to be a net foreignexchange earner. DTA sales would be on pay-ment of full customs duties and in accordancewith the import policy in force. The movementof goods between SEZs and ports will be unre-stricted and without any hindrance.

The SEZs imply a qualitative transformationof the traditional Export Processing Zones(EPZs). The improvements include 100 per centFDI investment through automatic route tomanufacturing SEZ units (barring a handful ofsensitive industries), no routine examination bycustoms of export and import cargo in SEZs,all imports on self-certification basis, duty freematerial to be utilized over five years, no pre-determined value addition, DTA sales on fullduty payment and various procedural simplifi-cation for operations like record keeping, inter-unit transfers, subcontracting, disposal of obso-lete materials, etc.

SEZs will be permitted to set up in the pub-lic, private, joint sector or by the State Govern-ments with a minimum size of not less than100 hectares. These units may be for manufac-turing, trading or service activity. Package ofincentives announced so far include exemptionfrom industrial licensing for manufacture ofitems reserved for SSIs and removal of sectoralceilings on FDI in SEZ units.

From November 1, 2000 Export ProcessingZones at Kandla, Santa Cruz (Mumbai), Kochiand Surat have been converted into SEZs. Ap-proval has also been given for setting up SEZsat Nawguneri (Tamilnadu), Positra (Gujarat),Kulpi (West Bengal), Paradeep (Orissa), Bhadohiand Kanpur (Uttar Pradesh), Kakinada(Andhra Pradesh), Dronagiri (Maharashtra)and Indore (Madhya Pradesh).

The performance of SEZs largely dependson comprehensive liberalisation and freedom,as inherent in the Chinese SEZ model. How-ever, Chinese zones are many times larger thanthose currently planned in India. The extent ofsuccess of SEZs in India would, therefore cru-


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cially depend upon the degree to which do-mestic regulations; restrictions and infrastruc-ture inadequacies are eliminated in those zones.

Export Processing Zones, Special EconomicZones & Export Houses

FTZs/EPZs are industrial estates, which formenclaves within the national customs territoryand are usually situated near international portand/or airport. The entire production of suchZones is normally exported. Imports of rawmaterials, intermediate products, equipment &machinery required for export production arenot subject to the payment of customs duty. Acharacteristic feature of EPZs is the speed andsimplicity of import and export transactions.Time-consuming customs procedures on importinto the Zones and exports from the zones arekept to minimum.

Export Processing Zones in India—

Seven Export Processing Zones operating in thecountry are:

1. Kandla Free Trade Zone (KFTZ), Kandla,Gujarat.

2. Santa Cruz Electronics Export ProcessingZone (SEEPZ), Santa Cruz, Mumbai

3. Noida Export Processing Zones, Noida,UP.

4. Madras Export Processing Zones, Chennai.

5. Cochin Export Processing Zones, Cochin, Kerala.

6. Falta Export Processing Zones, Falta, WestBengal.

7. Visakhapatnam Export Processing Zone,Visakhapatnam.

•••


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Poverty refers to the inability to get the mini-mum consumption requirement for life, healthand efficiency. Poverty is painful and it leadsto discontentment. If people are left to liveamidst poverty for a long time it may haveserious political repercussions. The people's dis-contentment may lead to social tension as seenin Bihar, Andhra and M.P. (Naxalite move-ments).

The word 'Poverty' is used in two senses:

1. Absolute Poverty2. Relative Poverty1. Absolute Poverty: This approach defines

minimum level of income required to sus-tain life: for example, estimating minimumdietary needs and how these can be mostcheaply met. In the official estimates ofpoverty by the Planning Commission inIndia, the concept of 'absolute poverty' hasbeen adopted. The concept of absolute pov-erty in India is based on 'nutritional crite-ria' expressed in terms of 'consumption ex-penditure'. There is one 'consumption ex-penditure level' above which the people arewell-off and below which people are poor.This consumption expenditure level isknown as 'poverty line'.

2. Relative Poverty: This approach definespoverty relative to appropriate comparatorgroups. Thus while an individual may havemore than enough income to sustain life, ifit is very low compared to the rest of thecommunity, the individual would beviewed as being in poverty. As societygrows richer so the income level definingpoverty rises. On this basis we have vari-ous economic categories in society (1)Higher Income Groups (2) Middle Income

Groups and (3) Lower Income Groups.

Poverty Ratios by URP and MRP

Table 1:

Source: Planning Commission

Poverty Estimates 2004-05

1. The Planning Commission as the Nodalagency in the Government of India for es-timation of poverty has been estimating thenumber and percentage of poor at nationaland state levels. Since, March 1997 it hasbeen using the Expert Group Method (Ex-pert Group on Estimation of Proportion andNumber of Poor) to estimate poverty. Ac-cording to this method the estimates ofpoverty are made from the large samplesurvey data on household consumer expen-diture conducted by the National SampleSurvey Organization (NSSO) of the Minis-try of Statistics and Programme Imple-

POVERTY & UNEMPLOYMENT CHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE

S.No Category 1993-94 2004-05

By Uniform Recall

Period (URP)

Method

1. Rural 37.3 28.3

2. Urban 32.4 25.7

3. All India 36.0 27.5

By mixed Recall

Period (MRP)

Method

4. Rural 27.1 21.8

5. Urban 23.6 21.7

6. All India 26.1 21.8


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mentation. Using this methodology thePlanning Commission, in the past, has re-leased poverty estimates for the year 1973-74, 1977-78, 1983, 1987-88 and 1993-94by the Government of India on 11th March1997. Subsequently, the poverty estimatesfor 1999-2000 were released by the Gov-ernment of India on 22nd February 2001.While releasing the estimates of povertyfor 1999-2000, it had been noted that theseestimates were not strictly comparable withthe estimates for the previous years.

2. The state-wise rural and urban povertylines for the year 2004-05 are given inTable-1. These are estimated using theoriginal state-specific poverty lines identi-fied by the Expert Group and updatingthem to 2004-05 prices using the ConsumerPrice Index of Agricultural Labourers(CPIAL) for rural poverty lines and Con-sumer Price Index for Industrial Workers(CPIIW) for urban poverty lines.

3. The NSSO released the result of the latestlarge sample survey data on householdconsumer expenditure (NSS 61st Round),covering the period July 2004 to June 2005[Report No.508 (61/1.0/1)]. From thisdata, two different consumption distribu-tions for the year 2004-05 have been ob-tained. The first one from the consump-tion data collected using 30-day recall pe-riod (also known as reference period) forall the items. The other distribution is ob-tained from the consumer expenditure datacollected using 365-day recall period forfive infrequently purchased non-fooditems, namely, clothing, footwear, durablegoods, education and institutional medi-cal expenses and 30-day recall period forthe remaining items. These two consump-tion distributions have been termed asUniform Recall Period (URP) consumptiondistribution and Mixed Recall Period(MRP) consumption distribution respec-tively. The Planning Commission, using theExpert Group methodology has estimatedpoverty in 2004-05 using both the distri-

butions.

4. The state specific percentage and numberof poor in rural and urban areas estimatedfrom URP consumption distribution givesthe state specific percentage and numberof poor in rural and urban areas estimatedfrom MRP consumption distribution.

5. The percentage and number of poor in2004-05 estimated from URP consumptiondistribution of NSS 61st Round of con-sumer expenditure data are comparablewith the poverty estimates of 1993-94. Thepercentage and number of poor in 2004-05 estimated from MRP consumption dis-tribution of NSS 61st Round of consumerexpenditure data are roughly (but notstrictly) comparable with the poverty esti-mates of 1999-2000.

6. The URP-consumption distribution data ofthe 61st Round yields a poverty ratio of28.3 per cent in the rural areas, 25.7 percent in the urban areas and 27.5 per centfor the country as a whole in 2004-05. Thecorresponding figures obtained from theMRP-consumption distribution data of the61st Round are 21.8 percent in the ruralareas, 21.7 per cent in the urban areasand 21.8 per cent for the country as awhole.

7. The poverty estimates in 2004-05 based onURP consumption distribution (27.5 per-cent) is comparable with the poverty esti-mates of 1993-94, which was 36 per cent.The poverty estimates in 2004-05 based onMRP consumption (21.8 per cent) isroughly (but not strictly) comparable withthe poverty estimates of 1999-2000, whichwas 26.1 per cent.

Expert Committee/Lakadawala Committee'sRecommendations

In view of the criticism of the official methodof estimation of poverty, the Planning Commis-sion Constituted an Expert Group in 1992 un-der the chairmanship of Prof. Lakadawala toexamine the methodology and computationalaspects of poverty ratio. Following are the main


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features of the expert committee's recommen-dation -

(1) The expert group retained the concept ofpoverty line as defined by the earlier offi-cial method.

(2) It suggested changes in the price deflatorto update the poverty line for use in lateryears.

(3) It suggested the use of state-specific priceindices so that the changes in the cost ofconsumption basket of the people belowthe poverty line may be reflected realisti-cally.

It recommended the use of NSS data on con-sumption expenditure without adjusting it tothe National Accounts estimates of consump-tion expenditure for estimation of ratio of peoplebelow poverty line.

TYPES OF UNEMPLOYMENT

Frictional Unemployment: This kind of unem-ployment arises because of the continuous move-ment of people between regions, jobs or shift-ing through different stages of the life cycle.Even if an economy were at full employmentthere would remain some unemployment asthere exists a time gap in coincidence of thoselooking for a job and those who are ready toemploy. This kind of unemployment may alsobe called as voluntary unemployment as work-ers are willingly selecting between Jobs and re-gions.

Structural Unemployment: This kind of unem-ployment arises because of a mismatch betweenthe supply of and demand for workers(depending on level of investment and capitalformation). Mismatches may occur because thedemand for one kind of labor is rising whilethe demand for another kind is falling andsupplies do not adjust quickly. This may hap-pens as certain sectors grow while others de-cline.

Cyclical Unemployment: This kind of unem-ployment exists when the overall demands forlabor is low. As total spending and output fall,

unemployment rises everywhere. The simulta-neous increase in unemployment in many mar-kets trends to cyclical unemployment. This kindof unemployment occurs during recessionswhen employment falls as a result of an imbal-ance between aggregate supply and demand.Our study of simple demand and supply curvesin microeconomics suggest that true exists amarket clearing price at which demand andsupply equals. The commodities market in per-fect competition gets cleared at this equilibriumprice. Since unemployment servants all the timeit seems that there is something which preventslabor markets from getting cleared away. Thismeans to say that there exists inflexibility inwage rates, which prevents them to adjustdownward and hence unemployment prevents.In this context, we now study the terms Volun-tary & Involuntary unemployment.

Voluntary unemployment: This refers to thoseworkers who are not willing to work at thegoing wage rate even if they could get one.This suggests that voluntarily unemployedworkers might prefer leisure to jobs at thegoing wage rate. The existence of voluntaryunemployment suggest that an economy maybe performing at the peak of efficiency eventhough it generates a certain amount of unem-ployment.

Involuntary unemployment: It refers to thoseworkers currently unemployed even thoughthey are ready to join at the market wage rate.The resultant over supply of labor at the enjoy-ing wage rate does not lead to downward move-ments in wage rates because of the inflexibilityof wage rates to move downward. This hap-pens due to imperfections in the labor marketin the form of labor unions (which preventsdownward movements of wage rates) or mini-mum-wage rate stipulation by the government.

Unemployment in India

India is predominantly an agrarian economy.The industrial sector in India has not grownsufficiently to absorb the labour force (15-60age group), which is increasing with an increase


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in population. In an agrarian society where as-sured source of irrigation is available only toOne-third of the cultivated area, agricultureturns out to be only a seasonal activity. There-fore our farmers and labourers are faced withseasonal unemployment. Another remarkablefeature about agriculture is the existence ofdisguised unemployment in this sector. SinceIndia is a country where about 65 per cent ofthe masses depend on agriculture for livelihood,the land-man ratio is very adverse. This impliesthat there is a huge burden on land. Disguisedunemployment refers to employment of a farmer(or labourer) in agricultural activity even if his/her marginal productivity is close to zero. Forexample if a farm unit is producing 100 quin-tals with the help of 10 labourers and now if aunit of labour is increased (total labourersbecome 11 in number) but production still re-mains only 100 quintals, the marginal productof one additional unit of labour is zero. This isdisguised unemployment, which is peculiar toagriculture sector. Prof. Arthur Lewis had sug-gested the method for capital formation throughsurplus of labour. In such a model disguisedlyunemployed labourers in the agriculture sectorwere to be shifted to a more productive sectorwhile sticking to the same consumption level,these labourers produce capital.

India is a country characterized by inequal-ity of income and wealth as well as massivepoverty with around 36 per cent of the popu-lation (1993) living below the poverty line. Herethere are people who have no tangible resourcesto fall back upon. They remain unemployed fora large part of the year. This is known as open-unemployment or chronic unemployment. Thenthere are people who are partially employed interms of their still and qualification as well astime in employment. Such cases are referred toas under employment.

Labor Force and Unemployment

The official definition of "labour force" (Per-sons in the age group of 15-60) leaves out alarge number of people who would work if

they had some prospect of a job. The totalpopulation of working age is far larger thanthe officially defined labour force. In the year2000, when employment was 337 million, andthe official figure of the labour force was 363million, the working age population was 578million. By March 2004, when employmentwould be 349 million, the working age popula-tion would have risen to 662 million. In otherwords, 313 million, or almost half the popula-tion in the working age group, are unable toengage in any 'gainful activity' because of theexisting economic order and the policies it hasadopted.

The three concepts of unemployment devel-oped by the NSSO

The three concepts of unemployment devel-oped by the NSSO primarily refer to chronicunemployment and underemployment. Thethree concepts are as follows:-

(a) Usual Status unemployment - This con-cept is meant to determine the usual Ac-tivity Status - employed or unemployed oroutside the labour force - of those coveredby the survey (N.S.S.O). The activity statusis determined with reference to a longerperiod; say a year proceeding to the time ofsurvey. The persons covered by the surveymay be classified into those working and/or available for work in their principal ac-tivity sector, and those working and/oravailable for work in subsidiary sector, thatis, a sector other than their principal activ-ity sector. Hence, within the usual statusconcept, the estimates are now derived onthe usual principle status as well as usualprincipal and subsidiary status basis.

(i) The Current Weekly Status - This con-cept determines the activity status of aperson with reference to a period of pre-ceding seven days. If in this period a per-son seeking employment fails to get workfor even one hour on any day, he (or she)is deemed to be unemployed.

(ii) The Current Daily Status - This conceptconsiders the activity status of a person for


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each day of the proceeding seven days. Aperson who works for one hour but less thanfour hours is considered having worked forhalf a day. If he works for four hours ormore during a day, he is considered as em-ployed for the whole day. The current DailyStatus unemployment rate is a time rate.

It is the most appropriate and comprehen-sive measure of unemployment.

Employment and Unemployment in India

Agricultural and allied sectors accounted forabout 60% of the total workforce in 2003 sameas in 1993-94. At present agriculture contrib-utes 52 percent of total employment. While ag-riculture has faced stagnation in growth, ser-vices have seen a steady growth. Of the totalworkforce, 8% is in the organised sector, two-thirds of which are in the public sector. TheNSSO survey estimated that in 1999-2000, 106million, nearly 10% of the population were un-employed and the overall unemployment ratewas 7.3%, with rural areas doing marginallybetter (7.2%) than urban areas (7.7%). India'slabor force is growing by 2.5% annually, butemployment only at 2.3% a year.

Unemployment in India is characterized bychronic underemployment or disguised unem-

ployment. Government schemes that targeteradication of both poverty and unemployment(which in recent decades has sent millions ofpoor and unskilled people into urban areas insearch of livelihoods) attempt to solve the prob-lem, by providing financial assistance for settingup businesses, skill honing, setting up publicsector enterprises, reservations in governments,etc. The decreased role of the public sector afterliberalization has further underlined the needfor focusing on better education and has alsoput political pressure on further reforms.

Child labor is a complex problem that is ba-sically rooted in poverty. The Indian govern-ment is implementing the world's largest childlabor elimination program, with primary edu-cation targeted for 250 million. Numerous non-governmental and voluntary organizations arealso involved. Special investigation cells havebeen set up in states to enforce existing lawsbanning employment of children (under 14) inhazardous industries. The allocation of the Gov-ernment of India for the eradication of child laborwas $10 million in 1995-96 and $16 million in1996-97. The allocation for 2007 is $21 million.

Employment

The estimates of employment and unemploy-

Employment and Unemployment in Million Persons Years (by CDS basis)

Million Million Million Million % Growth

Per Annum

1983 1993-94 1999-00 2004-05 1983 to 1993-94 1993-94 1999-00 to

to 1999-00 2004-05

Population 718.10 893.68 10050.5 1092.83 2.11 1.98 1.69

Labour Force 263.82 334.20 364.88 419,65 2.28 1.47 2.84

Work Force 239.49 313.93 338.19 384.91 2.61 1.25 2.62

Unemployment 9.22 6.06 7.31 8.28

Rate (Percent)

No of Unem- 24.34 20.27 26.68 34.74

-ployed

Source: Various Rounds of NSSO Survey on employment and unemployment, PlanningCommission.


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ment on Usual Principal Status (UPS) basis fromvarious rounds of NSSO survey are available.In the meantime, the Eleventh Five year Planhas largely used the Current Daily Status (CDS)basis of estimation of employment and unem-ployment in the country. It has also been ob-served that the estimates based on daily statusare the most inclusive rate of 'unemployment'giving the average level of unemployment on aday during the survey year. It captures the un-employed days of the chronically unemployed,the unemployed days of usually employed whobecome intermittently unemployed during thereference week and unemployed days of thoseclassified as employed according to the criterionof current weekly status. The estimates presentedearlier also need revisiting so as to be based onpopulation projections released by National Com-mission on Population.

Estimates on employment and unemploy-ment on CDS basis indicate that employmentgrowth during 1999-2000 to 2004-05 has accel-erated significantly as compared to the growthwitnessed during 1993-94 to 1999-2000. Dur-ing 1999-2000 to 2004-05, about 47 million workopportunities were created compared to only24 million in the period between 1993-94 and1999-00. Employment growth accelerated from1.25 per cent per annum to 2.62 per cent perannum. However, since the labour force grewat a faster rate of 2.84 per cent than theworkforce, unemployment rate also rose. Theincidence of unemployment on CDS basis in-creased from 7.31 per cent in 1999-00 to 8.28per cent in 2004-05.

The decline in overall growth of employmentduring 1993-94 to 1999-00 was largely due tothe lower absorption in agriculture. The shareof agriculture in total employment droppedfrom 61 per cent to 57 per cent. This trendcontinued and the share of agriculture in total2004-05. While the manufacturing sector's shareincreased marginally during this period, trade,hotel and restaurant sector contributed signifi-cantly in earlier years. The other importantsectors whose shares in employment have in-creased are transport, storage and communica-

tions apart from financial, insurance, real es-tate, business and community, social and per-sonal services.

LATEST IN POVERTY ANDUNEMPLOYMENT

Poverty

The Planning Commission, the nodal agencyfor estimating the number and proportion ofpeople living below the poverty line at nationaland state levels, separately for rural and urbanareas, makes poverty estimates based on a largesample survey of household consumption expen-diture carried out by the National Sample SurveyOffice (NSSO) approximately every five years. Themethodology for estimation of poverty has beenreviewed from time to time. The Planning Com-mission constituted an Expert Group under theChairmanship of Professor Suresh D. Tendulkarin December 2005, which submitted its report inDecember 2009. The recomputed poverty esti-mates for the years 1993-94 and 2004-05 as rec-ommended by the Tendulkar Committee havebeen accepted by the Planning Commission. Asper the Tendulkar Committee Report, the nationalpoverty line at 2004-05 prices was a monthly percapita consumption expenditure of Rs. 446.68 inrural and ` 578.80 in urban areas in 2004-05. Theabove poverty lines which refer to the nationalaverage, vary from state to state because of pricedifferentials.

The Tendulkar Committee has mentioned inits report that the proposed poverty lines havebeen validated by checking the adequacy ofactual private expenditure per capita near thepoverty lines on food, education, and health bycomparing them with normative expendituresconsistent with nutritional, educational, andhealth outcomes. In order to have a two-pointcomparison of changes in head count ratio, theExpert Group has re-estimated poverty for 1993-94. The head-count ratios for 1993-94 and 2004-05 as released earlier by the Planning Commis-sion. Even though the Tendulkar methodologygives higher estimates of headcount ratios forboth 1993-94 and 2004-05, the extent of povertyreduction is 8.1 percentage points which is not


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very different from the reduction of 8.5 percent-age points during the same period as perLakdawala Methodology.

Inequality

According to HDR 2011, inequality in Indiafor the period 2000-11 in terms of the incomeGini coefficient was 36.8. India's Gini index wasmore favourable than those of comparable coun-tries like South Africa (57.8), Brazil (53.9), Thai-land (53.6), Turkey (39.7), China (41.5), Sri Lanka(40.3), Malaysia (46.2), Vietnam (37.6), and eventhe USA (40.8), Hong Kong (43.4), Argentina(45.8), Israel (39.2), and Bulgaria (45.3).

Employment

The Eleventh Five Year Plan (2007-12) aimedat generation of 58 million work opportunities.The NSSO quinquennial survey has reportedan increase in work opportunities to the tuneof 18 million under the current daily status(CDS) between 2004-05 and 2009-10. However,the overall labour force expanded by only 11.7million. This was considerably lower than incomparable periods earlier, and can be attrib-uted to the much larger retention of youth ineducation and also because of lower labour forceparticipation among working-age women As aresult, unemployment in absolute terms camedown by 6.3 million. The lower growth in thelabour force is not expected to continue as edu-cated youth are expected to join the labour forcein increasing numbers during the Twelfth Planand in the years beyond. This means that thepace of job/ livelihood creation must be greatlyaccelerated. The Twelfth Plan Approach Papertherefore lays greater stress on skill building whichcan be viewed as an instrument for improvingthe effectiveness and contribution of labour tooverall production. This will push the productionpossibility frontier outward and take the economyon to a higher growth trajectory and can also beviewed as a means of empowerment.

Employment in the Organised sector

Employment growth in the organized sec-tor, public and private combined, has increased

by 1.9 per cent in 2010, which is lower than theannual growth for the previous year. The annualgrowth rate for the private sector was much higherthan that for the public sector. However, in re-spect of both sectors, annual increase in employ-ment had slowed down in 2010 vis-à-vis 2009.The share of women in organized-sector employ-ment was 20.4 per cent in 2010 March end andhas remained nearly constant in recent years.

Unemployment

A comparison between different estimates ofunemployment in 2009-10 indicates that theCDS estimate of unemployment is the highest.The higher unemployment rates according to theCDS approach compared to the weekly statusand usual status approaches indicate a highdegree of intermittent unemployment. Interest-ingly urban v unemployment was higher underboth the UPSS and CWS but ruralunemployment was higher under the CDSapproach. This possibly indicates higher inter-mittent or seasonal unemployment in rural thanurban areas, something that employment gen-eration schemes like the MGNREGA need to payattention to. However, overall unemploymentrates were lower in 2009-10 under each approachvis-a-vis 2004-05. Labour force participation rates(LFPR) under all three approaches declined in2009-10 compared to 2004-05. However, the de-cline in female LFPRs was larger under eachmeasure in comparison with male LFPRs whicheither declined marginally (UPSS), remained con-stant (CWS), or increased marginally (CDS).

Unemployment Rates all India (2009-10)- 66thround NSSO

Rural Urban Total

UPSS- 1.6 UPSS-3.4 UPSS-2.0 (declined from2.3 in 2004-05)

CWS-3.3 CWS-4.2 CWS-3.6 (declined from4.4 in 2004-05)

CDS-6.8 CDS-5.8 CDS-6.6 (increased

from 6.2)


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EMPLOYMENT PROGRAMMES

(i) MGNREGA

This flagship programme of the Governmentof India aims at enhancing livelihood securityof households in rural areas of the country byproviding at least one hundred days of guaran-teed wage employment in a financial year toevery household whose adult members volun-teer to do unskilled manual work. It also man-dates 1/3 participation for women. The pri-mary objective of the scheme is to augmentwage employment. This is to be done whilealso focusing on strengthening natural resourcemanagement through works that address causesof chronic poverty like drought, deforestation,and soil erosion and thus encourage sustain-able development. The MGNREGA was noti-fied in 200 districts in the first phase with ef-fect from 2 February 2006 and then extendedto additional 130 districts in the financial year2007-08. The remaining districts with rural ar-eas were brought under the Act with effectfrom 1 April 2008. Out of total outlay of ` 40,000crore approved for 2011-12, Rs. 21,471.92 crorehas been released to the states/union territoriesand the total funds available with states in-cluding the opening balance of Rs. 18,185.23crores (on 1 April 2011) are Rs. 41,615.05 crore.Of these Rs. 21,124.74 crore has been utilizedas reported on 19 January 2012. About 3.80crore households have been provided employ-ment under the programme. During the sameperiod, 122.37 crore persondays employmenthas been generated across the country out ofwhich 60.45 crore were women (49.40 per cent),27.27 crore (22.62 per cent) SCs, and 20.97 crore(17.13 per cent) STs. At national level, the av-erage wage paid under the MGNREGA hasincreased from Rs. 65 in FY 2006-7 to Rs. 120in FY 2011-12 (up to November 2011).

(ii) Swarnjayanti Gram Swarozgar Yojana

The Swarnjayanti Gram Swarozgar Yojana(SGSY) is a self-employment programme withthe objective of helping poor rural families cross

the poverty line by assisting them to take upincomegenerating economic activities througha mix of bank credit and government subsidy.The SGSY specially basic banking services to allpoor households, SHGs, and their federationson both the demand and supply sides of finan-cial inclusion; in order to ensure affordablecredit, the NRLM has a provision for subsidyon interest rates above 7 per cent per annumfor all eligible SHGs who have to look at stabi-lizing and enhancing existing livelihoods andsubsequently diversifying them; to develop back-ward and forward linkages and support busi-ness plans; to pursue skill upgradation andplacement projects through partnership mode,with the National Skill Development Corpora-tion (NSDC) being one of the leading partnersin this effort and 15 per cent of the centralallocation under the NRLM earmarked for thispurpose; and 5 per cent of the central alloca-tion to be earmarked for innovations.

(iii) Swarna Jayanti Shahari Rozgar Yojana

The Swarna Jayanti Shahari Rozgar Yojana(SJSRY) was launched by the Government ofIndia on 1 December1997 to provide gainfulemployment to the urban unemployed and un-deremployed by encouraging the setting up ofself-employment ventures or provision of wageemployment. This scheme subsumed the ear-lier three urban poverty alleviation programmesand was also revamped with effect from April2009 to include the Urban Self EmploymentProgramme (USEP), Urban Women Self-helpProgramme (UWSP), Skill Training for Employ-ment Promotion amongst Urban Poor (STEPUP),Urban Wage Employment Programme (UWEP),and Urban Community Development Network(UCDN). The annual budgetary provision forthe SJSRY for the year 2011-12 is Rs. 813.00crore and Rs. 676.80 crore has been released by16 February 2012. A total of 3,63,794 beneficia-ries have been assisted in the year 2011-12.

Social Sector in India

Social sector comprises of education, health,


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housing and all welfare programmes for thepoor, unemployed, women, children, minori-ties, farmers and certain programmes for ruraldevelopment. The development in social sectorin India lags behind because of paucity of funds,lack of focus of the government, leakagesthrough corruption and absence of good gover-nance.

Social Sector Spending

Central government expenditure on social services and rural development (Plan and non-Plan) has consistently gone up over the years.It has increased from 13.38 per cent in 2006-07to 18.47 per cent in 2011-12. Central supportfor social programmes has continued to expandin various forms although most social-sector sub-jects fall within the purview of the states. Majorprogramme-specific funding is available to statesthrough centrally sponsored schemes. Expendi-ture on social services (which include educa-tion, sports, art and culture, medical and pub-lic health, family welfare, water supply andsanitation, housing, urban development, wel-fare of SCs, STs and OBCs, labour and labourwelfare, social security, nutrition, and relief fornatural calamities,) by the general government(centre and states combined) has also shownincrease in recent years reflecting the higherpriority given to this sector. Expenditure onsocial services as a proportion of total expendi-ture increased from 21.6 per cent in 2006-07 to24.1 per cent in 2009-10 and further to 25 percent in 2011-12 (BE). As a proportion of thegross domestic product (GDP), its share in-creased from 5.57 per cent in 2006-07 to 6.76per cent, 6.91 per cent, and 7.34 per cent in2008-09, 2009-10, and 2010-11 respectively,helping India face the global crisis without muchadverse impact on the social sector. In 2011-12it is expected to be 6.74 per cent as per the BE.While expenditure on education as a propor-tion of GDP has increased from 2.72 per centin 2006-7 to 3.11 per cent in 2011-12 (BE), thaton health has increased from 1.25 per cent in2006-7 to 1.30 per cent in 2011-12 (BE). Oftotal social services expenditure, that on 'Oth-

ers' has fallen in 2011-12 (BE).

SOCIAL PROTECTION PROGRAMMES

Aam Admi Bima Yojana (AABY): Underthis scheme launched on 2 October 2007, in-surance is provided against natural as well asaccidental and partial /permanent disability ofthe head of the family of rural landless house-holds in the country. Under the scheme, thehead of the family or an earning member iseligible for receiving the benefit of Rs. 30,000 incase of natural death, Rs.75,000 for accidentaldeath, Rs. 75,000 for total permanent disabil-ity, and Rs. 37,500 for partial permanent dis-ability. The scheme has provided insurancecoverage to 1.97 crore lives in the country upto 31 January 2012.

Janashree Bima Yojana (JBY): The JBY waslaunched on 10 August 2000 to provide lifeinsurance protection to rural and urban per-sons living below and marginally above thepoverty line. Persons between ages 18 and 59years and who are the members of the 45 iden-tified occupational groups are eligible for par-ticipation in this policy. The scheme providescoverage of Rs.30,000 in case of natural death,Rs. 75,000 in case of death or total permanentdisability due to accident, and Rs. 37,500 incase of partial permanent disability. During2010-11, a total of 2.09 crore lives has beencovered under the JBY.

Rashtriya Swasthya Bima Yojana (RSBY): TheRSBY was launched on 01 October 2007 to pro-vide smart card-based cashless health insurancecover of Rs. 30,000 per family per annum on afamily floater basis to BPL families (a unit offive) in the unorganized sector. The schemebecame operational from 01 April 2008. Thepremium is shared on 75:25 basis by the centreand state governments. In the case of the north-eastern states and Jammu and Kashmir, thepremium is shared in a 90:10 ratio. The schemeprovides for portability of smart cards by split-ting the card value for migrant workers. As on20 December 2011, the scheme is being imple-mented in 23 states /UTs, namely Arunachal


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Pradesh, Assam, Bihar, Chhattisgarh, Delhi,Gujarat, Haryana, Himachal Pradesh,Jharkhand, Karnataka, Kerala, Maharashtra,Manipur, Meghalaya, Mizoram, Nagaland,Orissa, Punjab, Tripura, Uttar Pradesh,Uttarakhand, West Bengal, and ChandigarhAdministration. More than2.55 crore smartcards have been issued.

The Unorganized Workers Social Security Act2008: The Act came into force from 16 May2009 with the objective of providing social se-curity to unorganized workers. The Unorga-nized Workers' Social Security Rules 2009 havealso been framed. Constitution of the NationalSocial Security Board in 2009 was another sig-nificant step. The Board recommended thatsocial security schemes, namely the RSBY pro-viding health insurance, JBY providing deathand disability cover and Indira Gandhi NationalOld Age Pension Scheme (IGNOAPS) provid-ing old age pension be extended to buildingand other construction workers, MGNREGAworkers, Asha workers, Anganwadi workersand helpers, porters/coolies/gangmen, andcasual and daily wagers.

National Social Security Fund: A National So-cial Security Fund for Unorganized SectorWorkers with initial allocation of Rs 1000 crorehas been set up. This Fund will support schemesfor weavers, toddy tappers, rickshaw pullers,bidi workers, etc.

Bilateral Social Security Agreements: Bilateralsocial security agreements have been signed withBelgium, Switzerland, the Netherlands, Den-mark, and Norway to protect the interests ofexpatriate workers and companies on a recip-rocal basis. These agreements help workers byproviding exemption from social security con-tribution in case of posting, totalization of con-tribution period, and exportability of pensionin case of relocation to the home country orany third country.

RURAL INFRASTRUCTURE ANDDEVELOPMENT

Bharat Nirman: This programme, launched in

2005-06 for building infrastructure and basicamenities in rural areas, has six components,namely rural housing, irrigation potential,drinking water, rural roads, electrification, andrural telephony. A goal has been set to provideconnectivity to all villages with a population of1000 (500 in hilly or tribal areas) with all-weather roads. New connectivity is proposedto a total of 63,940 habitations under BharatNirman. This will involve construction of 189,897km of rural roads. In addition, Bharat Nirmanenvisages upgradation /renewal of 194,130 kmof existing rural roads. Under the rural roadscomponent of Bharat Nirman, 42,249 habitationshave been provided allweather road connectiv-ity up to December 2011 and projects for con-necting 16,126 habitations are at different stagesof implementation. Under the PMGSY, over19,443 km of all-weather roads have been com-pleted, including upgradation during 2011-12(up to December 2011). New connectivity hasbeen provided to 3710 habitations at an expen-diture of Rs. 7514 crore.

IAY : The IAY is one of the six components ofthe Bharat Nirman programme. During 2010-11, as against the target of 29.09 lakh houses,27.15 lakh houses were constructed. (Also seestate-wise performance in Table 13.10.) Duringfinancial year 2011-12, against the physicaltarget of 27.26 lakh houses, 21.18 lakh houseswere sanctioned and 7.26 lakh constructed ason 31October 2011. Since the inception of thescheme, 271 lakh houses have been completedtill September 2011. The unit assistance pro-vided to rural BPL households for constructionof a dwelling unit under the IAY has been re-vised with effect from 1 April 2010 from Rs35,000 to Rs. 45,000 for plain areas and fromRs. 38,500 to Rs. 48,500 for hilly/ difficult ar-eas. In addition, construction of IAY houseshave been included in the differential rate ofinterest (DRI) scheme for lending up to ` 20,000per housing unit at an interest rate of 4 percent. Sixty left wing extremism (LWE) affecteddistricts have been made eligible for a higherrate of unit assistance of Rs. 48,500. Under thisscheme a homestead site of 100-250 sq.m will


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be provided to those rural BPL households whohave neither land nor a house site. For thispurpose, Rs. 10,000 per beneficiary, to be sharedby the centre and states in a 50 : 50 ratio, willbe provided to the District Rural DevelopmentAgencies (DRDAs).

Rural drinking water: Drinking water supplyis one of the components of Bharat Nirman.The present status of provision of safe drinkingwater in rural areas as measured by habita-tions where the population is fully covered, asper information reported by the states is thatabout 72 per cent of rural habitations are fullycovered. The rest are either partially covered orhave chemically contaminated drinking watersources. As against the target of 653,798 habi-tations during the Eleventh Five year Plan, thecoverage up to 31 March 2011 was 526,667(80.56 per cent). The States of Jharkhand,Chhattisgarh, Nagaland, Madhya Pradesh,Odisha, Himachal Pradesh, Tamil Nadu,Kerala, and Uttarakhand have exceeded theirtargets whereas Sikkim, Punjab, Assam,Rajasthan, Arunachal Pradesh, and Jammu andKashmir have reported low (less than 50 percent) achievement against targets. Expenditurefor drinking water supply during the BharatNirman period increased considerably from Rs.4098 crore in 2005-06 to Rs. 8500 crore in 2011-12. All uncovered habitations have been re-ported covered as on 1April 2011. In order togive effect to the policy initiatives mentioned inthe Eleventh Five Year Plan document, theguidelines for the Rural Water SupplyProgramme were revised in 2009 and renamedthe National Rural Drinking Water Programme(NRDWP). The Jalmani programme, a schemeto provide 100 per cent assistance to states forinstalling stand-alone water purification systemsin schools in rural areas was launched in 2008-09. In pursuance of the same, Rs. 200 crorewas released to states in 2008-09 and 2009-10to cover 1 lakh schools. So far about 65,503schools have been covered under this scheme.

Rural Sanitation-Total Sanitation Campaign(TSC): The TSC is one of the flagshipprogrammes of the government. As of Decem-

ber 28, 2011, TSC projects have been sanctionedin 607 rural districts of the country at a totaloutlay of Rs. 22,022 crore, with a central shareof Rs. 14,425 crore. The approved central out-lay for the TSC in the Eleventh Plan is Rs. 7816crore. The annual budgetary support wasgradually increased from Rs. 202 crore in 2003-4 to Rs. 1500 crore in 2011-12. The TSC followsa community-led and people-centric approach,laying emphasis on information, education, andcommunication (IEC) for demand generationfor sanitation facilities. To motivate the com-munity towards creating sustainable sanitationfacilities and their usage, the incentive for Indi-vidual household latrines for BPL householdshas been increased from Rs. 2200 (Rs. 2700 forhilly and difficult areas) to Rs. 3200 (Rs. 3700for hilly and difficult areas) with effect from 1June 2011. With the scaling up of the TSC,combined with higher resource allocation,programme implementation has improved sub-stantially. As per Census 2001 data, only 21.9per cent rural households had access to latrines.Since 1999, over 8.30 crore toilets have beenprovided for rural households under the TSC.A significant achievement has also been theconstruction of 11.64 lakh school toilet unitsand 3.94 lakh Anganwadi toilets. This has ledto substantial increase in rural sanitation cov-erage from 21.9 per cent in 2001 to about 85.95per cent as of January 2012 as per the progressreported by states. With increasing budgetaryallocations and focus on rural areas, the num-ber of households being provided with toiletsannually has increased from only 6.21 lakh in2002-3 to 122 lakh in 2010-11. In the year 2011-12 (up to January 2012), more than 63 lakhtoilets have been provided to rural households.The active participation of women and adoles-cent girls in the sanitation programme has beenencouraged with special components for them.The Nirmal Gram Puraskar (NGP) incentivescheme has been launched to encourage PRIsto take up sanitation promotion. The award isgiven to those PRIs that attain a 100 per centopen defecation-free environment. A total of25,145 gram panchayats, 166 intermediatepanchayats, and 10 district panchayats have


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received the award in the last six years. Sikkimhas become the first state to receive the award.

SKILL DEVELOPMENT

In addition to constituting a three-tier insti-tutional structure on Coordinated Action onSkill Development consisting of (i) the PrimeMinister's National Council on SkillDevelopment(NCSD), (ii) National Skill Devel-opment Coordination Board (NSDCB), and (iii)National Skill Development Corporation(NSDC), the NCSD appointed an adviser tothe Prime Minister in the NCSD in January 2011.As on 31 October 2011, the NSDC has approved34 training projects spread across 177 districtsin 20 sectors. The NSDC has also approvedeight sector skill councils (SSCs). A new strate-gic framework for skill development for earlyschool leavers and existing workers has beendeveloped since May 2007 in close consultationwith industry, state governments, and experts.At present, 1386 modules for employable skillscovering 60 sectors have been developed, 36assessing bodies empanelled for conducting as-sessment, 6753 vocational training providers(VTPs) registered, and more than 12.19 lakhpersons trained / tested (since inception).

UIDAI

Implementation of the Unique Identification(UID) project has progressed and about 13 croreAadhaar numbers (UID numbers) have alreadybeen generated. The Unique Identification Au-thority of India (UIDAI) has scaled up enrol-ments and has also established infrastructurecapabilities to generate 10 lakh Aadhaar num-bers every day. The UIDAI is on the verge ofcommencing Phase III of the scheme, whichapart from enrolling residents and issuingAadhaar numbers extends to providingupdation services, a robust authentication pro-cess as a means of enhancing service deliveryof various social schemes, and facilitatingfinancial inclusion and development ofAadhaar-enabled applications to leverageAadhaar.

EDUCATION

The Twelfth Plan Approach Paper focuseson teacher training and evaluation and mea-sures to enforce accountability. It also stressesthe need to build capacity in secondary schoolsto absorb the passouts from expanded primaryenrolments. The GER in higher education mustbe targeted to increase from nearly 18 per cent.

Initiatives for primary education

(RTE): Free education for all children betweenthe ages of 6 and 14 years has been made afundamental right under the RTE Act 2009.While the RTE Act was notified on 27 August2009 for general information, the notificationfor enforcing the provisions of the Act witheffect from 1 April 2010 was issued on 16 Feb-ruary 2010. It mandates that every child has aright to elementary education of satisfactory andequitable quality in a formal school which sat-isfies certain essential norms and standards. Thereform processes initiated in 2010-11 continuedduring the year 2011-12.

Rashtriya Madhyamik Shiksha Abhiyan(RMSA): The RMSA was launched in March2009 with the objective of enhancing access tosecondary education and improving its quality.In addition to ensuring access, the quality in-terventions include ensuring all secondaryschools conform to prescribed norms, removinggender, socio-economic and disability barriers,providing universal access to secondary leveleducation by 2017, i.e. by the end of the TwelfthFive Year Plan, and achieving universal reten-tion by 2020. The central and state governmentsbear 75 per cent and 25 per cent of the projectexpenditure respectively during the EleventhFive Year Plan. The funding pattern is in theratio of 90:10 for the north-eastern states. TheRMSA Annual Plan 2011-12 proposals receivedfrom all 35 states/UTs were considered by theProject Approval Board (PAB) of the schemeand major interventions such as opening of 4032new schools, strengthening of 15,567 existingschools, 832 residential quarters for teachers,and 52,352 additional teachers have beenapproved.


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Model Schools Scheme: A scheme for settingup 6000 model schools as benchmarks of excel-lence at block level with one school per blockwas launched in November 2008 with a viewto providing quality education to talented ruralchildren. The scheme has two modes of imple-mentation: (i) 3500 schools are to be set up inas many Educationally Backward Blocks(EBBs)through state/UT governments and (ii) the re-maining 2500 schools are to be set up underPPP mode in blocks that are not educationallybackward. At present, only the first compo-nent is being implemented. The implementa-tion of the PPP component will start fromTwelfth Five Year Plan. Since the inception ofthe scheme, approval has been granted for set-ting up 1942 model schools in 22 states. Finan-cial sanctions have been accorded for settingup 1538 schools in 20 States and Rs. 1697.95crore has been released as central share to thesestates. During 2010-11, (140 schools) had be-come functional in Punjab (21 schools),Karnataka (74 schools), Chhattisgarh (15schools), Tamil Nadu (18 schools), and Gujarat(12 schools) and Rs. 9.55 crore as recurringgrants was released to these states. In 2011-12,the number of functional schools has increasedto 438 in seven states.

Inclusive Education for the DisabledatSecondary Stage (IEDSS): The IEDSS schemewas launched in 2009-10 replacing the earlierIntegrated Education for Disabled Children(IEDC) scheme. While inclusive education fordisabled children at elementary level is beingprovided under the SSA, this scheme provides100 per cent central assistance for inclusiveeducation of disabled children studying inClasses IX-XII in mainstream government, localbody, and government-aided schools. The aimof the scheme is to facilitate continuation ofeducation of children with special needs up tohigher secondary level.

Vocational Education: The revised centrallysponsored Vocationalisation of Secondary Edu-cation scheme aims to address the weaknessesof the earlier scheme to strengthen vocational

education in Classes XI-XII. The componentsapproved for implementation in the remainingperiod of the Eleventh Plan, i.e. 2011-12, in-clude (a) strengthening of 1000 existing voca-tional schools and establishment of 100 newones through state governments, (b) assistanceto 500 vocational schools under the PPP mode,(c) in-service training of seven days for 2000existing vocational teachers and induction train-ing of 30 days for 1000 new ones, (d) develop-ment of 250 competency based modules for eachindividual vocational course, (e) establishmentof a vocational education cell within the Cen-tral Board of Secondary Education (CBSE), (f)assistance to 150 reputed NGOs to runshortduration innovative vocational educationprogrammes, and (g) pilot programme underthe National Vocational Education Qualifica-tions Framework(NVEQF) in Class IX inHaryana and West Bengal.

Saakshar Bharat (SB)/Adult Education: The Na-tional Literacy Mission, recast as Saakshar Bharat(SB) launched by the Prime Minister on 8 Sep-tember 2009, reflects the enhanced focus on fe-male literacy. The literacy rate according to the2001 census was 64.83 per cent, improving to74.04 per cent in 2011. The literacy rate improvedsharply among females as compared to males.While the literacy rate for males rose by 6.9 percent from 75.26 per cent to 82.14 per cent, itincreased by 11.8 per cent for females from 53.67per cent to 65.46 per cent. The target of the Elev-enth Five Year Plan is to achieve 80 per centliteracy. With just one year to go for the TwelfthFive Year Plan, 74 per cent literacy has beenachieved. Literacy levels remain uneven acrossstates, districts, social groups, and minorities. Thegovernment has taken positive measures to re-duce the disparities by focusing on backward areasand target groups. By March 2010, the programmehad reached 167 districts in 19 states coveringover 81,000 gram panchayats.

Higher Education

Higher education is of vital importance forthe country, as it is a powerful tool for building


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a knowledge-based twenty-first-century society.The Indian higher education system is one ofthe largest in the world. At the time of Inde-pendence, there were only 20 universities and500 colleges with 0.1 million students; thesehave increased to 611 universities and univer-sity-level institutions and 31,324 colleges as onAugust 2011. To prepare for the challenges ofthe twenty-first century, the government hastaken a number of initiatives during the Elev-enth Plan period focusing on improvement ofaccess along with equity and excellence, adop-tion of state-specific strategies, enhancement ofthe relevance of higher education through cur-riculum reforms, vocationalization, networking,and use of information technology and distanceeducation along with reforms in governance inhigher education. A large-scale expansion inuniversity education has been initiated duringthe Eleventh Five Year Plan by setting up neweducational institutions comprising 30 centraluniversities, 8 new Indian Institutes of Technol-ogy (IITs), 8 new Indian Institutes of Manage-ment (IIMs), 10 new National Institutes of Tech-nology (NITs), 20 new Indian Institutes of infor-mation Technology (IIITs), 3 new Indian Insti-tutes of Science education and Research (IISERs),2 new Schools of Planning and Architecture(SPAs), 374 model colleges, and 1000 polytech-nics. Other important initiatives includeupgradation of state engineering institutions,expansion of research fellowships and provisionof hostels for girls, reservation for SCs, STs andOBCs, focus on backward, hilly and remote lo-cations including the north-east, facilitatinggreater participation of students belonging tominorities, girls, and persons with disabilities,scholarships, provision of education loans withinterest free subsidies, setting up of polytechnicsin unserved areas, and degree colleges in lowGER districts. The National Mission in Educa-tion through ICT, which aims at providing highspeed broadband connectivity to universities andcolleges and development of e-content in vari-ous disciplines, is under implementation. Openand distance learning is encouraged for increas-ing access to and making quality education avail-able at any time, any place.

HEALTHNational Health Policy

The National Health Policy of 2002 and thepriorities set in the successive Five Year Plansprovide the framework for the implementationof policies and programmes for health care. TheNational Health Policy seeks to provide pro-phylactic and curative health-care services andaims at achieving an acceptable standard ofgood health amongst the general population inthe country by increasing access to the decen-tralized public health system. Access to the de-centralized public health system is sought to beincreased through establishment of new infra-structure in deficient areas and upgrading ofexisting infrastructure. Success in eliminatingor controlling diseases such as small pox, lep-rosy, polio, and TB is indicative of the progressmade in some areas of health. Overall sex ratioin the country has increased from 933 in 2001to 940 as per census 2011 (prov.). In 2011-12,the Plan outlay for health is Rs. 26760 crore.This outlay constitutes among others Rs. 17,840crore under the NRHM and Rs. 2356 crore forschemes/projects in the north-eastern regionand Sikkim. A provision of Rs. 1616.57 crorehas been earmarked for the Pradhan MantriSwasthya Suraksha Yojana (PMSSY) aimed atstrengthening the tertiary sector. The NationalProgramme for Prevention and Control of Can-cer, Diabetes, Cardiovascular Diseases andStroke (NPCDCS) has been allocated Rs. 125crore in 2011-12. During 2011- 12, Rs. 1700crore has been earmarked for the National AidsControl Programme with the objective of halt-ing and reversing the HIV epidemic in the coun-try by integrating programmes for prevention,care, support, and treatment. The governmentalso seeks to develop and promote the Indiansystem of medicines in an organized and scien-tific manner by involvement/ integration ofAYUSH (Ayurveda, Yoga, Unani, Siddha, andHomeopathy) systems in national health-caredelivery and has allocated Rs. 900 crore planoutlay for it in 2011-12.


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Health Programmes

The government has launched a large num-ber of programmes and schemes to addressmajor concerns and bridge the gaps in existinghealth infrastructure and provide accessible, af-fordable, equitable health care. These includethe NRHM, National Programme for HealthCare of the Elderly (NPHCE), National MentalHealth Programme, NPCDCS, Pradhan MantriSwasthya Suraksha Yojana (PMSSY),upgradation/strengthening of state governmentmedical colleges, development of paramedicalservices and the Programmes of AYUSH. Thedetails of major programmes are as follows:

NRHM: The NRHM launched in 2005 aims toimprove accessibility to quality health care forthe rural population, bridge gaps in health care,facilitate decentralized planning in the healthsector and bring about inter-sectoral conver-gence. The NRHM provided an overarchingumbrella to the existing health and family wel-fare programmes including Reproductive andChild Health (RCH-II) and various programmesfor control of diseases, including tuberculosis,leprosy, vector-borne diseases and blindness. Theeffort is to integrate all vertical programmes.All the programmes have now been broughtunder the District Health Society at district leveland State Health Society at state level. Underthe NRHM, over 1.4 lakh health human re-sources have been added to the health systemacross the country (up to September 2011)which include 11,712 doctors/specialists,10,851 AYUSH doctors, 66,784 auxiliary nursemidwives (ANMs), 32,860 staff nurses, and14,434 paramedics including AYUSH paramed-ics. Accredited social health activists (ASHAs)are engaged in each village / large habitationin the ratio of one per 1000 population.

Reproductive and Child Health (RCH): TheRCH Programme was launched in 1997-8 as aseparate entity up to the year 2004-5 as a partof the Family Welfare Programme and wasbrought under the ambit of the NRHM duringthe Eleventh Plan. It has components such aspulse polio immunization and routine immuni-

zation for protection of children from life threat-ening conditions that are preventable such astuberculosis, diphtheria, pertussis, tetanus, po-lio, and measles.

Janani Suraksha Yojana (JSY): The JSY waslaunched with focus on demand promotion forinstitutional deliveries in states and regionswhere these are low. It integrates cash assis-tance with delivery and post-delivery care. Ittargets lowering of MMR by ensuring that de-liveries are conducted by skilled birth atten-dants. The JSY scheme has shown rapid growthin the last three years, with 90.37 lakh benefi-ciaries in 2008-9 to 106.96 lakh beneficiaries in2010-11. The issues of governance, transpar-ency, and grievance redressal mechanisms arenow the thrust areas for the JSY.

Janani Shishu Suraksha Karyakram (JSSK): TheJSSK is a new initiative launched on 1 June2011 to give free entitlements to pregnantwomen and sick new borns for cashless deliv-ery, C-Section, drugs and consumables, diag-nostics, diet during stay in the health institu-tions, provision of blood, exemption from usercharges, transport from home to health institu-tions, transport between facilities in case ofreferral, and drop back from Institutions tohome. A sum of Rs. 1437 crore has been allo-cated to the states during 2011-12 under theJSSK. In order to reach out to difficult, inacces-sible, backward and underserved areas withpoor health indicators, 264 high focus districtsin 21 states have been identified based on con-centration of SC/ST population and presenceof left wing extremism for focused attention.

National Vector Borne Disease ControlProgramme: This Programme is being imple-mented for prevention and control of vector-borne diseases such as malaria, filariasis, kala-azar, Japanese encephalitis, dengue, andchikungunya. The government has taken vari-ous steps for tackling of vector-borne diseasesincluding dengue and chikungunya by thestates. There are 250 filariaendemic districts in20 states /UTs in the country. The NationalHealth Policy (2002) aims at elimination of lym-


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phatic filariasis in country by 2015. Kala-azar isendemic in four states, namely Bihar, West Ben-gal, Jharkhand, and Uttar Pradesh. During 2011,31,322 cases and 78 deaths have been reported.

Revised National Tuberculosis ControlProgramme (RNTCP) : The RNTCP, a centrallysponsored ongoing scheme, is an application inIndia of the WHO-recommended directly ob-served treatment short course popularly knownas DOTS. Under the progra mme, quality diag-nosis and treatment facilities including a sup-ply of anti-TB drugs are provided free of cost toall TB patients. More than 13,000 microscopycentres have been established in the country.During 2010-11, the programme has achievednew sputem positive case detection rate of 71per cent and treatment success rate of 87 percent.

National Leprosy Eradication Programme(NLEP): The NLEP was started in 1983 withthe objective of eradication of the disease. In2005, the dreaded disease after 22 years re-corded a case load less than 1 per 10,000 popu-lation at national level. The recorded preva-lence further came down to 0.69 per 10,000 inMarch 2011.

National Programme for Control of Blindness

(NPCB): The NPCB, launched in the year 1976as a 100 per cent centrally sponsored schemewith the goal of reducing the prevalence ofblindness to 0.3 per cent by 2020, showed re-duction in the prevalence rate of blindness from1.1 per cent (2001-2) to 1 per cent (2006-7).

National Programme for Health Care of theElderly (NPHCE): The NPHCE aims to provideseparate and specialized comprehensive healthcare to senior citizens at various levels of thestate healthcare delivery system including out-reach services. Some of the strategies includepreventive and promotive care, managementof illness, health manpower development forgeriatric services, medical Information Educa-tion and Communication(IEC) activities. Themajor components of the NPHCE are establish-ment of 30 bedded departments of geriatrics in

8 identified regional medical institutions, andprovision of dedicated health-care facilities atdistrict, CHC, PHC and sub-centres levels in 100identified districts of 21 states of the country.

NPCDCS: The NPCDCS was launched duringthe Eleventh Five year plan. It envisages healthpromotion and health education advocacy, earlydetection of persons with high levels of riskfactors through opportunistic screening andstrengthening of health systems at all levels totackle Non Communicable Disease (NCDs), andimprovement of quality of care. At present theprogramme is being implemented in 100 dis-tricts covering 21 states.

Human Resources and Infrastructure Devel-opment in Tertiary Health Care: The EleventhPlan also witnessed a number of initiatives toimprove the availability of human resources inthe health sector. With a view to strengtheninggovernment medical colleges, the land require-ment norms and infrastructural requirementsfor opening new medical colleges have beenrevised. The faculty requirements have also beenrevised. Besides, increased intake at MBBS levelhas been enabled especially in the under-servedstates.

PMSSY: The PMSSY has been launched withthe objectives of correcting regional imbalancesin the availability of affordable/reliable tertiaryhealth-care services and augmenting facilitiesfor quality medical education in the country.These are sought to be achieved through estab-lishing AIIMS-like Institutions and upgradingexisting medical college institutions. The PMSSYaims at (i) construction of 6 AIIMS like institu-tions in the first phase at Bhopal, Bhubaneswar,Jodhpur, Patna, Raipur, and Rishikesh and inthe second phase in West Bengal and UttarPradesh, ii) upgradation of 13 medical collegeinstitutions in the first phase and 6 in the sec-ond phase. The upgradation programmesbroadly envisages improving health infrastruc-ture through construction of super specialityblocks/trauma centres, etc. and procurementof medical equipment for existing as well asnew facilities. Seven more medical colleges are


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proposed to be upgraded, one each in Kerala,Karnataka and Madhya Pradesh and two eachin Bihar and Uttar Pradesh in the third phase.

Ayurveda, Yoga & Naturopathy, Unani, Siddhaand Homeopathy (AYUSH): Mainstreaming ofAYUSH in national health care delivery is animportant goal under the NRHM for which thegovernment has sanctioned Rs. 42.19 crore uptoDecember 31, during the current financial year.A new component of upgradation of AYUSHdispensaries has been incorporated in the cen-trally sponsored scheme of Development ofAYUSH Hospitals and Dispensaries in July2010. Besides, a component of setting up of50/10 bedded integrated AYUSH hospitals forNorth Eastern and other hilly states has beenintroduced in 2011. The States of HimachalPradesh, Jammu and Kashmir, Mizoram,Manipur, Tripura, have been financially assistedfor setting up of 50 bedded hospitals whileAssam and Sikkim for 10 bedded hospitals uptoDecember 31, 2011.

CHILD AND WOMEN DEVELOPMENT

Integrated Child Development Services (ICDS):The scheme was launched in 1975 for holisticdevelopment of children below 6 years of ageand proper nutritional and health education ofpregnant and lactating mothers with 33 projectsand 4,891 anganwadi centres (AWCs). It hasnow been universalized with the governmentcumulatively approving 7,076 projects and 14lakh AWCs including 20,000 anganwadis 'ondemand'.

Rajiv Gandhi Scheme for Empowerment of Ado-lescent Girls (RGSEAG): This scheme waslaunched on 19 November 2010 with the objec-tive of empowering adolescent girls in the agegroup 11-18 years by bringing improvement intheir nutritional and health status and upgrad-ing various skills like home skills, life skills, andvocational skills. To start with, it is being imple-mented in 200 selected districts across the coun-try on a pilot basis. The RGSEAG is being imple-mented through state governments/UT admin-istrations with 100 per cent financial assistance

from the central government for all inputs otherthan nutrition provision for which 50 per centcentral assistance is provided. AWCs are thefocal points for delivery of services.

The Rajiv Gandhi National Creche Scheme forChildren of Working Mothers: This scheme pro-vides for day-care facilities to 0-6 year-old chil-dren of working mothers by opening crèchesand development services, i.e. supplementarynutrition, health-care inputs like immunization,polio drops, basic health monitoring, and rec-reation. The combined monthly income of boththe parents should not exceed Rs. 12,000 foravailing of the facilities. The number of crèchesfunctional at present are 23,785 and beneficiarychildren are 594,625. The approved outlay for2011-12 for the scheme was Rs. 85 crore.

Integrated Child Protection Scheme (ICPS): Thiscentrally sponsored scheme implementedthrough states was launched in 2009-10 withthe objective of providing a safe and secureenvironment for comprehensive development ofchildren in the country who are in need of careand protection as well as children in conflictwith the law. The ICPS provides preventive andstatutory care and rehabilitation services to anyvulnerable child including, but not limited to,children of potentially vulnerable families andfamilies at risk, children of socially excludedgroups like migrant families, families living inextreme poverty, families subjected to or affectedby discrimination and minority families, chil-dren infected and / or affected by HIV / AIDS,orphans, child drug abusers, children of sub-stance abusers, child beggars, trafficked or sexu-ally exploited children, children of prisoners,and street and working children.

Support to Training and EmploymentProgramme for Women (STEP) Scheme : Thisscheme seeks to provide updated skills and newknowledge to poor women in 10 traditional sec-tors of agriculture, animal husbandry, dairy,fisheries, handlooms, handicrafts, khadi and vil-lage industries, sericulture, social forestry, andwasteland development so as to enhance their


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productivity and income generation. For ex-panding the reach of the programme and fur-ther strengthening it, implementation of thescheme was revised in November 2009. Thescheme aims at introduction of locally appro-priate sectors.

Rashtriya Mahila Kosh (RMK): The RMK (Na-tional Credit Fund for Women) was created in1993 with a corpus fund of Rs. 31crore. Theinitial corpus has now grown to over Rs. 180crore including reserves and surplus due tocredit, investment and recovery management,

and an additional budgetary allocation of Rs.69 crore. Since its creation, the RMK has estab-lished itself as a premier advocacy organiza-tion for the development of the micro-financesector at national and international levels toenhance the flow of micro credit in the unorga-nized sector for poor women. It focuses on poorwomen and their empowerment through theprovision of credit for livelihood-related activi-ties. The RMK provides microcredit in a quasi-informal manner, lending to intermediate mi-cro-credit organizations (IMOs) across states.

•••


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CONCEPTS

Rural-Urban Areas

The data in the table on Final PopulationTotals census 2011 are presented separately forrural and urban areas. The unit of classifica-tion in this regard is 'town' for urban areas and'village' for rural areas. In the Census of India2011, the definition of urban area adopted is asfollows: (a) All statutory places with a munici-pality, corporation, cantonment board or noti-fied town area committee, etc. (b) All otherplaces satisfying the following three criteria si-multaneously:

i) a minimum population of 5,000;

ii) at least 75 per cent of male working popu-lation engaged in non-agricultural pursuits;and

iii) a density of population of at least 400 persq. km. (1,000 per sq. mile).

For identification of places which would qualifyto be classified as 'urban' all villages, which, asper the 2001 Census had a population of 4,000and above, a population density of 400 personsper sq. km. and having at least 75 per cent ofmale working population engaged in non-agri-cultural activity were considered. To work outthe proportion of male working population re-ferred to above against b)(ii), the data relating tomain workers were taken into account.

An Urban Agglomeration is a continuous ur-ban spread constituting a town and its adjoin-ing urban outgrowths (OGs) or two or morephysically contiguous towns together and anyadjoining urban outgrowths of such towns.

Examples of OGs are railway colonies, univer-sity campuses, port areas, etc., that may comeup near a city or statutory town outside itsstatutory limits but within the revenue limits ofa village or villages contiguous to the town orcity. Each such individual area by itself maynot satisfy the minimum population limit toqualify it to be treated as an independent ur-ban unit but may deserve to be clubbed withthe town as a continuous urban spread.

For the purpose of delineation of Urban Ag-glomerations during Census of India 2011, fol-lowing criteria are taken as pre-requisites: (a)The core town or at least one of the constituenttowns of an urban agglomeration should nec-essarily be a statutory town; and (b) The totalpopulation of all the constituents (i.e. townsand outgrowths) of an Urban Agglomerationshould not be less than 20,000 (as per the 2001Census). With these two basic criteria havingbeen met, the following are the possible differ-ent situations in which Urban Agglomerationswould be constituted: (i) a city or town withone or more contiguous outgrowths; (ii) two ormore adjoining towns with their outgrowths;and (iii) a city and one or more adjoining townswith their outgrowths all of which form a con-tinuous spread.

City

Towns with population of 1,00,000 andabove are called cities.

Scheduled Castes & Scheduled Tribes

Article 341 of the Constitution provides thatthe President may, with respect to any State orUnion territory, specify the castes, races or tribes

POPULATION OF INDIA

(India's Census)



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or parts of or groups within castes, races or tribeswhich shall for the purposes of the Constitutionbe deemed to be Scheduled Castes in relation tothat State or Union territory. Similarly, Article342 provides for specification of tribes or tribalcommunities or parts of or groups within tribesor tribal communities which are deemed to be forthe purposes of the Constitution the ScheduledTribes in relation to that State or Union territory.In pursuance of these provisions, the list of Sched-uled Castes and / or Scheduled Tribes are noti-fied for each State and Union territory and arevalid only within the jurisdiction of that State orUnion territory and not outside.

It is important to mention here that underthe Constitution (Scheduled Castes) Order,1950, no person who professed a religion dif-ferent from Hinduism was deemed to be amember of a Scheduled Caste in addition toevery member of the Ramdasi, Kabirpanthi,Majhabi or Sikligar caste resident in Punjab orPatiala and East Punjab States Union were inrelation to that State whether they professedthe Hindu or the Sikh religion. Subsequently, inSeptember, 1956, by an amendment, the Presi-dential Order of 1950 and in all subsequentPresidential Orders relating to Scheduled Castes,the population professing the Hindu and theSikh religions were placed on the same footingwith regard to their inclusion as ScheduledCastes. Later on, as per the amendment madein the Constitution (Scheduled Castes) Order1990, the Hindu, the Sikh and the Buddhistprofessing population were placed on the samefooting with regard to the recognition of theScheduled Castes.

For finalizing the list of Schedule Castes/Scheduled Tribes notified in each state/unionterritory, all the constitutional amendments thathave taken place prior to the conduct of 2011census were taken into account. Since there isno Scheduled Castes list for the state of Nagalandand the Union territories of Andaman & NicobarIslands and Lakshadweep; and no ScheduledTribes list for the States of Delhi, Haryana and

Punjab and the Union territories of Chandigarhand Puducherry, the Scheduled Castes andScheduled Tribes population figures are fur-nished for only the relevant category in respectof these States and Union territories.

Literates

A person aged 7 years and above who canboth read and write with understanding in anylanguage has been taken as literate. It is notnecessary for a person to have received anyformal education or passed any minimum edu-cational standard for being treated as literate.People who were blind and could read in Brailleare treated to be literates.

A person, who can neither read nor write orcan only read but cannot write in any language,is treated as illiterate. All children of age 6 yearsor less, even if going to school and have pickedup reading and writing, are treated as illiterate.

Sex Ratio

Sex ratio has been defined as the number offemales per 1000 males in the population. It isexpressed as 'number of females per 1000 males'.

Sex-ratio = Number of females

1000Number of males

×

Literacy Rate

Literacy rate of population is defined as thepercentage of literates to the total populationof age 7 years and above.

Literacy rate =Number of Literates

1000Population aged 7+

×

Work Participation Rate

Work participation rate is defined as the per-centage of total workers (main and marginal)to total population.

Work participation rate

= Total Workers (Main+Marginal)

× 100Total Population


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Definition of Slum

Slums have come to form an integral part ofthe phenomena of urbanization in India. Com-prehensive information on the slums being essen-tial for formulation of effective and coordinatedpolicy for their improvement. Formation and iden-tification of slum enumeration blocks prior to theconduct of 2011 Census has made it possible tocompile and repare special tables for slums. It isfor the first time in the history of census in thecountry that the slum demography is being pre-sented on the basis of the actual count. The sys-tematic delineation of slums for collection of pri-mary data on their population characteristicsduring population enumeration itself may per-haps be the first of its type in the world.

For the purpose of Census of India, 2011, theslum areas broadly constitute of :-

(i) All specified areas in a town or city noti-fied as 'Slum' by State/Local Governmentand UT Administration under any Act in-cluding a 'Slum Act'.

(ii) All areas recognized as 'Slum' by State/Local Government and UT Administration,Housing and Slum Boards, which mayhave not been formally notified as slumunder any act;

(iii) A compact area of at least 300 populationor about 60-70 households of poorly builtcongested tenements, in unhygienic envi-ronment usually with inadequate infra-structure and lacking in proper sanitaryand drinking water facilities.

Variation in Population Since 1901

Year Total Rural Urban

1901 238,396,327 212,544,454 25,851,873

1911 252,093,390 226,151,757 25,941,633

1921 251,321,213 223,235,043 28,086,170

1931 278,977,238 245,521,249 33,455,989

1941 318,660,580 274,507,283 44,153,297

1951 361,088,090 298,644,381 62,443,709

1961 439,234,771 360,298,168 78,936,603

1971 548,159,652 439,045,675 109,113,977

1981 683,329,097 523,866,550 159,462,547

1991 846,302,688 628,691,676 217,611,012

2001 1,028,737,436 742,490,639 286,119,689

2011 1,210,569,573 833,463,448 377,106,125

INDIA, STATES AND UNION TERRITORIES BY POPULATION, PERCENTAGEDECADAL GROWTH, AREA, DENSITY, SEX RATIO, AND LITERACY-2011

Sr. State Population Growth Area Density/ Sex Literacy

No. Rate Sq.km Sq.km. Ratio Rate

– India 1,21,05,69,573 17.7 32,87,240 382 943 73.0

1. Uttar Pradesh 19,98,12,341 20.2 2,40,928 829 912 67.7

2 Maharashtra 11,23,74,333 16.0 3,07,713 365 929 82.3

3 Bihar 10,40,99,452 25.4 94,163 1,106 918 61.8

4 West Bengal 9,12,76,115 13.8 88,752 1,028 950 76.3

5 Andhra Pradesh 8,45,80,777 11.0 2,75,045 308 993 67.0

6 Madhya Pradesh 7,26,26,809 20.3 3,08,245 236 931 69.3


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7 Tamil Nadu 7,21,47,030 15.6 1,30,058 555 996 80.1

8 Rajasthan 6,85,48,437 21.3 3,42,239 200 928 66.1

9 Karnataka 6,10,95,297 15.6 1,91,791 319 973 75.4

10 Gujarat 6,04,39,692 19.3 1,96,024 308 919 78.0

11 Odisha 4,19,74,218 14.0 1,55,707 270 979 72.9

12 Kerala 3,34,06,061 4.9 38,863 860 1,084 94.0

13 Jharkhand 3,29,88,134 22.4 79,714 414 949 66.4

14 Assam 3,12,05,576 17.1 78,438 398 958 72.2

15 Punjab 2,77,43,338 13.9 50,362 551 895 75.8

16 Chhattisgarh 2,55,45,198 22.6 1,35,191 189 991 70.3

17 Haryana 2,53,51,462 19.9 44,212 573 879 75.6

18 NCT of Delhi 1,67,87,941 21.2 1,483 11,320 868 86.2

19 Jammu & Kashmir 1,25,41,302 23.6 2,22,236 124 889 67.2

20 Uttarakhand 1,00,86,292 18.8 53,483 189 963 78.8

21 Himachal Pradesh 6,86,41,602 12.9 55,673 123 972 82.8

22 Tripura 36,73,917 14.8 10,486 350 960 87.2

23 Meghalaya 29,66,889 27.9 22,429 132 989 74.4

24 Manipur 25,70,390 18.6 22,327 115 992 79.2

25 Nagaland 19,78,502 -0.6 16,579 119 931 79.6

26 Goa 14,58,545 8.2 3,702 394 973 88.7

27 Arunachal Pradesh 13,83,727 26.0 83,743 17 938 65.4

28 Puducherry 12,47,953 28.1 479 2,547 1,037 85.8

29 Mizoram 10,97,206 23.5 21,081 52 976 91.3

30 Chandigarh 10,55,540 17.2 114 9,258 818 86.0

31 Sikkim 6,10,577 12.9 7,096 86 890 81.4

32 Andaman and 3,80,581 6.9 8,249 46 876 86.6

Nicobar Islands

33 Dadra and 3,43,709 55.9 491 700 774 76.2

Nagar Haveli

34 Daman and Diu 2,43,247 53.8 112 2,191 618 87.1

35 Lakshadweep 64,473 6.3 32 2,149 947 91.8


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Population :

Persons 1,21,05,69,573

Males 62,31,21,843

Females 58,74,47,730

Highest / Lowest Population :

State with Highest Population Uttar Pradesh 199,8,12,341

State with Lowest Population Sikkim 6,10,577

UT with Highest Population NCT of Delhi 167,87,941

UT with Lowest Population Lakshadweep 64,473

Literacy Rate

Persons Males Females

Total Literacy rate 73.0% 80.9% 64.6%

Rural Literacy rate 67.8% 77.2% 57.9%

Urban Literacy rate 84.1% 88.8% 79.1%

Persons (%) Males (%) Females (%)

State with Highest Literacy Kerala (94.0) Kerala (96.1)` Kerala (92.1)

Rate

State with Lowest Literacy Bihar (61.8) Bihar (71.2) Bihar (51.5)

Rate

UT with Highest Literacy Rate Lakshadweep Lakshadweep Lakshadweep

(95.6) (95.6) (87.9)

UT with Lowest Literacy Rate Dadra & Dadra & Dadra &

Nagar Haveli Nagar Haveli Nagar Haveli

(85.2) (85.2) (64.3)


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Population Density

Persons / Sq.Km

India 382

State with Highest Population Density Bihar 1106

State with Lowest Population Density Arunachal Pradesh 17

UT with Highest Population Density Delhi 11,320

UT with Lowest Population Density Andaman & Nicobar Islands 46

District with Highest Population Density North East (Delhi) 36,155

District with Lowest Population Density Dibang Valley 1

Rural - Urban Distribution Population (%)

Rural 83,3463,448 68.8%

Urban 37,71,6,125 31.2%

State with highest proportion of Goa 62.2

Urban Population

State with lowest proportion of Himachal Pradesh 10.0Urban Population

UT with highest proportion of NCT of Delhi 97.5

Urban Population

UT with lowest proportion of A. & Nicobar Islands 37.7

Urban Population

Sex Ratio (females per thousand males)

India 943

Rural 949

Urban 929

State with Highest Female Sex Ratio Kerala 1,084

State with Lowest Female Sex Ratio Haryana 879

UT with Highest Female Sex Ratio Puducherry 1,037

UT with Lowest Female Sex Ratio Daman & Diu 618

District with Highest Female Sex Ratio Mahe (Puducherry) 1,147

District with Lowest Female Sex Ratio Daman (Daman & Diu) 534

Work Participation Rate : 2011 Census


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Total Workers Number Rate (%)

Persons 48,17,43,311 39.8

Males 33,18,65,930 53.3

Females 14,98,77,381 25.5

Main Workers Percentage of Main Workers

Persons 36,24,46,420 75.2

Males 27,31,49,359 82.3

Females 8,92,97,061 59.6

Marginal Workers Percentage of Marginal Workers

Persons 11,92,96,891 24.8

Males 5,87,16,571 17.7

Females 6,05,80,320 40.4

Population Composition Population (%)

(2001 Census)

Hindus 827,578,868 80.5

Muslims 138,188,240 13.4

Christians 24,080,016 2.3

Sikhs 19,215,730 1.9

Buddhists 7,955,207 0.8

Jains 4,225,053 0.4

Other Religions & Persuasions 6,639,626 0.6

Religion not stated 727,588 0.1

Total 1,028,610,328 100.0


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Scheduled Castes & Scheduled Tribes Population - (2011 Census)

Scheduled Castes : 20,13,78,086 16.6%

Scheduled Tribes : 10,42,81,034 8.6%

Scheduled Castes

State with highest proportion of Scheduled Castes Punjab ( 31.9%)

State with lowest proportion of Scheduled Castes Mizoram ( 0.1%)

UT with highest proportion of Scheduled Castes Chandigarh (18.9%)

UT with lowest proportion of Scheduled Castes D & N Haveli (1.8% )

Scheduled Tribes

State with highest proportion of Scheduled Tribes Mizoram ( 94.4%)

State with lowest proportion of Scheduled Tribes Uttar Pradesh (0.06%)

UT with highest proportion of Scheduled Tribes Lakshadweep (94.8%)

UT with lowest proportion of Scheduled Tribes Daman & Diu (6.3%)

•••


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The International Monetary Fund (IMF) isan international organization that oversees theglobal financial system by following the macro-economic policies of its member countries, inparticular those with an impact on exchangerates and the balance of payments. It is an or-ganization formed to stabilize international ex-change rates and facilitate development. It alsooffers financial and technical assistance to itsmembers, making it an international lender oflast resort. Its headquarters are located in Wash-ington, D.C., USA. The International MonetaryFund was created in July of 1944, with a goal tostabilize exchange rates and assist the reconstruc-tion of the world's international payment sys-tem. Countries contributed to a pool which couldbe borrowed from, on a temporary basis, bycountries with payment imbalances.

The IMF currently has a near-global mem-bership of 188 countries. To become a member,a country must apply and then be accepted bya majority of the existing members. In April2012, Republic of South Sudan joined the IMF,becoming the institution's 188th member.

Upon joining, each member country of the IMFis assigned a quota, based broadly on its rela-tive size in the world economy. The IMF'smembership agreed in November 2010 on amajor overhaul of its quota system to reflectthe changing global economic realities, espe-cially the increased weight of major emergingmarkets in the global economy.

A member country's quota defines its financialand organizational relationship with the IMF.

Members Quota in the IMF

A member's quota in the IMF determines the

amount of its subscription, its voting weight, itsaccess to IMF financing, and its allocation ofSpecial Drawing Rights (SDRs). A member statecannot unilaterally increase its quota - increasesmust be approved by the Executive Board andare linked to formulas that include many vari-ables such as the size of a country in the worldeconomy. For example, in 2001, China wasprevented from increasing its quota as high asit wished, ensuring it remained at the level ofthe smallest G7 economy (Canada). In Septem-ber 2006, the IMF's member countries agreed tothe first round of ad hoc quota increases forfour countries, including China.

The percentage of quotas of the individualmember-countries decides not just their votingrights but also determines their access to theFund resources. Besides, the size of a country'squota is a decisive factor in its level of repre-sentation in the Fund, as for example, the postof a Director or his alternate on the ExecutiveBoard of the Fund.

Industrial countries also attach great impor-tance to their ranking in the Fund membership,which is strictly in accordance with their quotasize. At present the largest member of the IMFis the US, with a quota of SDR 42,122.4 millionand the smallest is Palau (SDR 3.1 million).

The quota largely determines the votingpower. Each member has 250 basic votes plusone additional vote for each SDR 100,000 ofquota. Accordingly, the US has 421,961 votes(16.75 per cent of the total) and Palau 768 votes(0.03 per cent).

The amount of financing a member couldobtain from the IMF (its access limit) is basedon its quota. Under Stand-By and ExtendedArrangements, a member can borrow up to 100

MULTILATERAL AGENCIES CHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE


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per cent of its quota annually and 300 per centcumulatively.

However, access may be higher in excep-tional circumstances. Further, a member's shareof general SDR allocations is established in pro-portion to its quota.

IMF Financial Facilities

The IMF makes its financial resources avail-able to member countries through a variety offinancial facilities. Except for the ESAF mem-bers avail themselves of the IMF's financial re-sources by purchasing (drawing) other mem-bers' currencies or SDRs with an equivalentamount of their own currency. The IMF leviescharges on these drawings and requires thatmembers repurchase (repay) their own currencyfrom the IMF over a specified time.

IMF Financial Policies

IMF financial policies govern the modalitiesfor the use of its financial resources under ex-isting IMF facilities. These include:

• Reserve Tranche Policies: A member hasa reserve tranche position in the IMF tothe extent that its quota exceeds the IMF'sholdings of its currency, excluding creditsextended to it by the IMF. Subject only tobalance of payments need, a member maydraw up to the full amount of its reservetranche position at any time. This draw-ing does not constitute a use of IMF credit,as its reserve position is considered part ofthe member's foreign reserves, and is notsubject to an obligation to repay.

• Credit Tranche Policies: Credits underregular facilities are made available to mem-bers in tranches (segments) of 25 percent ofquota. For first credit tranche drawings,members must demonstrate reasonable ef-forts to overcome their balance of paymentsdifficulties, and no phasing applies. Uppercredit tranche drawings (over 25 per cent)are normally phased in relation to certainconditions or "performance criteria."

• Policy on Emergency Assistance: The IMFprovides emergency assistance by allow-ing members to make drawings to meetbalance of payments needs arising fromsudden and unforeseeable natural disas-ters and in postconflict situations. Normallythis takes the form of an outright purchaseof up to 25 percent of quota provided thatthe member is cooperating with the IMF.It does not entail performance criteria or aphasing of drawings.

• Debt and Debt-Service Reduction Poli-cies: Part of a credit extended to a mem-ber by the IMF under regular facilities canbe set aside to finance operations involv-ing debt principal and debt service reduc-tion. The exact amount of the set-aside isdetermined on a case-by-case basis; itsavailability is generally tied to program per-formance.

Regular IMF Facilities

• Stand-by arrangements (SBA): It isdesigned to provide short-term balance ofpayments assistance for deficits of a tempo-rary or cyclical nature, such arrangementsare typically for 12 to 18 months. Drawingsare phased on a quarterly basis, with theirrelease made conditional on meeting perfor-mance criteria and the completion of peri-odic program reviews. Repurchases aremade 3¼ to 5 years after each purchase.

• Extended Fund Facility (EFF): It is designedto support medium-term programs thatgenerally run for three years, the EFF aimsat overcoming balance of payments diffi-culties stemming from macroeconomic andstructural problems. Performance criteriaare applied, similar to those in stand-byarrangements, and repurchases are madein 4½ to 10 years.

Concessional IMF Facility

• Enhanced Structural Adjustment Facility(ESAF): It was established in 1987, andenlarged and extended in 1994. Designedfor low-income member countries with pro-


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tracted balance of payments problems,ESAF drawings are loans and not pur-chases of other members' currencies. Theyare made in support of three-year programsand carry an annual interest rate of 0.5percent, with a 5½-year grace period anda 10-year maturity. Quarterly benchmarksand semiannual performance criteria ap-ply; 80 low-income countries are currentlyeligible to use the ESAF.

Special IMF Facilities

• Systemic Transformation Facility (STF):It is in effect from April 1993 to April 1995.The STF was designed to extend financialassistance to transition economies experi-encing severe disruption in their trade andpayments arrangements. Repurchases aremade over 4½ to 10 years.

• Compensatory and Contingency Financ-ing Facility (CCFF): It provides compen-satory financing for members experienc-ing temporary export shortfalls or excessesin cereal import costs, as well as financialassistance for external contingencies inFund arrangements. Repurchases are madeover 3¼ to 5 years.

• Supplemental Reserve Facility (SRF): Itprovides financial assistance for exceptionalbalance of payments difficulties due to alarge short-term financing need resultingfrom a sudden and disruptive loss of mar-ket confidence. Repurchases are expectedto be made within 1 to 1½ years, but canbe extended, with IMF Board approval, to2 to 2½ years.

Special Drawing Rights

SDRs were originally created to replace Goldand Silver in large international transactions.Being that under a strict (international) goldstandard, the quantity of gold worldwide isrelatively fixed, and the economies of all par-ticipating IMF members as an aggregate aregrowing, a perceived need arose to increase thesupply of the basic unit or standard propor-tionately. Thus SDRs, or "paper gold", are cred-

its that nations with balance of trade surplusescan 'draw' upon nations with balance of tradedeficits. So-called "paper gold" is little morethan an accounting transaction within a ledgerof accounts, which eliminates the logistical andsecurity problems of shipping gold back andforth across borders to settle national accounts.It has also been suggested that having holdersof US dollars convert those dollars into SDRswould allow diversification away from thedollar without accelerating the decline of thevalue of the dollar. SDRs are defined in termsof a basket of major currencies used in interna-tional trade and finance. At present, the cur-rencies in the basket are, by weight, the UnitedStates dollar, the euro, the Japanese yen, andthe pound sterling. Before the introduction ofthe euro in 1999, the Deutsche Mark and theFrench Franc were included in the basket. Theamounts of each currency making up one SDRare chosen in accordance with the relativeimportance of the currency in internationaltrade and finance. The determination of thecurrencies in the SDR basket and their amountsis made by the IMF Executive Board every fiveyears.

THE WORLD BANK

The World Bank is one of two major finan-cial institutions created as a result of the BrettonWoods Conference in 1944. The United Na-tions Monetary and Financial Conference, com-monly known as Bretton Woods conference,was a gathering of 730 delegates from all 44Allied nations at the Mount Washington Hotel,situated in Bretton Woods, New Hampshire toregulate the international monetary and finan-cial order after the conclusion of World War II.The conference was held from 1 July to 22 July1944 when the agreements were signed to setup the International Bank for Reconstructionand Development (IBRD), the General Agree-ment on Tariffs and Trade (GATT), and theInternational Monetary Fund (IMF).

The World Bank Group (WBG) is a family offive international organizations makes leveragedloans, generally to poor countries. The Bank


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came into formal existence on 27 December 1945following international ratification of the BrettonWoods agreements, which emerged from theUnited Nations Monetary and Financial Con-ference (1 July - 22 July 1944). It also providedthe foundation of the Osiander-Committee in1951, responsible for the preparation and evalu-ation of the World Development Report. Com-mencing operations on 25 June 1946, it ap-proved its first loan on 9 May 1947 ($250M toFrance for postwar reconstruction, in real termsthe largest loan issued by the Bank to date). Itsfive agencies are:

• International Bank for Reconstruction andDevelopment (IBRD)

• International Development Association(IDA)

• International Finance Corporation (IFC)• Multilateral Investment Guarantee Agency

(MIGA)• International Centre for Settlement of In-

vestment Disputes (ICSID)

The term "World Bank" generally refers to theIBRD and IDA, whereas the World Bank Groupis used to refer to the institutions collectively.

The World Bank differs from the World BankGroup, in that the World Bank comprises onlytwo institutions:

• International Bank for Reconstruction andDevelopment (IBRD)

• International Development Association(IDA)

Whereas the latter incorporates these two inaddition to three more:

• International Finance Corporation (IFC)• Multilateral Investment Guarantee Agency

(MIGA)

• International Centre for Settlement of In-vestment Disputes (ICSID)

The World Bank is not a "bank" in the com-mon sense. It is one of the United Nations' spe-cialized agencies, and is made up of 188 mem-ber countries. These countries are jointly respon-sible for how the institution is financed and

how its money is spent. Along with the rest ofthe developing community, the World Bank cen-ters its efforts on reaching the Millennium De-velopment Goals, agreed to by UN members in2000 and aimed at sustainable poverty reduc-tion. The "World Bank" is the name that hascome to be used for the International Bank forReconstruction and Development (IBRD) andthe International Development Association(IDA). Together these organizations providelow-interest loans, interest-free credit, andgrants to developing countries. Some 10,000development professionals from nearly everycountry in the world work in the World Bank'sWashington DC headquarters or in its 109 coun-try offices. Interest-free credit and grant financ-ing comes from IDA, the world's largest sourceof concessional assistance. Some 40 rich coun-tries provide the money for this funding bymaking contributions every four years. IDAcredits make up about one-quarter of the Bank'sfinancial assistance. Aside from IDA funds, verylittle of the Bank's income is provided by itsmember countries.

Current President of World Bank

An indirect presidential election was held on16 April 2012 to choose a new president of theWorld Bank to replace Robert Zoellick, whoseterm expired in June. Although the organiza-tion has always had presidents from, and nomi-nated by, the United States, this election fea-tured the nomination of two non-United Statescandidates for the first time, originating, respec-tively, from Nigeria and Colombia. Though theColombian Jose Antonio Ocampo withdrew hiscandidacy in the final stages, the Nigerian Fi-nance Minister Ngozi Okonjo-lweala remainedin the race. Eventually, and amid controversy,the U.S. nominee Jim Young Kim was an-nounced as the new president on 16 April.

WTO AND INDIAN ECONOMY

The world trade organization (WTO) is aninternational trade institution. the wtosuperseded and replaced the gatt. the gatt wasa provisional, multilateral agreement governing


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international trade from 1947 until january 1,1995. the creation of the wto was negotiated inthe final gatt round, the uruguay round. thewto inherited a number of core principles fromthe gatt. these principles include:

• Non–discrimination, which in practicemeans two things. The first principle isMFN–most favoured nation treatment. Anytrade concession a nation offers to onemember, it must offer to all. The secondprinciple is national treatment. This meansthat imported products must be treated thesame as domestic goods.

• Reciprocity of Trade Concessions.

• Trade Liberalization.

• Transparency and predictability in importand export rules and regulations.

• Favourable treatment to less developedcountries.

Although built on the GATT legacy, theUruguay Round and WTO added many newissues and features. To begin with, many olderagreements were replaced by new, strongeragreements. For example, the Agreement onTextiles and Clothing established a time–table toliberalize textile trade, while the Agreement onSanitary and Phytosanitary Measures establisheda more transparent regime for trade inagricultural goods and ensures plant and animalhealth standards are followed. The WTO alsobroke new ground, adding a number of tradesectors and issues not addressed by the GATT:

• The General Agreement on Trade in Services(GATS) adds services.

• Trade in Intellectual Property Rights (TRIPs)adds copyrights, trademarks and patents.

• Trade Related Investment Measures (TRIMs)sets rules for Foreign Direct Investment.

• The Agreement on Government Procurement(GPA) & the Information TechnologyAgreement (ITA) are also international ruleson new product areas.

These new agreements are ambitious issuesadditions to the rule governing the worldtrading system. However, at this stage thereare significant enforcement problems andnumerous loopholes that countries use to evadetheir obligations.

The WTO differs from the GATT not onlyin scope, but in institutional functioning. TheWTO has two significant functions that theGATT did not. First, the WTO has a Trade PolicyReview Mechanism. This process periodicallyaccesses a country’s trade policies and notesany changes. It is a non-judgmental, non-confrontational process.

More controversial is the Dispute SettlementBody and its dispute settlement panels. Thesepanels, composed of economists, hand downbinding judgments in trade disputes.

The WTO has 153 members, representingmore than 97% of total world trade and 30observers, most seeking membership. The WTOis governed by a ministerial conference, meetingevery two years; a general council, whichimplements the conference’s policy decisionsand is responsible for day-to-day administration;and a director-general, who is appointed bythe ministerial conference. The WTO’sheadquarters is at the Centre William Rappard,Geneva, Switzerland.

Main Provisions of WTO

General Agreement on Trade in Services(GATS)

The GATS applies in principle to all servicesectors except “services supplied in the exerciseof governmental authority”. These are servicesthat are supplied neither on a commercial basisnor in competition with other suppliers’ vizsocial security schemes and central banking.

Modes of supply

The GATS sets out four modes of supplyingservices:

Mode 1: Cross-border trade

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Mode 3: Commercial presence

Mode 4: Presence of natural persons

Mode 1

Cross-border trade corresponds with thenormal form of trade in goods and maintains aclear geographical separation between seller andbuyer. In this case services flow from theterritory of one member into the territory ofanother member crossing national frontiers.(e.g., banking or architectural servicestransmitted via telecommunications or mail).

Mode 2

Consumption abroad refers to situationswhere a service consumer moves into anothermember’s territory to obtain a service (e.g.,consumer travelling for tourism, medicaltreatment, to attend educational establishment).

Mode 3

Commercial presence is the supply of aservice through the commercial presence of theforeign supplier in the territory of another WTOmember. In this case a service supplier of onemember establishes a territorial presence,including through ownership or lease ofpremises, in another member’s territory toprovide a service. (e.g., the es tablishment ofbranch offices or agencies to deliver such servicesas banking, legal advice or communications).

Mode 4

Presence of natural persons involves theadmission of foreign nationals to anothercountry to provide services there. An Annex tothe GATS makes it clear, however, that theagreement has nothing to do with individualslooking for employment in another country, orwith citizenship, or residence requirements. Themembers still have a right to regulate the entryand stay of the persons concerned, for instanceby requiring visas.

General Principles

These are basic rules that apply to allmembers and to all services.

MFN Treatment

Under Article II of the GATS, “Each Membershall accord immediately and unconditionallyto services and service suppliers of any otherMember treatment no less favourable than itaccords to like services and service suppliers ofany other country”. However, a member ispermitted to maintain a measure inconsistentwith the general MFN requirement if it hasestablished an exception.

However, all exemptions are subject toreview and they should in principle, not lastlonger than 10 years.

Transparency

The GATS requires each member to publishpromptly “all relevant measures of generalapplication” that affect operation of theagreement. Members must also notify theCouncil for Trade in Services of new or changedlaws, regulations or administrative guidelinesthat affect trade in services covered by theirspecific commitments under the agreement.Each member is required to establish an enquirypoint, to respond to requests from othermembers for information.

Specific Obligations

Obligations, which apply on the basis ofcommitments, laid down in individual countryschedules concerning market access andnational treatment in specifically designatedsectors. These requirements apply only toscheduled sectors.

Market Access

Market access is a negotiated commitmentin specified sectors. The GATS also sets outdifferent forms of measure affecting free marketaccess that should not be applied to the foreignservice or its supplier unless their use is clearlyprovided for in the schedule. They are:

• Limitations on the number of service suppliers

• Limitations on the total value of servicestransactions or assets


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• Limitations on the total number of serviceoperations or the total quantity of service output

• Limitations on the number of persons thatmay be employed in a particular sector orby a particular supplier

• Measures that restrict or require supply ofthe service through specific types of legalentity or joint venture

• Percentage limitations on the participationof foreign capital, or limitations on the totalvalue of foreign investment

National Treatment

A commitment to national treatment meansthat in the sectors covered by its schedule,subjected to any conditions and qualificationsset out in the schedule, each member shall givetreatment to foreign services and servicesuppliers treatment, in measures affectingsupply of services, no less favourable than itgives to its own services and suppliers. Again,the extension of national treatment in anyparticular sector may be made subject toconditions and qualifications. Members are freeto tailor the sector coverage and substantivecontent of such commitments as they see fit.The commitments thus tend to reflect nationalpolicy objectives and constraints, overall and inindividual sectors. While some Members havescheduled less than a handful of services, othershave assumed market access and nationaltreatment disciplines in over 120 out of a totalof 160-odd services.

Exemptions

Members in specified circumstances areallowed to introduce or maintain measures incontravention of their obligations under theAgreement, including the MFN requirement orspecific commitments. These circumstance covermeasures necessary to protect public morals ormaintain public order, protect human, animalor plant life or health or secure compliance withlaws or regulations not inconsistent with the–Agreement including, among others, measures

necessary to prevent deceptive or fraudulentpractices.

Also, in the event of serious balance-of-payments difficulties, members are allowed totemporarily restrict trade, on a non-discriminatory basis, despite the existence ofspecific commitments.

Indian Concerns

Services exports account for 40% of India’stotal exports of goods and services, and stoodat $86 billion in 2007–08. The contribution ofServices to India’s GDP is more than 55%. Thesector (domestic and exports) providesemployment to around 142 million people,comprising 28% of the work force of thecountry. India’s exports are mainly in the ITand IT enabled sectors, Travel and Transport,and Financial sectors.

The main destinations are the US (33%),the EU (15%) and other developed countries.India has an obvious interest in the liberalisationof services trade and wants commerciallymeaningful access to be provided by thedeveloped countries to fulfil the DevelopmentAgenda of this Round. Since the UruguayRound, India has autonomously liberalised itsServices trade regime across the board, withsignificant market access provided in core areasof interest to the India’s interest in services liesin the large pool of trained, qualifiedexperienced manpower providing services bytemporarily moving to provide services and thenreturning to India (Mode 4). Trade in Mode 4accounts for only a minuscule 1% of globaltrade at the moment. India has asked for acommitment from the developed countries inMode 4, inter alia in I.T and I.T Enabled Services,Engineering Services, Health Services, EducationServices, etc. The other manner in which Indiacan deliver services is by way of remote supplyof services with improved connectivity and vastpool of professionals in various services sectors(Mode 1). It includes outsourcing, BPO, etc.Global trade in Mode 1 accounts for only 18%of total trade. In Mode 1, India wants developed


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countries to take binding commitments invarious services sectors–Health Services, R&DServices, Engineering & Integrated EngineeringServices, Construction and Related Services,Computer Related Services, ProfessionalServices, Other Business Services like creditreporting services, collection agency services,telephone–based support services, dataprocessing services, etc. The major concern forIndia in the area of services is that the marketsfor services in the larger economies are notsufficiently open, particularly in respect oflabour and labour–related services. Furthermore,in order to realise effective access in the largermarkets, there is a need to ensure thatpredictable and transparent disciplines are putin place for Domestic Regulations so that theyare not abused to deny access or to createbarriers.

Trade–Related Investment Measures (TRIMs)

In the late 1980s, there was a significantincrease in foreign direct investmentthroughout the world. However, some of thecountries receiving foreign investment,imposed numerous restrictions on thatinvestment designed to protect and fosterdomestic industries, and to prevent the outflowof foreign exchange reserves. Examples of theserestrictions include local content requirements(which require that locally-produced goods bepurchased or used), manufacturingrequirements (which require the domesticmanufacturing of certain components), tradebalancing requirements, domestic salesrequirements, technology transfer requirements,export performance requirements (whichrequire the export of a specified percentage ofproduction volume), local equity restrictions,foreign exchange restrictions, remittancerestrictions, licensing requirements, andemployment restrictions. These measures canalso be used in connection with fiscal incentivesas opposed to requirement. Some of theseinvestment measures distort trade in violationof GATT Article III and XI, and are thereforeprohibited. Until the completion of theUruguay Round negotiations, which produced

a well-rounded Agreement on Trade-RelatedInvestment Measures (hereinafter the “TRIMsAgreement”), the few international agreementsproviding disciplines for measures restrictingforeign investment provided only limitedguidance in terms of content and countrycoverage. The OECD Code on Liberalization ofCapital Movements, for example, requiresmembers to liberalize restrictions on directinvestment in a broad range of areas. TheOECD Code’s efficacy, however, is limited bythe numerous reservations made by each of themembers. In addition, there are otherinternational treaties, bilateral and multilateral,under which signatories extend most-favoured-nation treatment to direct investment. Only afew such treaties, however, provide nationaltreatment for direct investment. Moreover,although the APEC Investment Principlesadopted in November 1994 provide rules forinvestment as a whole, including non-discrimination and national treatment, they haveno binding force.

Legal Framework

GATT 1947 prohibited investment measuresthat violated the principles of national treatmentand the general elimination of quantitativerestrictions, but the extent of the prohibitionswas never clear. The TRIMs Agreement,however, contains statements prohibiting anyTRIMs that are inconsistent with the provisionsof Articles III or XI of GATT 1994. In addition,it provides an illustrative list that explicitlyprohibits local content requirements, tradebalancing requirements, foreign exchangerestrictions and export restrictions (domesticsales requirements) that would violate ArticleIII:4 or XI:1 of GATT 1994. TRIMs prohibitedby the Agreement include those that aremandatory or enforceable under domestic lawor administrative rulings, or those with whichcompliance is necessary to obtain an advantage(such as subsidies or tax breaks). The followingtable contains a list of measures specificallyprohibited by the TRIMs Agreement. Note thatthis table is not exhaustive, but simply illustratesTRIMs that are prohibited by the TRIMs


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Agreement. The table, therefore, calls particularattention to several common types of TRIMs.We would add that this table identifiesmeasures that were also inconsistent with Article

III:4 and XI:1 of GATT 1947. Indeed, the TRIMsAgreement is not intended to impose newobligations, but to clarify the pre–existing GATT1947 obligations. Under the WTO TRIMs

Examples of TRIMs Explicitly Prohibited by the TRIMs Agreement

Local Content Trade Balancing Foreign Exchange Export RestrictionsRequirement Requirements Restrictions (Domestic Sales

Requirements)

Measures requiring 1. Measures requiring Measures restricting the Measures restricting thethe purchase or use that an enterprise’s importation by an exportation or sale forby an enterprise of purchases or use of enterprise of products export by an enterprisedomestic products, imported products be (parts and other goods) of products, whetherwhether specified limited to an amount used in or related to specified in terms ofin terms of particular related to the volume its local Production by particular products, inproducts, in terms of or value of local exports. restricting its access to terms of volume or valuevolume or value of products that it foreign exchange to an of products, or in termsproducts, or in terms (Violation of GATT amount related to the of a proportion of volumeof a proportion of Article III:4) 2. Measures foreign exchange inflows or value of its localvolume or value of restricting the importation attributable to the enter- production. (Violationits local production. by an enterprise of prise.(Violation of GATT of GATT Article XI:1)(Violation of GATT productsused in or Article XI:1)Article III:4) related to its local

production, generallyor to an amount relatedto the volume or valueof local production thatit exports. (Violation ofGATT Article XI:1)

Exceptional Provisions of the TRIMs Agreement

Transitional period Exceptions for developing countries Equitable provisions

Measures specifically Developing countries are permitted To avoid damaging theprohibited by the TRIMs to retain TRIMs that constitute a competitiveness to companiesAgreement need not be violation of GATT Article III or XI, already subject to TRIMs,eliminated immediately, provided the measures meet the governments are allowedalthough such measures conditions of GATT Ariticle XVIII to apply the same TRIMsmust be notified to the which allows specified derogation to new foreign directWTO within 90 days after from the GATT provisions, by investment during thethe entry into force of the virtue of the economic development transitional period described.TRIMs Agreement. Developed needs of developing countriescountries will have a periodof two years in which toabolish such measures; inprinciple, developingcountries will have five yearsand least-developed countrieswill have seven years.


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GATT and WTO Trade Rounds

Name Start Duration Countries Subjects Covered AchievementsGeneva April 1947 7 months 23 Tariffs Signing of GATT,

45,000 tariffconcessions affecting$10 billion of trade

Annecy April 1949 5 months 13 Tariffs Countries exchangedsome 5,000 tariffconcessions

Torquay September 8 months 38 Tariffs Countries exchanged1950 some 8,700 tariff

concessions, cuttingthe 1948 tariff levelsby 25%

Geneva II January 5 months 26 Tariffs, $2.5 billion in tariff1956 admission reductions

of Japan

Dillon September 11 months 26 Tariffs Tariff concessions1960 worth $4.9 billion of

world trade

Kennedy May 1964 37 months 62 Tariffs, Tariff concessionsAnti-dumping worth $40 billion of

world trade

Tokyo September 74 months 102 Tariffs, non-tariff Tariff reductions1973 measures, worth more than

“framework” $300 billion dollarsagreements achieved

Uruguay September 87 months 123 Tariffs, non-tariff, The round led to the1986 measures, rules creation of WTO,

services, intellectual and extended theproperty, dispute range of tradesettlement, textiles, negotiations, leadingagriculture, creation to major reductionsof WTO, etc in tariffs (about

40%) and agriculturalsubsidies, an agreementto allow full access fortextiles and clothingfrom developingcountries, and anextension of intellectualproperty rights.

Doha November ? 141 Tariffs, non-tariff The round is not yet2001 measures, agriculture, concluded

labor standards,environment,competition, invest-ment, transparency,patents, etc


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Agreement, countries are required to rectify anymeasures inconsistent with the Agreement,within a set period of time, with a fewexceptions the second table.

Agreement on Trade Related Aspects ofIntellectual Property Rights (TRIPS)

TRIPS contains requirements that nations’laws must meet for copyright rights, includingthe rights of performers, producers of soundrecordings and broadcasting organizations;geographical indications, including appellationsof origin; industrial designs; integrated circuitlayout-designs; patents; monopolies for thedevelopers of new plant varieties; trademarks;trade dress; and undisclosed or confidentialinformation. TRIPS also specify enforcementprocedures, remedies, and dispute resolutionprocedures. Protection and enforcement of allintellectual property rights shall meet theobjectives to contribute to the promotion oftechnological innovation and to the transfer anddissemination of technology, to the mutualadvantage of producers and users oftechnological knowledge and in a mannerconducive to social and economic welfare, andto a balance of rights and obligations.

The TRIPS agreement introduced intellectualproperty law into the international tradingsystem for the first time and remains the mostcomprehensive international agreement onintellectual property to date. In 2001, developingcountries, concerned that developed countrieswere insisting on an overly narrow reading ofTRIPS, initiated a round of talks that resulted inthe Doha Declaration. The Doha declaration isa WTO statement that clarifies the scope ofTRIPS, stating for example that TRIPS can andshould be interpreted in light of the goal “topromote access to medicines for all.”

Impact of WTO on Indian Agriculture

For the last two decades, the concept ofWTO is highlighted in every newspaper,electronic media, agriculture and commerceministries, states and central governmentforums, farmer’s union, academicians, policy

makers, researchers, etc.

Especially in the Doha Development Roundof trade talks, agriculture has emerged as oneof the most important issues for negotiations.Developing countries are particularly concernedabout the widespread use of domestic farmsubsidies by developed countries. Estimatessuggest that domestic farm support indeveloped countries amounts to about 300billion US dollars. Such huge subsidies not onlycreate distortion in the domestic markets of thesecountries, they also distort trade by artificiallyinfluencing commodity prices. One of thepriorities of the current round of WTOnegotiations is to bring substantial reduction intrade distorting domestic support.

Background

The Agreement on Agriculture forms a partof the Final Act of the Uruguay Round ofMultilateral Trade Negotiations, which wassigned by the member countries in April 1994at Marrakesh, Morocco and came into force on1st January, 1995. The Uruguay Round markeda significant turning point in world trade inagriculture. For the first time, agriculturefeatured in a major way in the GATT round ofmultilateral trade negotiations. Although theoriginal GATT – the predecessor of the WorldTrade Organisation (WTO) – applied to tradein agriculture, various exceptions to thedisciplines on the use of non–tariff measuresand subsidy meant that it did not do soeffectively. The Uruguay Round agreementsought to bring order and fair competition tothis highly distorted sector of world trade byestablishment of a fair and market orientedagricultural trading sector. The root cause ofdistortion of international trade in agriculturehas been the massive domestic subsidies givenby the industrialised countries to theiragricultural sector over many years. This in turnled to excessive production and it’s dumping ininternational markets as well as importrestrictions to keep out foreign agriculturalproducts from their domestic markets. Hence,the starting point for the establishment of a fair


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agricultural trade regime has to be the reductionof domestic production subsidies given byindustrialised countries, reduction in the volumeof subsidized exports and minimum marketaccess opportunities for agricultural producersworld-wide.

The obligations and disciplines incorporatedin the Agreement on Agriculture, therefore,relate to (a) market access; (b) domestic subsidyor domestic support; and (c) export subsidy.

Salient Features

The Agreement on Agriculture containsprovisions in the following three broad areas ofagriculture and trade policy:

(a) Market Access: On market access, theAgreement has two basic elements:

(i) Tariffication of all non–tariff barriers. Thatis to say, non-tariff barriers such asquantitative restrictions and export andimport licensing, etc. are to be replaced bytariffs to provide the same level ofprotection. Tariffs, resulting from this“tariffication” process together with othertariffs on agricultural products, are to bereduced by a simple average of 36% over 6years in the case of developed countries and24% over 10 years in the case of developingcountries. With India being under balanceof payments cover (which is a GATT-consistent measure), we had not undertakenany commitments with regard to marketaccess and this has been clearly stated inour schedule filed under GATT. The onlycommitment India has undertaken is to bindits tariffs on primary agricultural productsat 100%; processed foods at 150%; andedible oils at 300%.

(ii) The second element relates to setting up ofa minimum level for imports of agriculturalproducts by member countries as a share ofdomestic consumption. Countries arerequired to maintain current levels (1986–88) of access for each individual product.Where the current level of import is

negligible, the minimum access should notbe less than 3% of the domesticconsumption, during the base period andtariff quotas are to be established whenimports constitute less than 3% of domesticconsumption. This minimum level is to riseto 5% by the year 2000 in the case ofdeveloped countries and by 2004 in the caseof developing countries. However, specialSafeguards Provisions allow for theapplication of additional duties whenshipments are made at prices below certainreference levels or when there is a suddenimport surge. The market access provision,however, does not apply when thecommodity in question is a ‘traditionalstaple’ of a developing country.

(b) Domestic support: Provisions of theAgreement regarding domestic support havetwo main objectives– first to identifyacceptable measures that support farmersand second, to deny unacceptable, tradedistorting support to the farmers. Theseprovisions are aimed largely at thedeveloped countries where the levels ofdomestic agricultural support have risen toextremely high levels in recent decades.

All domestic support is quantified throughthe mechanism of total Aggregate Measurementof Support (AMS). AMS is a means ofquantifying the aggregate value of domesticsupport or subsidy given to each category ofagricultural product. Each WTO membercountry has made calculations to determine itsAMS wherever applicable. Commitment maderequires a 20% reduction in total AMS fordeveloped countries over 6 years. For developingcountries, this percentage is 13% and noreduction is required for the least developedcountries. The base period external referenceprice on which the reductions were calculatedwas 1986-88.

AMS consists of two parts—product-specificsubsidies and non-product specific subsidies.Product-specific subsidy refers to the total levelof support provided for each individual


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agricultural commodity, essentially signified byprocurement price in India. Non-productspecific subsidy, on the other hand, refers tothe total level of support for the agriculturalsector as a whole, i.e., subsidies on inputs suchas fertilisers, electricity, irrigation, seeds,credit, etc.

There are three categories of supportmeasures that are not subject to reduction underthe Agreement, and support within specifiedde minimis level is allowed. These threecategories of exempt support measures are:

1. Measures which have a minimum impacton trade and which meet the basic andpolicy specific criteria set out in theAgreement (the so-called Green Boxmeasures in the terminology of WTO). Thesemeasures include Government assistance ongeneral services like (i) research, pest anddisease control, training, extension, andadvisory services; (ii) public stock holdingfor food security purposes; (iii) domesticfood aid; and (iv) direct payment toproducers like governmental financialparticipation in income insurance and safetynets, relief from natural disasters, andpayments under environmental assistanceprogrammes.

2. Developing country measures otherwisesubject to reduction which meet the criteriaset out in paragraph 2 of Article 6 of theAgreement (the so-called ‘Special andDifferential Treatment’ or the S&D Box).Examples of these are (i) investmentsubsidies which are generally available toagriculture in developing countries; and (ii)agricultural input services generallyavailable to low–income and resource–poorproducers in developing countries.

3. Direct payments under production limitingprogramme which conform to therequirement set out in paragraph 5 ofArticle 6 of the Agreement (the so-calledBlue Box measures). These are relevant fromthe developed countries point of view only.

Under the de minimis provision of Article6.4 of the Agreement, there is no requirementto reduce support in this residual categorywhose value in any year, in the case of productspecific support does not exceed 10% fordeveloping countries of the total value ofproduction of the basic agricultural product inquestion or of the value of total agriculturalproduction in the case of non-product specificsupport. Where the support is below 10 percent, as in the case of India, product–specificand non-specific de minimis ceiling may beraised to those levels.

(c) Export subsidies: The Agreement onAgriculture lists several types of subsidiesto which reduction commitments apply.However, such subsidies are virtually non-existent in India as exporters of agriculturalcommodities do not get direct subsidy. Evenexemption of export profits from incometax under Section 80–tHHC of the IncomeTax Act is not among the listed subsidies. Itis also worth noting that developingcountries are free to provide three of thelisted subsidies, namely, reduction of exportmarketing costs, internal and internationaltransport and freight charges. In general, itmay be noted that the virtual explosion ofexport subsidies in the industrialisedcountries in the years leading to theUruguay Round was one of the key issuesaddressed in the agricultural negotiations.While under GATT 1947, prohibition ofexport subsidies for industrial products hasbeen effective since 1956, in the case ofagricultural primary products, suchsubsidies were only subject to limiteddisciplines which, moreover, did not proveto be operational or effective. As a result, inthe 1970s and 1980s, success in internationalmarkets for agricultural products wasincreasingly determined by the financialpower and largesse of national treasuriesrather than the efficiency and marketingskills of agricultural producers andexporters. Export subsidies also became amajor factor in depressing or destabilising


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world market prices for many agriculturalcommodities. The Uruguay Round markeda radical departure from the earlier GATTdisciplines in the areas of agricultural exportsubsidies. Members are required to reducethe value of direct export subsidies to a levelof 36% below the 1986-90 base period levelover a six year implementation period. Thequantity of subsidized export is to bereduced by 21% over the same period. Inthe case of developing countries, thereductions are two-thirds those of thedeveloped countries over a ten-year periodand there are no reductions for leastdeveloped countries. Under the Agreement,export subsidies are defined as “subsidiescontingent on export performance” and thelist covers export subsidy practices such asdirect export subsidies contingent on exportperformance; sales of noncommercial stocksof agricultural products for export at priceslower than comparable prices for suchgoods in the domestic markets; producer-financed subsidies such as governmentprogrammes which require a levy onproduction which is then used to subsidisethe export of the product; cost-reductionmeasures such as subsidies to reducemarketing costs for exports includinghandling costs and costs of internationalfreight; internal transport subsidies applyingonly to exports; subsidies on incorporatedproducts i.e., subsidies on agriculturalproducts such as wheat contingent on theirincorporation in export products made ofwheat, etc. All such export subsidies aresubject to reduction commitments in termsof both the volume of subsidised export andbudgetary outlays for such subsidies. Asindicated earlier, such measures are virtuallynon-existent in India and, hence, the issueof reduction of export subsidy onagricultural products is not of particularrelevance for India.

Product Coverage

The Agreement defines agricultural products

by reference to the harmonised system ofproduct classification. The definition covers notonly basic agricultural products such as wheat,milk and live animals, but the products derivedfrom them such as bread, butter, other dairyproducts and meat, as well as all processedagricultural products such as chocolates andsausages. The coverage includes wines, spiritsand tobacco products, fibres such as cotton,wool and silk, and raw animal skins destinedfor leather production. Fish and fish productsare not included nor are forestry products.

Implementation Period

The implementation period for thecountry-specific commitments is the six-yearperiod commencing in 1995. However,developing countries have the flexibility toimplement their reduction and other specificcommitments over a period of up to 10 years.Members had the choice of implementing theirconcessions and commitments on the basis ofcalendar, marketing (crop) or fiscal years. AWTO Member’s implementation year for tariffreduction may thus differ from the one appliedto export subsidy reductions. For the purposeof the ‘peace clause’ the implementationperiod is the nine-year period commencing in1995.

Implications of the Agreement

Implications of the Agreement would differfrom country to country and would dependlargely on the overall agricultural scenario inthe country. Indian agriculture is characterisedby a preponderant majority of small andmarginal farmers holding less than two hectaresof land, less than 35.7% of the land, is underany assured irrigation system and for the largemajority of farmers, the gains from theapplication of the science & technology inagriculture are yet to be realised. Farmers,therefore, require support in terms ofdevelopment of infrastructure as well asextension of improved technologies andprovisions of requisite inputs at reasonable cost.India’s share of world’s agricultural trade is of


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the order of 1%. There is no doubt that duringthe last 30 years, Indian agriculture has grownat a reasonable pace, but with stagnant anddeclining net cropped area it is indeed going tobe a formidable task to maintain the growth inagricultural production. The implications of theAgreement would thus have to be examined inthe light of the food demand and supplysituation. The size of the country, the level ofoverall development, balance of paymentsposition, realistic future outlook for agriculturaldevelopment, structure of land holdings, etc.are the other relevant factors that would havea bearing on India’s trade policy in agriculture.

Implications of the Agreement on Agriculturefor India should thus be gauged from the impactit will have on the following:

i) Whether the Agreement has opened upmarkets and facilitated exports of ourproducts;

ii) Whether we would be able to continue withour domestic policy aimed at improvinginfrastructure and provision of inputs atsubsidised prices for achieving increasedagricultural production.

Implications–Short Term

As far as opening of markets and impacton trade in agriculture is concerned, it may benoted that the share of developing countries inworld exports of food remained at 44% and ofagricultural raw materials increasedinsignificantly from 32% in 1994 to 34% in 1996that is the post-Agreement period. The averagegrowth of developed countries imports ofagricultural products increased by just 1%during 1994-96. Nearer home, agriculturalexports of ten Asian developing countriesincreased from US $ 49252 million in 1994 toUS $ 55902 million in 1996. India’s share intotal agricultural exports from developing Asiais 8%, behind China’s 19%, Thailand’s 17%,Malaysia’s 14% and Indonesia’s 10%. India’sexports of agricultural products have increasedfrom US $ 4151 million in 1993-94 to US $

7054 million in 1997-98. No tangible openingup of the markets has thus been noticed in thepost–Agreement period so far. However, it maybe premature on this basis to assess the long-term impact of the Agreement on opening upof markets.

Regarding freedom to pursue our domesticpolicies, it is quite evident that in the short termIndia will not be affected by the WTOAgreement on Agriculture. The safeguardsprovided for developing countries give enoughmanoeuvres to insulate ourselves from anymajor impact of trade liberalisation inagricultural commodities.

India has been maintaining quantitativerestrictions (QRs) on import of 825 agriculturalproducts as on 1.4.97. QRs are proposed to beeliminated within the overall time frame of sixyears in three phases – 1.4.97 to 31.3.2003. (Allour trading partners barring the US have agreedto this phase-out plan and dispute with the USis pending with Dispute Settlement Body ofWTO for adjudication). Within the provisionsof the GATT Agreement India has bound tariffsat high levels of 100%, 150% and 300% forprimary products, processed products andedible oils respectively.

Therefore, the QRs can be replaced withhigh import tariff in case we want to restrictimports of these commodities.

In India, for the present, the minimumsupport price provided to commodities is lessthan the fixed external reference pricedetermined under the Agreement. Therefore,the AMS is negative. Theoretically, therefore,we could increase the product-specific supportup to 10%, the only restraint being the fiscalsustainability in the country’s context.

Implications–Long Term

As mentioned earlier, for a large majorityof farmers in different parts of the country, thegains from the application of science andtechnology in agriculture are yet to be realisedwhich would require infrastructural support,


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improved technologies and provision of inputsat reasonable cost. The Agreement on Agriculturethus recognised this and developing countrieshave been given the freedom to implement suchpolicies under Article 6 relating to differentialtreatment, but any attempt in future to diluteprovisions relating to differential treatment fordeveloping countries could affect us adversely.

Regarding the impact of liberalisation oftrade in agriculture in the long term, Indianagriculture enjoys the advantage of cheaplabour. Therefore, despite the lowerproductivity, a comparison with world pricesof agricultural commodities would reveal thatdomestic prices in India are considerably lesswith the exceptions of a few commodities(notably oilseeds). Hence, imports to Indiawould not be attractive in the case of rice, tea,sunflower oil and cotton. On the whole, largescale import of agricultural commodities as aresult of trade liberalisation is ruled out. Eventhe exports of those foodgrains which arecheaper in the domestic market, but are sensitivefrom the point of view of consumption by theeconomically weaker sections are not likely torise to unacceptable levels because of highinland transportation cost and inadequateexport infrastructure in India. Through propertariffication, however, we will have to strike abalance between the competing interest of 10%farmers who generate marketable surpluses andconsumers belonging to the economically poorsections of the society.

It is also argued that because of increasingprice of domestic agricultural commoditiesfollowing improved export prospects, farmerswould get benefits which in turn wouldencourage investment in the resource scarceagricultural sector. With the decrease inproduction subsidies as well as export subsidies,the international prices of agriculturalcommodities will rise and this will help inmaking our exports more competitive in worldmarket. Given our agro diversity, we have thepotential to increase our agro exports in asubstantial way. In the words of Shri A.V.

Ganesan, “There will be growing pressure fromthe farmers to realise higher prices for theirproduce and to narrow the gap between thedomestic and external prices. Our industrialistsare pressing for a ‘level playing field’ vis-a-visforeign enterprises; our farmers will press for a‘level playing field’ for the prices of theirproducts vis-a-vis international prices. Both thepattern of production and price expectationswill increasingly be influenced by the demandsand trends in world markets. On the one hand,the price incentive could be the best incentiveand could give a strong boost to investment inagriculture as well as adoption of moderntechnologies and thereby to the raising ofagricultural production and productivity. Onthe other hand, the rise in domestic prices wouldput pressure on the public distribution systemand accentuate the problem of food subsidy.Furthermore, freedom to export agriculturalproducts without restrictions will also needshedding the long–nurtured inhibition againsttheir imports. The nature and character of Stateintervention and State support will have toundergo qualitative changes in order not onlyto realise the opportunities for exports, but alsoto cope with the implications of our agriculturecoming into increasing alignment with theinternational market place”.

Doha Round

Non Tariff Measures (NTMs) are allmeasures on international trade that are not inthe form of a tariff or a tax. These measuresinclude trade related procedures such asdocumentation, certification and inspections;technical regulations; standards; import relatedmeasures such as restrictions, prohibitions,seasonal duties, tariff rate quotas; foreignexchange controls including artificial exchangerates; public procurement practices, etc. CertainNTMs such as imposition of anti-dumping andsafeguard duties have the effect of tariffs. Onthe other hand, some measures are intended toprotect human, animal and plant, life andhealth, and are known as sanitary andphytosanitary (SPS) measures.


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Non Tariff Barriers (NTBs) are a sub-set ofNTMs which violate the obligations under theAgreements of the WTO. Therefore, NTBs areunfair measures which serve to discriminateagainst imports.

The NAMA negotiations focussed on thelisting of NTBs by countries. Subsequently, theNegotiating Group went into text basednegotiations on various proposals.

Last Status

In the draft NAMA modalities of 6 December,2008, there were 13 NTB textual proposals listedin Annex 5. These could be categorised as:

Horizontal proposals (those related acrosssectors)

• Ministerial Decision on Procedures for theFacilitation of Solutions to Non–Tariff Barriers(known as the Horizontal Mechanism)

• Decision on the elimination of Non-TariffBarriers imposed as unilateral trade measures

• Ministerial Decision on Trade inRemanufactured Goods

Vertical proposals (related to specific sectors)

(A) Export related proposals

• Revised submission on Export Taxes

• Protocol on Transparency in ExportLicensing to the General Agreement onTariffs and Trade 1994

(B) TBT (Technical Barriers to Trade) relatedproposals

• Understanding on the Interpretation of theAgreement on Technical Barriers to Tradeas Applied to Trade in Fireworks

• Understanding on the Interpretation of theAgreement on Technical Barriers to Tradeas Applied to Trade in Lighter Products

• Understanding on the Interpretation of theAgreement on Technical Barriers to Tradeas Applied to Trade in Electronics

• Decision on non–tariff barriers affectingforestry products used in buildingconstruction

• Agreement on Non–Tariff BarriersPertaining to the Electrical Safety andElectromagnetic Compatibility (EMC) ofElectronic Goods

• Negotiating Proposal on Non–Tariff Barriersin the Chemical Products and SubstancesSector

• Understanding on the Interpretation of theAgreement on Technical Barriers to Tradewith respect to the Labelling of Textiles,Clothing, Footwear, and Travel Goods

• Agreement on NTBs pertaining tostandards, technical regulations andconformity assessment procedures forautomotive products.

While listing these 13 proposals, the NAMAtext states that 7 of the proposals meritparticular attention which includes theproposals on the horizontal mechanism;remanufactured goods; TBT proposals onelectronics (2 in number); vertical proposals onautomotives; labelling in textiles, clothing,footwear and travel goods; and chemicalproducts. Subsequently, the EC came out withits proposal on automobiles thereby putting 14NTB proposals on the table.

While most proposals have little supportand are unlikely to achieve consensus, the threekey proposals under discussion are:

• “Ministerial Decision on Procedures for theFacilitation of Solutions to NTBs” known asthe Horizontal Mechanism

This Horizontal Mechanism was originallymooted by the NAMA 11(of which India is aMember) and European Communities (EC)with the support of more than 100 Membersnamely the African Group, Canada, LDCs, NewZealand, Norway, Pakistan and Switzerland.The Mechanism is an informal dispute resolution


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mechanism that explores trade solutions withoutaffecting the rights and obligations under theWTO Agreements. It operates through theexisting WTO Committee’s, takes the help ofan expert in the respective field and enablesfaster and more economical resolution of NTBsespecially those on products of export interestfor developing countries.

The Procedures have the following salientfeatures:

• The procedures are intended to explore tradesolutions to the NTB without getting intothe rights and obligations under the WTOAgreement.

• The first stage is of information exchangebetween the requesting and respondingMember which seeks to ensuretransparency. This is non confidential andis circulated to the WTO Committee.

• The Chairman or Vice Chairman getassociated at this stage since they call ameeting for addressing any outstandingissues and explore possible steps forward.

• Third parties can join in based on consentof the two parties and on terms andconditions decided upon by them.

• The second stage is purely mandatory atthe consent of both parties. It involves theappointment of a facilitator which is bymutual consent or else selected by theChairman of the Council of Trade in Goods(CTG) after consulting the parties.

• This stage has flexible procedures in termsof the venue, means of communication,exploration of possible solutions, etc. Theemphasis is on reaching a mutually agreedsolution. The entire proceedings and contentof the discussions in this stage areconfidential.

• If a mutually agreed solution is reached,the facilitator will submit a draft report onthe NTB, procedures followed and the

solution arrived at. This has to be vetted bythe parties and then submitted to theCommittee.

• While the solution may be trade related, itshould not impinge on the rights andobligations of Members under the WTOAgreements.

• The procedures would be useful especiallyfor developing countries in the context ofthe economical and expeditious nature ofthe decision making. It would alsostrengthen the WTO Committees especiallyin the context of their decision making.

• Ministerial Decision on Trade inRemanufactured Goods

The salient features of the proposal drivenby the US are that it seeks to enhance marketaccess opportunities for remanufactured goods,it seeks a review of the non tariff measures onimportation of remanufactured goods so thatthey are in compliance with multilateralobligations and putting in place an institutionalframework for consultations as well asdiscussing progress in reduction or eliminationof non tariff barriers on remanufactured goods.

Some of the concerns on this proposal are:

• There is no conceptual clarity onremanufacturing and the suggesteddefinition in the textual NTB proposal doesnot capture the concept of remanufacturingacross various sectors.

• Re-manufactured imports would adverselyaffect the domestic manufacturing sectorespecially the unorganised sector and SMEs.

• It could serve as a conduit for dumping ofwaste (including e waste) into developingcountries due to stringent standardselsewhere.

• Without any extended producer liability(EPL) for re-manufactured products, therecould be grave environmental implications


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• Issues of customs valuation, misclassificationand intellectual property protection onimports of re-manufactured products wouldcrop up.

• Remanufacturing cannot generate the samelevel of employment or value addition asmanufacture of the new goods.

• In the absence of standards, technicalregulations and conformity assessmentprocedures (both domestic and global) forremanufactured goods, there is a possibilityof environmental norms being flouted.

• One needs to look at a Work Programmewherein all these issues are discussed andthereby generates greater clarity.

• TBT Related Proposals

9 out of the 14 NTB proposals are verticalin nature relating to specific NAMA sectors.They would also have a legal relationship withthe Agreement on Technical Barriers to Trade(TBT Agreement) and would affect some of theprovisions of the latter. It was in this contextthat India took a decision to seek a horizontalsolution to specific NTB in NAMA sectors whileretaining some elements of the vertical solutionswherever it was applicable. This was to ensurethat specific carve outs for sectors did notcreate a cobweb of provisions that couldotherwise be addressed through a horizontaltreatment. The EC later joined India and ajoint submission on a “Framework for IndustrySpecific proposals” was made in September,2009. Work is now going on to convert thisinto a negotiating text.

•••


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myINTERIM UNION BUDGET 2014-2015

In an election year, Finance Ministerpresented an Interim Budget short of rhetoricand stuck to highlighting the Government’sachievements of the last 10 years. Faced with amassive economic slowdown the FinanceMinister tinkered with excise duty to make cars,two-wheelers and mobiles cheaper, announcedthe implementation of the long standing OneRank, One Pension for defence forces andexpressed hope that the worst of the slowdownis over.

Key Features of Budget

1. The Current economic situation and thechallenges:

� The state of world economy has been themost decisive factor affecting the fortunesof every developing country.

� The world economy has been witnessing asliding trend in growth, from 3.9 percent in2011 to 3.1 per cent in 2012 and 3 per centin 2013.

� The economic situation of major tradingpartners of India, who are also the majorsource of our foreign capital inflows,continues to be under stress. United Stateshas just recovered from long recession, Eurozone, as a whole, is reporting a growth of0.2 per cent, and China’s growth has alsoslowed down.

� The economic challenges faced by ourcountry are common to all emergingeconomies. Despite these challanges, wehave successfully navigated through thisperiod of crisis.

� Apart from embarking on the path of fiscalconsolidation, the objectives of price stability,self sufficiency in food, reviving the growthcycle, enhancing investments, promotingmanufacturing, encouraging exports,quickening the phase of implementation ofprojects and reducing a stress on importantsectors were the goals set in 2012-13.

2. State of economy

(a) Deficit and Inflation

� The fiscal deficit for 2013-14 contained at4.6 per cent.

� The currect account deficit projected to beat USD 45 billion in 2013-14 down fromUSD 88 billion in 2012-13.

� Foreign exchange reserve to grow by USD15 billion in this Financial Year

� No more talk of down grade of IndianEconomy by Rating Agencies.

� Fiscal stability at the top of the Agenda.

� Government and RBI have acted in tandemto bring down inflation.

� WPI inflation down to 5.05 per cent andcore inflation down to 3.0 per cent inJanuary 2014.

� Food inflation down to 6.2 per cent from ahigh of 13.8 per cent.

(b) Agriculture

� Agricultural sector has performedremarkably well.

� Food grain production estimated for the

INTERIM UNION BUDGET

2014-2015CHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE


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current year is 263 million tonnes comparedto 255.36 million tonnes in 2012-13.

� Agriculture export likely to cross USD 45billion higher from USD 41 billion in 2012-13.

� Agricultural credit to exceed the target ofRs 7 lakh crore.

� Agricultural GDP growth for the currentyear estimated at 4.6 per cent compared to4.0 per cent in the last four years.

(c) Investment

� Savings rate at 30.1 per cent and investmentrate of 34.8 per cent in 2012-13.

� Government set up a Cabinet Committeeon investment and the Project Monitoring

� Group to boost investment. By end of January2014, Projects numbering 296 with anestimated project cost of Rs 660,000 crorecleared.

(d) Foreign Trade

� Despite a decline in growth of global trade,our export have recovered sharply.

� The estimated merchandise export isestimated to reach USD 326 billionindicating a growth rate of 6.3 per cent incomparison to the previous year.

(e) Manufacturing

� The sluggish import is a matter of concernfor manufacturing and domestic tradesector.

� Due to deceleration in investment, themanufacturing sector has witnessed asluggish growth.

� The National Manufacturing Policy has setthe goal of increasing the share ofmanufacturing in GDP to 25 per cent andto create 100 million jobs over a decade.

� 8 National Investment and ManufacturingZones (NIMZ) along Delhi MumbaiIndustrial Corridor (DMIC) have beenannounced. 9 Projects had been approvedby the DMIC trust.

� 3 more Industrial Corridors connectingChennai and Bengaluru, Bengaluru andMumbai & Amritsar and Kolkata are underdifferent stages of preparatory works.

� Additional capacities are being installed inmajor manufacturing industries.

� Notification of a public procurement policy,establishing technology and common facilitycentres, and launching the Khadi Mark aresteps taken to promote Micro Small andMedium Enterprises.

(f) Infrastructure

In 2012-13 and in nine months of thecurrent financial year, 29, 350 MW ofpower capacity, 3, 928 kms of NationalHighways, 39, 144 kms of Rural Roads,3,343 kms of New Railway track and 217.5million tonnes of capacity per annum inour ports have been created to give a bigboost to infrastructure industries.

� 19 Oil and Gas blocks were given out forexploration and 7 new airports are underconstruction.

� Infrastructure debt funds have beenpromoted to provide finances forinfrastructure Projects.

(g) Exchange Rates

� Rupee came under pressure followingindications by US Federal Reserve ofreduction in asset purchases in May 2013.

� Government, RBI and SEBI undertook anumber of measures to facilitate capitalinflows and stablize the foriegn exchangemarkets. As a result among emerging economycurrencies rupee was least affected whenactual reduction took place in December 2013.


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(h) GDP Growth

� The GDP slow-down which began in 2011-12 reaching 4.4 per cent in Q1 of 2013-14from 7.5 per cent in the correspondingperiod in 2011-12 has been controlled bynumerous measures taken by theGovernment. Growth in the third and fourthquarter of the current year is expected tobe 5.2 per cent and that for the whole yearhas been estimated at 4.9 per cent.

� The declining fiscal deficit, stable ExchangeRate and reducing Current Account Deficit,moderation in inflation, increasing exportsare reflection of a more stable economytoday

3. Report Card of 2013-14

� De-controlling sugar, gradual correction ofdiesel prices, rationalization of railway fares,were some of the courageous and long overdue decisions taken by the government.

� Applications were invited for issue of newbank licences.

� DISCOMS, mostly sick are being restructuredwith generous central assistance.

� 12.8 lakhs land titles covering 18.80 lakhhectare were distributed under theScheduled Tribes and Other traditionalForest Dwellers Act.

� The oppressive colonial law of 1894 wassubstituted with the Right to FairCompensation and Transparency in LandAcquisition Rehabilitation and ResettlementAct.

� National Food Security Act was passedassuring food to 67 per cent of thepopulation/households.

� The new companies Act replaced a law of1956 vintage.

� The PFRDA Act was passed to establish astatutory regulator for the New Pension Scheme.

4. Economic Initiative

� Centrally Sponsored Schemes wererestructured into 66 Programs for greaterSynergy.

� Funds under these programs will be releasedas Central assistance to State Plan, thusgiving greater authority and responsibility.As a result, Central assistance to plans ofStates & UTs will rise substantially from Rs136,254 crore in BE 2013-14 to Rs 338,562crore in 2014-15.

� Record Capital expenditure of Rs 257,641crores in 2013-14 by public sectorenterprises.

� About 50,000 MW of Thermal and HydelPower capacity is under construction afterreceiving all clearances and approvals.78,000 MW of power capacity have beenassured coal supply.

� Liberalised FDI policy in tele-communication, pharmaceuticals, civilaviation, power trading exchange, and multibrand retail to attract large investment.

� Approval to establish 2 semi conductorwafer fab units.

� Approval of IT modernization project ofDepartment of Post.

� Kudankulam Nuclear Power Plant Unit-Iachieved criticality and is generating 180million Units of power.

� Fast breeder Reactor at Kalpakkam and 7Nuclear Power Reactors under construction.

� National Solar Mission to add 4 Ultra MegaSolar Power Projects each with the capacityof over 500 MW in 2014-15.

� Ministry of MSME will create the ‘IndiaInclusive Innovation Fund’ to promote grassroot innovations with social returns tosupport enterprises in the MSME sector withan initial contribution of Rs 100 crore tothe corpus of the fund.


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5. Social Sector Initiative

� A Venture Capital Fund to provideconcessional finance to Scheduled Caste willbe set up by IFCI with an initial capital of200 crore which can be supplemented everyyear.

� The restructured ICDS, underimplementation in 400 districts, will berolled out in remaining districts from1.4.2014.

� A National Agro-Forestry Policy 2014 hasbeen approved.

� A mechanism for marketing minor Forestproduce has been introduced and anallocation of Rs 444.59 crore has been madeto continue the Scheme in 2014-15.

� A new Plan Scheme with an allocation ofRs 100 crore has been approved to promotecommunity radio station.

� New technologies such as JE vaccine, adiagnostic test for Thalassaemia andMagnivisualizer for detection of Cervicalcancer have been delivered to people.Additional Central Assistance to someStates

� A sum of Rs 1200 crore as additional centralassistance to North Eastern states, HimachalPradesh and Uttarakhand in this financialyear.

� Space India joined a handful of countrieswhen it launched the Mars Orbiter Mission.

� The Country has acquired capability inlaunch vehicle technology, cryogenics andnavigation ,meteorological andcommunication satellites.

� Several flight tests, navigational satellites andspace missions are planned for 2014-15.

� A Corpus has been created for ‘NirbhayaFund’ with a non lapsable grant of Rs 1000crore. 2 Proposals to ensure the dignity and

safety of women have been approved whichwill be funded from the Nirbhaya Fund . Asum of Rs 1000 crore has again beenprovided in FY 2014-15

� The National Skill Certification andmonetary reward schemes launched inAugust 2013 with an allocation of Rs 1000crore has been widely hailed as a success.A sum of Rs 1000 crore is proposed to betransferred to the NSD Trust to scale up itsprogramme rapidly.

� Government remains fully committed toAadhar under which 57 crore UniqueNumbers have been issued so far and toopening bank accounts for all Aadharholders to promote financial inclusion.

� Through the Direct Benefit Transfer (DBT)Scheme, a total of Rs 628 crore (54,20,114transactions) has been transferred directlyto the beneficiaries till 31st January 2014under 27 Schemes.

OVERVIEW OF THE INTERIM BUDGET

In order to sustain the pace of planexpenditure, it has been kept at the same levelin 2014-15 at which, it was budgeted in 2013-14. Ministries/Departments which run keyflagship programmes have been providedadequate funds in 2014-15 either equal to orhigher than in the BE 2013-14. These includeMinistries namely, Minority Affairs, TribalAffairs, Housing & Poverty Alleviation, SocialJustice & Empowerment, Panchayat Raj,Driniking Water and Sanitation, Women & ChildDevelopment, Health & Family Welfare, HumanResource Development and Rural Development.

(a) Railways

� Budgetary support to Railways has beenincreased from Rs 26,000 crore in BE 2013-14 to Rs 29,000 crore in 2014-15.

� It is proposed to indentify new instrumentsand new mechanisms to raise funds forRailway Projects.


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(b) SC sub-plan and Tribal sub-plan, gender bud-get and child budget

Rs 48,638 crore and Rs 30,726 crore areallocated to the SC Sub-Plan and Tribal Sub-Plan respectively.

Gender Budget and Child Budget has Rs97,533 and Rs 81,024 respectively.

(c) Non plan expenditure

� Non plan expenditure is estimated Rs12,07,892 crore.

� The expenditure on subsidies for food,fertilizer and fuel will be Rs 2,46,472 croreslightly higher than the revised estimates ofRs 2,35,453 crore in 2013-14.

� Rs 1,15,000 crore has been allocated forfood subsidies taking in to account,government’s firm and irrevocablecommitment to implement the NationalFood Security Act throughout the country.

(d) Defence

10 per cent hike in Defence allocation hasbeen given in comparison to BE 2013-14.

Government has accepted the principle ofone rank one pension for the Defence Forceswhich will be implemented prospectively fromthe FY 2014-15. A sum of Rs 500 crore isproposed to be transferred to the Defence PensionAccount in the current Financial Year itself.

(e) Central Armed Police Forces

A modernisation Plan at a cost of Rs 11,009crore has been approved the capacity of CentralArmed Police Forces and to provide them thestate-of-art, equipment and technology.

(f) Financial sector

� All the announcements concerning theFinancial sector made in the Budget Speechof February 2013 have been implemented.

� Rs 11,300 crore is proposed to be providedfor Capital infusion in Public Sector Banks.

� 5,207 new branches have been openedagainst the target of 8,023.

� Bhartia Mahila Bank has been established.

� Rs 6,000 crore and Rs 2,000 crore have beenprovided to Rural and Urban HousingFunds respectively.

� The target of Rs 700,000 crore ofAgricultural Credit is likely to be exceededby the Banks. The target for 2014-15 is ‘800,000 Crore.

� Rs 23,924 crore has been released underthe Interest Subvention Scheme on farmloans, with effective rate of interest on farmloans at 4 per cent including subvention of2 per cent and incentive of 3 per cent forprompt payment.

(g) Credit to Minority Communities

The number of bank accounts of minoritieshas increased to 43,52,000 at the end of March2013 from 14,15,000 ten years ago. The volumeof lending has soared to Rs 66,500 crore fromRs 4,000 crore in the same period. Loans tominorities stood at Rs 211,451 crore at the endof December 2013.

(h) Self-Help Groups (SHGs) Loans

Ten years ago, only 9,71,182 women Self-Help Groups (SHGs) had ben credit linked tobanks. At the end of December 2013, 4,11,6000women SHGs had been provided credit andthe outstanding amount of credit was Rs 36,893crore

I. Education Loans

A moratorium period is proposed for alleducation loans taken up to 31.3.2009 andoutstanding on 31.12.2013. Government willtake over the liability for outstanding interestas on 31.12.2013 but the borrower would haveto pay interest for the period after 1.1.2014. Anamount of Rs 2,600 crore has been providedthis year and it will benefit nearly 9 lakh studentborrowers.


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(k) Insurance

LIC and the four public sector generalinsurance companies have opened arround 3000offices in towns with a population of 10,000 ormore to serve peri-urban and rural areas.

l. Financial Markets

Steps envisaged to deepen the IndianFinancial Market :

� ADR/GDR Scheme revamp, anenlargement of the scope of depositoryreceipt

� Liberalization of rupee denominatedcorporate bond market.

� Currency Derivatives Market to be deepenedand strengthened to enable IndianCompanies to fully hedge against foreigncurrency risk

� To create one record for all financial assetsof every individual

� To enable smoother clearing and settlementfor international investors looking to investin Indian bonds.

(m) Commodity Derivatives Markets

Swift action taken to sequester NationalSpot Exchange Limited (NSEL) after thepayment crisis in the NSEL, this preventedspill over of the crisis to the other regulatedsegment of the financial markets. Proposalto amend the Forward Contracts(Regualtion) Act.

(n) Revenue proposals

� To give relief to automobile industry whichis registering unprecedented negativegrowth, it is proposed to reduce the exciseduty for the small cars, motor cycles, scootersand commercial vehicles by 4 percent. It willbe cut from 12 percent to 8 percent.

� The excise duty on SUVs is proposed to be reducedby 6 percent. From 30 percent to 24 percent.

� In case of large and mid-segment cars, it isproposed to reduced excise duty by 3percent i.e. 27/24% to 24/20%. All thesereduced rates will be applicable upto June30, 2014.

� To stimulate growth in capital goods andconsumer non-durable, it is proposed toreduce the excise duty from 12 to 10 percenton all goods for a period up to June 30,2014. It is applicable to all goods fallingunder Chapter 84 and 85 of the Scheduleto the Central Excise Act.

� To encourage the domestic production ofmobile handsets and reduce the dependenceon imports, it is proposed to restructure theexcise duty for category of mobile handsets.The rates will be 6 percent with CENVATcredit or 1 percent without CENVAT credit.

� To boost domestic production of soaps andoleo chemicals, it is proposed to rationalizethe customs duty structure on non-ediblegrade industrial oils and fractions, fattyacids and fatty alcohols at 7.5 percent.

� It is proposed to withdraw the exemptionfrom CVD on similar imported machineryto encourage domestic production of thespecified road construction machinery.

� The Government has succeeded in obtaininginformation in 67 cases of illegal Off-shoreAccounts and action is underway todetermine the tax liability as well as imposepenalty. Prosecutions for willful tax evasionhave been launched in 17 other cases.

� Setting-up a Research FundingOrganization that will fund researchprojects selected through a competitiveprocess. Contributions to that organizationwill be eligible for tax benefit.

� The Direct Taxes code (DTC) is ready andit will be placed on the website for a publicdiscussion. The Finance Minister appeals toall political parties to resolve to pass theGST laws and the DTC in 2014-15.


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Vision for future

India poised to be third largest economyalong with US and China, to play a leading animportant role in global economy.

10 Tasks as part of the road map ahead include:

1. Fiscal consolidation : We must achieve thetarget of fiscal deficit of 3 percent of GDPby 2016-17 and remain below that levelalways.

2. Current Account Deficit : CAD will beinevitable for some more years which canbe financed only by foriegn investment.Hence, there is no room for any aversion toforeign investment.

3. Price Stability and Growth : In a developingeconomy, a high growth target entails amoderate level of inflation. RBI must strike abalance between price stability and growthwhile formulating the monetary policy.

4. Financial Sector reforms to be completed aslaid down by Financial Sector LegislativeReforms Commission.

5. Massive investment in infrastructure : to bemobilized through the Public PrivatePartnership.

6. Manufacturing sector to be the base of India’sdevelopment : All taxes, Central and Statethat go into an exported product should bewaived or rebated. There should be aminimum tariff protection to incentiwisedomestic manufacturing.

7. Subsidies, which are absolutely necessaryshould be chosen and targeted only to theabsolutely deserving.

8. Urbanisation to be managed to make citiesgovernable and livable.

9. Skill development must be given priority atpar with secondary and university education,sanitation and universal health care.

10.States to partner in development so as toenable the Centre to focus on Defence,Railways, National Highways and Tele-communication.

HIGHLIGHTS OF THE RAILWAYBUDGET – 2014-15

Achievements / Initiatives

� Major landmark achievement in NationalProject of Kashmir State of Meghalaya andcapital of Arunachal Pradesh to be onRailway Map by this fiscal.

� Gauge Conversion of strategically important510 km Rangiya Murkongselek line inAssam to be completed by this fiscal.

� XIth Five Year Plan Targets exceeded inNew Lines (2,207 km) , Doubling (2,758km) and Electrification (4,556 km),Production of Diesel (1,288) & Electrical(1,218) Locos and Acquisition of Wagons(64,875)

� Dedicated Freight Corridors on the Easternand Western Routes leading to strategicallycritical capacity augmentation.

� Railways met from its own means the totaladditional impact of Rs one lakh crore dueto implementation of 6th Pay Commission

� In 2013-14, 1532 km of New Lines, Doublingand Gauge Conversion commissioned.

� Production commenced at the new factoriesRail Wheel Plant, Chhapra ; Rail CoachFactory, Rae Bareli ; and Diesel ComponentFactory, Dankuni.

� Specially designed coaches for adverseweather condition for rail travel in Kashmir.

� Successful development of Corrosionresistant, lighter wagons with higher pay-load and speed potential upt 100kmph.

� Railways sportspersons dominate nationalevents by winning titles in 23 disciplines


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and runners up in 9 disciplines. In variousinternational championships a total of 2Gold, 4 Silver and 3 Bronze Medals won.

� Unigauge Policy started in 1992 hasconverted 19,214 km to Broad Gauge,benefitting several States including Gujarat,Rajasthan, Madhya Pradesh, Maharashtra,Karnataka, Uttar Pradesh, Assam andTamil Nadu.

Measures for improving Safety & Security

� No unmanned Level Crossing. A total of5,400 unmanned level crossings eleiminated2,310 by manning it and 3,090 by closure /merger / construction of ROBs or RUBs.

� Improved audio visual warning to roadusers in advance of approaching trains.

� Induction of indigenously developed TrainCollision Avoidance System.

� Development of ‘crashworthy coaches.

� In last five years, offering employment to overone lakh persons in Group C categories andto 1.6 lakh persons in erstwhile Group Dcategories.

� Provision of Vigilance Control Device in alllocomotives.

� Various measures to prevent fire incidentson trains

1. Fire retardant materials.

2. Multi-tier protection for electriccircuits.

3. Portable fire extinguishers in coaches.

4. Intensive checks against explosivesand inflammable materials.

5. Induction based cooking to replaceLPG in pantry cars.

Financial Health

� Rail infrastructure by cost sharing arrangement

with State Governments; Karnataka,Jharkhand, Maharashtra, Andhra Pradesh andHaryana agreed to several projects.

� Several Public Private Partnerships (PPP)projects are in the pipeline.

� FDI being enabled to foster creation ofworld-class rail infrastructure.

� Rail Land Development Authority raised Rs937 crore so far.

Modernisation and Technology Induction-

High Speed Trains

� Joint feasibility study by India and Japan forMumbai Ahmedabad Corridor to be co-financed by international Cooperation Agency

� Business Development Study by SNCF forMumbai – Ahmedabad corridor.

Semi- High Speed Projects- Exploring low costoption of speeds 160- 200 kmph on select routes

Green initiative

� Railway Energy Management Companybecomes functional. Windmill and solarpower plants to be set up with 40% subsidyfrom Ministry of New & Renewable Energy.

� 200 Stations, rooftops of 26 buildings and2,000 level crossing gates to be covered.

� Railways bagged 22 out of 112 awards givenby the Government.

� Green Curtains along the track close to majorstations; Pilot work at Agra and Jaipur.

� Coverage of Bio-toilets in 2,500 coaches andwould be increased progressively.

Passenger Friendly Initiatives

� Overwhelming public response to e-bookingof ticket.

� On-line tracking of exact location andrunning of train movements.


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� 51 Jan-Ahaar outlets for Janta Meals ; 48passenger escalators commisionsed atstations and 61 more being installed ; air-conditioned EMU services in Mumbai fromJuly 2014 ; information display system inimportant trains to indicate stations &arrival time.

� Upgradation scheme extended to AC ChairCar and Executive Chair car passengers.

Demand Management through Dynamic Pricing

Premium AC Special train introduced inDelhi – Mumbai Sector with shorter advancereservation period and dynamically varyingpremium over tatkal fare.

Enhancing Market Share

Clearing missing links in Carrying Capacity +8 tonne routes; freight train speeding ; upgradationof rolling stock ; increasing length of trains ; tariffand incentive schemes to encourage traffic to railand minimizing empty running.

Rail Tariff Authority

Independent Rail Tariff Authority set-up toadvise on fixing of fares and freight, to engageall stake-holders.

Information Technology

Initiatives taken include – proliferation ofcash accepting Automatic Ticket VendingMachines ; ticketing on mobile phones inunreserved segments ; system update on PNRstatus; online booking of retiring rooms atimportant stations ; online booking of meals forselected en-route stations ; introduction of e-forwarding note and electronic transmission ofrailway receipts for freight customers.

Revenue Freight Traffic

� Loading target of 1047 Million Tonnes for2013-14 would be surpassed.

� Empty Flow Discount Scheme to beimplemented.

� Carrying Capacity + 9 tonne + 1 tonneroutes being planned.

� Easing of some restrictions on movement ofimported commodities through containers.

� Carrying capacity of 20 feet containersincreased by 4 tonnes.

� Parcel Terminals & Special Parcel Trainswith scheduled timings.

� New policy on parcels to encouragetransportation of milk.

� New concept of •ehub and spoke•f forparcel business

� Third party warehousing in Special ParcelTerminals envisaged.

Financial Performance 2012-13

� Loading of 1,008 Million Tonnes surpassedthe R.E. target of 1,007 Million Tonnes.

� Paid full dividend Rs 5,389 crore to GeneralExchequer.

� 90.2% Operating Ratio in 2012-13.

� Repayment in full with interest of Rs 3,000crore loan from the Government.

� Railway Fund Balances of Rs 2,391 crore.

Financial Performance 2013-14

� Loading Target raised to 1,052 MillionTonne from B.E. 1,047 Million Tonne.

� Freight Earnings Target revised to Rs 94,000crore from B.E. Rs 93,554 crore.

� Stringent Financial control exercised andOrdinary Working Expenses pegged only atRs 560 crore higher than Budget Estimates,despite various post-budgetary factors.

� Plan Outlay revised to Rs 59,359 crore.

� Operating Ratio likely to be 90.8%.

� Fund Balances to continue to grow to Rs8,018 crore.•••

1© Chronicle IAS Academy

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1. Consider the following statements aboutProducer Price Index (PPI) which was proposedby the RBI to measure the inflation and selectthe correct answer:1. Producer Price Index is the measure of the

average change in selling prices receivedby domestic producers for their output overa period of time.

2. It will include hidden costs like shipping,taxes and other levies thus providing amuch clear picture of inflation.

3. The prices included in the PPI are from thefirst commercial transaction for manyproducts and some services and measuresprice changes from the perspective of theseller.

Codes:(a) 1 and 2 only (b) 1 and 3 only(c) 2 and 3 only (d) All the above

2. Consider the following statements in the contextof Bank rate:1. It is official rate of interest charged by the

Reserved Bank of India on loans to other banks.2. It is the rate at which RBI discounts first

class securities, including bills of exchange.3. It is also known as discount rate.

Which of the above statements are correct?(a) Only 1 (b) Only 2(c) 2 and 3 (d) 1, 2 and 3

3. Banks have recently launched a new systemfor easy transfer of money known as NEFT.Consider the following statements about NEFT:1. It allows individuals, firms and the

corporates to electronically transfer fundsfrom any bank branch to any individual,firm or corporate having an account withany other bank branch in the countryparticipating in the scheme.

2. The cash remittance is restricted to amaximum of Rs. 100,000/- per transaction.

3. NEFT system also facilitates one-way cross-border transfer of funds from India toBhutan.

Which of the above statements are false?(a) Only 2 (b) 2 and 3(c) 1 and 3 (d) None of the above

4. Consider the following statements about RajivGandhi Equity Savings Scheme (RGESS) andselect the correct answer:1. RGESS is available to all resident indivi-

duals whose gross total income is less thanRs. 10 lacs.

2. It will be available to those individuals onlywho are investing in equity for the firsttime.

3. Under this scheme, the investor would geta 50% tax deduction of the amount soinvested, up to a maximum investment ofRs. 50,000.

4. Under this scheme, there is a fixed lock-inperiod of total three years.

Codes:(a) 1 only (b) 1 and 2(c) 1, 2 and 3 (d) All the above

5. In which of the following sectors FDI is notallowed in India, both under the AutomaticRoute as well as under the Government Route?1. Lottery Business2. Gambling and Betting3. Housing and Real Estate business4. Manufacture of cigars and cigarettes

Codes:(a) 1, 2 and 3 (b) 2, 3 and 4(c) All of the above (d) None of the above

6. Consider the following in the context of typesof loans provided to Indian farmers, and theduration of loans:1. Short term loans - less than 12 months2. Medium term loans - 12 months to 5 years3. Long term loans - more than 5 years

Which of the above statements are correctlymatched?(a) None of the above (b) Only 3(c) 2 and 3 (d) 1, 2 and 3

Sample Questions(Economy)


© Chronicle IAS Academy2

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7. To reduce the incidences of misuse, tampering,alterations, etc. of cheques, RBI has introducedCheque Truncation System-2010 standard.Consider the following statements about theprocess of truncation:1. An electronic image of the cheque is

transmitted to the drawee branch by theclearing house, along with relevantinformation like data on the MICR band,date of presentation, presenting bank, etc.

2. It makes multi-city handling of cheques easier.3. Indian Banks Association (IBA) and

National Payments Corporation of India(NPCI) are coordinating with the banks onimplementation of the new truncationstandard.

Which of the above statements are correct?(a) Only 2 (b) 1 and 2(c) 2 and 3 (d) All the above

8. Consider the following statements and selectthe correct answer:1. The Budget 2013-14 has proposed to

introduce Inflation-Indexed Bonds or IIBswith the aim to control rising CurrentAccount Deficit, fiscal deficit and inflation.

2. Inflation-Indexed Bonds or IIBs will providehouseholds and other investors a competitiveoption against gold and real estate.

Codes:

(a) 1 only (b) 2 only(c) Both (d) None

9. Which of the following statements is/arecorrect?1. The information relating to employment in

the formal sector and informal sector arecollected by the Union Ministry of Labourthrough employment exchanges located indifferent parts of the country.

2. In 2010, out of about 29 million formalsector workers, about 18 million workerswere employed by the private sector.

3. Women constitute only about one-sixth ofthe formal sector workforce.

Codes:

(a) Only 1 is correct (b) 2 and 3 are correct(c) All are correct (d) Only 3 is correct

10. Which of the following is/are true about G-20?1. The G-20 Summit was constituted as a

response both to the financial crisis of 2007-2010 and to a growing recognition that keyemerging countries were not adequatelyincluded in the core of global economicdiscussion and governance.

2. The G-20 was proposed by formerCanadian Prime Minister Paul Martin.

3. G- 20 has 19 countries as members plus theEuropean Union, which is represented bythe President of the European Council andby the European Central Bank.

Codes:

(a) 1, 2 and 3 (b) 1 and 2(c) 2 and 3 (d) 1 and 3

11. Consider the following statements in the contextof the system of basket of currencies:1. In this system the exchange value of a

country's currency is fixed in terms of somemajor international currencies.

2. Indian rupee is valued against US Dollar,British Pound, Japanese Yen, French Francand German Deutsche Mark.

3. India opted for this system in 1975.

Which of the above statements are correct?(a) Only 1 (b) Only 2(c) 1 and 2 (d) 1, 2 and 3

12. Consider the following statements about thehistory of banks in India:1. Reserve Bank of India was set up on the

basis of the recommendations of the HiltonYoung Commission in 1935 and finallynationalized in 1949.

2. Bank of India, founded in 1906 in Mumbaiwas the first Indian bank to open a branchoutside India in London in 1946 and thefirst to open a branch in continental Europeat Paris in 1974.

3. Canara Bank is the first bank in India to begiven an ISO Certification.

Which of the above statements are false?(a) Only 1(b) Only 2(c) Only 3(d) None


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13. Consider the following statements about currentaccount and select the correct answer:1. Components of current account include

goods, services, income and current transfers.2. In current account calculation, income also

includes a foreign company's investment upona domestic company or a local government.

3. In current account calculation currenttransfers include donations, aids, or officialassistance.

Codes:(a) 1, 2 and 3 (b) 1 and 2(c) 2 and 3 (d) 1 and 3

14. Which of the following statements are incorrect?1. The price elasticity of supply of the goods

measures the responsiveness of quantitysupplied to changes in the price of thegoods.

2. When the supply curve is horizontal, supplyis completely insensitive to price and theelasticity of supply is zero.

3. Like the price elasticity of demand, the priceelasticity of supply is also independent of units.

Codes:(a) Only 2 (b) Only 1 and 3(c) Only 2 and 3 (d) None of the above

15. Which of the following committees and theirmandates are correctly matched?1. Malegam Committee Micro finance

Institutions2. MR Srinivasam Consumer price

Committee index3. MK Gupta Committee Common tax code

Codes:(a) Only 1 (b) 1 and 2(c) 1 and 3 (d) 1, 2 and 3

16. Reserve Bank of India has revised the definitionof sickness of micro and small enterprises(MSEs). Consider the following statements inthe context of the new guidelines. A MSE wouldbe considered sick if1. Any of the borrowal account remains sub-

standard for more than six months.2. Any of the borrowal account remains sub-

standard for more than three months.3. Any of the borrowal account remains non

performing asset (NPA) for three monthsor more.

4. Any of the borrowal account remains NPAfor six months or more.

Which of the above statements is/are part ofthe guidelines?(a) Only 1 (b) 2 and 3(c) Only 3 (d) 2 and 4

17. A stock or equity market is a public entity forthe trading of company stocks (shares) andderivatives at an agreed price. Consider thefollowing statements about the Stock Exchangesin India:1. OTCEI is an electronic stock exchange

comprising of small and medium sized firmslooking to gain access to the capitalmarkets.

2. The National Stock Exchange wasincorporated in 1992 on the recommen-dations of the "Malhotra Committee".

3. NSE was the first exchange in the world touse satellite communication technology fortrading, using a client server based systemcalled National Exchange for AutomatedTrading (NEAT).

Which of the above statements are correct?(a) Only 1 (b) 2 and 3(c) 1 and 3 (d) All the above

18. Consider the following statements about RBI'scriteria for getting new bank licenses and selectthe correct ones:1. The initial paid-up capital for new banks

has been set at Rs. 500 crore.2. New banks are required to establish at least

25% of their branches in places with lessthan 10,000 population.

3. As per the new norms, private corporatesand public sector entities must have 10 years'experience to be eligible to apply for new license.


19. Which of the following pairs is NOT correctlymatched?(a) Grey Revolution Honey(b) Silver Revolution Eggs (Poultry)(c) Red Revolution Meat, tomato(d) Silver Fiber Revolution Cotton

20. Consider the following items in the context ofIndia's manufactured exports:1. Engineering goods2. Gems and Jewellery3. Chemicals and related products4. Textiles


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Arrange the above items in the ascending orderof their percentage in India's manufacturedexports:(a) 3, 4, 2, 1 (b) 3, 4, 1, 2(c) 4, 3, 1, 2 (d) 4, 3, 2, 1

21. To improve the business environment, India haslaunched its first Government-to-business portal"eBiz". Consider the following statements withrespect to the portal:1. The portal has been developed by HCL in

a Public Private Partnership (PPP) model.2. The project aims to create a business and

investor-friendly ecosystem in India bymaking all business and investment relatedregulatory services across Central, State andlocal Governments available on a singleportal.

3. It includes inbuilt payment gateway, whichallows collection of all payments at onepoint and then apportioned, split androuted to the respective heads of accountof Central/ State along with generation ofchallans and MIS reports.

Which of the above statements are correct?(a) Only 2 (b) Only 3(c) 1, 2 and 3 (d) 2 and 3

22. Consider the following statements and selectthe correct answer:1. Structural unemployment occurs when a

labour market is unable to provide jobs foreveryone who wants one because there is amismatch between the skills of theunemployed workers and the skills neededfor the available jobs.

2. Frictional unemployment is the time periodbetween jobs when a worker is searchingfor, or transitioning from one job toanother.

3. Cyclical unemployment, also known asdeficient-demand unemployment, occurswhen there is not enough aggregatedemand in the economy to provide jobs foreveryone who wants to work.


23. Consider the following statements and selectthe correct answer:1. The primary market is the market where

the securities are sold for the first time andtherefore it is also called the New IssueMarket (NIM).

2. The secondary market, also called aftermarket,is the financial market in which previouslyissued financial instruments such as stock,bonds, options, and futures are bought andsold.

3. The primary market or new issue marketalso includes certain other sources of newlong term external finance, such as loansfrom financial institutions.


24. Which of the following are correct about theNational Manufacturing Policy (NMP)?1. The main objective of the policy is

enhancing the share of manufacturing ingross domestic product (GDP) to 25 percent.

2. The NMP provides for promotion of clustersand aggregation, especially through thecreation of national investment andmanufacturing zones (NIMZs).

3. The Policy also provides special focus toindustries that are employment intensive,producing capital goods and does not giveweightage to those having strategic significanceand small and medium enterprises.


25. FDI, being a non-debt capital flow, is a leadingsource of external financing, especially for thedeveloping economies. Consider the followingstatements in the context of recent changes inthe FDI policy in India:1. Liberalization of conversion of imported

capital goods/machinery andpreoperative/pre-incorporation expenses toequity instruments.

2. Pricing of convertible instruments upfront,on the basis of a conversion formula,instead of price.

3. FDI, up to 100%, would be permitted forbrownfield investments, in the pharma-ceuticals sector, under the Governmentapproval route.

Which of the above statements are now partsof FDI policy in India?(a) 1 and 2 (b) 2 and 3(c) 1 and 3 (d) 1, 2 and 3


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1. (b)

2. (d)

3. (b)

4. (d)

5. (c)

6. (b)

7. (d)

8. (c)

9. (d)

10. (a)

11. (d)

12. (d)

13. (a)


ECONOMY SAMPLE QUESTIONS

(ANSWERS)

14. (a)

15. (c)

16 (c)

17. (c)

18. (d)

19. (a)

20. (d)

21. (d)

22. (d)

23. (a)

24. (b)

25. (d)

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1. Under which of the following circumstancesmay “capital gains” arise?1. When there is an increase in the sales of a

product.

2. When there is a natural increase in the valueof the property owned.

3. When you purchase a painting and thereis a growth in its value due to increase inits popularity.

Select the correct answer using the codes givenbelow:(a) 1 only (b) 2 and 3 only

(c) 2 only (d) 1, 2 and 3

2. Which of the following measures would resultin an increase in the money supply in theeconomy?

1. Purchase of government securities from thepublic by the Central Bank.

2. Deposit of currency in commercial banksby the public.

3. Borrowing by the government from theCentral Bank.

4. Sale of government securities to the publicby the Central Bank.

Select the correct answer using the codes givenbelow:(a) 1 only (b) 2 and 4 only

(c) 1 and 3 (d) 2, 3 and 4

3. Which of the following would include ForeignDirect Investment in India?1. Subsidiaries of foreign companies in India.

2. Majority foreign equity holding in Indiancompanies.

3. Companies exclusively financed by foreigncompanies.

4. Portfolio investment.

Select the correct answer using the codes givenbelow:(a) 1, 2, 3 and 4 (b) 2 and 4 only

(c) 1 and 3 only (d) 1, 2 and 3 only

4. Consider the following statements:

The price of any currency in internationalmarket is decided by the

1. World Bank.

2. Demand for goods/services provided by thecountry concerned.

3. Stability of the government of theconcerned country.

4. Economic potential of the country inquestion.

Which of the statements given above are correct?(a) 1, 2, 3 and 4 (b) 2 and 3 only

(c) 3 and 4 only (d) 1 and 4 only

5. The basic aim of Lead Bank Scheme is that(a) Big banks should try to open offices in each

district.

(b) There should be stiff competition amongthe various nationalized banks.

(c) Individual banks should adopt particulardistricts for inten-sive development.

(d) All the banks should make intensive effortsto mobilize deposits.

6. In India, deficit financing is used for raisingresources for(a) economic development.

(b) redemption of public debt.

(c) adjusting the balance of payments.

(d) reducing the foreign debt.

7. Which of the following constitute CapitalAccount?1. Foreign Loans.

2. Foreign Direct Investment.

3. Private Remittances.

4. Portfolio Investment.

Select the correct answer using the codes givenbelow:(a) 1, 2 and 3 (b) 1, 2 and 4

(c) 2, 3 and 4 (d) 1, 3 and 4

UPSC Questions(Economy)



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8. Consider the following statements:

1. Inflation benefits the debtors.

2. Inflation benefits the bond-holders.

Which of the statements given above is/arecorrect?

(a) 1 only (b) 2 only

(c) Both 1 and 2 (d) Neither 1 nor 2

9. Consider the following liquid assets:

1. Demand deposits with the banks.

2. Time deposits with the banks.

3. Savings deposits with the banks.

4. Currency.

The correct sequence of these decreasing orderof Liquidity is:

(a) 1-4-3-2 (b) 4-3-2-1

(c) 2-3-1-4 (d) 4-1-3-2

10. Which of the following grants/ grant directcredit assistance to rural households?

1. Regional Rural Banks.

2. National Bank for Agriculture and RuralDevelopment.

3. Land Development Banks.

Select the correct anser using the codes givenbelow:

(a) 1 and 2 only (b) 2 only

(c) 1 and 3 only (d) 1, 2 and 3

11. The national income of a country for a givenperiod is equal to the

(a) total value of goods and services producedby the nationals.

(b) sum of total consumption and investementexpenditure.

(c) sum of personal income of all individuals.

(d) money value of final goods and servicesproduced.

12. Economic growth in country X will necessarilyhave to occur if

(a) there is technical progress in the worldeconomy.

(b) there is population growth in X.

(c) there is capital formation in X.

(d) the volume of trade grows in the worldeconomy.

13. Supply of money remammg the same whenthere is an increase in demand for money, therewill be

(a) a fall in the level of prices.

(b) an increase in the rate of interest.

(c) a decrease in the rate of interest.

(d) an increase in the level of income andemployment.

14. Which one of the following is likely to be themost inflationary in its effect?

(a) Repayment of public debt.

(b) Borrowing from the public to finance abudget deficit.

(c) Borrowing from banks to finance a budgetdeficit.

(d) Creating new money to finance a budgetdeficit.

15. Which one of the following groups of items isincluded in India's foreign-exchange reserves?

(a) Foreign-currency assets, Special DrawingRights (SDRs) and loans from foreigncountries.

(b) Foreign-currency assets, gold oldings of theRBI and SDRs.

(c) Foreign-currency assets, loans from theWorld Bank and SDRs.

(d) Foreign-currency assets, gold holdings of theRBI and loans from the World Bank.

16. A rise in general level of prices may be causedby

1. an increase in the money supply.

2. a decrease in the aggregate level of output.

3. an increase in the effective demand.

Select the correct answer using the codes givenbelow:

(a) 1 only (b) 1 and 2 only

(c) 2 and 3 only (d) 1, 2 and 3

17. Priority Sector Lending by banks in Indiaconstitutes the lending to

(a) Agriculture.

(b) Micro and small enterprises.

(c) Weaker sections.

(d) All of the above.


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18. In the context of Indian economy, Open MarketOperations' refers to

(a) borrowing by scheduled banks from the RBI.

(b) lending by commercial banks to industryand trade.

(c) purchase and sale of government securitiesby the RBI.

(d) None of the above.

19. Why is the government of India disinvesting itsequity in the central public sector enterprises(CPSEs)?

1. The government intends to use the revenueearned from the disinvest-ment mainly topay back the external debt.

2. The government no longer intends to retainthe management control of the CPSEs.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only.

(c) Both 1 and 2

(d) Neither 1 nor 2

20. The lowering of bank rate by the reserve bankof India leads to:

(a) More liquidity in the market.

(b) Less liquidity in the market.

(c) No change in the liquidity in the market.

(d) Mobilization of more deposits bycommercial banks.

21. Which one of the following is not a feature of“value added tax”?

(a) It is multi-point destination-based systemof taxation.

(b) It is a tax levied on value addition at eachstage of transaction in the production-distribution chain.

(c) It is a tax on the final consumption of goodsor services and must ultimately be borneby the consumer.

(d) It is basically a subject of the centralgovernment and the state governments areonly a facilitator for its successfulimplementation.

22. A “closed economy’’ is an economy in which

(a) The money supply is fully controlled.

(b) Deficit financing takes place.

(c) Only exports take place.

(d) Neither exports nor imports take place.

23. Both foreign direct investment (HDI) and foreigninstitutional investor (FII) are related toinvestment in a country.

Which one of the following statements bestrepresents an important difference between thetwo?

(a) FII helps bring better management skills andtechnology. While FDM only brings incapital.

(b) FII helps in increasing capital availabilityin general, while FDI only targets specific.

(c) FDI flows only into the secondary market,in general, while FDI only targets specificsectors.

(d) FII is considered to be more stable than FDI.

24. Microfinance is the provision of financialservices to people of low-income groups. Thisincludes both the con-summers and the self-employed. The service/services rendered undermicro- finance is/are:

1. Credit facilities.

2. Savings faculties.

3. Insurance facilities.

4. Fund transfer faculties.

Select the correct answer using the codes giventhe lists?

(a) 1 only.

(b) 1 and 4 only.

(c) 2 and 3 only.

(d) 1, 2, 3 and 4.

25. With reference to the finance commission ofIndia, which of the following statements iscorrect?

(a) It encourages the inflow of foreign capitalfor infrastructure development.

(b) It facilities the proper distributor of financesamong the public section undertakings.

(c) It ensures transparency in financialadministration.

(d) None of the statements (a), (b) and (c) givenabove is correct in his context.


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1. (b)

2. (c)

3. (d)

4. (c)

5. (c)

6. (a)

7. (b)

8. (a)

9. (d)

10. (a)

11. (a)

12. (c)

13. (b)


ECONOMY UPSC QUESTIONS

(ANSWERS)

14. (d)

15. (b)

16 (d)

17. (d)

18. (c)

19. (d)

20. (a)

21. (d)

22. (d)

23. (b)

24. (d)

25. (d)

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indian economy (part-ii) dlp fi - wordpress.comthe government (slr) and inflation management (crr)....

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