1. What is National income**? Explain various methods of calculating it**.

Answer: Meaning and Definition

Economic welfare of a country purely depends on the amount of goods and

services made available by a country for the consumption needs of its people.
Economic Welfare of a country can be effectively measured by the National
Income of a country. National income is the flow of goods and services which
become available to a nation during a given year. Thus National Income is a flow
and not a stock.
Thus NI is- The market value of goods and services produced and is a

monetary measure. Calculations of goods and services in a given year must

be done without duplication. NI has 3 interpretations-

1. It is the total value of production,

2. It represents total receipts,
3. It represents total expenditure.

NI=National Product=National expenditure. Thus it is the sum of all the incomes,

values of all the final production and sum value of all the expenditure.

Definitions

Simon Kuznets- The net output of commodities and services flowing during the
year from the country’s production system in the hands of the ultimate consumers.

National income committee India-a NI estimate measures the volume of

commodities and services turned out during a given period, counted without
duplication.

According to Marshall: “The labour and capital of a country acting on its natural
resources produce annually a certain net aggregate of commodities, material and
immaterial including services of all kinds. This is the true net annual income or
revenue of the country or national dividend.

In the words of Pigou, “National income is that part of objective income of the
community, including of course income derived from abroad which can be
measured in money.”
According to Fisher, “The National dividend or income consists solely of services
as received by ultimate consumers, whether from their material or from the human
environments. Thus, a piano, or an overcoat made for me this year is not a part of
this year’s income, but an addition to the capital. Only the services rendered to me
during this year by these things are income.”

Fisher’s definition is considered to be better than that of Marshall or Pigou,

because Fisher’s definition provides an adequate concept of economic welfare
which is dependent on consumption, and consumption represents standard of
living.

The 3 methods to calculate national Income of a country are –

1. Product method

2. Income method

3. Expenditure method
Product method/Output method/value added method

It measures the output of a country. It takes into consideration the total good and
services produced in a year at market prices. Here value added by each enterprise
in the production of goods and services is calculated during a year and is added
up. While estimating NI with this method the economy is divided into different
sectors, like agriculture, mining, construction, trade etc.

This method involves –

First there will be identification of the producing enterprise and classifying them
into sectors. Then estimating the net value added by each producing unit as well
as each sector and adding up the net value of all the sectoral contributions. It
includes only the money value of final goods and services produced during a
given year. This method deducts the value of depreciation.

The following deductions are made in the process of calculating NI through

Product method -

a. Intermediate consumption (raw materials)

b. Consumption of fixed capital
 c. Net indirect taxes.
d. Further real income earned from abroad is to be added.
Thus Product method is derived by –

Y = (P –D) +(S –T) + [(X –M) + (R –P)]

Y – Total income of a nation
P- Domestic output of all
production sectors D –
Depreciation allowance
S- Subsidies T – Indirect taxes X –exports
M – Imports
R – Receipts from abroad P – Payments made abroad.

Income method

Income method approaches NI from distribution side. NI is obtained by summing up the

incomes of all individuals and business enterprises of a country during a year. It is the
sum total of all money incomes such as wages, salaries, rent and profits received by
individuals and enterprises in a country during a given financial year. Income details are
obtained through income tax returns, book of accounts, reports, published accounts and
estimates of small accounts. This method helps in analyzing the distribution of NI among
different income groups such as landlords, employees, workers, owner of capital,
entrepreneurs.

To calculate NI under Income methods following steps are to be followed:

1. Identification of production enterprises and classify them into various sectors –

namely, agriculture, fishing, manufacturing etc.

2. To classify the factor payments –

a. Wages and salaries of employees, both in cash and kind and employer’s
contribution to social security schemes.
b. Rent/royalty
c. Interest
d. Profits –
e. Dividend
f. Undistributed profits
g. Corporate income tax.
 3. To measure factor payments here income paid by each enterprise can be
estimated by collecting information about the number of units each factor has
employed and the income paid out to each unit of every factor.
4. Add up factor payments of all enterprises belonging to the industrial sector, it
helps us to understand the income paid out to various factors by a particular
industry or sector.

5. Add up net factor income earned from abroad to domestic factor income.

Y =∑( w + r + i + p) + [(X – M ) + ( R- P)
This method is helpful for countries with large income tax payers. Thus NI of a
country is equivalent to the sum total of the disbursements of their factor income.

Expenditure method

Expenditure method also called as outlay method. Here it is assumed that NI on

the consumption side is always equal to the value of consumption plus
expenditure. Hence NI is derived by adding up all expenditure made on goods and
services during a year. NI is derived by summing up all consumption expenditure
and investment expenditure made by all the individuals and also by the
government of a country during a given year.

It takes into account the following expenditures incurred by –

1. Personal consumption expenditure made on consumption of durable and

non durable goods and services. It is denoted by – C.

2. Government purchases of goods and services to satisfy the collective wants. It is

denoted as – G.

3. Gross domestic capital formation i.e. the expenditure by productive enterprises

on capital goods and inventories/stocks. It comprises of

a. Gross fixed capital formation

b. Addition to the stock or
inventories. This is denoted
as I.
4. Net foreign Investment. It includes receipts of the exports of goods to other
 countries ,
i.e. – X and the expenditure made by the people , enterprise and
government on the import of goods and services from other countries, i.e. –
M

Thus it is -

C+G+I+(X-M)

C+G+I+Nx.

2. *Explain the role of RBI in controlling credit and inflation

Answer: Price stability or inflation control-

C. Rangarajan quotes- Faced with multiple objectives that are equally relevant and
desirable, there is always a problem of assigning to each investment the most
appropriate target or objective. Of the various objectives, price stability is perhaps
the one that can be pursued most effectively by monetary authorities. Price
stability is the dominant objective of monetary policy. This refers to maintaining
of reasonable rate of inflation that promotes the process of economic growth. This
does not mean any change in price.

For country like India, in the process of economic growth, the country would go in
for structural changes which could result in relative price changes, such
inflationary pressures are inevitable. Thus here the role of the RBI and its
monetary policy would be to maintain a reasonable rate of inflation to promote the
growth process. When the Commercial Banks does not follow the policy of the
Central Bank, then the Central Bank has the only recourse is direct action. This
method can be used to enforce both quantitatively and qualitatively credit controls
by the Central Banks. This method is not used in isolation; it is used as a
supplement to other methods of credit control.

Direct action may take the form either of a refusal on the part of the Central Bank
to re- discount for banks whose credit policy is regarded as being inconsistent
with the maintenance of sound credit conditions. Even then the Commercial
 Banks do not fall in line; the Central Bank has the constitutional power to order
for their closure. This method can be successful only when the Central Bank is
powerful enough and has cordial relations with the Commercial Banks. Mostly
such circumstances are rare when the Central Bank is forced to resist to such
measures.

Any failure to control the price rise would endanger the economic situation of the
country with either rise in the living cost, increase in the export prices fall in the
value of money and BOP pressures.

Thus Prof. Chakravarthy recommended that formulation of India's monitory

policy should be able to maintain a reasonable rate of inflation up to 4%.
RBI has been empowered with powers to regulate credit. It has various weapons of
control through which it can control money supply and price fluctuations. The weapons of
control are

a. Quantitative credit control

b. Qualitative credit control

Objectives of Credit control-

1. To maintain stability in the internal price level.

2. Economic Stability

3. Stability in Exchange rate

4. Stabilization of the money markets

5. Promotion of economic growth

6. Meeting Business needs

7. Checking outflow of gold.

3. **. Explain the impact of WTO on various aspects of Indian economy

Answer: WTO and its Impact on India

The main challenges India faced under the new international economic regime as
a member of WTO are-

1. WTO on Indian Agriculture - It legitmised various trade distorting practices of the

developed countries in their favour. The provisions under AoA for UDCs are
focused to reduce tariff commitments by an average of 24 per cent in equal steps
over 10 years (upto 2004) from 1995 and for developed countries (DCs) it is 36
per cent over the period of 6 years (up to 2000)

This resulted in selling the Indian agricultural goods are comparatively at higher
prices due to high cost of cultivation. This discouraged the Indian farmers. The
domestic grain market became non remunerative to the Indian farmers, even when
the agricultural growth rate slided down to 4.6 per cent in 2000-2001. The average
tariff barriers on 600 agricultural items have been reduced.

The custom duties on Indian goods entering the foreign market (USA, EU)
continue to be high e.g. 180 per cent for wheat, while it is less than 80 per cent in
India. It is disincentive to the investors. To bring at the level of equivalence, India
should step up to enhance its export. India could get the benefit of competitiveness
only in 46 items out of 406 exportable items.

As per the agreement, there are Product Specific (PS) and Non Product Specific
(NPS) subsidies. NPS subsidies are given to fertilises, irrigation, pesticides, credit
and other input subsidies.

PS subsidies cover the support to 22 products, of which 19 (rice, wheat, jowar,

maize, barley, gram, groundnut, rapeseed, toria, cotton, soya, urad, moong, fur,
tobacco, jute and sugarcane) are included in the list of commitments.

The economic help is further classified as Amber box subsidies covering statutory
minimum price, grant to agricultural universities, water, services etc. under NSP
and PS subsidies to 22 commodities in India. Green box subsidies cover help,
consultancy and basic services etc. And under blue box, subsidies coves direct
subsidies, investment subsidies and subsidies on capital etc which are more
beneficial to DCs.

The DCs agreed to cut the value of export subsidies by 36 per cent over a period
of 6 years from 1995 and the UDCs to cut the same by 24 per cent over a period
of 10 years. The DCs were to reduce 21 per cent in quantities of subsidised
exports and UDCs to reduce 14 per cent of the same during same period. The DCs
were allowed to reduce the cost of marketing and transporting exports under
certain conditions.

On the contrary, The EU (UK, France, Germany etc.) countries gave an average
265 per cent of export subsidy, Brazil 60 per cent, Thailand 40 per cent, Pakistan
30 per cent and this has created a panic situation in the agricultural economy of
India. Besides, imposition of import duties is neglected, QRs have been
withdrawn, no direct export subsidy is given to the exporters of agricultural
commodities. Thus, India had to oppose such hike in export subsidies in the
Agricultural Round of talks.

TRIPS

The implementation period for India begins from 1995 and ends by 2005, India
must grant product patents over pharmaceutical and agricultural chemical
products. The patent terms will run from the date of the application field to 20
years thereafter.

It has far reaching implication for developing countries including India. Under the
new agreement, inventor's rights widely cover patents, trademarks, copyright,
industrial design, layout of integrated circuits, geographical indications and trade
secrets. The phasing-out period is specified as 10 years for drugs and agro-
chemicals and 5 years for the rest of the products.

The TRIPs brought in adverse effects on pharmaceutical industry in India, when

new discoveries would become available at very heavy cost of royalties.
According to the new agreement, when the product patents will be brought into
force in the year 2005 in the developing India, drug prices will increase. The
indigenous pharmaceutical industry following the process patent would be in an
adverse position. Under TRIPs seeds will be patented by which the input costs of
Indian farmers will increase.

Further the extension of IPR on agriculture had an negative impact on Indian

Economy, as plant breeding and seed production was of public domain. Thus
patenting of plant varieties would be beneficial for MNCs. It would also impact
food security programme.

Trade related Investment Measures

These measures assure free entry for foreign as well as Indian companies on the
same terms and conditions. It means Indian companies will have to compete with
the MNCs on the basis of survival of fittest. It has impact on small scale
companies as they cannot compete with MNCs in the changed global competitive
environment. As the foreign enterprises can set their business, it leads to takeover
and acquisitions. On the other hand foreign investment leads to foreign exchange
earnings and better technology in the country.

GATS

India will have to open up its service sector to other WTO member countries. This
will result to entry of overseas service providers into the service sectors in the
 country The GATS agreements has the potential to open up all aspect of a national
economy to foreign competition. There are several income generating services
include brokerage, communications, non merchandise insurance, leasing and
rental equipment, technical and professional services. GATS have been beneficial
to some extent in India.

The areas that impacted India are Trade and NTBs. They were non transparent and
complex and created complexities for India. The other was Labour standards and
environment. There was ttrespassing the sovereignty of Nation states. There is
inequality within the structure of WTO.

4. ****. Briefly explain the role of public sector in the economic development of India

Answer: “The public sector is expected to provide specially for the further

development of industries of basic and strategic importance or in the nature of

public utility services.” - Indian Planning Commission.

Public sector occupied an important place for achieving systematic and planned
development in a developing country like India. in the post independence period,
the expansion of public sector was undertaken as an integral part of the Industrial
Policy 1956.

Contribution of Public Sector to Indian Economy-

1. Employment generation- Public sector employment in government

administration, defence and other government services. It has also generated
employment in public sector economic enterprises of Centre, State and Local
bodies. In 1971, the public sector offered employment opportunities to about
11 million persons but in 2003 their number rose to
18.6 million showing about 69 per cent increase during this period.As of 2003, the
public sector offered employment opportunities to 18.6 million persons which was
69 per cent of the total employment generated in the country as compared to 71
per cent employment generated in 1991. However, there is considerable decline in
the annual growth rate of employment in the public sector from 1.53 per cent
during 1983-1994 to 0.80 per cent during 1994- 2004.
About 69.0 per cent of the total employments are generated in the public sector, at
the end of March 2004, about 51.7 per cent of the total employment (i.e. about 96
lakh) was generated in public sector in the areas of Government administration,
community, social and personal services and the remaining 48.3 per cent (i.e.,
nearly 89.7 lakh) of the employment in public sector is generated by economic
enterprises run by the Centre, State and Local Governments. The maximum
number of employment is derived from transport, storage and communications
(28.1 lakh). The public sector manufacturing is the next industry which generated
employment to the extent of 11.1 lakh persons.

2. Strong Industrial base-The contribution of industrial sector i.e.,

manufacturing, construction, electricity in GDP at Factor Cost has raised slowly
and steadily during the plan periods. It was only 13.3 percent in 1950-51 to 21.6
percent in 1980-81 and further to 24.5 percent in 2003-04. During the plan
period, most of the industries like iron-steel, heavy engineering, coal, heavy
electrical machinery, petroleum and natural gas, chemicals and drugs, fertilizers
and defence have increased remarkably. The development of private sector
industries is also solely depending on these industries. Thus by

developing a strong industrial base, the public sector has developed a suitable base
for rapid industrialization in the country. Moreover, public sector has also been
dominating in critical areas such as petroleum products, coal, copper, lead, hydro
and steam turbines etc.

3. Infrastructure development-Public sector investment on infrastructure sector

like power, transportation, communication, basic and heavy industries, irrigation,
education and technical training etc. has paved the way for agricultural and
industrial development of the country leading to the overall development of the
economy as a whole. Private sector investments are also depending on these
infrastructural facilities developed by the public sector of the country.

4. Capital formation - Capital Public sector has been playing an important role in
the gross domestic capital formation of the country. The share of public sector in
gross domestic capital formation has increased from 3.5 per cent during the First
Plan to 9.2 per cent during the Eighth Plan. In the 1st and 2nd five year plans 54
 percent of total investment was in public sector and in 3rd plan it had increased
further to 60 percent.

The Public sector has not made a remarkable progress in respect of mobilization
of savings. The share of public sector in gross domestic savings increased from
1.7 per cent of GNP during 1951-56 to only 3.6 per cent during 1980-85. During
1980s, the share of public sector in gross domestic savings declined from 16.2 per
cent in 1980-81 to 7.7 per cent in 1988-89.

5. Export promotion and Import Substitution-Public sector enterprises have

been contributing a lot for the promotion of India’s exports. The foreign
exchange earning of the public enterprises rose from Rs. 35 crore in 1965-66 to
Rs. 5,831 crore in 1984-85 and then to Rs. 34,893 crore in 2003- 04. Thus, the
export performance of the public sector enterprises in India is quite satisfactory.

The number of PSUs like Bharat Heavy Electricals Ltd. HMT Ltd, Hindustan
Steels Ltd., State Trading Corporations have contributed lot for increasing the
foreign exchange reserve had increased from Rs. 35 crores in 1965-66 to Rs.
34890 crores to 2004-05 due to increase in export promotion. On the contrary, the
PSUs like Bharat Electronics Ltd.,

IOC, ONGC, IDPL etc. are also playing extra ordinary performances to save our
foreign exchange, with the effective policy of import institution.
Social Welfare- It is the public sector, which always thinks for the growth and
welfare of the weaker sections of the country. Public sector has always been
working with the motive of social welfare maximization. Most of public
sectors are running with the motto of no profit and no loss ideology
5. *****. Explain the recommendations of Chakravarthy committee report on restructuring
the money market in India.

Answer: Chakravarthy committee recommendations

Earlier Hilton Young Commission and the Central Banking Enquiry committee
had reviewed the working of the Indian monetary system. During 1982 Dr.
Manmohan Singh, the then governor of RBI appointed a committee under the
Chairmanship of Sukhamoy Chakravarthy to review the functioning of Indian
monetary system. The committee was assigned to review the following—
 1. To critically review the structure and operation of the Indian monetary
system in the context of the basic objectives of planned development.

2. To evaluate the various instruments of monetary and credit policies.

3. To assess the interaction of monetary policy and public debt management.

4. To recommend suitable measures for the formulation and operation of

monetary and credit policies and for strengthening the instruments of
monetary and credit policies.

5. To make such other recommendation as the committee may deem

relevant to the effective operation of monetary and credit policy.

The committee observed that Indian monetary system failed in attaining its
major social objectives mainly due to —

a. Excessive fiscal deficits,

b. Unnecessary large credit of the banking system to government.

c. RBI’s main support to public borrowings at cheaper rate rather than taking
relevant action for the effective monetary management: monetary tools
like the Statutory Liquidity Requirements (SLR) and interest policy being
used to facilitate a large public debt from the banking sector.

The Committee has made the following noteworthy observations:

1. The growth of money supply (М3) has greatly exceeded the growth in output
during the period 1971-1984. The money supply (M3) has increased on an
average at the rate of

17.2 per cent per annum, while the output (NNP at factor cost) has increased just
at the rate of 3.7 per cent; the wholesale price index 1 as registered a 9.8 per cent
rise per annum.

2. The government’s resort to RBI’s credit has increased excessively. This has
caused a phenomenal expansion in reserve money adversely affecting the
conduct of monetary policy since 1970.
 3. The government borrows at a much lower rate than the prevailing market
rates by resorting to the RBI and the captive market of the banks.

4. The system of administered interest rates is typical of the Indian monetary

system.

5. Yields on treasury bills at 4.6% discount rates are very low.

6. Concessional rates of interest seem to have permitted the rise of economically

non- viable projects.

7. The currency-deposit ratio has steadily declined from 1.53 in March 1951 to
0.3 in March 1984.

The Committee’s Recommendations:

The following recommendations of the Committee are noteworthy –

1. Structure and operation of Indian monetary system.

It recommended for consistency with plan authorities, to enable the process of

mobilization of resources and utilization these resources for social objectives. It
recommended for emphasizing the need for financing the five year plans in a non
inflationary manner-

a. Tapping the savings of the public in a greater measure.

b. Raising the savings from public sector enterprises and

c. Improving the efficiency in both revenue gathering and in expenditure.

2. Objectives of monetary policy-

Relative price stability is to be maintained by not allowing the annual price rise to
go beyond 4 per cent. “It would be desirable, in the Indian context, to assign to the
monetary authority a major role in promoting price stability, and also to accord
price stability a dominant position in the spectrum of objectives pursued by the
monetary authority.”

To achieve this RBI should bring reduction in the growth of reserve money and
the money supply, while government should ensure raising output levels.
 The Committee advocates strong supply management measures to combat
fluctuations in agricultural production. It also stressed upon demand management
and felt the need for coordination between govt. and RBI

3. Monetary targeting-

It emphasized on inter relationship between price output and money . It said target
for growth in Money supply should be determined in view of the expanded growth
rate in GNP, the real income elasticity of demand for money, and a permissible
price rise of, say 4 per cent per annum.

To achieve the said, target should be announced in advance, and the modifications
and the circumstances under which such modifications would be made should also
be announced in advance. Committee also recommended that RBI and
government should evolve a policy framework for the regulation of RBI credit to
government.

Change in the definition of budgetary deficit-

Budgetary deficit of government always took the form of an increase in treasury

bills outstanding. Here only part of treasury bills is absorbed by the public. The
concept of budgetary deficit did not distinguish between the amount of bills
absorbed by public and the amount held by RBI, thus it overstated the extent of
monetary impact on fiscal operations. Increase in lending by RBI to govt. for its
programme led to corresponding increase in money supply. This committee
suggested a change definition of budgetary deficit, by clear between distinction
revenue, fiscal deficit and overall budgetary deficit.

5. Interest rate policy-

There should be only two concessional lending rates applicable to bank credit
provided to the specified priority sector borrowers, one of which should be
equivalent to the basic (minimum) lending rate and the other somewhat lower than
it. Banks should have freedom to fix their other lending rates. The committee
viewed those concessional interest rates as distributive device should be used in a
selective manner.
 The Committee also recommended that interest rate on bank deposits should be
positive after adjusting for inflation, to encourage small savers. It felt that it is a
misconception to assign to the trade sector a low priority for bank finance in
comparison to the industrial sector in the present stage of development in Indian
economy. Hence, the trade sector must be given due recognition and should not be
starved of bank credit.

Long-term deposits and loans must yield a minimum of 3 per cent real rate of
returns. It stressed for strengthening for effective credit delivery system in the area
of priority sector lending and provision of timely credit to this sector.

Restructuring of money market in India-

They stressed the need for an upward revision of the administered interest rates.
The yields on treasury bills and the government securities must be enhanced
corresponding to the prevailing market rates of interest on other financial assets.

Ceiling on call-rates should be removed. Banks should be assisted by the Reserve

Bank by extending larger refinance and bills discounting facilities. Bill markets
should be strengthened by removing impediments like payment of stamp duty,
difficulty in obtaining supplies of stamp paper, administrative rigidities, etc.

The Chakavarty Committee set out the following other tasks for the monetary
system so that its functioning would be in consonance with the national
development strategy as envisaged in the successive Five Year Plans:

(a) mobilizing the savings of the community and enlarging the financial savings pool;

(b) promoting efficiency in the allocation of the savings of the community to

relatively productive purposes in accordance with national economic goals;

(c) enabling the resource needs of the major ‘entrepreneur’ in the country, viz., the
government, to be met in adequate measure; and

(d) Promoting an efficient payments system.

6. *Need for agricultural finance

Answer: Agricultural production in this country depends upon millions of small

 farmers. It is the intensity of their effort and the efficiency of their technique that
will help in raising yields per acre. Finance in agriculture is as important as other
inputs being used in agricultural production. With the prevalence of inadequate
financial resources and absence of timely credit facilities at reasonable rates to
farmers, many of the farmers are unable to go in for improved seeds and manures
or to introduce better methods or techniques. Thus realizing the importance of
agricultural credit in fostering agricultural growth and development, the emphasis
on the institutional framework for agricultural credit is being stressed since the
beginning of planned era in India

NEED FOR AGRICULTURAL FINANCE

The financial need of the Indian farmer can be broadly classified into two categories

a. On the basis of time and

b. On the basis of purpose.

The needs of the farmers can be classified into three categories on the basis of time:

1. Short term.

2. Medium term, and

c. Long term finance

Short-term loans are required for the purchase of seeds, fertilizers, pesticides, feeds
on fodder of livestock, marketing of agricultural produce, payment of wages for
hired labors. Period of such loans are up to 15 months. Agencies for granting such
loans are the moneylenders and cooperative societies.

Medium-term loans are obtained for the purchase of cattle, small agricultural
implements, repair and construction of wells etc. The period of such loans extends
from 15 months to 5 years. These loans are generally provided by money-lenders,
relatives of farmers, cooperative societies and commercial banks.

Long-term loans are required for effecting] permanent improvement on land,

digging tube wells,’ purchase of larger agriculture implements and’ machinery like
tractors, harvesters etc. and repayment; of old debts. The period of such loans
extends beyond; 5 years. Such loans are normally taken from Primary Cooperative
 Agricultural and Rural Development Banks (PCARDBS).

On the Basis of Purpose:

Agricultural credit needs of the farmers can be classified on the basis of purpose
into the following categories:

Productive needs- it includes all credit requirements which directly affect agricultural
productivity. Farmers need loans for the purchase of seeds, fertilizers, manures,
agricultural implements, livestock, digging and repair of wells and tube wells,
payment of wage, effecting permanent improvements on land, marketing of
agricultural produce, etc. Repayment of these loans is generally not difficult because
the very process of production generally creates the withdrawal for repayments.
Consumption needs- Farmers often require loans for consumption as well.
Institutional credit agencies do not provide loan for consumption purpose. Therefore
farmers stretch their hand towards the moneylenders.

Unproductive borrowings-Loans are taken for unproductive purposes such as

litigation, marriages, and social ceremonies on birth and death of a family member,
religious functions, festivals etc. Farmers take loans from Mahajans since institutional
credit agencies do not give such loans.

7. *****Control of black money (parallel economy policies)

Answer: The government has been making various efforts to combat black
money issue. Post liberalization was expected to act as mechanism to control
black money.

Some policy measures are-

a. preventing the inflow of the smuggled gold-- In the 1993, the government of
India tried to liberalize the import of gold in the Indian market through various
concessions, customs duty relaxation, duty free imports in exceptional cases etc.
Thus, the prices of gold in the Indian market became more or less equal to that
of the international market. It prohibited the smugglers to take sufficient risk in
importing the gold illegally.
 The NRIs were allowed to import 5 Kg of gold per passenger with an import
duty of only Rs.220 per 10 grams. Similarly, silver imports up to 100 kg per
passenger with an import duty of Rs.500 per kg have been allowed.

b. Reducing the difference in exchange rate between the official market and
the Hawala market.

The Liberalized Exchange Rate Management system (LERMS) reduced this

difference to about 8%. Soon, Unified Market-determined Exchange Rate system
tried to put an end to the Hawala market.

c. Policy of LPG model of growth—

Under the liberalization policy of the government, the licensing system, permits,
quotas and other restrictions imposed on the private sector was abolished.

a. The tax reforms were also introduced. There was a moderation of

tax rates and improvement in tax compliance.

b. Policy against the black money stored in the Swiss banks

c. Ratification of UN conventions against corruption – India has recently

ratified the UN conventions against black money and corruption. The
convention came into force in 20005 and has been ratified only once since
then.

d. Five-tier policy of the finance minister Pranab Mukherjee, the central

finance minister of India has formulated five ways to tackle black money
both in India and that hidden in the foreign nations. These five policies are
at initial stage and may take long time to be implemented due to the
involvement of various countries. There are more bilateral issues involved
in the implementation of these policies.

Latest measures

i. Enactment of the Black Money (Undisclosed Foreign Income and

Assets) and Imposition of Tax Act, 2015 more effectively to tackle
the cases involving black money stashed abroad.
 ii. Enactment of the Benami Transactions (Prohibition) Amendment
Act, 2016 w.e.f. 01/11/2016 to effectively deal with domestic black
money cases by linking bank accounts with Aadhaar and PAN.

iii. Government launched the plan to link bank accounts with Aadhaar
and PAN. Income tax department got huge success in getting hold
of fake or Ghost accounts. It also made it easy to track big and
suspicious transactions through bank accounts.

iv. Constitution of the Special Investigation Team (SIT) on Black Money

in May, 2014 under Chairmanship and Vice-Chairmanship of two
former Judges of Hon’ble Supreme Court. The SIT detected black
money worth more than Rs. 70,000 crore, including 16,000
thousand rupees hidden by Indians in off shore accounts.

v. Constitution of Multi-Agency Group (MAG) for coordinated and

effective investigation in ‘Panama paper leaks’ cases and Paradise
Leaks cases.

vi. Task Force (TF) on Shell Companies constituted under the joint
chairmanship of Revenue Secretary and Secretary (Ministry of
Corporate Affairs) in February, 2017.

vii. Various other anti-evasive legislative measures taken are Tracking &
curbing cash transactions and strengthening third party reporting
mechanism.

viii. Income Disclosure Scheme 2016- The scheme was launched on 1st
June 2016 with the starting of a three-month declaration window.
People and entities can reveal black money earned till 2016 and
convert them into white money by paying 45% payment including
tax plus surcharge and a penalty.

ix. Promotion of cashless transaction. Several efforts were made by

the government and the RBI to encourage cashless transactions.
Card based transactions or digital transactions automatically
 uploads transaction details under the PAN Card. Such a system will
reduce the scope of black money. National Payment Corporation’s
Rupay Card, UPI, BHIM, Adhaar Enabled Payment System etc. are
government initiatives for cashless transaction economy.

8. **Monopolistic restrictive trade practices act (MRTP act)

Answer: The MRTP Act will be amended to remove the threshold limit of assets
in respect of MRTP companies and dominant undertakings. This would eliminate
the requirement of prior approval of the Central Government for establishment of
new undertakings, merger, amalgamation, takeover and appointment of directors
under certain circumstances.
(elaborate)

9. **. Development of Indian banking system since independence

Answer: The enactment of Banking Regulation Act (B.R. Act) in 1949 was the
major step in the history of banking in India. This Act conferred on the RBI a wide range
of regulatory and supervisory powers relating to the establishment of a bank and
maintenance of a certain minimum operating standards.

According to section 5 (b) of Banking regulation Act 1949-

Of unless there is anything repugnant in the subject or context, - 3 [(a) "approved

securities" means the securities issued by the Central Government or any State
Government or such other securities as may be specified by the Reserve Bank from time
to time;]

(b) "banking" means the accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and withdrawal
by cheque, draft, order or otherwise;

(c) "Banking Company" means any company which transacts the business of banking1
[in India].

In brief phases of Banking in India-

The All-India Rural Credit Survey Committee recommended the creation of a
State partner and State sponsored bank by having control over the Imperial Bank of India
and integrating it with the former State Bank of princely states.

The Government also passed the legislation in 1959 enabling SBI to take over 8
State associated banks (which were functioning in the princely States) as subsidiaries of
SBI. Of these eight subsidiary banks, the State Bank of Bikaner and State Bank of Jaipur
were merged into one. The other 6 banks were State Bank of Hyderabad, State Bank of
Patiala, State Bank of Mysore, State Bank of Saurashtra, State Bank of Indore and State
Bank of Travancore. The National Credit Council in its various meetings took note of the
legitimate resource needs of the large scale and medium scale industrial 28 sector and
suggested targets for setting up one bank branch for population of 10,000 in every town
(March 1969).

In 1969, major process of nationalization was carried out. It was the effort of the
then Prime Minister of India, Mrs. Indira Gandhi 14 major commercial banks in the
country was nationalized. The fourteen major banks having deposits of Rs.50 crores and
above were nationalized in July 1969.

These banks were:

a. Central Bank of India,

b. Bank of India,

c. Punjab National Bank,

d. Bank of Baroda,

e. United Commercial Bank,

f. Canara Bank,

g. United Bank of India,

h. Dena Bank,
i. Syndicate Bank,

j. Union Bank of India,

k. Allahabad bank,
 l. Indian Bank

m. Bank of Maharashtra, and

n. Indian Overseas Bank.

The banks nationalised in 1980 are-Andhra Bank, Corporation Bank, New Bank,
Punjab & Sind Bank, Oriental Bank of Commerce ,UTI Bank
In order to improve financial stability and profitability of Public Sector Banks, the
Government of India set up a committee under the chairmanship of Shri.
M. Narasimham. The committee recommended several measures to reform
banking system in the country.

The major thrust of the recommendations was to make banks competitive and
strong and conducive to the stability of the financial system. The committee
suggested for no more nationalization of banks. Foreign banks would be allowed
to open offices in India either as branches or as subsidiaries. In order to
make banks more competitive, the committee suggested that public sector
banks and private sector banks should be treated equally by the Government
and RBI.

It was emphasized that banks should be encouraged to abandon the conservative

and traditional system of banking and adopt progressive function such as
merchant banking and underwriting, retail banking, etc. It led to foreign banks and
Indian banks to set up joint ventures in these and other newer forms of financial
services.

Further, 10 Privates players got a license from the RBI to entry in the Banking
sector. These were Global Trust Bank, ICICI Bank, HDFC Bank, Axis Bank,
Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank and
Development Credit Bank. The Government of India accepted all the major
recommendation of the committee, Kotak Mahindra Bank and Yes Bank got a
license from RBI to entry in the system in the year 2003 and 2004. In 2014,
RBI grants in principle approval to IDFC and Bandhan Financial Services to
set up banks.
 10. ****. Functions of RBI

Answer: RBI functions are as follows—

2. Monopoly to issue currency notes-The Reserve Bank of India has the sole right to
issue currency notes except one rupee notes which are issued by the Ministry of
Finance. Currency notes issued by the Reserve Bank are declared unlimited legal
tender throughout the country. One- rupee notes and coins and small coins are
issued by the Government of India. India has adopted the “managed paper currency
standard.”

Notes issue function with the Reserve Bank has a number of advantages:

(i) It brings uniformity in notes issue;

(ii) It makes possible effective state supervision;

(iii) It is easier to control and regulate credit in accordance with the requirements in
the economy; and

(iv) It keeps faith of the public in the paper currency.

Prior to 1956, the principle of note issue of the RBI was based on proportional reserve
system. This system was replaced by the minimum reserve system in 1956 under which
the RBI was required to hold at least Rs. 115 crores worth of gold as backing against the
currency issued. The rest (Rs. 85 crores) should be in foreign securities, so that together
with gold and foreign exchange reserve the minimum value of these assets is Rs. 200
crores.

3. Banker to the government- The RBI acts as the banker to the government of India and
State Governments (except Jammu and Kashmir). It has to maintain and operate the
government’s deposit accounts. It collects receipts of funds and makes payments on
behalf of the government. It represents the Government of India as the member of the
IMF and the World Bank.

As the Government’s banker, the RBI provides short term credit to the Government of
India. This short term credit is obtainable through the sale of treasury bills. RBI also
provides ways and means of advances (repayable with 90- days) to State Government. It
may be noted that the Central Government is empowered to borrow any amount it likes
from the RBI. The RBI acts as the adviser of the Government not only on banking and
financial matters but also on a wide range of economic issues (like financing patterns,
mobilisation of resources, institutional arrangements with regard to banking and credit
matters, arrangements with regard to banking and credit matters, international finance)
etc.

4. Banker’s bank - the RBI holds a part of the cash reserves of commercial banks and
lends them funds for short periods. All banks are required to maintain a certain
percentage of their total liabilities. The main objective of changing this cash reserve ratio
by the RBI is to control credit. The RBI provides financial assistance to commercial banks
and State cooperative banks through rediscounting of bills of exchange. The RBI has
been empowered by law to supervise, regulate and control the activities of commercial
and cooperative banks. The RBI periodically inspects banks and asks them for returns
and necessary information.

5. Exchange management and control- under section 40 of RBI Act, it performs function
of maintaining the external value of rupee. The external stability of the currency is
closely related to its internal stability the inherent economic strength of the country and
the way it conducts its economic and monetary affairs. Domestic, fiscal and monetary
policies have an important role in maintaining the external value of the currency.
Reserve Bank of India has a very important role to play in this area. The RBI has the
authority to enter into foreign exchange transactions both on its own account and on
behalf of the Government.

The official external reserves of the country consist of monetary gold and foreign assets
of the Reserve Bank, besides SDR holdings. The Reserve Bank, as the custodian of the
country’s foreign ex- change reserves, is vested with the duty of managing the investment
and utilisation of the reserves.

6. Credit control - The RBI controls the total supply of money and bank credits to sub
serve the country’s interest. The RBI controls credit to ensure price and exchange rate
stability. To achieve this, the RBI uses all types of credit control instruments namely,
quantitative, qualitative and selective controls. The most extensively used credit
instrument of the RBI is the bank rate. The RBI also relies greatly on the selective
methods of credit control.

7. Agricultural finance- a special department known as Agricultural credit department is

set up to encourage financing for agricultural sector. It makes am analysis about the
requisite of agricultural finance and gives advice to the government and state cooperatives to
meet financial requirements in agricultural sector.

On 1/7/1963 RBI established Agricultural Refinance Corporation to meet medium term

and long term agricultural financial needs. In 1975 it was renamed as Agricultural
Refinance and Development Corporation. In 1982, NABARD came into existence.

8. Collection and publication of data- The RBI collects, collates and publishes all
monetary and banking data regularly in its weekly statements in the RBI Bulletin
(monthly) and in the Report on Currency and Finance (annually).

9. Lender of Last Resort - The commercial banks approach the Reserve Bank in times of
emergency to tide over financial difficulties, and the Reserve bank comes to their rescue
though it might charge a higher rate of interest.

Developmental and promotional functions- the RBI performs various activities of

promotional and developmental nature.

1. Mobilisation of savings and extending banking facilities to unbanked areas.

2. Providing security to the depositors

3. Development of agricultural credit institutions

4. Helping the development of specialized institutions of industrial finance.

5. Advisor to the government.

RBI is not a typical Central Bank as is traditionally understood. It is something more than
a Central Bank. It regulates not only currency and credit but aids the development of the
Indian economy by conducting various types of promotional activities
 11. **. Features of industrial policy 1991
a. Answer:
12. ****. Difficulties in calculating national income

Answer: Difficulties in estimating National Income

National Income is a simple linear aggregation of income accruing to the factors of

production supplied by the normal residents of a country in question. In this process of
calculation confusion always arises as to inclusion and exclusion of services and goods.
The process of calculation of NI for any country is marked by difficulties and
complexities. The problems faced by India in estimating

Problems-

1. There is difficulty in estimating the output of the non monetized sector, because
proper accounts are not maintained. The rough approximate estimates are
added in the process of calculation leading to either over estimated or under
estimated figures.

2. There is non availability of data of small producers or household enterprises as

they do not follow standard accounting principle.

3. The data on income distribution is also not accurate and reliable because many
firms and sources do not give correct estimates. .

4. The existence of parallel economy leads to unreported illegal income that does
get included in national income estimates.

5. Conceptual difficulties-

a. It is a difficult task in analyzing the inclusion of government administration

services in National Income estimates.

b. There exists difficulty in identification of productive services.

c. The valuation of products in terms of fixing base year is the biggest challenge as
the base year should be free from economic fluctuations.
 d. Another difficult task has been in defining what an economic good is. Many
economists argue that there many services contributed on the basis of emotional
parameters that does not get included in National Income. Example -services of a
housewife which has been under debate for a long period for inclusion in
calculation of National Income.

e. There cannot be accurate values of imputed value of goods and services as most
of the time rough estimates are added.

f. The basic condition of estimates of National Income is without multiple counting,

but accuracy in estimates has always been a failure and many times certain
goods and services are included more than once under different heads.

g. The statistical problems are maintenance of data accurately. The statitistical data
are not available for especially in nonmonetised sector and failure of maintain
information in various department leads to adding up approximate numbers.
The other areas of concerns for estimation of National Income in India are non
adoption of technology, following of conventional methods and lack of
specialization in data collection

13. ***. Major obstacles in the development on India

Answer: Since independence Indian economy has thrived hard for improving its
pace of development. India in the process is preparing itself for becoming an
economic superpower, to attain this status; it must expedite socio-economic reforms
and take steps for overcoming institutional and infrastructural bottlenecks inherent in
the system. Availability of both physical and social infrastructure is central to
sustainable economic growth. But there are many problems which are to be addressed
that are hampering the process of faster economic growth and economic development.

The major issues are-

1. Low per Capita Income

National income and per capita income are the parameters to gauge the economic
growth of any country. It is said that higher the level of national income, higher
will be the rate of economic growth.India’s net national product (NNP) at factor
 cost in 2007-08 at 1999- 2000 prices stood at Rs 27,60,325 Cr. Population during
the time stood at 1124 million. This means per capita NNP came to Rs 24,256 or
Rs 2,021 per month. Further studies reports that the per capita income in India in
2014 was $1,560, the per-capita Gross National Income (GNI) of USA was 35
times that of India and that of China was 5 times higher than India. This indicates
that, the standards of living of masses are badly low. Even the basic necessities are
beyond the means of the majority of population.

2. High proportion of people below poverty line.

Indian economy also has great inequalities in the distribution of income and
wealth. India had third highest number of people living in extreme poverty. India's
poverty rate for the period 2011-12 stood at 22% of the total population. Nearly
60 p.c. of the total population share one-third of India’s national income while
only rich 5 p.c. of the total population enjoy the same amount of national income.

This inequality widens the problem of poverty. Even in 1972-73, more than 50
p.c. of the total population lived below the poverty line. Thanks to some economic
progress it has come down from 36% in 1993-94 to about 27.5% in 2004- 05,
23.5% as of 2011.

3. Low level of productive efficiency due to inadequate nutrition and

malnutrition.

Nutrition and balanced diet is a prerequisite for productive affiance. The NSS has
estimated around 55% of urban population 45% of rural population suffer from
inadequate intake of nutritional food intake. The level of malnutrition is visible in
all income groups across the country.

Causes identified are-

a. High proportion of calorie intake is derived from cereals

b. Consumption of non cereal commodities is far short of the requirements.

c. Change pattern of food habits.

4. Imbalance between the population size, resources and capital.

The rate of growth of population is very high. So far as the size of population is
 concerned, India ranks second next only to China. 1.1% population growth is not
sustainable for India. High birth rate coupled with low death rate is the genuine cause
for population explosion in India. In the 20th century, India’s population went up by 5
p.c. as against 3 p.c. increase in the world’s population as a whole. This is imposing
great economic burdens. The cchallenges are- per capita availability of land, sizeable
proportion of capital utilised for provision of basic facilities for increasing population
slows down the economic development.

5. Problem of unemployment

On one hand Natural resources are under-utilized and on the other there is massive
wastage occur in the case of manpower resources. Economic growth is not to the mark
of population growth rate and has accentuated the problem of unemployment in India.
Indian agriculture exhibits a considerable amount of underemployment and disguised
unemployment. In the urban areas disguised unemployment is visible. Despite
massive investment made during the various plan periods, unemployment problem has
assumed a gigantic proportion. This amounts to huge wastage of human capital.

6. Instability of output of agriculture and related sectors.

The uncertainty in agricultural production and gamble with monsoon along with lack of
irrigation facilities has been the major reason for fluctuations in agricultural
productivity.

14. **. Objectives and functions of IMF**

Answer: The origin of the IMF goes back to the days of international chaos of the
1930s. The restrictions on multilateral trade and payments increased during the
world war II. This fear led the British economist John Maynard Keynes during the
War to prepare a comprehensive plan of international monetary cooperation for
implementation after the war. This plan came to be known as the "Keynes Plan"

The other plan was prepared by the American expert Harry D. White and called
the 'White Plan", the basic features of these plans were taken together and merged
into a common plan which was evolved at the United Nations Monetary and
Financial Conference of 44 nations held at Bretton Woods. New Hampshire in the
USA in July 1944. Thus at the Bretton Woods Conference held in July 1944,
delegates from 44 non communist countries negotiated an agreement on the
 structure and operation of the international monetary system.

Objectives:

Article 1 of the Articles of Agreement (AGA) spell out 6 purposes for which the
IMF was set up.

They are as follows:

I. To promote international monetary cooperation through a permanent institution

this provides the machinery for consolation and collaboration on international
monetary problems.

II. To facilitate the expansion and balanced growth of international trade, and to
contribute thereby to the promotion and maintenance of high levels of employment
and real income and to the development of the productive resources of all members
as primary objective of economic policy.

III. To promote exchange stability, to maintain orderly exchange arrangements

among members, and to avoid competitive exchange depreciation.

IV. To assist in the establishment of a multilateral system of payments in respect of

current transactions between members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade.

V. To give confidence to members by making the general resources of the Fund

temporarily available to them under adequate safeguards, thus providing them with
the opportunity to correct maladjustments in their balance of payments, without
resorting to measures destructive of national or international prosperity.

VI. In accordance with the above, to shorten the duration and lessen the degree of
disequilibrium in the international balance of payments of members.

The major functions of the IMF:

1. It functions as a short term credit institution.

2. It provides machinery for the orderly adjustments of exchange rates.

 3. It is a reservoir of the currencies of all the member countries from which a
borrower nation can borrow the currency of other nations.

4. It is a sort of lending institution in foreign exchange. However, it grants loans

for financing current transactions only and not capital transactions.

5. It also provides machinery for altering sometimes the par value of the
currency of a member country. In this way, it tries to provide for an orderly
adjustment of exchange rates, which will improve the long-term balance of
payments position of member countries.

6. It also provides machinery for international consultations.

The principal function of the IMF is to supervise the international monetary system. These
are: granting of credit to member countries in the midst of temporary balance of payments
deficits, surveillance over the monetary and exchange rate policy of member countries,
issuing policy recommendations. It is to be noted that all these functions of the IMF may be
combined into three. They are- regulatory, financial, and consultative functions

15. **. Green revolution.

Answer: The new agricultural strategy was adopted in India during the Third
Plan, i.e., during 1960s. In 1951, Prime Minister Nehru invited Ford Foundation
president Paul G. Hoffman to begin a program in India. Ford began by sending
Douglas Ensminger as a representative. "Ensminger's first projects in India were
connected to community development and thus were aimed at increased food
grain production through social reform with secondary attention paid to the spread
for existing technologies but only minor interest in new technology.“ As
suggested by the team of experts of the Ford Foundation in its report “India’s
Crisis of Food and Steps to Meet it” in 1959, the Government decided to shift the
strategy followed in agricultural sector of the country.

After the passage of P.L. 480 in the U.S. in 1956, American grain imports to India
increased. India imported so much American grain that at one point the United
States controlled "as much as one-third of the money supply in India." the United
States saw its role in providing food and agricultural aid to India in the context of
the Cold War. By that time, the USSR had the atomic bomb and China was on the
 brink of becoming Communist. The US used food and agricultural aid with the
hopes of preventing hunger, unrest, and Communism in India. Until at least 1961,
the Indian government based its policies upon bedrock of steady and usually low-
cost American food grain imports."
Thus, the traditional agricultural practices followed in India are gradually being
replaced by modern technology and agricultural practices. The report of Ford
Foundation suggested introducing intensive effort for raising agricultural
production and productivity in selected regions of the country through the
introduction of modern inputs like fertilizers, credit, marketing facilities etc. They
"prepared a ten-point program that promoted the "package" approach to increasing
India's agricultural yields. On a trial basis of seven districts, India would attempt
to marshal all of the inputs, to be made available to capable farmers, needed for
intensive high-yielding practices. Use of improved seeds, fertilizer, irrigation, and
pesticides was indispensible. Also needed were adequate credit facilities, technical
advice, and a guaranteed price that would provide the grower an incentive to take
the risk of trying new technology. This report was the foundation for

the Intensive Agricultural District Program (IADP), the organizational framework

for the green revolution."

Accordingly, in 1960, seven states were selected and from these 7 states, seven
districts were selected and the Government introduced a pilot project known as
Intensive Area Development Programme (IADP) into those seven districts.

1. West Godavari In AP

2. Shahabad in Bihar.

3. Raipur in Madhya Pradesh.

4. Thanjavur in Tamil Nadu

5. Ludhaina in Punjab

6. Aligarh in UP

7. Pali in Rajasthan for millets.

16. *. Role of industry in Indian economy

 a. Answer:
17. What is black money*? Factors responsible for the generation of black money**.

Answer: Black money refers to that income or money which is generated by the
clandestine transactions pertaining to the production of transaction of goods and
services, purchase and sale of immovable property and smuggling, which remains
outside the disclosed channels of production of goods, trading and investment.

As per Wanchoo committee- Black money denotes not only unaccounted currency
which is either hoarded or is in circulation outside disclosing trading channels,
both in its investments for gold jewellery and also in precious stones made
secretly, and business assets over and above the amount shown in the books of
account.

Causes for Generation of Black Money

There are several factors responsible for the emergence of black money---
1. Divergence in the acceptable rate of return and net rate of return and legally
permissible rate of return.—the High tax rates has been responsible for the
existence of black money to a large extent, example direct taxation. Till
recently the tax on income and on wealth was very high to invite evasion. The
marginal rate of income tax was as high as 75 per cent. And when it was
combined with the tax on wealth, it was still higher. The corporate tax rate
too was very high. In these circumstances the temptation / gain from tax
evasion was substantial.

2. Controls and licensing system -The system of controls, permits, quotas and
licenses which are associated with misdistributions of the commodities in
short supply results in the generation of black money.

Price and distribution controls have in the past led to the generation of black
money on a significant scale. Any price control without any adequate
machinery of distribution and speedy arrangement for increasing supplies is
potentially a source of black money generation. Rent control leads to “pugree
system” the system of licenses requires large number of inspectors for
completing various formalities and thus good amount of hush money has to be
paid.
3. Donation to political parties- with the ban on donations to political parties
in 1968, it prompted businessmen to fund political parties, especially the
ruling party, with the help of black money. The politics and the business are
acting and lending their hands to each other in the development of this illegal
and parallel economy. The big players in the field of business sponsors all the
expenses of the political parties relating to the election fight and contests. In
return, they ask the political party to relax the stiff laws in their favor and also
give them concession and incentives without any staunch reasons.

4. Ineffective enforcement of tax laws - Government has an armory of tax

laws pertaining to income tax, sales tax, stamp duties, excise duty etc., their
enforcement is very weak due to widespread corruption in these
departments. . The high rates of these taxes induce businessmen to avoid
recording of these transactions. This evasion

largely goes unchecked and thus sets in a chain reaction for the generation of
black money at the wholesale, retail as well as production levels.

5. Generation of black money in the public sector

Every successive five-year plan is planned for a larger size of investment in the
public sector. The projects undertaken by the public sector have to be monitored by
the bureaucrats in Government departments and public sector undertakings.
Tenders are invited for the various works and these tenders are awarded by the
bureaucracy in consultation with the political bosses.

6. Hawala market as the main cause of black money generation- the illegal
market dealing in such foreign currency conversions called the "Hawala
market". In the Hawala market, the foreign exchange rate of Indian rupee is
23 to 25% higher than the official market. In other words, the Hawala market
converts a dollar into the Indian rupee at 25% higher than the legal monetary
market. They sell their foreign exchange earnings in the Hawala market in
respect of some consideration. The same money is remitted to the
international dealers in illicit trade. These foreign currencies are generally
purchased by the big businessmen who use this money to pay for officially
 under-invoiced import of industrial goods as this is considered to be lower
than the custom duties of 80%. It is estimated that the foreign exchange
market accounts for as much as $4 billion flow of the foreign money.

7. Deterioration of the quality and morality of the general masses- The

'License- permit-subsidy' concept has led to the relationship that is too
friendly between the civil servants and the officials due to various selfish
interests. Those self-interests are in view of the businessmen, foreign
investors and other brokers. Corruption is the sole motive of this alliance
between the two considered rivals in the history whose objectives are a
paradox to each other.

Common man: Prey as well as predator of black money---Though the common

man's contribution in the generation of black money is considered to be quite
insignificant, he contributes through tax evasion, capitation fees,
Unawareness of the consumer’s rights and duties, Donations to charitable
trusts and temples trusts, Paying bribes to the government officials for various
purposes. This way common man is also a contributor for generation of black
money in India.

18. *. Defects of agricultural marketing in India

Answer: Defects of Agricultural Marketing in India:

1. The major problem faced by farmers in India is lack of adequate storage

facility to store the agricultural produce.
2. The farmers in distress sell their produce to middlemen, moneylenders at low
prices due to financial problems.
3. There is no proper development of road connectivity from villages to taluk
places, towns and cities which acts a hindrance for farmers to transport their
products to markets.
4. There is existence of unfavorable mandis where farmers are exploited by
intermediaries and middlemen.
5. The markets are unregulated and do not follow rules and regulations as
 specified by the government and thus farmers are exploited.
6. There is lack of Market Intelligence as correct and accurate information of
market prices for agricultural commodities do not reach farmers.

7. There is lack of knowledge to grade the agricultural produce by the farmers,

thus they do not get fair price for their produce. Lack of Institutional Finance
a.
19. ***. World Bank (including the objectives and functions)

Answer: The International Bank for Reconstitution and Development) was set up as a
result of the decision taken in Bretton Woods Conference New Hampshire. The
conference was held in July 1944 and attended by 44 nations. Decision was to set up
two organizations i.e.

(a) the I.M.F. and

(b) I.B.R.D to solve the monetary and financial problems of the countries due to the
impact of War II.

The I.B.R.D. or World Bank was set up on December 27, 1945, when its Articles of
Agreement was signed by 29 members Government in Washington. United States has
a controlling voting interest. The objective is to eliminate the long term
disequilibrium in the BOP of the ember countries by advancing long term loans to
them for development purpose. The World Bank’s initial aim was to help rebuild
European countries devastated by World War II. Its first loan was to France in 1947
for post-war reconstruction.

World Bank at a Glance

The World Bank is not a bank in the conventional sense of the word, it consists of
two organizations. One is the International Bank for Reconstruction and
Development. It provides loans, credit, and grants.

The second is the International Development Association. It provides low or no

interest loans to low income countries.

The Bank works closely with three other organizations in the World Bank Group:

The International Finance Corporation (IFC) provides investment, advice, and asset
management to companies and governments.

The Multilateral Investment Guarantee Agency (MIGA) insures lenders and investors
against political risk such as war.

The International Centre for the Settlement of Investment Disputes (ICSID). It settles
investment disputes between investors and countries.

Objectives of the Bank

The following objectives are assigned by the World Bank:

1. To provide long-run capital to member countries for economic reconstruction

and development.

2. To induce long-run capital investment for assuring Balance of Payments (BoP)

equilibrium and balanced development of international trade.

3. To provide guarantee for loans granted to small and large units and other
projects of member countries.

4. To ensure the implementation of development projects so as to bring about a

smooth transference from a war-time to peace economy.

5. To promote capital investment in member countries by the following ways;

(a) To provide guarantee on private loans or capital investment.

(b) If private capital is not available even after providing guarantee, then IBRD
provides loans for productive activities on considerate conditions.

The main functions can be explained with the help of the following points:

1. World Bank provides various technical services to the member countries. For
this purpose, the Bank has established “The Economic Development Institute”
and a Staff College in Washington.

2. Bank can grant loans to a member country up to 20% of its share in the paid up
capital.

3. The quantities of loans, interest rate and terms and conditions are determined
 by the Bank itself.

4. Bank grants loans for a particular project duly submitted to the Bank by the
member country.

5. The debtor nation has to repay either in reserve currencies or in the currency
in which the loan was sanctioned.

6. Bank also provides loan to private investors belonging to member countries on

its own guarantee, but for this loan private investors have to seek prior
permission from those counties where this amount will be collected.

a.
20. *. Major recommendations in Abid Hussain Committee report on small scale sector

Answer: The Expert Group headed by Abid Hussain recommends that the guiding
principle of the future course of small scale enterprise (SSE) development policy should
be their accelerated growth and competitiveness. The group submitted its report on 27 th
January, 1997. The recommendations are as follows-

1. Mechanisms of promotion

Adequate supply of credit, services, technology assistance, infrastructure and low

transaction costs are the hallmarks of the proposed strategy for promotion of SSEs. This
can be achieved by developing a variety of linkages between enterprises and their support
institutions, partnerships between the private sector and the government, greater
information flows and by streamlining legally an institutional framework.

2. Focus on Clusters

The Expert Group recommends that state governments should identify the existing SSE
clusters and then promote new types of organizations which are joint ventures between
the state governments or local authorities and business associations in these clusters. The
new approach is an increasing public private partnership in setting up support systems for
small scale enterprises. The Clusters Small Enterprise Associations (CESAs) should be
autonomous and the government should only support them if the local business
associations are willing to provide some level of matching funding. The level of matching
 funding would have to differ between different locations depending on the size and
strength of clusters.

3. Development Roles for Central and State Government-

The state governments have to create an administrative infrastructure to address the

needs of the SSEs in the future, and thus, the development of SSEs should be largely the
responsibility of state governments. The development of SSEs is an aspect of regional
development that can be best pursued by state governments. The Central Government’s
tasks should be confined to policy formulation, legal and institutional development.

4. Revitalising District Industry Centers-

District Industry Centers will play a pivotal role on account of the regional focus in small
enterprises development. The Expert Group therefore recommends that a completely new
look be taken on the functioning of the District Industry Centres, DICs need to be
redesigned as autonomous District Enterprise Promotion Agencies (DEPAs) with
participation from business associations, government agencies, banks, etc. DEPAs should
help in weaving a web of relationship between clusters and their support institutions and
be the conduits for flow of information for dissemination to SSEs.

Corporation of Government Extension Agencies-

The Expert Group recommends that government extension agencies be corporatized.

They should also specialize in a few core activities to develop their competitiveness.
Government should facilitate the transition by part funding to the corporatized
institutions. Similarly, enterprises should have the option of sourcing services from the
private sector with part funding from the state. It is recommended that SIDBI to open a
special window for the funding of technical consultancy organization and other business
support services aimed mainly at small scale enterprises.

Abolish Reservations- The Expert Group recommended for the policy of reservation to
be entirely abolished.

Transitional arrangements for SSIs affected by de-reservation-The Expert Group

recommends that the Ministry of Industry should immediately set up a joint
mechanism between the government and industry representatives to identify specific
industries/items in which small scale units are likely to be affected by the proposed
 dereservation. These are perhaps among the 68 reserved items which accounts for
more than 80% of the total value of production of reserved products. The Expert
Group recommends that the government should provide annual resources of the
order of Rs. 500 crore over the next five years, thereby totaling Rs. 2500 crore, to the
Ministry of Industry for providing the proposed support for expansion, technology up
gradation, modernization and training.

Raise investment limits-

Incentives, credit facilities, and promotional facilities should be available to all small
scale enterprises. To begin with, the concept of the SSE sector should include all business
enterprises in the service sector which provide services to industrial enterprises. Taking
into account all these factors, an investment limit of Rs. 25 lakh for tiny units is adjudged
to be most appropriate. For small scale enterprises, the level should be immediately raised
to Rs. 3 crore for the same reasons.

5. Excise incentives for graduating tiny and small-scale units-

The committee proposed that tiny units which graduate beyond the investment limit of
Rs. 25 lakh be permitted for a higher total exemption limit of turnover to Rs. 50 lakh, for
a period of 5 years after crossing the tiny sector investment limit.

Similarly the total turnover limit of Rs. 3 crore may be expanded to Rs. 5 crore after the
SSI crosses the proposed new investment limit of Rs. 3 crore, but only for a period of 3
years from such graduation. In order to encourage franchising, ancillarisation and to
promote closer complementary links between small scale enterprises and large scale
enterprises, it is recommended that excise exemption withdrawn earlier for branded goods
should be restored.

6. Restructuring of financial support-

The Government had appointed the Nayak Committee to review the credit requirements
of SSEs. The Expert Group endorses the recommendations of the Nayak Committee and
urges the RBI to implement them. In particular, all effort must be made to achieve the
prescribed target of providing working capital of a minimum of 20 percent of the
projected turnover of small scale enterprises. Restructuring of SFCs and SIDCs, the
approach should be to make these institutions autonomous by reducing government
equity to less than 50%. The rest of equity could be held by other financial institutions,
commercial banks, private banks, including industries and other private interests which
have particular interest in the specific states.The Expert Group further endorses the plan
for local area banks and specialized branches of commercial banks to service the needs of
SSEs. The Expert Group recommends that SIDBI in co-operation with the national credit
rating agencies should promote the establishment of local credit rating agencies in the
identified SSE clusters. The Expert Group proposes that it should earmark a minimum of
70 per cent of the priority lending allocated to the small scale sector to the tiny sector.

7. Integrated Support Services- technical assistance, market assistance and information

have to be available as a package to have the desired results for SSIs. The committee
suggested for assistance to new technology, which can be effectively commercialized in
incubation centres and science parks. Training of manpower has to also take place to
enhance human capability to absorb new technology. Assistance should be provided out
of the fund to support service institutions / enterprises engaged in technology transfer,
technology-oriented research and development. SIDBI and other financial / banking
institutions which opt to take up this scheme may be compensated for such soft lending
under a Special Revamped Scheme for Technology Development and Modernization of
SSEs.

8. Support for Research and Development- The Expert Group recommends that the
government should establish fund(s) at both central and state level in order to design
schemes which provide matching funds as incentives to clusters industry associations to
establish the required technology support institutions. The Expert Group recommends
that the Department of Science and Technology initiates a new scheme in the 9 th five-
year plan to from R&D associations based around identified clusters of industries which
may be identified as those which are in urgent need of technology up gradation.

At least 10 such clusters should be identified within the first year and the aim should be
to establish at least 50 such industrial R&D associations for assisting SSEs, within 5
years. It recommends for identifying the links between the existing technical institutions
and existing industries on the one hand, and with the new proposed technology support
institutions could best be forged by the national level industry associations through their
members.
The Expert Group recommends that a National Research Institute for Small Scale
Industries be established, it is proposed that this institutes should be promoted jointly
by the central government and apex industry associations.

9. Training: Technology up gradation in the small scale sector will throw up large
requirements for training of entrepreneurs, managers and employees. The Ministries of
Industry, Labour and Education should set up a special Task Force to work out the
modalities for a special training

scheme for SSEs. The Expert Group also recommends that state government should make
provision for matching funds to be provided for establishing skills development centres.

1. Marketing Assistance: The Expert Group suggests that on the lines of Marketing
Development Assistance Fund should be set up at the earlier in collaboration with
EXIM Bank and with World Bank assistance; a fund should be created and operated
through SIDBI for assisting a targeted SSE exporting units numbering around 5000 in
the 9th plan period.

2. Infrastructure Development in Clusters: The Expert Group therefore recommends

that both central and state governments redirect their existing growth centre and other
infrastructure development schemes to enhance the infrastructural development of
existing SSE cluster. Greater participation of business associations will help to avert
such problems, thus the government, at the state level must initiate action to activate
the city / cluster level business associations.

3. Institutional and Legal Innovation-The Expert Group recommends a separate law for
small enterprises. The objective of the law would be to define the small enterprise
sector and outline the broad framework for the promotion of the sector. A new single
business law called the "Basic Law for Small Enterprises"

4. Monitoring of The New Policy Approach: Expert Group recommends that the
Ministry of Industry set up a Steering Committee under the chairmanship of the Industry
Minister to oversee the evolution of the new policy approach.

These were the recommendations made to strengthen, support and help for the growth of
SSI in India.
21. *. Foreign Trade Policy 1991

Answer: EXIM POLICY

The policy of economic liberalization was put into operation with effect from
1991. A highly crucial aspect of economic liberalization is the liberalization in the
field of foreign trade. The two basic components of the import policy of the
government of India before 1991 were import restriction and import substitution.
The stiff restrictions remained applicable upon imports until 1977-78. The trend
towards import liberalization appeared from 1980’s.

The trade policy reforms were guided mainly by the concerns over globalisation
of the Indian economy, improving competitiveness of its industry, and manage
adverse balance of payments situation. The main features of trade sector reforms
introduced by the government after 1991 are as follows-

1. Freer Imports and Exports:

Simplification and liberalization of imports- The tariff line wise import policy was
first announced on March 31, 1996 and 6,161 tariff lines were made free. By
2000, the freed tariff lines accounted for 8,066. The Exim Policy 2000-01
removed quantitative restrictions on 714 items. The Exim Policy 2001- 02
removed quantitative restrictions on the balance 715 items.

2. Reduction in Import Tariffs-

a. On the recommendations of the Chelliah Committee, the government has reduced

the maximum rate of duty.The government of India reduced the peak rates of
import duty from 110 percent to 85 percent. The government continued to scale
down the peak rates of import tariffs in phases. As per the latest data, the peak rate
of import duty on non- agricultural goods is only 10 percent.

3. Decanalisation-
A large number of exports and imports used to be canalised through the public
sector agencies in India. The supplementary trade policy announced on August 13,
1991 reviewed these canalised items and decanalised 16 export items and 20
import items. The 1992-97 policy decanalised imports of a number of items
including newsprint, non- ferrous metals, natural rubber, intermediates and raw
materials for fertilizers.
 4. Convertibility of Rupee on Current Account-

An important reform in the direction of liberalization in the fields of trade and

payments was related to the convertibility of rupee with other currencies. The
government made a two step downward adjustment of 18-19 per cent in the
exchange rate of the rupee on July 1 and July 3, 1991.The partial convertibility of
rupee was later introduced in 1992- 93 by the introduction of LERMS (Liberalized
Exchange Rate Management System).The full convertibility of rupee on current
account was introduced in 1994-95. With this, the exchange rate of rupee no
longer remained pegged. It became a market- determined rate.

5. Concessions and Exemptions-

In order to liberalise imports and to promote exports, the government extended a

number of tax concessions and exemptions during the 1990’s.

1. Reduction in the peak rate of import duty to 15 percent;

2. Reduction in the rates of duties in the information technology sector upon

certain critical imports;

3. A 10-year tax holiday to the developers of Special Economic Zones (SEZ) for
the building up of infrastructure; and

4. Extension of facilities and tax benefits to the exporters. In addition, the policy
of providing tax benefits to information technology, telecommunication and
entertainment sectors was adopted by the government.

Promotion of Exports of Services-

In order to promote the export of services, the Exim Policy 2002-07, announced in
March 2003, included several measures. The advance license system was
announced for the tourism sector. The firms were permitted to make duty-free
import of consumable goods and spares up to 5 percent of their average export
earnings over the previous three years, provided they were actual uses of the items
to be imported.

7. Special Economic Zones (SEZ) Scheme-

 In March 2000, the government announced the scheme for the establishment of
Special Economic Zones (SEZ) for the boosting up of exports. Such zones could
be set up in public sector, joint sector or by the State governments. It was also
announced that some of the existing Export Processing Zones (EPZs) would be
converted into Special Economic Zones.

The essential purposes for setting up the SEZ’s were to ensure hassle-free exports
and to increase the competitiveness of Indian exports in the international markets.
In 2004-05, there were 15 functional SEZ’s.

8. Export-Oriented Units (EOU) Scheme-

This scheme is complementary to SEZ scheme. It offers more extensive and wide
options for the establishment of export-oriented units. It offers a wide option in
locations with reference to factors like source of raw materials, ports of export,
hinterland facilities, and availability of technological skills, existence of an
industrial base and the need for a larger area of land for the project. The EOUs
have put up their own infrastructure.

9. Agriculture Export Zones-

b. The Exim Policy of 2001 put forward the proposal of setting up of Agricultural Export
Zones (AEZ). This scheme was meant for promoting agricultural exports and to
organize the export effort on the basis of specific products and specific geographical
areas. The scheme is based on the cluster approach of identifying the potential
products, the geographical region in which these products are grown and adopting
an end to end approach of integrating the entire process right from the stage of
production till it reaches the market.

The AEZs are provided with the state-of-the-art services such as pre-post harvest
treatment and operations, plant protection, processing, packaging, storage and
related research and development.

10. Market Access Initiative Scheme-

This scheme was launched in 2001-02. Under this scheme, in-depth market
studies are conducted related to the expansion of export of specific products in
some selected countries. For generating the demand for domestic products in
foreign markets, trade fairs and exhibitions are organized. The publicity
campaigns are undertaken in foreign countries. The efforts are made to upgrade
 the quality of products in accordance with the requirements of the foreign buyers.

12. Trading Houses-

The trade policy of 1991 permitted the export houses and trading houses to import
a wide range of products. The trade policy of 1992-97 allowed them the duty-free
imports. A new category of trading houses called Super Star Trading Houses was
introduced under the 1994-95 trade policy. The government also permitted for the
setting up of trading houses with 51 per cent foreign equity for the purpose of
promoting exports.

22. *. Characteristics of developed economy

a. Answer:
23. *. NDP
a. Answer :
24. *. NNP

Net national Product

NNP refers to the value of net output of the economy during a given year. It is
obtained by deducting the value of the depreciation, or replacement allowance of
the capital assets from this concept the GNP.

GNP – Depreciation = NNP

This concept gives a clear picture to the net increase in the total production as it
excludes depreciation costs.
a.
25. *. Bank rate and cash reserve ratio

Answer : It is the oldest method of credit control. It was first introduced by Bank
of England till the outbreak of 1st world war. The bank rate or the discount rate is
the rate fixed by the central bank at which it rediscounts first class bills of
exchange and government securities held by the commercial banks. The bank rate
is the interest rate charged by the central bank at which it provides rediscount to
banks through the discount window. The central bank controls credit by making
variations in the bank rate.

To expand credit, the central bank lowers the bank rate. Borrowing from the
central bank becomes cheap and easy. So the commercial banks will borrow more.
 They will, in turn, advance loans to customers at a lower rate. The market rate of
interest will be reduced.

Conditions for the bank rate policy-

1. Maintenance of close relationship between bank rate and other interest rate.

2. Prevalence of elastic economic structure.

3. Existence of Short term money markets.

Objectives of bank rate policy-

1. Controlling the volume of credit in the economy.

2. Restoring the equilibrium between savings and investments.

3. Correcting the disequilibrium in the BOP and

4. Maintaining the exchange rate stability.

Limitations

1. The conditions were not conducive for a successful implementation of bank rate
policy.

2. The economy is non sensitivity to interest rate changes many a times.

3. It has failed in controlling deflation and has been successful in inflationary periods..

4. There exists a conflict between the internal and external effects of the bank rate
policy.

5. The increasing non-dependence of commercial central bank banks on financial

assistance.

6. It failed in controlling the BOP disequilibrium.

7. Impersonal nature of bank rate policy.

Cash Reserve Ratio

It is the direct and effective method of credit control. The excessive reserves of
commercial banks can either be wiped out altogether or rendered ineffective for
 the purpose of credit creation. It is through the variations in the cash reserve ratio
of commercial bank and is known as Variable CRR.

This method was first suggested by Lord Keynes. This method is considered as an
indispensable tool for promoting the overall liquidity and the solvency of the
banking system. This system also brings public confidence in the ability of the
commercial bank s to meet their obligation of deposits, this method was 1 st
introduced in 1933 in the USA, where the Federal Reserve System used it for
controlling the volume of credit in the economy.

Under the RBI Act of 1934, every commercial bank had to keep certain minimum
cash reserves with RBI. It was initially 5%against demand deposits and 2%
against time deposits. In 1962 RBI was empowered to vary cash reserves
requirements between 3%to 15%of the total demand and time deposits.

The Narasimhan committee was not in favour of utility of CRR for inflation
control. CRR was gradually reduced from 15% in 1994-95 to 8% in 2000-01 and
was finally reduced to 4%. Again it saw an upward movement to combat inflation
in 2008 to 8% and over the years it has settled at 4%. CRR is reduced to 3%.

26. Open market operations* and statutory liquidity ratio

Answer: Open Market Operation

OMO as a instrument of credit control emerged in the latest period when Central
bank felt bank rate policy as a weak instrument. This credit control measure
emerged post 1st world war. It refers to the buying and selling of government
securities in the open market in order to expand or contract the amount of money
in the banking system.

OMO means the purchase and sale of securities by the Central bank of a country.
The sale of security by the Central bank leads to contraction of credits and the
purchase to the credit expansion. This method is adapted to make the bank rate
policy effective.

An open market operation is a measure used by the central bank of the country to
manage money supply. Through OMOs, central bank either purchase or sell
 government bonds in the open market. The primary tool for implementing
monetary policy, OMOs facilitate changes in short-term interest rates and money
supply depending on the prevailing economic scenario.

The success of OMO was mainly due to following reasons -it is a direct credit
control measure and has immediate effect and success of OMO has been only
after the emergence of strong money market. Objectives –

To eliminate the effects of exports and imports of gold under the gold standard,

To impose check on the export of capital.

To remove shortage of money in the money market.

To support bank rate policy.

To check the ‘Run on the Bank’.

Conditions for OMO

a. Prevalence of well developed securities market- a country should posses

well developed and well organised market for different types of securities
for central bank to use it in the market.

b. Maintenance of a definite CRR by commercial bank- the purchase and sale

of securitie by central bank to chck the cash reserves of commercial banks
can be successful only when commercial banks posses definite cash reserve
ratio.

c. Non cooperation of extraneous factors- impact of unfavourable balance of

payments, hoarding, and change in the velocity of circulation of money will
not be supportive for the functioning of OMO.

d. Non conformist attitude of the borrowers- the behaviour of the borrowers

and attitude towards the commercial banks with respect borrowings will
not support OMO at times.

e. Existence of adequate stock of securities with the central bank- OMO is

successful only when the purchase and sale of securities is carried on in
 extensive scale. Thus

there should be a possession of large types of securities for OMO to

function effectively.

1. Non existence of direct access of commercial banks to the central bank- if the
commercial banks have direct access to central bank then, OMO will not be
effective.

2. OMO is more helpful for credit contraction than expansion

Limitations

a. OMO does not prove effective when the cash reserves of the bank remain
unaffected.

b. Despite OMO many a time’s commercial banks do not contract or expand

credit according to the prevailing economic requirements.

c. Circulation of Bank credit should have constant velocity but fails due to
fluctuations in bank deposits. Thus credit contracting policies get neutralized
due to inconsistent velocity of circulation.

d. OMO has proved efficient instrument for developed countries as they have
strong money market.
2. Banking regulation act 1962 has made provision for a minimum of statutory liquidity
ratio (SLR) of 25% of the banks against their net demand and time liabilities. It makes
provision for RBI to increase this ratio up to 40%if it needs necessary to control
liquidity. The RBI is vested with the power to determine SLR for commercial bank.

3. SLR was as high as 38.5% of the net demand and time liabilities of commercial bank in
1991. With the Narsimhan committee recommendation the government decided to
gradually reduce SLR from 38.5% to 25% and further to 23% in 2012.
f.
27. What is parallel economy**? Examine the effects of parallel economy

Answer: Parallel economy speaks about the functioning of unsanctioned economy which
runs parallel to the sanctioned economy. It is also called as black economy, unaccounted
economy, illegal economy, sub terrain economy or as unsanctioned economic system. The
unaccounted transaction of production, consumption and investment which takes place
parallel to the transactions that are duly accounted is called as parallel economy.

Black money refers to that income or money which is generated by the clandestine
transactions pertaining to the production of transaction of goods and services, purchase and
sale of immovable property and smuggling, which remains outside the disclosed channels
of production of goods, trading and investment.

As per Wanchoo committee- Black money denotes not only unaccounted currency which is
either hoarded or is in circulation outside disclosing trading channels, both in its
investments for gold jewellery and also in precious stones made secretly, and business
assets over and above the amount shown in the books of account.

Black money as a flow always signified incremental generation. The British East India
Company in late 18th century laid the foundations of both a corrupt bureaucracy and a
parallel economy during World War II. The Indian black economy is immense, lucrative,
widespread, and has grown significantly since independence.

Black money as a stock signifies the monetary, financial and real assets acquisitions. The
parallel economy has political, commercial, legal, industrial, social and ethical aspects.
Transactions in black money are always followed by further transactions in unaccounted
sector itself, and with every successive transaction in black market, the income velocity
increases.

Impact of black money

The circulation of black money has adversely affected the Indian economy in
several ways, the impact of black money on the Indian economic and social system
has been –

1. It has resulted in loss of income to the government exchequer.

2. It has enormously worsened the income-distribution, and has led to

conspicuous consumption and has led to emergence of demonstration effect.

3. Black money results in transfer of funds from India to foreign countries

through clandestine channels. Such transfers are made possible by violations
in exchange regulations through the device of under – invoicing of exports
 and over-invoicing of imports

4. Black money held in cash leads to abundance of liquidity, and any attempt of
government to control of excess demand for money goes in vain.

5. Black money has corrupted our political system in a most vicious manner. At
various levels, MLAs, MPs, Ministers, party functionaries openly and
shamelessly go on collecting funds.

6. Black money requires for its protection, proliferation and expansion of a

service organisation composed of musclemen, touts and brokers to combat
the forces of law and order on the one hand and on the other hand, there are
income tax advisers, or chartered accountants in the pay of black money
operators. Then there are contract men, better known as liaison officers who
negotiate favors from top bureaucracy and political bosses through bribes of
black money. This has developed a new black money culture in the business
world.

28. *. Foreign Direct Investment

Foreign direct investment is defined as the ownership of assets in one country by

the resident of another country. The upsurge of FDI in the post World War II era
focused on US multinationals and their worldwide operations in manufacturing
industries. Foreign Direct Investment is the investment of funds by an organization
from one country into another, with the intent of establishing ’lasting interest’.
According to OECD (Organisation for Economic Co-operation and Development),
lasting interest is determined when the organization acquires a minimum of 10% of
voting power in another organization. Reinvestment of profits from overseas
operations, as well as intra - organizational loans and borrowings to overseas
subsidiaries are also categorized as FDI.

The definition also encompasses the international movement of elements that are
complementary to capital - such as skills, processes, management, technology etc.

FDI can be Greenfield, wherein an organization creates a subsidiary concern in

 another country and builds its business operations there from the ground up.
Greenfield investments provide the highest degree of control to the organization. It
can construct the production plant as per its specifications, employ and train human
resources as per company standards, as well as design and monitor its operational
processes.
a.
29. *. Selective credit control method

Answer: These are generally meant to regulate credit for specific purposes. The
banking regulation Act of 1949 empowers RBI to directives to the commercial
banks regarding their advances. RBI uses three kinds of selective credit control
measures

a. Minimum margins for lending against specific securities.

b. Ceiling on the amount of credit for certain purposes.

c. Discriminatory rate of interest charged on certain types of advances.

Credit Authorization Schemes (CAS) – this scheme was introduced in

November 1965. Under this scheme the commercial bank has to obtain RBIs
authorization before sanctioning any fresh credit of more than one crore to any
single party. This was later raised to 6 crore in 1986 and further cut of was fixed
for all manufacturing units and exporters to 7 crores. This scheme was abolished
in 1988.

Credit monitoring arrangement- To ensure financial discipline of the

commercial banks RBI brought in monitoring and scrutinizing of all sanctions of
bank loans exceeding 5 crores to any single party for working capital and 2 crore
in terms of loans. This was also discontinued in 1997.

The concept of selective credit controls emerged in USA. RBI has also introduced
this instrument to prevent hoarding speculation in the Indian market. RBI has
extensively utilized this weapon to check market pressures.

Moral Suasion has been another instrument used by RBI. Here central bank
persuades, suggests and advices the commercial bank to follow its monetary
policy from time to time. It does by sending circulars, calling meetings.
Direct Action– it empowers RBI to caution or prohibit banks from entering in to a
direct transactions or class of transactions. It can inspect the accounts of the bank.
It can also wind up or merge bank branches with other banks. When the
Commercial Banks does not follow the policy of the RBI, then the RBI has the
only recourse is direct action. This method can be used to enforce both
quantitatively and qualitatively credit controls by the RBI. This method is not
used in isolation; it is used as a supplement to other methods of credit control.

Direct action may take the form either of a refusal on the part of the Central Bank
to re- discount for banks whose credit policy is regarded as being inconsistent
with the maintenance of sound credit conditions. Mostly such circumstances are
rare when the Central Bank is forced to resist to such measures.

Rationing of Credit: Under this method the credit is rationed by limiting the
amount available to each applicant. The RBI puts restrictions on demands for
accommodations made upon it during times of monetary stringency.

In this the RBI can discourage the granting of loans to stock exchanges by
refusing to re- discount the papers of the bank which have extended liberal loans
to the speculators. This is an important method of credit control and this policy
has been adopted by a number of countries like Russia and Germany.

Method of Publicity:

RBI in order to make their policies successful can take the course of the medium
of publicity. A policy can be effectively successful only when an effective public
opinion is created in its favour. Its officials through news-papers, journals,
conferences and seminar’s present a correct picture of the economic conditions of
the country before the public and give a prospective economic policies. In
developed countries Commercial Banks automatically change their credit creation
policy. But in developing countries, commercial Banks are being lured for
regional gains.

Regulation of Consumer’s Credit:

Under this method consumers are given credit in a little quantity and this period is
fixed for 18 months; consequently credit creation expanded within the limit. This
 method was originally adopted by the U.S.A. as a protective and defensive
measure, there after it has been used and adopted by various other countries.

30. Importance of Industrial policy of 1991* in view of globalization

Answer: Industrial policy 1991

The India’s approach towards industrialisation was first spelt in Industrial Policy
1948. In 1951, the state came up with Industries (Development and Regulation
Act) as a direction towards the process of Industrialisation in India. With the
implementation of 2 nd five year plan, it led to beginning of industrialisation in
India; Government of India came up with new Industrial Policy, 1956.

The main objectives of the Act were to empower the Government:-

(i) To take necessary steps for the development of industries;

(ii) To regulate the pattern and direction of industrial development;

(iii) To control the activities, performance and results of industrial undertakings

in the public interest.

The new government by Shri Narasimha Rao, announced a package of liberalization

measures under its Industrial Policy on July 24, 1991. The policy aimed at
strengthening the industrial sector with the objective of “build on the gains already
made, correct the distortions or weaknesses that may have crept in, maintain a
sustained growth in productivity and gainful employment and attain international
competitiveness. The pursuit of these objectives will temper the need to preserve the
environment and ensure the efficient use of available resources.”

The broad objectives of New Industrial Policy 1991 are as follows:

(i) Liberalizing the industry from the regulatory devices such as licenses and controls.

(ii) Enhancing support to the small scale sector.

(iii) Increasing competitiveness of industries for the benefit of the common man.

(iv) Ensuring running of public enterprises on business lines and thus cutting their losses.

(v) Providing more incentives for industrialization of the backward areas, and
(vi) Ensuring rapid industrial development in a competitive environment.

Thus Government decided to take a series of initiatives and the important policy
measures announced to pursue the above objectives were in respect of the relating to
the following areas.

Thus conditions prevailing in 1990-91 pushed India for adopting structural adjustment
programme and accepted the process of Globalization. In the year 1991 saw the nation
entering into a new phase of economic reforms under the stewardship of the current Prime
Minister P V Narasimha Rao, Manmonhan Singh, and then Finance Minister (1991-95).
Call it the era of globalization, Indian economy for the first time saw a fundamental shift
from its socialist ideologies.

For India Globalization- meant integrating the economy of the country with the world
economy through the reduction in imports duties and export restrictions, promotion of
foreign investments and permission for the flow of foreign technology and skills.

India emphasized on the following benefits through the process of Globalization-

1. Shift from import substitution to Export led growth.

2. Foreign capital inflows

3. Globalization and Transfer of technology

4. Increased market access

5. Faster Economic Growth and Poverty reduction

6. Employment agreement.
Steps towards Globalization-
The step towards globalization was initiated by the Government of India in 1991 to
restore good economic health of Indian economy with the changes in economic policy
to promote changes in Indian economic conditions

1. Import Liberalization- Import controls through licensing was removed. All

items of capital goods, raw materials, intermediate goods could now be easily
 imported with only payment of custom duties. All quantitative restrictions on
consumer goods were withdrawn in 1995. To liberalize imports peak customs
duty was reduced from 300% to 150% in stages by 1991, further to 85% in
1993 and was 12.5% in 2006. Further changes were brought to accommodate
TRIPS in 1999 and made provision for exclusive marketing rights. Patents Act
was adopted in 2005

2. Import of Gold and Silver- it was made free and further it was freed from any
commission charged for it.

3. Market determined exchange rate- it allowed to determine its own exchange

in international market without any official intervention by making currency fully
convertible. Exchange control was lifted in a phased manner. The Government of
India made a 2 step downward adjustments of 18-19% in exchange rate of the
rupee on 1st and 3rd July 991. In 1993 exchange rate was switched to unified
exchange rate system, thus leading to market determined exchange rate.

4. Rupee convertibility- The convertibility of rupee on BOP on current account

was reformed. Now importers can get their quantity of foreign exchange by
converting the rupee in to dollars from foreign exchange market. The exporters
could now sell their foreign exchange earnings directly in the foreign exchange
market.

Liberalization of Foreign Investments and Portfolio Foreign Investments- The

NEP liberalized the scope of foreign investments both direct and portfolio. It
provided for an automatic approval of FDI without any prior permission from the
government for up to 51% of the total equity capital of the firms in 34 priority
industries. In 1996 the government raised this ceiling limit to 74% for foreign
equity participation.

Industrial licensing restrictions were withdrawn leading to opening up of number

of Industries for private sector. NRI investments up to 100% equities in high
priority industries, investment up to 100% equity in export houses, trading houses,
hospitals, sick industries and FIIs (Foreign institutional investor) were allowed to
invest in Indian capital market subject to registration with SEBI and approval of
 RBI. FDIs under the automatic route have been permitted up to 100% for all
manufacturing activities in SEZs. 100% FDI is also permitted in Pharma, Airport,
Hotel and Tourism industries, Town ship development, courier’s services and
Mass Rapid Transport System. FDI in private airlines has been hiked to 49% and
FDI in private banks has been hiked to 74%. FERA (Foreign Exchange Regulation
Act) was replaced by FEMA (Foreign Exchange Management Act) to remove the
constraints with foreign equity firms. Both pull and push factors worked to attract
foreign portfolio investment in India
31. *. Features of Indian economy

Answer: The features of Indian Economy are as follows-

1. Low Per capita Income

a. India’s per capital income is very low as compared to the advanced countries. India's
per capita income was $1670 per year in 2016, ranked at 112th out of 164 countries
as reported by the World Bank. The growth of 8.6 percent in per capita income is the
lowest in six years in nominal terms for India in 2017-18. And according to
2005 statistics, the per capita income figure in Switzerland was nearly 76 times, in
U.S.A. about 61 times, in Germany about 48 times and in Japan about 54 times the
per capita income figure in India. Thus the standard of living of Indian people
remained all along very low in comparison to that of developed countries of the
world. According to the World Bank’s Report, in 2017, India’s PCI was $ 1940 and
was ranked 138 out of 184 countries

2. Dependency on Agriculture

Indian economy is characterized by too much dependence on agriculture and thus

it is primary producing. A very high proportion of population is engaged in
agriculture and allied activities even now, thus contributing a large share in the
national income of our country. The latest statistics reveal that 50% of people in
India are dependent on agriculture for employment.

It is also marked by low agricultural productivity, lack of modernization and lack

of diversification in its output. Thus agricultural sector is overburdened as the
majority of the active population is depending on agriculture.

3. Heavy Population pressure

India has a very high rate of growth of population since 1950. Thus the pressure of
population on the country is very heavy. This has resulted from a very high level
of birth rates coupled with a falling level of death rates. The rate of growth of
population was
1.31 per cent annually during 1941-50 to 2.5 per cent annually during 1971-81 to
2.11 per cent annually during 1981-91 and then finally to 1.77 per cent during
2001-2011 and is at 1.1% in 2017.

4. Prevalence of Chronic unemployment and underemployment

Rapid growth of population coupled with inadequate growth of secondary and

tertiary occupations are responsible for the occurrence of chronic unemployment
and under- employment problem in our country. India also has the problem of
cyclical unemployment. Unemployment Rate in India increased to 6.10 percent in
2018 from 3.52 percent in 2017. Unemployment Rate in India averaged 4.12
percent from 1983 until 2018, reaching an all time high of 8.30 percent in 1983
and a record low of 3.41 percent in 2014. Lack of market for industrial goods,
leads to disincentive for growth of industrial sector, poverty, lack of effective
demand, unskilled labour with lack of opportunities for employment, dominance
of traditional industries with lower productivity are all factors for prevalence of
unemployment in the country.
5. Improving capital formation

In India, the rate of capital formation is also low. Capital formation mainly depends on
the ability and willingness of the people to save. With low per capita income and mal-
distribution of income in the country, the ability of the people to save is very low for
which capital formation will be considerably less.

6. Inequality in the distribution of wealth

Unequal distribution in income is the result of inequality in the distribution of

assets in the rural areas. On the other hand, in respect of industrial front there
occurs a high degree of concentration of assets in the hands of very few big
business houses. This shows high degree of assets concentration in the hands of
very few powerful business houses of our country.

The nation has seen much of the increase in inequality has been since 1991. The
wealth held by Indian billionaires increased from 49 billion dollars in 2004 to 479
billion dollars held by richest 100 billionaires by 2017. The wealth of Indian
billionaires was less than 5% of the GDP until 2005, but increased sharply to 22%
by 2008, declined after the financial crisis to 10% by 2012. By the latest
estimates, the total wealth of Indian billionaires is 15% of the GDP of the country.
The richest 10% of Indians own 77.4% of the country’s wealth, 2018 Global
Wealth Report. The bottom 60%, the majority of the population, own 4.7%

7. Low level of living

The standard of living of Indian people in general is considered as very low.

Nearly 25 to 40 per cent of the population in India suffers from malnutrition. The
average protein content in the Indian diet is about 49 grams only per day in
comparison to that of more than double the level in the developed countries of the
world.
India remains one of the highest-ranking countries in the world in terms of the
number of children suffering from malnutrition. India continues to consume non-
nutritious, non- balanced food either in the form of under nutrition, over nutrition
or micronutrient deficiencies, according to the report.

A small percentage of Indian populations have access to safe drinking water and
proper housing facilities. As per the estimate of National Building Organization
(NBO), in total there was a shortage of 31 million housing units at the end of
March, 1991 and by the turn of the century, total backlog of housing shortage in
the country is around 41 million units.

8. Poor quality of human capital

Indian economy is suffering from its poor quality of human capital. Due to high
poverty levels, a large population of Indians lives BPL and do not have access to
basic health and educational facilities.

Mass illiteracy is the root of this problem and illiteracy at the same time is
retarding the process of economic growth of our country. As per 2001 census,
65.3 per cent of the total population of India is literate and the rest 34.7 per cent
still remains illiterate. India marks for poor health, lower literacy rates,
malnutrition, and lack of proper housing. It reduces the quality of living.

9. Technological backwardness
The economy of our country is thus suffering from technological backwardness.
Obsolete techniques of production are largely being applied in both the
agricultural and industrial sectors of our country.

10. Demographic factors

The demography of India’s population is like the density of population, age

composition, sex composition, literacy rate, life expectancy and rural-urban ratio
etc... The demographic characteristics of India are not at all satisfactory.
The density of population calculated as a ratio of the number of persons per square
kilometer of land area. Normally the density of population is very high in the
urban and industrial areas and it is quite low in the rural areas, according 2001
census the density of population in India is 324per sq km.

The sex distribution of population of India has shown two perspectives- (a) a
higher ratio males in the population and (b) a rising tendency towards masculinity.

The proportion of females per 100 males has fallen from 962 in 1901 to 933 in
2001. The latest trend showcases that in India 103 female babies are born against
100 male babies and loss of female babies after birth is much higher than that of
male.

The analysis of age composition of population can determine the proportion of

labor force in the total population of the country. The population in India is
divided into three groups on the basis of age structure such as 0-14, 15-59 and 60
and above. The higher child population in India has resulted from higher birth rate
and fall in the infant mortality rate. Populations on 0-14 age groups are dependent.

The proportion on working population in the age group of 55-60 has been declining
from
60.2 percent in 1921 to 57.1 percent in 1951 and then 54.1 percent in 1981. In
2017, about 27.78 percent of the Indian population fell into the 0-14 year
category, 66.23 percent into the 15-64 age group and 5.99 percent were over 65
years of age.

The rural urban composition of India population reflects on the pattern of living of
the country’s population. There is growing trend for gradual shift of population
from rural to urban areas. The urban population increased by 41 percent during
194.51. The percentage of urban population in total population has gone up from
17 percent in 1951 to 25.72 percent in 1991 and 27.8 percent in 2001. The Rural –
Urban distribution: 68.84% & 31.16% as of 2011 census.

11 Under-utilization of natural resources

India is considered as a very rich country. Various types of natural resources, viz.,
land, water, minerals, and forest and power resources are available in sufficient
quantity in the various parts of the country. But due to its various inherent
problems like inaccessible region, primitive techniques, shortage of capital and
small extent of the market such huge resources remained largely under-utilized.